**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D. C.   20549**

 

**FORM 10-K/A**

**(AmendmentNo. 1 to Form 10-K)**

 

**(Mark One)**

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

 

**FOR THEFISCAL YEAR ENDED MAY 29, 2005**

 

**CommissionFile Number 0-12611**

 

**AULT INCORPORATED**

(Exact name of registrant asspecified 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  principal executive offices                   |

 

Registrant’s telephone number, including area code: **(763) 592-1900**

Securities registered pursuant to Section 12(b) of theAct:  **None**

Securities registered pursuant to Section 12(g) of the Act:

 

**CommonStock, No Par Value**

(Title of Class)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES  ý     NO  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendments to this Form 10-K.     o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).

YES  o     NO  ý

 

The aggregate market value of the voting stock held by non-affiliatesof the registrant was approximately $8,070,000 based upon the closing price ofthe Company’s common stock on the NASDAQ National Market on September 13,2005, multiplied by the number of outstanding shares of the Company held bypersons other than officers, directors and 10% or more shareholders referred toin the “Security Ownership of Principal Shareholders and Management” tablereferred to under Item 12 herein.

 

On December 12, 2005, there were outstanding 4,861,192 shares ofthe Registrant’s common stock.

 

The Form 10-K/A consists of 71 pages.  The Exhibit Index is located on page 65.

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the act). YES o   NO ý

 

 

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**AULTINCORPORATED**

 

**FORM 10-K/A**

**FOR THEFISCAL YEAR ENDED MAY 29, 2005**

 

#### **Restatement**

 

This Amendment No. 1 on Form 10-K/A(“Form 10-K/A”) to the Company’s Annual Report on Form 10-K for theyear ended May 29, 2005, initially filed with the Securities and ExchangeCommission (the “SEC”) on October 7, 2005, (“Original Filing”) reflects arestatement of the consolidated financial statements of Ault Incorporated (the “Company”)for the year ended May 29, 2005 and May 30, 2004, as discussed inNote 1 to the consolidated financial statements.  The determination to restate these financialstatements and other financial information was made as a result of management’sidentification of accounting errors at the Company’s China subsidiary relatedto unrecorded payables.  The adjustmentstotaled $248,000 for the year ended May 30, 2004 and increased the Company’snet loss applicable to common shareholders to ($5,793,646) from ($5,545,646) asoriginally reported, and totaled $342,385 for the year ended May 29, 2005and increased the Company’s net loss applicable to common shareholders to($5,472,302) from ($5,129,917) as originally reported.  Further information on the restatementadjustments can be found on Note 1 to the accompanying consolidated financialstatements.

 

This Form 10-K/A amends and restatesItems 6, 7, 8 and 9A of Part II and Item 15 of Part IV of theOriginal Filing.  In addition, pursuantto the rules of the SEC, Item 15 of Part IV of the Original Filinghas been amended to contain an updated consent of the Company’s independentregistered public accounting firm and currently dated certifications from theCompany’s Chief Executive Officer and Chief Financial Officer, as required bySections 302 and 906 of the Sarbanes-Oxley act of 2002.

 

**PART I**

 

#### **ITEM 1.**     BUSINESS

#### ** **

(a)                                  **General Development of Business**

 

Ault Incorporated (herein “Ault” or the “Company”) was incorporatedunder the laws of the State of Minnesota in 1961.  The Company designs, manufactures, andmarkets power conversion products and is a leading domestic supplier of suchproducts to original equipment manufacturers (OEMs) of data communicationsequipment, telecommunications equipment, portable medical devices and equipmentas well as scanning and printing equipment and industrial equipment.

 

On July 16, 2002, the Company purchased a portion of the operatingassets of the Power General division of Nidec America Corporation.  The Power General division developed,manufactured, and sold high-efficiency DC/DC converters and custom powersupplies at various power levels up to 1200 watts under the Power General brandname.  Pursuant to the PurchaseAgreement, the Company paid the Seller $366,000 in cash and issued $2,074,000face amount of the Company’s newly created Series B 7% ConvertiblePreferred Stock, no par value (the “Preferred Stock”).  Further information regarding thisacquisition is contained in Note 15 of the Notes to Financial Statements underItem 8 herein.  Since the acquisition ofthe Power General division significant time and resources have been expendedintegrating the Massachusetts engineering group and internal power supply lineinto Ault’s existing 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, through training provided toAult’s field sales organization worldwide, Ault’s customers and prospects arefamiliar with the additional products and design engineering capabilitiesprovided by this acquisition.

 

On July 17, 2003, the Company announced the consolidation of itsmanufacturing operations.  Theconsolidation includes the closing of its Minneapolis production operations,eliminating approximately 40 jobs in assembly, equipment maintenance,procurement and administrative support and the integration of production intoAult’s other manufacturing plants.  Ault’sengineering, documentation, safety certification/reliability, sales, marketingand administrative services will remain at the Minneapolis headquartersfacility.  The consolidation wasimplemented to reduce expenses, improve cash flow and return the Company toprofitability.  The savings have beenapproximately $1.3 million on an annual basis.

 

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On May 20, 2005, the Company completed the sale of its whollyowned subsidiary, Ault Korea Corporation (“Ault Korea”), to JEC Korea Co., Ltd.for $3.7 million.  The agreement includesthe receipt of $1,472,000 in cash and a secured note in the amount of $2,250,000.  The sale includes all assets and liabilitiesof Ault Korea Corporation and the use of the “Ault Korea” name in Korea for aperiod of three years.  Ault Koreaincludes the property in Seoul, South Korea and approximately 110employees.  As part of the terms of theagreement, JEC has the rights to sell power conversion products in Korea whileAult will have rights to sell the same power conversion products throughout therest of the world.  Prior to thistransaction, JEC was a supplier of Ault, but otherwise no material relationshipexisted between Ault and JEC, or their respective affiliates, directors orofficers, or any associates of their directors and officers. The transactionresulted in a loss of approximately $2,442,000, principally the result of theCompany forgiving an intercompany note in the amount of approximately $2.3million.

 

On May 27, 2005, the Company completed the sale of its Minneapolisheadquarter building (64,000 square feet) and land to Dane Industries Inc. for$3.85 million.  The gross proceeds of$3.85 million 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. 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 andofficers.  Related to this salestransaction, Ault entered into an agreement to lease a portion (13,313 squarefeet) of its headquarter building for a period of twenty-seven months with amonthly rent payment of $18,860.

 

During June 2005, the Company became aware of accounting errors inits China operations that affected fiscal year 2004 and the first threequarters of fiscal 2005. As a result of these errors, the loss applicable tocommon stockholders was underreported by $593,000 in fiscal year 2004 andunderreported by $425,000 in the first three quarters of fiscal year 2005.

 

The sale of the Korean subsidiary has required the Company to adjustthe financial statements to treat the Korean subsidiary as discontinuedoperations.

 

The Company 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.  To obtain copies of these reports, go to www.http://www.aultinc.com.

 

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

 

The Company operates in only one industry segment - the manufacture andsale of power conversion devices.

 

(c)                                  **Narrative Description of the Business**

 

Ault’s power conversion products are used to adapt alternating current(AC) to provide a source of power at various levels up to more than onekilowatt of continuous power for a wide variety of electronic equipment.  A significant amount of the Company’sproducts are located outside the equipment they power as a wall plug-in or asin-line components.  Both of these stylesare generally referred to 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.  Eachproduct configuration, external and internal, offers distinct advantages to theOEM buyer.  Internal power products aremore generally accepted among design engineers across all segments of theelectronic original equipment market (EOEM). Internal power has traditionally been the norm in product design and, interms of range, it provides greater latitude especially in applications beyond100 watts.  External power still ranks asa high growth area in the power supply industry due to the increasing emphasison smaller and portable products that perform increasingly sophisticatedfunctions.  Ault’s business strategy isto offer OEMs in these markets an expanding line of high-quality powerconversion products, diverse design engineering expertise and customizedcustomer services.

 

(1)                **Products**

 

Ault’s product line includes internal AC/DCand DC/DC switching power supplies, DC/DC converters, DC mobile adapters andfour major categories of external power conversion products:  switching power supplies, linear powersupplies, transformers and battery chargers. The Company’s broad range of power conversion products --- ranging from1 watt to more than 1 kilowatt --- are capable of providing power at mostoutput levels that OEMs require.

 

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The Company’s design and applicationengineers work closely with customers to ensure that these products arecustomized to meet each OEM customer’s unique power conversion needs.

 

The following table summarizes the proportionof sales of each of the Company’s five major product categories for its lastthree fiscal years ended May 29, 2005:

 

**Sale ofProducts by Category**

**as aPercentage 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’straditional power supplies provide all power conversion elements for electronicequipment in power outputs ranging from 1 to 1200 watts.  The majority of the Company’s productscontain a component level transformer, which reduces the voltage level, as wellas other circuitry and components, which convert alternating current (AC) todirect current (DC) and, in most cases, maintain voltage within specificlimits.

 

•                  ***Internal and External Switching PowerSupplies. ***The Companybelieves the market for switching power supplies in the 1-500 watt range isgenerally the fastest growing segment of the overall power supplyindustry.  For internals, switching powersupplies are efficient and easily modified to meet an OEM’s specific footprintand power requirements.  In externals,switching power supplies use switching transistors to convert power from AC toDC and are more energy efficient, smaller and lighter in weight than linearunits with comparable power outputs.  Theapplications in which these internal and external products are currently usedinclude telecommunications (wireless, wire line, cellular), data communications(networking, broadband modem, Power over Ethernet, routers, hubs, switches),computer and related peripherals, medical equipment, microprocessor controlledsystems, printing and scanning equipment, security systems, automatic tellerterminals, test equipment, multiplexers, digital cameras and point of saleequipment.

 

Most of the Company’s internal and externalswitching power supplies incorporate a universal input ranging from 90 to 265volts AC.  This universal input meansthat the power supplies can be used in virtually any country for applicationssuch as local area networks (LANs), printers and fiber optic links.  The Company has also designed medical gradeswitching power supplies with similar universal input ranges.

 

•                  ***Linear Power Supplies. ***Linear power supplies arelarger and generally less expensive than switching power supplies because theirdesign is based on technology employing steel laminations with windings ofcopper wire rather than switching transistors. Linear power supplies tend to be used when the wattage output requiredis relatively low.  Ault manufactureslinear power supplies that provide up to 12 watts of regulated power and 25watts of unregulated power.  The Company’slinear power supplies are used in a variety of applications including modems,telecommunications products, local area networks, microprocessor controlledsystems, test equipment and multiplexers.

 

•                  ***Transformers. ***The Company manufactures a wide variety of wall plug-intransformers as part of its full range 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 from approximately 110 volts (230 voltsin some countries) down to lower voltages that range from 5 to 60 voltsAC.  The Company’s product line alsoincludes highly customized transformers that operate within stringent poweroutput tolerances, features that are not offered by most of the Company’scompetitors.  The Company’s transformersare utilized in a broad spectrum of applications including modems, telephonesets, multimedia products and scanners.

 

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•                  ***Battery Chargers. ***Ault has been an innovator in battery charging technologysince the early 1980s.  Ault specializesin providing custom designed, advanced solutions for manufacturers of portableand battery powered equipment. Applications for the Company’s battery chargers include medical devices,mobile telecom devices, notebook computers, global positioning equipment andradio frequency communications products.

 

The Company’s products servethe entire range of widely used battery chemistries such as nickel cadmium,sealed lead acid, gel cell and nickel-metal hydride.  In addition, the Company has developedbattery chargers for the particular requirements of newer battery chemistriessuch as zinc air, lithium ion and lithium polymer.  The Company is committed to supporting thesenew emerging chemistries and to developing battery charger products to beintroduced as these new battery chemistries become commercially accepted.

 

The Company sells primarily “smart”battery chargers as 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 for slow (8 to 10 hours) chargingand/or standby battery maintenance.

 

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

 

•                  ***High-Efficiency and High-Density DC/DCConverters. ***The addition ofDC/DC converters to the Company’s product offering was in response to customerrequests for “on-the-board” power solutions and Ault’s strategy to fulfill the “totalsolution” approach as a preferred supplier to valued OEM customers.  In fiscal 2003, as part of the Power Generalproduct offering, Ault acquired a line of DC/DC converters and seasonedengineers who have developed new, innovative high-density quarter-brick andeighth-brick designs.  These productsprovide Ault with a wide range of converter options to meet the needs of OEMsusing distributed power architecture in their next generation and newelectronic product designs.  In fiscal2002, Ault signed a private label agreement with a third party manufacturer fordistribution of high-efficiency DC/DC converters.  The agreement was in-place for fiscal 2002,2003 and part of fiscal 2004.  Since theagreement was subject to an annual review by each party, Ault decided toterminate the agreement during the second quarter of fiscal year 2005 due to alack of sales activity.

 

•                  ***Mobile Products. ***In late 2002, the Company expanded its product offering to include aline of mobile products for powering laptop computers in a broad range of fieldand service applications.  The productfocus is on mobile adapters in a single and dual output with a primary salesfocus on laptop OEMs and value-added resellers (VARs).  The Company anticipates nearly 65% of themarket to be field and service applications in the business travel, insurance,trucking and delivery industries.  Theremainder of the applications is in emergency fire, police and medical services(20%); military and government (10%); and a small percentage in miscellaneoususes (5%).  The product family, known asTransport, was introduced in fiscal 2003. The TR75 (75watts) is a single output mobile adapter that has generatedapproximately $380,000 in revenue.  Thenext models in the product 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.

 

(2)                **Markets and Customers**

 

The Company’s marketing effortsare directed primarily toward OEMs producing non-consumer electronic equipmentfor broadband modems, wireless and wire line telecommunications product,networking, Power over Ethernet, as well as industrial and retail dataacquisition.  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 its expertise to tailor a broadrange of products to meet customer requirements, the Company believes it iswell positioned to serve the needs of its OEM customers as they respond tothese trends and competitive factors.

 

Historically, the mostsignificant market for the Company’s products has been OEMs oftelecommunications/data communications equipment (broadband modems, wirelessand wire line); in fiscal 2005 sales in this market represented approximately39% of net sales. The Company’s products power cable and ADSL modems, networktermination equipment (devices which interface between telephone network andthe customer’s PBX or other

 

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telephone system), lineconditioning equipment (devices which prepare telephone lines for thetransmission 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, thetelecommunications industry overall began to rebound as OEMs began launchingnew projects/designs and had the need to replenish existing product inventorythat had been slow-moving over the past two years.    A couple of telecommunication segments havebeen particularly strong:  wireless andnetworking.  There are new applicationssuch as broadband wireless routers and wireless Ethernet devices that requirecost-effective switching power supplies in the 12-32 watt range.  The Company introduced a family ofsingle-port Power-over-Ethernet power supplies that combine power throughintegrated RJ45 jacks as well as data over 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 thePW130 family is available to power OEM devices that are not compliant to thestandard.  Both versions can be sold as astandard product or be modified to suit specific requirements.

 

Approximately 33% of net salesin fiscal 2005 were to OEMs of portable medical equipment such as infusionpumps, patient monitoring systems, apnea monitors, and portable terminals forpatient history input diagnostics.

 

In fiscal 2005 approximately 17% of the Company’s net sales were toOEMs in the industrial market segment that includes digital cameras, loadsurvey equipment, industrial lighting, outdoor and specialty lighting as wellas power tools, metal detectors and GPS equipment.  The remaining 11% of the Company’s net saleswere to OEMs of computers and computer peripherals such as digitizers,printers, plotters, portable terminals, point of sale scanners and opticalcharacter readers, LAN hardware and multimedia speakers for computerapplications.

 

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

 

(3)**                Design Engineeringand Product Development**

 

Design engineering teams at theCompany’s facilities in the United States and the People’s Republic of Chinaare responsible for developing new power conversion products and customizingexisting products to meet customer needs. The Company also utilizes the significant engineering resources of itsAsian subcontractors for the development of products targeted for subcontractmanufacturing.  The Company’s productdevelopment activities are divided equally between developing products tosatisfy customer needs and new products based upon anticipated customer needsand market trends.  New productdevelopment opportunities are evaluated based upon criteria such as globalmarket potential, return on investment and technological advantages.  The Company believes that its collaborativeefforts with customers, combined with its forward-looking concern for powertechnology and market trends, have enabled it to gain a reputation as a leadinginnovator in the development of new power conversion products.

 

(4)**                Sales andDistribution**

 

The Company markets itsproducts primarily in the U.S. and Canada through a network of 17 manufacturerrepresentatives employing approximately 120 salespersons, each of whomrepresents, in addition to Ault’s products, several different but complementaryproduct lines of other manufacturers. The Company also sells through four national distributor organizations,which employ over 1,000 salespersons, and 13 regional distributors, whichemploy over 75 salespersons.  The Companyselects representatives based upon their industry knowledge as well as accountexpertise with products that are synergistic with the Company’s products.  Individual salespersons are trained, mentoredand technically assisted by the Company’s application engineers and other salesadministration staff.  Any reduction inthe efforts of these manufacturer representatives or distributors couldadversely affect the Company’s business and operating results.

 

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The Company begins the salesprocess by identifying a potential customer or market; researching the targetor potential customer’s total business, product and strategic needs; and thenpreparing a total solution proposal that includes engineering, productdevelopment, safety agency approvals, logistics and project developmentprocesses, coordinating pilot runs and assisting OEMs with their productintroductions.

 

The Company focuses its sellingefforts primarily on OEMs in the U.S. and Canada.  However, many of the larger OEM customers ofthe Company manufacture and sell their products globally.  As a result, the Company has extended itspresence to markets throughout the world. The Company’s sales in the Pacific Rim are primarily to customers inChina.

 

The Company markets itsproducts in Europe through a network of distributors who are managed throughthe Company’s customer team located in Minnesota and in Maryland.  In the Pacific Rim, the Company markets itsproducts through direct sales teams located in Shanghai, People’s Republic ofChina.

 

(5)                **Safety Agency Certification**

 

The power conversion system ispotentially the most hazardous element in most electronic equipment because thepower supply modifies standard power to a level appropriate for suchequipment.  Virtually all of the Company’scustomers require that the power conversion products supplied by the Companymeet or exceed established international safety and quality standards, sincemany of the Company’s products are used in conjunction with equipment that isdistributed throughout the world.  Inresponse to these customer requirements, the vast majority of the Company’sproducts are designed and manufactured in accordance with certificationrequirements of many safety agencies, including Underwriters LaboratoriesIncorporated (UL) in the United States; the Canadian Standards Association(CSA) in Canada; Technischer Uberwachungs-Verein (TUV) in Germany; the BritishApproval Board for Telecommunication (BABT) in the United Kingdom; theInternational Electrotechnical Committee (IEC), a European standardsorganization and (CE) a standard for the European Community.  In addition, some of the Company’s productshave also received Japanese Ministry of International Trade and Industry (MITI)approval.  For certain safetyapplications, the Company’s products conform to FCC Class B requirements,which regulate the levels of electronic magnetic interference that may beemitted by electronic equipment.  Unlikemost of its competitors, the Company is a certified test laboratory for UL, CSAand TUV and is able to conduct most certification tests at its Minneapolisheadquarters.  This procedure reduces thetime required to obtain safety certifications.

 

(6)**                Competition**

 

The Company competes primarilywith various manufacturers of external power conversion products.  The industry is highly fragmented, withmanufacturers generally focusing their marketing on specific segments.  The Company has experienced strongcompetition from Taiwanese-based manufacturers principally on price.  Many of these competitors have a smallerpresence in the external conversion market than the Company, although severalare engaged in more than one business and have significantly greater financialresources.

 

No single company dominates theoverall external power conversion product market, and the Company’s competitorsvary depending upon the particular power conversion product category.  The companies with which Ault competes mostdirectly in each of its major product categories are: Leader Electronics, Inc.and Golden Pacific Electronics, Inc. for transformers; Dee Van EnterpriseCo., Ltd., Friwo, and EMC, Inc. for linear power supplies; GlobTek, Inc.,Condor and Phihong Enterprise Co., Ltd. for switching power supplies; and Friwo,Phihong and Anam for battery chargers.

 

The Company competes on thebasis of the quality and performance of its products, the breadth of itsproduct line, customer service, and dependability in meeting deliveryschedules, design engineering services, and price.  The Company believes it is currently one of asmall number of companies that design, manufacture and obtain certifying agencyapprovals for the full range of internal and external power conversion devices,which OEMs consider in designing their electronic product.

 

The Company provides a totalsolution approach to the OEM’s entire power conversion product needs (under 1kilowatt) through its commitment to reliable partnerships and its delivery ofhigh quality products supported by solution-oriented design engineering.  The manufacturing facility in China, andarrangements with subcontract

 

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manufacturers in China andThailand enable the Company to compete effectively when price is the primaryconsideration.

 

Internal power conversionproducts continue to be used for most electronic equipment, and as a result theCompany experiences competition from numerous OEMs and independent suppliersoffering internal products.  With thetrend toward lower power requirements in portable electronic equipment and withthe increasing availability of smaller, competitively priced internal switchingpower supplies, certain customers of the Company may choose to return tointernal power supplies in place of the external power conversion products theycurrently purchase.  In response to thisissue, the Company is now well positioned to service the power requirements ofits customers, whether internal or external, as a result of the Power Generalacquisition.  This acquisition not onlyprovided the engineering expertise to design internal power supplies, but alsohas expanded the Company’s product offering significantly to include a line ofAC/DC and DC/DC switching power supplies and DC/DC converters.  The Company competes with a number ofmanufacturers of internal AC/DC power supplies, including Astec, Power-One,GlobTek, Condor and Delta Electronics.

 

The Company competes with a broad range ofmanufacturers in the DC/DC converter market. The industry is fragmented, with manufacturers concentrating their salesand marketing on specific customer requirements in specific markets.  The Company’s primary competitors are Synqor,Power-One, Ericsson, Artesyn, and Galaxy. In the past 12 months, all of the key players in the DC/DC market haveintroduced models in the isolated, high-efficiency eighth-brick andquarter-brick models.  The largest singlemarket segment for the sale of these high-efficiency models istelecommunications.  To date, no singlecompetitor dominates the DC/DC market in terms of market share.

 

The estimated size of the mobile productsmarket in North America is $55-$65 million. The major competitors, Targus, Lind and Mobility, specialize in thismarket segment.  These three companiesdominate the market with combined revenues of approximately $47 million.  The rest of the market includes smallercompanies with limited sales to a handful of key customers.

 

(7)**                Manufacturing andSources of Supply**

 

The Company’s manufacturingoperations consist of assembly and integration of electronic components to meetproduct specifications and design requirements for a variety of powerconversion applications.  Manufacturingof the Company’s products is located at the Company’s facilities in Xianghe,China, and at subcontract manufacturers in four facilities in China andThailand.

 

As discussed above, the Companydiscontinued its Minneapolis manufacturing operations beginning in the firstquarter of fiscal 2004, moving this production to its other manufacturingplants, primarily China.  Theconsolidation included the closing of its Minneapolis production operations,with the headquarters location continuing to provide engineering, safetycertification, reliability testing, sales, marketing and administrativeservices for its global customers.  Ault’sheadquarters will continue to provide prototypes and engineering builds as partof its engineering support services.

 

Electronic components and rawmaterials used in the Company’s products are generally available from a largenumber of suppliers, although from time to time shortages of particular itemsare experienced.

 

Quality and reliability areemphasized in both the design and manufacture of the Company’s products.  This emphasis is reflected in the ISO 9001certification of the Company’s Minneapolis facility in 1991 and its Chinafacility in 1998.  The Company tests 100%of its finished products against its own and the customers’ specifications, andthen ships the products in custom-engineered protective packaging to minimize anydamage during shipment.

 

The Company has subcontractmanufacturing arrangements with two business partners in Thailand and two inChina. The Company does not have long-term commitments with its subcontractorsand the subcontractors build product for the Company pursuant to individualpurchase orders. Either party may terminate the arrangements at any time. Theproduct that is manufactured by the subcontractors is not specific to thatsubcontractor. The product could be produced by one of the other subcontractorsor a company owned facility. Currently the subcontractors account for less than15% of the current year’s revenue. The Company selects its subcontractmanufacturers based upon their ability to manufacture high-quality products,the sufficiency of their engineering capabilities to support products beingmanufactured; and their ability to meet required delivery times.

 

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(8)                **Significant Customers: Backlog**

 

The Company sells its productsto over 400 customers, and it is the Company’s objective to maintain adiversified customer base to avoid, where practicable, dependence upon a singlecustomer.  In fiscal 2005, 2004, and2003, no customers accounted for more than 10% of sales.

 

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

 

The Company enters into buyingcommitments and other scheduling agreements with certain customers.  For its larger customers, these agreementsallow for order increases and decreases within scheduled limits and includecancellation charges for completed and in-process products and procuredmaterials.  Most products are shippedwithin 4 to 10 weeks of an order.

 

(9)                **Warranties**

 

The Company provides up to athree-year parts and labor warranty against defects in materials or workmanshipon all of its products. Servicing and repairs are conducted at the Company’sfacilities in Minneapolis. The Company’s warranty expenses have not beensignificant.

 

(10)          **Patents**

 

The Company holds nosignificant patents.

 

(11)          **Seasonality**

 

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

 

(12)          **Employees**

 

As of August 11, 2005, theCompany employed approximately 577 full-time employees.  Listed below is a breakdown by geographicarea:

 
| ** **                 | ** ** | **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’s employeesare represented by a labor organization, and the Company has never experienceda work stoppage or interruption due to a labor dispute.  Management believes that its relations withits employees are good.

 

(13)          **ExecutiveOfficers of the Registrant**

# ** **

Certain information with respect to the executive officers of theCompany 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              |       |

 

9

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(14)          **Working Capital**

 

Withalmost all of the Company’s products manufactured in China, Korea and Thailand,and shipped to customers around the world, principally over the ocean by boat,it can take four to seven weeks for product shipments to reach customers.Generally, the Company invoices customers shortly after the product has beenshipped from the Asian manufacturing location. The long shipping schedule resultsin delays in customer payments of invoices and increases the amount of accountreceivables that are ineligible as part of the borrowing base on the creditline facility with the bank.

 

(15)**          Risk Factors**

 

The following risk factors arerelevant to an understanding of the Company’s business:

 

•                  ***The Company recently received adelisting notice from Nasdaq and there can be no assurance that the Company’ssecurities will continue to be listed on Nasdaq***.  On September 15, 2005, the Companyreceived a notice from Nasdaq that because the Company’s annual report on Form 10-Kfor the fiscal year ended May 29, 2005 has not been filed, the Company issubject to delisting.  On September 27,2005 Nasdaq advised the Company that because its stockholders’ equity droppedbelow the $10 million threshold, another grounds for delisting exists. TheCompany has appealed the delisting notice and believes that it will be able tomaintain compliance with Nasdaq listing requirements, but continued listing issubject to 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 has recently experienced materialweaknesses in its internal controls related to its Ault China subsidiaries, andrelated to its warehouse arrangements with third parties.  These weaknesses in controls resulted incertain adjustments to the 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.***  The Company’s future success will continue todepend upon its ability to enhance its current products and to develop newproducts that keep pace with technological developments and respond to changesin customer requirements.  Any failure bythe Company to respond adequately to technological changes and customerrequirements or any significant delay in new product introductions could have amaterial adverse effect on the Company’s business and results ofoperations.  In addition, there can be noassurance that new products to be developed by the Company will achieve marketacceptance.  See “Business-DesignEngineering and Product Development.”

 

•                  ***The Company’s financial results are influenced by anumber of factors.***  TheCompany’s financial results are subject to fluctuation due to various factors,including general business cycles in the Company’s markets, the mix of productssold, the stage of each product in its life cycle and the rate and cost ofdevelopment of new products.  Inaddition, component and material costs, the timing of orders from and shipmentsof products to customers and deferral or cancellation of orders from majorcustomers could adversely affect financial results.

 

•                  ***The Company’s reliance on outside contractorsreduces its control over quality and delivery schedules. ***  The Company currently depends on thirdparties located in foreign countries for a significant portion of themanufacture and assembly of certain of its products. While the Company takes anactive role in overseeing quality control with its third-party manufacturers,the failure by one or more of these subcontractors to deliver quality productsor to deliver products in a timely manner could have a material adverse effecton the Company’s operations.  Inaddition, the Company’s third-party manufacturing arrangements are short termin nature and could be terminated with little or no notice.  If this happened, the Company would becompelled to seek alternative sources to manufacture certain of itsproducts.  There can be no assurance thatany such attempts by the Company would result in suitable arrangements with newthird-party manufacturers.  See “Manufacturingand Sources of Supply.”

 

10

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•                  ***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 of service of any of these keypersonnel could have a material adverse effect on the Company.  The Company does not have key-person lifeinsurance on any of its employees.  Inaddition, the Company’s future success will depend on the ability of itsofficers and key employees to successfully manage the Company for growth andprofitability and to attract, retain, motivate and effectively utilize the teamapproach to manage its employees.

 

•                  ***While the Company actively trains and technicallyassists the individual sales representatives representing its products, a reductionin 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 and sells products primarily through independentmanufacturer representatives and distributors that are not under its directcontrol.  The Company employs a limitednumber of internal sales personnel.

 

•                  ***To satisfy customer demand and toobtain greater purchasing discounts, the Company carries increased inventory******levels of certain items.***  The Company’s financial results may beadversely affected when inventory exceeds anticipated demand. Carryingadditional inventory levels also increases the risk of loss due toobsolescence. Gross margin can be adversely affected by increases in costs ofraw materials.  There can be no assurancethat raw material cost increases or the cost of carrying increased finishedgoods inventory will not have a material adverse effect on the financialresults.

 

•                  ***A prolonged reduction in demand for the Company’sproducts will continue to impact the financial success.***  In fiscal year 2002, sales declined in largepart due to a substantial downturn in sales to the telecommunications and datacommunications markets.  Sales to thesemarkets stabilized in fiscal 2003 and fiscal 2004 with modest growth in fiscal2005.  A decline of thetelecommunications and data communications markets would adversely affect theCompany’s results.

 

•                  ***The financing agreements containcovenants with which the Company may not be able to comply.***  The Company has entered into a financingagreement that contains financial covenants. These covenants require, that theCompany, among other things, maintain a minimum working capital base, and alsoimpose certain limitations on additional capital expenditures and the paymentof dividends. The Company believes the covenants are achievable based on theexpected operating results.  Its abilityto comply with financial covenants depends upon future operating performance. And,future-operating performance depends, in part, on general industry conditionsand other factors beyond the Company’s control. If the Company were unable to obtain a waiver or amendment from thelender on its credit facility on reasonable terms, the credit facility could beaccelerated and the entire balance could be due.  The default interest rate would rise to primeplus 5%.  Availability under the facilityis based on the Company’s accounts receivables. Historically, the balance has fluctuated between $2.3 and $2.6million.  If the balance were acceleratedand the interest rate rose to the default rate, the Company would be requiredto secure an alternative credit facility or capital.  There can be no assurance that a replacementfor the revolving credit facility could be obtained at all, or on termsfavorable to the Company.  A failure toobtain a replacement facility would have a material adverse effect on theCompany.

 

•                  ***Civil unrest, labor disruptions, or acts ofaggression could impede the Company’s ability to operate in foreign locationsand would have a material adverse effect on future business and consequently,the operating results.*** Manufacturing is conducted at the Company’s facilities in China andthrough manufacturing relationships in the People’s Republic of China (China),Korea and Thailand.  While this PacificRim manufacturing strategy enables the Company to compete worldwide againstother suppliers of external power conversion products, it also involvesrisks.  While, its manufacturingoperations in China, Korea and Thailand have not been affected by labordisruptions, civil unrest or political instability, the risk of civil unrestand political instability is present in each of these countries.

 

(d)               **Financial Information About Foreign and Domestic Operations and ExportSales**

# ** **

Export sales in fiscal year 2005 represented 15.7% ofthe Company’s gross sales, most of which were to OEMs in Europe andCanada.  For other financial informationabout foreign and domestic operations and export sales including the

 

11

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amount of export sales for the last 3 years, refer to “Note13 - Segment Information and Foreign Operations” under notes to consolidatedfinancial 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 rights expire in 2050.

 

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

 

Management considers all of the Company’s propertiesto be well maintained, and together with subcontract arrangements in China andThailand, adequate for all Company functions, including manufacturingrequirements.

 

**ITEM 3.****     LEGALPROCEEDINGS**

 

No material litigation or other claims are presentlypending against the Company.

 

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

 

Notapplicable.

 

12

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**PART II.**

 

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

 

(a)                                  MarketInformation

 

Ault common shares are traded on the NASDAQ marketunder the symbol AULT.  The followingtable presents the range of closing bid prices for the Company’s common stockon the NASDAQ Market for fiscal 2005 and 2004. The Company recently received a delisting notice from NASDAQ and therecan be no assurance that the Company’s securities will continue to trade onNASDAQ.

 
| ** **  | ** ** | **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 of September 1, 2005 there were 266shareholders of record for the Company’s common stock.  This number of record stockholders does notinclude beneficial owners of common stock whose shares are held of record byDepository Trust under the name CEDE & Co.

 

(c)                                  Dividends

 

Ault has not paid cash dividends on its common shares, and the presentpolicy of its Board of Directors is to retain any earnings for use in thebusiness.  The Board of Directors doesnot anticipate paying cash dividends on its common shares in the foreseeablefuture.  The Company is obligated to paydividends on its outstanding 7% Convertible Preferred Stock.  See Note 9 of the Notes to FinancialStatements 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 not have individualcompensation arrangements involving the granting of options warrants andrights.

(2)               During the past three fiscal years, theCompany has not sold its securities except pursuant to registration statementsunder the Securities Act of 1933.

 

13

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**ITEM 6.            SELECTEDFINANCIAL SUMMARY**

 

(Amounts in Thousands, Except Per Share Data)

 
| ** **                                               | ** ** | **YEARS ENDED**                          | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                               | ** ** | **Restated  May 29,  2005  (1)(2)** | ** ** | **Restated  May 30,  2004  (1) (2) (3)** | ** ** | **June 1,  2003  (1)(4)** | ** ** | **June 2,  2002  (1)** | ** ** | **June 3,  2001  (1)(5)** | ** ** |
| Net sales                                                |       | $                                        | 37,216     |   | $ | 35,361 |   | $ | 35,996 |   | $ | 36,080 |   | $ | 78,231 |   |
| Gross profit                                             |       | 9,797                                    |       | 7,925 |   | 6,895 |   | 6,474 |   | 16,824 |   |
| Operating  expenses                                      |       | 12,003                                   |       | 13,249 |   | 14,069 |   | 10,338 |   | 12,702 |   |
|                                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Operating  income (loss)                                 |       | (2,206                                   | )          | (5,324 | ) | (7,174 | ) | (3,864 | ) | 4,122 |   |
|                                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Nonoperating  income (expense)                           |       | (518                                     | )          | (415 | ) | (284 | ) | (127 | ) | (188 | ) |
|                                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Income  (loss) before income taxes                       |       | (2,724                                   | )          | (5,739 | ) | (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                |       | (2,732                                   | )          | (5,799 | ) | (7,118 | ) | (3,172 | ) | 2,529 |   |
|                                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Discontinued  operations                                 |       | (2,595                                   | )          | 150 |   | (446 | ) | (392 | ) | (333 | ) |
|                                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net Income  (loss)                                       |       | (5,327                                   | )          | (5,649 | ) | (7,564 | ) | (3,564 | ) | 2,196 |   |
|                                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Redeemable  convertible preferred stock dividends        |       | (145                                     | )          | (145 | ) | (128 | ) | — |   | — |   |
|                                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Net income  (loss) applicable to common stockholders     |       | $                                        | (5,472     | ) | $ | (5,794 | ) | $ | (7,692 | ) | $ | (3,564 | ) | $ | 2,196 |   |
| Net income  (loss) per share from continuing operations: |       |                                     |       |   |   |   |   |   |   |   |   |
| Basic                                                    |       | $                                        | (0.61      | ) | $ | (1.27 | ) | $ | (1.58 | ) | $ | (0.70 | ) | $ | 0.56 |   |
| Diluted                                                  |       | (0.61                                    | )          | (1.27 | ) | (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                                         |       | 5,266                                    |       | 5,429 |   | 8,431 |   | 14,084 |   | 17,840 |   |
| Long-term  debt, less current maturities                 |       | 0                                        |       | 2,313 |   | 2,483 |   | 2,754 |   | 3,035 |   |
| Stockholders’  equity                               |       | 7,360                                    |       | 11,689 |   | 17,319 |   | 24,753 |   | 28,129 |   |

 

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(1)          The yearshave been adjusted to reflect the Company’s Korean subsidiary as discontinuedoperations.

(2)          See Note 1to financial statements for restatement information.

(3)          The 2004results include exit costs of $2,064.

(4)          The 2003results include a goodwill impairment charge of $1,153.

(5)          The 2001results include a noncash, pretax cumulative effect of accounting changerelated to the adoption of Staff Accounting Bulletin No. 101 of $77expense ($50 after tax, or $0.01 per share). The 2001 results include 53 weeks of activity.

 

14

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**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTSOF OPERATIONS**

 

This amended Annual Report on Form 10-K/Afor the fiscal year ended May 29, 2005, amends and restates financialstatements and related financial information for the fiscal year ended May 30,2004 and May 29, 2005.  Thedetermination to restate these financial statements and other financialinformation was made as a result of the Company’s identification of accountingerrors at the Company’s China subsidiary related to unrecordedliabilities.  Further information on therestatement can be found in Note 1 to the accompanying consolidated financialstatements.

 

**CriticalAccounting Policies**

 

The discussion and analysis of our financial condition and results ofoperations are based on our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.  Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets and liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities atthe date of our financial statements. Actual results may differ from these estimates under differentassumptions or conditions.

 

Critical accounting policies are defined as those that involvesignificant judgments and uncertainties and potentially result in materiallydifferent 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 to recognizerevenue for product sales when title transfers and risk of loss has passed tothe customer, which is generally upon acceptance of the product by the overseasfreight carrier. The Company’s policies comply with the guidance provided byStaff Accounting Bulletin No. 104, Revenue Recognition, issued by theSecurities and Exchange Commission. Judgments are required in evaluating thecredit 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 down for estimatedsurplus and discontinued inventory items. The amount of the write-down isdetermined by analyzing historical and projected sales information, plans fordiscontinued products and other factors. Changes in sales volumes due tounexpected economic or competitive conditions are among the factors that wouldresult in materially different amounts for this item.

 

*Allowance for Doubtful Accounts*– An allowanceis established 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 are sold with warranty provisions that require it toremedy deficiencies in quality or performance over a specified period of time,up to 36 months, at no cost to the Company’s customers. The Company’s policy isto establish warranty reserves at levels that represent its estimate of thecosts that will be incurred to fulfill those warranty requirements at the timethat revenue is recognized. The Company believes that its recorded liabilitiesare adequate to cover its future cost of materials, and overhead for theservicing of its products sold through that date. If there is an actual productfailure, or material or service delivery costs differ from the Company’sestimates, its warranty liability would need to be revised accordingly.

 

*Deferred Taxes*– Deferred tax assets and liabilitiesare recognized using enacted tax rates for the effect of temporary differencesbetween the book and tax basis of recorded assets and liabilities.  Deferred tax assets are reduced by avaluation allowance if it is likely that some portion or the entire deferredtax asset will not be realized.  Basedupon prior taxable income and estimates of future taxable income, the 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

 

15

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varies fromthese estimates, the Company may be required to change the valuation allowanceagainst the deferred tax assets resulting in a change in income tax benefit,which will be recorded in the consolidated statement of operations.

 

# **LIQUIDITY AND CAPITAL RESOURCES**

 

The financial statements have been prepared on a going-concern basis,which contemplates the realization of assets and satisfaction of liabilities inthe normal course of business. The Company sustained net losses applicable tocommon stockholders of $5,472,302 (restated) in 2005 and $5,793,646 (restated)in 2004 and at May 29, 2005 had an accumulated deficit of $14,041,346(restated). 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 sale of the Minneapolis headquarter building resulted inthe receipt of cash from Dane Industries Inc. of $3,850,000, of which$2,509,203 was used to pay the mortgage. During May 2005 the Company paidoff the bank debt in the United States and at May 29, 2005 the Company’sbank debt was $289,628, all applicable to its China operations. The Companycontinues to have a $7,000,000 line-of-credit agreement with Wells Fargo Bankin Minneapolis that runs through December 4, 2006.

 

Based on available funds, current plans and business conditions,management believes the Company’s available cash and amounts generated fromoperations and bank borrowings, will be sufficient to meet the Company’s cashrequirements for the next twelve months and in the foreseeable future. Theassumptions underlying this belief include, among other things, that there willbe no material adverse developments in the business or market in general. Therecan be no assurances however that those assumed events will occur. Ifmanagement’s plans are not achieved, there may be further negative effects onthe results of operations and cash flows, which could have a material adverseeffect on the Company.

 

The following table summarizes the Company’s working capital positionat May 29, 2005 and May 30, 2004:

 
| **(US Dollars in Thousands)**         | ** ** | **May 29, 2005** | ** ** | **May 30, 2004** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|
|                                  |       |                  |       |                  |       |
| Working capital                       |       | 5,266                 |       | 5,429                 |       |
| 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 andcurrent liabilities of $7,372,718 representing working capital of $5,265,804(restated) and a current ratio of 1.7. This represents a decrease in workingcapital of $163,000 from $5,429,000 (restated) at May 30, 2004. TheCompany relies on its credit facilities as sources of working capital tosupport normal growth in revenue, capital expenditures and attainment of profitgoals. The Company has not committed to any material capital expenditures as ofMay 29, 2005.

 

**Cash and Investments**:At May 29, 2005, the Company had cash and securities totaling $2,191,000,up from $837,000 at May 30, 2004. The increase in cash was principally dueto the cash receipts from the sale of the Korean subsidiary and the Minneapolisheadquarters 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 wereno borrowings compared to borrowings of $1,965,000 at May 30, 2004. Thefinancing agreement contains financial covenants. These covenants require theCompany, among other things, to maintain a minimum capital/equity base, andalso impose certain limitations on additional capital expenditures and thepayment of dividends. At the end of fiscal 2005, the Company’s actual net bookworth and income before taxes did not meet the minimum of the credit agreement.The minimum net book worth covenant was $13,809,000 and the minimum incomebefore taxes covenant was a loss of $573,000. The Company has received a waiverand amendment for these covenants. Following the August 31, 2005 waiver,the Company believes the provisions imposed by this credit agreement areachievable based on the Company’s expected operating results for the next year.

 

16

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# **CASH FLOWS FOR FISCAL 2005**

# ** **

**Operations:**Operationsprovided $1,480,000 of cash during fiscal 2005 due principally to the followingactivities: (1) the loss, net of non-cash charges for: depreciation of$518,000, loss on the sale of Minneapolis headquarter’s building of $137,000,loss on the sale of Korean subsidiary of $2,442,000 and an increase in theprovision for bad debts on trade receivables of $490,000 used cash of$1,740,000 (restated); (2) net changes of current assets and currentliabilities provided $2,749,000 (restated) of cash, and (3) thediscontinued Korean operation provided $470,000 of cash.

 

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

 

**Financing Activities:**  Financing activities used cash of $4,648,000,with repayments for bank borrowings of $1,965,000 and principal payments onlong-term debt of $2,483,000, principally the mortgage debt on the Minneapolisbuilding, representing the major financing activities for the year.

 

**Effect of Foreign Currency Exchange RateFluctuations:** The effect of translating the Chinese financial statements, which wereprepared in Chinese Yuan (Yuan) to U.S. Dollars, had minimal effect on cash forthe year.

 

# **RESULTS OF OPERATIONS**

# ** **

*Recent Events* –During June 2005 the Company became aware of accounting errors in itsChina operations that resulted in an understatement of the loss applicable tocommon stockholders of $593,000 for fiscal year 2004 and $425,000 for the firstthree quarters of fiscal year 2005 compared to results that were originallyreported. The sale of the Company’s Korean subsidiary in May 2005,required adjustments to the financial statements to present Korean operationsas “discontinued operations”.

 

In December 2005, the Company became aware of additionalaccounting errors in its China operations that resulted in an understatement ofthe loss applicable to common stockholders of $248,000 for fiscal 2004 and $342,385for fiscal 2005 compared to the results that were originally reported.

 

# **Fiscal Year Ended May 29, 2005**

 
| ** **     | ** ** | **Restated**    | ** ** | **Restated**    | ** ** | **Increase** | ** ** | **Increase** | ** ** |
|----------------|------------|-----------------|------------|-----------------|------------|--------------|------------|--------------|------------|
| **($000)**     | ** ** | **Fiscal 2005** | ** ** | **Fiscal 2004** | ** ** | **Amount**   | ** ** | **Percent**  | ** ** |
| Net Sales      |       | $               | 37,216     |            | $          | 35,361       |       | $            | 1,855      |   | 5 | % |
| Operating Loss |       | $               | (2,206     | )               | $          | (5,324       | )          | $            | 3,118      |   | 59 | % |

 

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

 

The gross profit margin was 26.3% (restated) for fiscal 2005 comparedto 22.4% (restated) 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 during fiscal year 2005 that were notenjoyed in the early quarters of fiscal year 2004, of approximately $650,000.

 

Operating expenses, in total, decreased to $12,003,000 during fiscal2005, down from $13,249,000 in fiscal 2004, which included $2,064,000 of exitcosts, which did not repeat in fiscal 2005. During fiscal 2005 general andadministrative costs were $5,642,000 compared to $4,769,000 in the previousfiscal year. Some of the more significant expense increases in general andadministrative expenses during fiscal 2005 included outside consultants for thestart of Sarbanes-

 

17

----

 

Oxley compliance of $210,000, one year’s severance pay and relatedtaxes for the former general manager of the Korean subsidiary of $164,000 andan increase to the bad debt allowance of $490,000.

 

The Company’s order backlog at May 29, 2005 was $9,678,000, down3.5% from May 30, 2004 of $10,027,000.

 

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

 

**CASH FLOWS FOR FISCAL 2004**

 

**Operations:**  Operations used $950,000 of cash duringfiscal 2004 due principally to the following activities: (1) the loss, netof non-cash charges for: depreciation of $872,000, and asset impairment of$1,742,000 used cash of $3,034,000 (restated); (2) net changes of currentassets and current liabilities provided $1,685,000 (restated) of cash, and (3) thediscontinued Korean operation provided $375,000 of cash.

 

**Investing Activities:**  The purchase of tooling and test equipmentused $322,000 of cash, including $9,000 from discontinued operations.

 

**Financing Activities:**  Net bank borrowings provided $1,965,000 ofcash 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 Currency Exchange RateFluctuations**: The effect was minimal on cash for theyear.

 

# **RESULTS OF OPERATIONS**

# ** **

**Fiscal Year Ended May 30, 2004**

 
| ** **     | ** ** | **Restated**    | ** ** | ** **      | ** ** | **Increase /** | ** ** | **(Decrease)** | ** ** |
|----------------|------------|-----------------|------------|-----------------|------------|----------------|------------|----------------|------------|
| **($000)**     | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** | **Amount**     | ** ** | **Percent**    | ** ** |
| Net Sales      |       | $               | 35,361     |            | $          | 35,996         |       | $              | (635       | ) | (2 | )% |
| Operating Loss |       | $               | (5,324     | )               | $          | (7,174         | )          | $              | 1,850      |   | 26 | % |

 

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

 

The gross profit margin was 22.4% (restated) 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.

 

Operating expenses decreased to $13,249,000 in fiscal 2004, compared to$14,069,000 in fiscal 2003. The fiscal year 2003 had a goodwill impairmentcharge of $1,153,000, which did not repeat in fiscal 2004. The fiscal 2004operating expenses include $2,064,000 of exit costs related to thediscontinuance of manufacturing activities in Minneapolis. Severance pay foremployees 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 comparedto $13,850,000 at June 1, 2003. The backlog decrease is principally theresult of many customers ordering on a just in time basis.

 

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

 

18

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# **Information About Revenue by Geography**

# ** **

Revenue from the U.S., from each foreign country that is a source ofsignificant revenue, and from all other foreign countries as a group are asfollows:

 
| ** **    | ** ** | **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 a country to be the geographic source of revenueif it has contractual obligations, including obligation to pay for tradereceivable invoices.

 

# **Impact of Foreign Operations and Currency Changes**

# ** **

Products manufactured by the Company’s Chinese subsidiaries comprise alarge portion of total sales. The Company will experience normal valuationchanges as the Chinese currency fluctuates. The effect of translating the Chinesefinancial statements had minimal effect for the year.

 

# **Forward Looking Statements**

# ** **

From time to time, in reports filed with the Securities and ExchangeCommission (SEC), in press releases, and in other communications toshareholders or the investing public, the Company may make forward-lookingstatements concerning possible or anticipated future results of operations orbusiness developments that are typically preceded by the words “believes,” “expects,”“anticipates,” “intends” or similar expressions.  For such forward-looking statements, theCompany claims the protection of the safe harbor for forward-looking statementscontained in the Private Securities Litigation Reform Act of 1995.  Shareholders and the investing public shouldunderstand that such forward-looking statements are subject to risks anduncertainties which could cause results or developments to differ significantlyfrom those indicated in the forward-looking statements.  Such risks and uncertainties include, but arenot limited to, the overall level of sales by original equipment manufacturers(OEMs) in the telecommunications, data communications, medical and othermarkets; buying patterns of the Company’s existing and prospective customers;the impact of new products introduced by competitors; delays in new productintroductions; higher than expected expense related to sales and new marketinginitiatives; availability of adequate supplies of raw materials and components;dependence on outside contractors; reliance on third-party distribution; unanticipated expenses related to integration of manufacturing andpersonnel from acquisitions, such as the acquisition of the Power Generalassets;  dependence on foreignmanufacturing and other operations; and other risks affecting the Company’s targetmarkets generally.

 

19

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# **Contractual Obligations**

# ** **

The following table summarizes the Company’s contractual obligationsand commercial commitments as of May 29, 2005 (in thousands):

 

Payments 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, the Financial Accounting Standards Board (FASB)approved for issuance SFAS No. 142, *Goodwilland Other Intangible Assets*. SFAS No. 142 requires that upon adoption, amortization of goodwillwill cease 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, theCompany adopted SFAS No. 142, and the initial impairment test wasperformed and it was determined that there was no goodwill impairment on June 3,2002.  During the fourth quarter offiscal 2003, the annual goodwill impairment test was performed and the fairvalue of the Company was assessed to determine whether goodwill carried wasimpaired and the extent of such impairment. After performing this evaluation it was evident that impairment ofgoodwill had occurred because of a decline in revenues for the fourth quartercompared to forecasted revenues, as well as a significant increase in thefourth quarter loss compared to forecast. The Company did not perform an impairment test prior to the fourthquarter as there wasn’t an event that had occurred or circumstances had changedin such a manner to warrant an impairment test prior to the fourthquarter.  Accordingly, an impairmentcharge of $1,153,153 was recorded in the fourth quarter of fiscal 2003.

 

# **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

# ** **

The Company experiences foreign currency gains and losses, which arereflected in the financial statements, due to the strengthening and weakeningof the U.S. Dollar against currencies of the Company’s foreign subsidiaries. Todate, the effect of translating the Chinese financial statements, which wereprepared in Chinese Yuan to U.S. Dollars, has had minimal effect on the Company’sfinancial position. There are no assurances that future results will not besignificantly affected by future exchange rates between the Chinese Yuan andU.S. Dollar.

 

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

 

20

----

 

**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA**

 
| (a) Financial Statements               |                                                                                                                           |
|---------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|
| Index to Consolidated Financial Statements  |                                                                                                                           |
|                                        |                                                                                                                           |   |
| •                                      | Report of Independent Registered Public Accounting  Firm – Grant Thornton LLP                                             |   |
|                                        |                                                                                                                           |   |
| •                                      | Report of Independent Registered Public Accounting  Firm – Deloitte Anjin LLC                                             |   |
|                                        |                                                                                                                           |   |
| •                                      | Report of Independent Registered Public Accounting  Firm – Deloitte & Touche LLP                                 |   |
|                                        |                                                                                                                           |   |
| •                                      | Consolidated Balance Sheets, May 29, 2005 and May 30,  2004                                                          |   |
|                                        |                                                                                                                           |   |
| •                                      | Consolidated Statements of Operations, Years Ended May 29,  2005, May 30, 2004, and June 1, 2003                |   |
|                                        |                                                                                                                           |   |
| •                                      | Consolidated Statements of Stockholders’ Equity,  Years Ended May 29, 2005, May 30, 2004, and June 1, 2003 |   |
|                                        |                                                                                                                           |   |
| •                                      | Consolidated Statements of Cash Flows, Years Ended May 29,  2005, May 30, 2004, and June 1, 2003                |   |
|                                        |                                                                                                                           |   |
| •                                      | Notes to Consolidated Financial Statements                                                                                     |   |
|                                        |                                                                                                                           |   |
| (b) Supplemental Financial Information |                                                                                                                           |
|                                        |                                                                                                                           |   |
| •                                      | Quarterly Financial Data                                                                                                       |   |

 

21

----

 

# **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Stockholders and Board of Directors

Ault Incorporated and Subsidiaries

 

We have audited the consolidated balance sheets of Ault Incorporatedand subsidiaries (a Minnesota corporation) as of May 29, 2005 and May 30,2004, and the related consolidated statements of operations, stockholders’equity, and cash flows for the years then ended.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.  We did not audit the 2004 financialstatements of the Ault Korea Corporation, a wholly-owned subsidiary, whichstatements (presented as discontinued operations) reflect total assets andrevenues constituting 46 percent and 22 percent, respectively, of the relatedconsolidated totals as of and for the year ended May 30, 2004.  Those statements were audited by otherauditors whose report has been furnished to us, and our opinion, insofar as itrelates to the 2004 amounts included for the Ault Korea Corporation is basedsolely on the report of the other auditors.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements, assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe our audits and the report of other auditors provide areasonable basis for our opinion.

 

In our opinion, based on our audits and the report of other auditors,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Ault Incorporated andsubsidiaries as of May 29, 2005 and May 31, 2004, and the results oftheir operations and their cash flows for the years then ended, in conformitywith accounting principles generally accepted in the United States of America.

 

As discussed in Note 1, the consolidated financial statements havebeen restated.

 

Our audits were conducted for the purpose of forming an opinion on thebasic consolidated financial statements taken as a whole.  The accompanying Schedule II of AultIncorporated and subsidiaries is presented for purposes of additional analysisand is not a required part of the basic consolidated financial statements.  This schedule has been subjected to theauditing procedures applied in the 2005 and 2004 audits of the basicconsolidated financial statements and, in our opinion, is fairly stated in allmaterial respects in relation to the basic consolidated financial statementstaken as a whole.

 

 

Grant Thornton LLP

Minneapolis, Minnesota

December 19, 2005

 

22

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To theBoard of Directors and Shareholder of

AultKorea Corporation

 

We have audited the balance sheet of Ault Korea Corporation (the “Company”) as of April 30,2004, and the related statements of income, stockholder’s equity and cash flowsfor the year then ended (all expressed in Korean won, none of which arepresented herein).  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, such financial statementspresent 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 to the financial statements, the Company sells a substantial portionof its finished goods to and purchases raw materials from related parties.  For the year ended April 30, 2004, salesto related parties totaled ₩7,438 millionand purchases from related parties totaled ₩993million.  As of April 30 2004, therelated accounts receivable were ₩2,398million and the related accounts payable, including long-term accounts payable,were ₩5,215 million.  In addition, as of April 30, 2004, loansprovided to related parties were ₩163million.

 

 

**DeloitteAnjin LLC**

** **

Seoul,Republic of Korea

June 1,2004

 

23

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Stockholders and Board of Directors

Ault Incorporated and Subsidiaries

Minneapolis, 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 Item15.(2). These consolidated financial statements and the financial statement schedule arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on the consolidated financial statements and financialstatement schedule 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, such consolidated financial statements present fairly,in all material respects, the results of operations and cash flows of AultIncorporated and Subsidiaries for the fiscal year ended June 1, 2003, inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects the information set forththerein for the fiscal year ended June 1, 2003

 

Deloitte & Touche LLP

 

Minneapolis, Minnesota

August 18, 2003 (October 4, 2005, as to theinformation in Note 2  for the year ended June 1, 2003)

 

24

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## ***AULT INCORPORATED AND SUBSIDIARIES***

##### **CONSOLIDATED BALANCE SHEETS**

**MAY 29,2005 AND MAY 30, 2004**

 
| ** **                                                                                     | ** ** | **Restated**     | ** ** | **Restated**     | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                     | ** ** | **May 29,** | ** ** | **May 30,** | ** ** |
| ** **                                                                                     | ** ** | **2005**         | ** ** | **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                                                                 |       | 5,676,816        |       | 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.

 

25

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### **AULT INCORPORATED AND SUBSIDIARIES**

#### **CONSOLIDATED BALANCE SHEETS**

**MAY 29, 2005 AND MAY 30, 2004**

 
| ** **                                                                                                                            | ** ** | **Restated**     | ** ** | **Restated**     | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                            | ** ** | **May 29,** | ** ** | **May 30,** | ** ** |
| ** **                                                                                                                            | ** ** | **2005**         | ** ** | **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                                                                                                                     |       | 5,482,478        |       | 4,162,782        |       |
| 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                                                                                                            |       | 7,372,718        |       | 13,555,998       |       |
|                                                                                                                                  |       |             |       |             |       |
| 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                                                                                                                  |       | (14,041,346      | )          | (8,569,044       | )          |
|                                                                                                                                  |       |             |       |             |       |
| Total  stockholders’ equity                                                                                                      |       | 7,359,940        |       | 11,688,936       |       |
|                                                                                                                                  |       |             |       |             |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                      |       | $                | 16,806,658 |             | $          | 29,835,291 |   |

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

 

26

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AULTINCORPORATED AND SUBSIDIARIES

CONSOLIDATEDSTATEMENT OF OPERATIONS

YEARS ENDED MAY 29,2005, MAY 30, 2004, AND JUNE 1, 2003

 
| ** **                                                                   | ** ** | **Restated**          | ** ** | **Restated**          | ** ** | ** **            | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **May 29, 2005** | ** ** | **May 30, 2004** | ** ** | **June 1, 2003** | ** ** |
| NET SALES                                                                    |       | $                     | 37,215,509 |                  | $          | 35,360,584            |       | $ | 35,995,845 |   |
|                                                                         |       |                  |       |                  |       |                  |       |
| COST OF  GOODS SOLD                                                          |       | 27,419,309            |       | 27,436,047            |       | 29,100,551            |       |
| Gross profit                                                                 |       | 9,796,200             |       | 7,924,537             |       | 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                                                              |       | (2,206,441            | )          | (5,324,424            | )          | (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                                                    |       | (2,724,513            | )          | (5,739,084            | )          | (7,457,593            | )          |
|                                                                         |       |                  |       |                  |       |                  |       |
| INCOME TAX  EXPENSE (BENEFIT)                                                |       | 7,534                 |       | 59,989                |       | (340,200              | )          |
| LOSS FROM  CONTINUING OPERATIONS                                             |       | (2,732,047            | )          | (5,799,073            | )          | (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                                                                     |       | (5,327,122            | )          | (5,648,466            | )          | (7,563,831            | )          |
|                                                                         |       |                  |       |                  |       |                  |       |
| REDEEMABLE  CONVERTIBLE PREFERRED                                            |       |                  |       |                  |       |                  |       |
| STOCK  DIVIDENDS                                                             |       | (145,180              | )          | (145,180              | )          | (128,242              | )          |
|                                                                         |       |                  |       |                  |       |                  |       |
| NET LOSS  APPLICABLE TO COMMON                                               |       |                  |       |                  |       |                  |       |
| STOCKHOLDERS                                                                 |       | $                     | (5,472,302 | )                     | $          | (5,793,646            | )          | $ | (7,692,073 | ) |
|                                                                         |       |                  |       |                  |       |                  |       |
| NET BASIC  AND DILUTED LOSS PER COMMON SHARE:                                |       |                  |       |                  |       |                  |       |
| From continuing  operations                                                  |       | $                     | (0.61      | )                     | $          | (1.27                 | )          | $ | (1.58 | ) |
| From  discontinued operations                                                |       | $                     | (0.54      | )                     | $          | 0.03                  |       | $ | (0.09 | ) |
| Net basic  and diluted loss per common share                                 |       | $                     | (1.15      | )                     | $          | (1.24                 | )          | $ | (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.

 

27

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## ***AULT INCORPORATED AND SUBSIDIARIES***

##### **CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

#### **YEARS 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 (restated)                                                                                     |       |             |       |          |       |            |       | (5,648,466    | )          |                   |        | (5,648,466 | )          |
| Net change in foreign currency translation adjustment                                                   |       |             |       |          |       |            |       |          |       | 16,713                 |        | 16,713     |       |
| Total comprehensive loss (restated)                                                                     |       |             |       |          |       |            |       |          |       |                   |        | (5,631,753 | )          |
| 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 (restated)                                                                 |       | 4,705,083        |       | 21,172,717    |       | (45,000         | )          | (8,569,044    | )          | (869,737               | )           | 11,688,936 |       |
|                                                                                                    |       |             |       |          |       |            |       |          |       |                   |        |       |       |
| Comprehensive loss:                                                                                     |       |             |       |          |       |            |       |          |       |                   |        |       |       |
| Net loss (restated)                                                                                     |       |             |       |          |       |            |       | (5,327,122    | )          |                   |        | (5,327,122 | )          |
| Net change in foreign currency translation adjustment                                                   |       |             |       |          |       |            |       |          |       | 925,115                |        | 925,115    |       |
| Total comprehensive loss (restated)                                                                     |       |             |       |          |       |            |       |          |       |                   |        | (4,402,007 | )          |
| 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 (restated)                                                                 |       | 4,806,116        |       | $             | 21,390,135 |            | $          | (44,227       | )          | $                      | (14,041,346 | )          | $          | 55,378 |   | $ | 7,359,940 |   |

 

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

 

28

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**AULT INCORPORATED AND SUBSIDIARIES**

##### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

#### **YEARS ENDED MAY 29, 2005, MAY 30, 2004, AND JUNE 1,2003**

 
| ** **                                                                                 | ** ** | **Restated**     | ** ** | **Restated**     | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                 | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
| ** **                                                                                 | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |       |             |       |             |       |             |       |
| Net loss                                                                                   |       | $                | (5,327,122 | )                | $          | (5,648,466       | )          | $ | (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                                                                           |       | 1,319,541        |       | (87,604          | )          | 1,610,609        |       |
| Accrued expenses                                                                           |       | 56,258           |       | 230,353          |       | 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 FINANCIALSTATEMENTS.

 

29

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## ***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

 

*Nature of Business*-Ault Incorporated and Subsidiaries (Ault or the Company) operate in onebusiness segment which includes the design, manufacturing, and marketing ofpower conversion products, principally to original equipment manufacturers ofdata communications equipment, microcomputers and related peripherals, telecommunicationsequipment, and portable medical equipment. Sales are to customers worldwide, and credit is granted based upon thecredit policies of the Company.

 

*Restatement –*The consolidated financial statements as of and for the fiscal years ended May 29,2005 and May 30, 2004 were restated as a result of the Company’sidentification of accounting errors at the Company’s China subsidiary relatedto unrecorded liabilities.  Theaccounting errors resulted in a misstatement in accounts payables, current liabilities,accumulated deficit, total shareholders’ equity, cost of goods sold, grossprofit, operating loss, loss before taxes, net loss, net loss applicable tocommon stockholders, and net loss per share. There were also related adjustments to the Company’s consolidatedstatement of cash flows and consolidated statement of stockholders’ equity.

 

**Effects onConsolidated Balance Sheet**

**as of May 29,2005**

 
| ** **                      | ** ** | **As previously** | ** ** | ** **      | ** ** |
|---------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                      | ** ** | **reported**      | ** ** | **As restated** | ** ** |
| Accounts Payable                |       | $                 | 4,892,093  |            | $          | 5,482,478 |   |
| Total current liabilities       |       | 6,782,333         |       | 7,372,718       |       |
| Accumulated deficit             |       | (13,450,961       | )          | (14,041,346     | )          |
| Total stockholders’ equity |       | 7,950,325         |       | 7,359,940       |       |
|                                 |            |                   |            |                 |            |  |  |

 

**Effects onConsolidated Statement of**

**Operations for fiscalyear-ended May 29, 2005**

 
| ** **                                 | ** ** | **As previously** | ** ** | ** **      | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                                 | ** ** | **reported**      | ** ** | **As restated** | ** ** |
| Cost of goods sold                         |       | $                 | 27,076,924 |            | $          | 27,419,309 |   |
| Gross profit                               |       | 10,138,585        |       | 9,796,200       |       |
| Operating loss                             |       | (1,864,056        | )          | (2,206,441      | )          |
| Loss before income taxes                   |       | (2,382,128        | )          | (2,724,513      | )          |
| Net loss                                   |       | (4,984,737        | )          | (5,327,122      | )          |
| Net loss applicable to common stockholders |       | (5,129,917        | )          | (5,472,302      | )          |
| Net loss per share basic                   |       | (1.07             | )          | (1.15           | )          |
| Net loss per share diluted                 |       | (1.07             | )          | (1.15           | )          |
|                                            |            |                   |            |                 |            |  |  |

 

**Effects onConsolidated Balance Sheet**

**as of May 30,2004**

 
| ** **                      | ** ** | **As previously** | ** ** | ** **      | ** ** |
|---------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                      | ** ** | **reported**      | ** ** | **As restated** | ** ** |
| Accounts Payable                |       | $                 | 3,914,782  |            | $          | 4,162,782 |   |
| Total current liabilities       |       | 13,307,998        |       | 13,555,998      |       |
| Accumulated deficit             |       | (8,321,044        | )          | (8,569,044      | )          |
| Total stockholders’ equity |       | 11,936,936        |       | 11,688,936      |       |
|                                 |            |                   |            |                 |            |  |  |

 

30

----

 

**Effects onConsolidated Statement of**

**Operations for fiscalyear-ended May 30, 2004**

 
| ** **                                 | ** ** | **As previously** | ** ** | ** **      | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                                 | ** ** | **reported**      | ** ** | **As restated** | ** ** |
| Cost of goods sold                         |       | $                 | 27,188,047 |            | $          | 27,436,047 |   |
| Gross profit                               |       | 8,172,537         |       | 7,924,537       |       |
| Operating loss                             |       | (5,076,424        | )          | (5,324,424      | )          |
| Loss before income taxes                   |       | (5,491,084        | )          | (5,739,084      | )          |
| Net loss                                   |       | (5,400,466        | )          | (5,648,466      | )          |
| Net loss applicable to common stockholders |       | (5,545,646        | )          | (5,793,646      | )          |
| Net loss per share basic                   |       | (1.19             | )          | (1.24           | )          |
| Net loss per share diluted                 |       | (1.19             | )          | (1.24           | )          |
|                                            |            |                   |            |                 |            |  |  |

 

*Liquidity*– The financial statements have been prepared on a going-concern basis, whichcontemplates the realization of assets and satisfaction of liabilities in thenormal course of business. The Company sustained net losses applicable tocommon stockholders of $5,472,302 (restated) in 2005 and $5,793,646 (restated)in 2004 and at May 29, 2005 had an accumulated deficit of $14,041,346(restated). 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 the Minneapolisheadquarter 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 2005 the Company paid off thebank debt in the United States and at May 29, 2005 the Company’s bank debtwas $289,628, all applicable to its China operations. The Company continues tohave a $7,000,000 line-of-credit agreement with Wells Fargo Bank in Minneapolisthat runs through December 4, 2006.

 

Based on available funds, current plans andbusiness conditions management believes that the Company’s available cash,borrowings and amounts generated from operations, will be sufficient to meetthe Company’s cash requirements for the next 12 months.  The assumptions underlying this beliefinclude, among other things, that there will be no material adversedevelopments in the business or market in general.  There can be no assurances however that thoseassumed events will occur.  If management’splans are not achieved, there may be further negative effects on the results ofoperations and cash flows, which could have a material adverse effect on theCompany.

 

A summary of the Company’s significantaccounting policies follows:

 

*Principles of Consolidation*- The consolidated financial statements include the accounts of AultIncorporated and its wholly owned subsidiaries. All intercompany transactions have been eliminated.  The foreign currency translation adjustmentrepresents the translation into United States dollars of the Company’sinvestment in the net assets of its foreign subsidiaries.

 

*Fiscal Year*****- TheCompany operates on a 52 to 53-week fiscal year.  The fiscal years for the financial statementspresented end on May 29, 2005, May 30, 2004, and June 1,2003.  All years presented contain 52weeks.  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.

 

31

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*Cash and Cash Equivalents -*The Companymaintains its cash in bank deposit accounts which, at times, may exceedfederally insured limits.  The Companyhas not experienced any losses in such accounts.  The Company considers all highly liquidfinancial instruments purchased with an original maturity of three months orless to be cash equivalents.  Cash equivalentsconsist primarily of short-term commercial paper.  The Company maintained cash at variousfinancial institutions located in China totaling $545,362 and $553,807 at May 29,2005 and May 30, 2004.

 

*Accounts Receivable*- The Company grants credit to customers in the normal course of business, butgenerally does not require collateral or any other security to support amountsdue.  Management performs on-going creditevaluations of customers based on financial position, past history, thecustomer’s current ability to pay its obligation to the Company, and thecondition of the general economy and the industry as a whole.  The Company maintains allowances forpotential credit losses which, when realized, have generally been withinmanagement 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) ormarket.  Inventories include material,labor, and manufacturing overhead.

 

*Depreciation -*Depreciationis based on the estimated useful lives of the individual assets and iscalculated on the straight-line method for financial reporting and acceleratedmethods for tax purposes.  The estimateduseful lives are 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 |       |

 

*Financial Instruments -*The fair value of the long-term debt is estimated based on the use ofdiscounted cash flow analysis using interest rates for the same or similar debtoffered to the Company having the same or similar remaining maturities and collateralrequirements.  Management estimates thecarrying value of the long-term debt approximates fair value.  All other financial instruments approximatefair value because of the short-term nature of these instruments.

 

*Revenue Recognition -*The Company recognizes revenue at the shipping point for sales tocustomers located within the Company’s or subsidiaries’ country ofdomicile.  For sales to customers outsideof the Company’s or subsidiaries’ country of domicile, the Company recognizesrevenue at the time risk of ownership passes. All of the Company’s product heldby distributors are stocked for OEM’s and the sales terms are noncancelable,and nonreturnable.  Payment terms fordistributors are no different than other customers, 0.5% 10 net 30.

 

*Freight*- Customerbillings for freight are included in sales, and the freight costs are includedin costs of sales.

 

*Design Engineering -*Designengineering costs are those incurred for research, design, and development ofnew products and redesign of existing products. These costs are expensed as incurred.

 

32

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

 

*Stock Compensation* - TheCompany’s 1986 and 1996 stock option plans have reserved 600,000 and 1,500,000common shares, for issuance under qualified and nonqualified stock options forits key employees and directors.  Optionprices are determined by the market value of the stock at the time the optionwas granted.  Options become exercisableas determined at the date of grant by a committee of the Board of Directors.  Options expire ten years after the date ofgrant unless an earlier expiration date is set at the time of grant.

 

The intrinsic value method is used to value thestock option grants to employees and directors. No compensation cost has been recognized for the stock option plans, asall options have been issued with exercised prices at or above fair value.  Had compensation cost for the Company’s stockoption plans been determined based on the fair value at the grant date forawards in 2005, 2004, and 2003, the Company’s net loss and net loss per sharewould have changed to the pro forma amounts indicated below:

 
| ** **                                  | ** ** | **Restated**     | ** ** | **Restated**     | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                  | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
| ** **                                  | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| Net loss applicable to common stockholders: |       |             |       |             |       |             |       |
| As reported                                 |       | $                | (5,472,302 | )                | $          | (5,793,646       | )          | $ | (7,692,073 | ) |
| Pro forma                                   |       | (5,678,259       | )          | (6,054,664       | )          | (8,092,340       | )          |
| Per share,  basic, as reported              |       | (1.15            | )          | (1.24            | )          | (1.67            | )          |
| Per share,  diluted, as reported            |       | (1.15            | )          | (1.24            | )          | (1.67            | )          |
| Per share,  basic, pro forma                |       | (1.19            | )          | (1.29            | )          | (1.76            | )          |
| Per share,  diluted, pro forma              |       | (1.19            | )          | (1.29            | )          | (1.76            | )          |
|                                             |            |                  |            |                  |            |                  |            |  |  |  |

 

The fair value of each option grant is estimatedon the date of grant using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions 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       |       |
|                                 |            |                  |            |                  |            |                  |            |  |  |  |

 

33

----

 

*Long-Lived Assets*****- The Company reviews its long-lived assets annually todetermine potential impairment by comparing the carrying value of thelong-lived assets outstanding with estimated future undiscounted cash flowsexpected to result from the use of the assets, including cash flows fromdisposition.  Should the sum of theexpected future undiscounted cash flows be less than the carrying value, theCompany would recognize an impairment loss. An impairment loss would be measured by comparing the amount by whichthe carrying value exceeds the fair value of the long-lived assets andintangibles.  To date, management hasdetermined that no impairment of long-lived assets exists.

 

*Net Loss per Share -*Basic net loss per share is computed by dividing net loss by theweighted-average number of common shares outstanding during the period.  Diluted loss per share is computed bydividing net loss by the weighted-average number of common shares outstandingduring the period adjusted by common share equivalents related to stock optionsand warrants.  Options to purchase1,265,626, 1,187,826, and 1,093,426, shares of common stock were outstanding atthe fiscal years ended May 29, 2005, May 30, 2004, and June 1,2003, but were excluded from the computation of common stock equivalentsbecause they were anti-dilutive.

 

The following table reflects the calculationof basic and diluted net loss per share:

 
| ** **                                                  | ** ** | **Restated**     | ** ** | **Restated**     | ** ** | ** **       | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                  | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
| ** **                                                  | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| ** **                                                  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Numerator -                                                 |       |             |       |             |       |             |       |
| Net loss  applicable to common stockholders                 |       | $                | (5,472,302 | )                | $          | (5,793,646       | )          | $ | (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                                    |       | $                | (1.15      | )                | $          | (1.24            | )          | $ | (1.67 | ) |
|                                                        |       |             |       |             |       |             |       |
| Diluted net loss per share                                  |       | $                | (1.15      | )                | $          | (1.24            | )          | $ | (1.67 | ) |
|                                                             |            |                  |            |                  |            |                  |            |  |  |  |  |

 

The numerator for net loss for continuingoperations includes loss from continuing operations and preferred stockdividends.

 

*Use of Estimates -* The preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

*Comprehensive Loss -*TheCompany’s fiscal 2005 comprehensive loss consists of net loss and foreigncurrency translation adjustments.

 

*Foreign Currency Translation -*TheCompany’s international subsidiaries have United States dollars as theirfunctional currency.  Specifictransactions that are denominated in the foreign currency are translated at thecurrent exchange rate.

 

34

----

 

2.          DISCONTINUED OPERATIONS

 

On May 20, 2005, the Company completed the sale of its whollyowned subsidiary, Ault Korea Corporation (“Ault Korea”), to JEC Korea Co., Ltd(“JEC”) for $3.7 million.  The agreementincludes the receipt of $1,472,000 in cash and a secured note in the amount of$2,250,000.  The transaction resulted ina loss of approximately $2,442,000 and the reclassification of the Koreansubsidiary activity as “discontinued operations” for all periods presented.

 

The sale includes all assets and liabilities of Ault Korea Corporationand the use of the “Ault Korea” name in Korea for a period of three years.  Ault Korea includes the property in Seoul,South Korea and approximately 110 employees. As part of the terms of the agreement, JEC has the rights to sell powerconversion products in Korea while Ault will have rights to sell the same powerconversion products throughout the rest of the world.  Prior to this transaction, JEC was a supplierof Ault, but otherwise no material relationship existed between Ault and JEC,or their respective affiliates, directors or officers, or any associates oftheir directors and officers.

 

The secured note receivable is scheduled to be paid in four equalinstallments of $562,500 in December 2005, June 2006, December 2006and the final installment in June 2007.

 

Revenues and results of operations for the Korean subsidiary for themost recent three fiscal years include 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 | ) |
|                                            |            |                       |             |                       |            |                       |            |  |  |  |  |

 

The balance sheet information of discontinuedoperations 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

----

 

3.          INVENTORIES

 

The components 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-yearwarranty on products.  Warranty expenseis estimated at the time revenue is recognized and is determined by calculatingthe historical relationship between sales and warranty costs and applying thecalculation to the current period’s sales. Based on warranty repair costs andthe rate of return, the Company periodically reviews and adjusts its warrantyaccrual.  Actual repair costs are offsetagainst the reserve.   The followingtable shows 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.          FINANCINGARRANGEMENT AND LONG-TERM DEBT

 

*Financing Arrangement*****-****The Companyhas a financing agreement, which includes a $7,000,000 revolving line-of-creditagreement through December 4, 2006. Interest on advances is at the prime rate plus 2% (prime plus 5% defaultrate).  The rate at May 29, 2005 was8.00% and on May 30, 2004 the rate was 6.00%.  All advances are due on demand and arecollateralized by all assets of the Company.  The availability of the line is based on the outstanding receivables ofthe Company; the amount available at May 29, 2005 was $3,357,000.  There was nothing outstanding on this line-of-creditat May 29, 2005.  The Company’sfinancing agreement contains financial covenants. These covenants require theCompany, among other things, to maintain a minimum capital base, and alsoimpose certain limitations on additional capital expenditures and the paymentof dividends.  At the end of fiscal 2005,the Company’s actual net book worth and income before taxes did not meet theminimum of the credit agreement.  TheCompany received a waiver and amendment for these covenants.  Following the August 2005 waiver, theCompany believes the provisions imposed by this credit agreement are achievablebased on the Company’s expected operating results for the next year.

 

36

----

 

*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 the consolidation of its manufacturingoperations.  The consolidation includedthe closing of its Minneapolis production operations, eliminating approximately40 jobs in assembly, equipment maintenance, procurement and administrativesupport and the integration of production into Ault’s other manufacturingplants. The consolidation was completed at the end of February 2004. Ault’sengineering, documentation, safety certification/reliability, sales, marketingand administrative services remain at the Minneapolis headquartersfacility.  The consolidation wasimplemented to reduce expenses, improve cash flow and help return the Companyto profitability.

 

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

 

37

----

 

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

#### ** **

Pretax income (loss) for domestic and foreignoperations was as follows:

 
| ** ** | ** ** | **Restated**     | ** ** | **Restated**     | ** ** | ** **       | ** ** |
|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
| ** ** | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|       |       |             |       |             |       |             |       |
| Domestic   |       | $                | (3,712,746 | )                | $          | (4,607,298       | )          | $ | (6,549,516 | ) |
| Foreign    |       | (1,606,842       | )          | (981,179         | )          | (1,354,515       | )          |
| Total      |       | $                | (5,319,588 | )                | $          | (5,588,477       | )          | $ | (7,904,031 | ) |
|            |            |                  |            |                  |            |                  |            |  |  |  |  |

 

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

 
| ** **                                           | ** ** | **Restated**     | ** ** | **Restated**     | ** ** | ** **       | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
| ** **                                           | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|                                                 |       |             |       |             |       |             |       |
| Computed expected tax provision (benefit)            |       | $                | (1,862,000 | )                | $          | (1,956,000       | )          | $ | (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                        |       | 682,440          |       | 378,382          |       | —           |       |
| 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

----

 

Net deferred 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       |       | $                | —     |             | $          | — |   |

 

The Company has net operating losscarryforwards of approximately $10,846,000 as of May 29, 2005, withvarious expiration dates through 2023. Based on prior taxable income and estimates of future taxable income,the Company has determined that it is likely that the net deferred tax assetwill not be fully realized in the future. Thus a full valuation allowance has been established.

 

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

#### ** **

*401(k) Employer Match Plan -*****The Company has a 401(k) plan covering substantially allU.S. employees.  The Company is requiredto match 25% of the employees’ first 6% of contributions and may makeadditional contributions to the plan to the extent authorized by the Board ofDirectors.  The contribution amountscharged 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*- The Company maintains a stock purchase plan in which up to 200,000 shares ofcommon stock may be purchased by employees. The purchase price is equal to the lesser of 85% of the fair marketvalue of the shares on the date the phase commences or 85% of the fair marketvalue of the shares on the termination date of the phase.  Each phase is one year from the commencementdate of a phase.  There were 23,212, and25,875 shares purchased under this plan during the fiscal years ended June 1,2003, and May 29, 2005, respectively. No shares were purchased under the plan during the year ended May 30,2004 due to the phase ending on May 31, 2004.

 

39

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#### **9.**          REDEEMABLE CONVERTIBLE 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.  Thepreferred stock is convertible into common stock at the holders’ option at aconversion price of $4.25 principal amount of preferred stock for each shareand has a mandatory redemption of one-third of the outstanding shares ofunconverted preferred stock on July 16, 2006, one-half of the remainingoutstanding shares on July 16, 2007, and the remaining outstanding shareson July 16, 2008.  The dividends onthe preferred 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 Companydeclared dividends of $145,180, which have been paid with 52,158 shares ofcommon stock.  In fiscal 2004 the Companydeclared dividends of $145,180, which have been paid with 55,584 shares ofcommon stock.  In fiscal 2003 the Companydeclared dividends of $128,242, of which $108,885 have been paid with 51,177shares of common stock. The preferred stock has a preference in liquidationover common stock. In the event of liquidation or winding up of the Company,the preferred stockholders will receive an amount equal to $1,000 per shareplus any unpaid dividends accrued through the date of such event.

 

10.        STOCKOPTION PLAN

 

Information relating to all outstanding optionsas of May 29, 2005, May 30, 2004, and June 1, 2003 is asfollows:

 
| ** **                                                      | ** ** | **May 29,  2005** | ** ** | **May 30,  2004** | ** ** | **June 1,  2003** | ** ** |
|-----------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                      | ** ** | ** **             | ** ** | **Weighted-**          | ** ** | ** **             | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                      | ** ** | ** **             | ** ** | **Average**            | ** ** | ** **             | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                      | ** ** | ** **             | ** ** | **Exercise**           | ** ** | ** **             | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                      | ** ** | **Shares**             | ** ** | **Price**              | ** ** | **Shares**             | ** ** | **Price** | ** ** | **Shares** | ** ** | **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

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The following table summarizes information aboutstock options outstanding at May 29, 2005:

 
| ** **   | ** ** | ** **          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------|------------|---------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **   | ** ** | ** **          | ** ** | **Weighted-**           | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **   | ** ** | **Number**          | ** ** | **Average**             | ** ** | **Weighted-**           | ** ** | **Number** | ** ** | **Weighted-** | ** ** |
| **Range of** | ** ** | **Outstanding**     | ** ** | **Remaining**           | ** ** | **Average**             | ** ** | **Exercisable** | ** ** | **Average** | ** ** |
| **Exercise** | ** ** | **at May 29,** | ** ** | **Contractual**         | ** ** | **Exercise**            | ** ** | **at May 29,** | ** ** | **Exercise** | ** ** |
| **Prices**   | ** ** | **2005**            | ** ** | **Life (Years)**        | ** ** | **Price**               | ** ** | **2005** | ** ** | **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 establishand to 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 provide that the preferred sharesare senior to the common shares with respect to dividends and liquidation.

 

The Company has a shareholders’ rights plan -under which, a Class A, Junior Participating Preferred Stock with no parvalue was created.  In addition, adividend of one right was declared for each share of common stock at anexercise price of $36 per right and a redemption price of $0.001 perright.  Each right is equal to a right topurchase one one-hundredth of a share of the Class A, Junior ParticipatingPreferred Stock. 100,000 shares of preferred stock are reserved for theexercise of the rights.  No rights wereexercised during the years ended May 29, 2005, May 30, 2004, and June 1,2003.

 

The Company has notes receivable from certainofficers of the Company arising from the sale of common stock recorded as anoffset to stockholders’ equity.  During2003, the Company wrote off $55,000 of such notes as compensation expense.

 

41

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12.        COMMITMENTAND CONTINGENCIES

 

*Operating Leases -* The Companyleases certain facilities under operating leases through March 2008.  In addition, certain equipment and motorvehicles are leased under operating leases with terms of approximately 36months.

 

During May 2005, the Company entered intoan agreement for the sale of its headquarter building in Brooklyn Park,Minnesota and the leaseback of a part of that building.  The lease is for a twenty-seven month period,and is classified as an operating lease.

 

Approximate minimum annual rental commitments atMay 29, 2005 are as follows:

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

 

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

 

13.        SEGMENTINFORMATION AND FOREIGN OPERATIONS

 

The Company conducts its business within onereportable segment:  the power conversionproduct industry.  Manufacturing of theCompany’s products are performed at the Company’s former Korean subsidiary, theChinese subsidiaries, and certain nonaffiliated companies in China andThailand.  A summary of the Company’srevenues, net income, and identifiable assets by geographic area is presentedbelow:

 
| ** **                                           | ** ** | **Restated**     | ** ** | **Restated**     | ** ** | ** **       | ** ** |
|------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **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                                    |       | (1,454,938       | )          | (1,133,986       | )          | (908,077         | )          |
| Discontinued  Operations                             |       | (153,074         | )          | 150,607          |       | (446,438         | )          |
| Eliminations                                         |       | 3                |       | 2,200            |       | —           |       |
| Consolidated                                         |       | $                | (5,472,302 | )                | $          | (5,793,646       | )          | $ | (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 |   |
|                                                      |            |                  |            |                  |            |                  |            |  |  |  |  |

 

42

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| ** **          | ** ** | **May 29,** | ** ** | **May 30,** | ** ** | **June 1,** | ** ** |
|---------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **          | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
| 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 |   |
|                     |            |                  |            |                  |            |                  |            |  |  |  |  |

 

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

 

*Export Sales -*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 -*In additionto the manufacturing done by the Asian subsidiaries, the Company has subcontractingagreements for the purchase of finished assemblies from certain manufacturersin China and Thailand.  Total purchasesunder these agreements were approximately $4,288,000, $5,243,000, and$5,918,000 for the fiscal years ended May 29, 2005, May 30, 2004, andJune 1, 2003, respectively.

 

#### **14.**        MAJOR CUSTOMER

#### ** **

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

 

#### **15.**        ACQUISITION

#### ** **

On July 16, 2002, the Company purchaseda portion of the operating assets of the Power General division of NidecAmerica Corporation. The Power General division developed, manufactured, andsold high-efficiency DC/DC converters and custom power supplies at variouspower levels up to 1200 watts under the Power General brand name.  Pursuant to the Purchase Agreement, theCompany paid the seller $366,000 in cash and issued $2,074,000 face amount ofthe Company’s newly created Series B 7% Convertible Preferred Stock, nopar value (the Preferred Stock). The Preferred Stock issued to seller isconvertible into 488,000 shares of the Company’s common stock.  The Company has filed a registrationstatement covering the shares of common stock issuable upon conversion of the PreferredStock with the Securities and Exchange Commission. Diluted EPS reflects thepotential dilution that could occur if the Preferred Stock was converted intocommon stock of the Company during reported periods.  The Preferred Stock was excluded from DilutedEPS in the current year as the effect of its inclusion would beantidilutive.  The Company has maintainedPower General’s engineering group in Massachusetts and has moved Power General’smanufacturing operations and related functions to the Company’s otherfacilities in Asia.

 

43

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The total cost of the acquisition was$2,559,278 and was accounted for under the purchase method of accounting.  Accordingly, the acquired assets andliabilities assumed have been recorded at their respective fair values as ofthe date of acquisition.  The results ofoperations of the acquired business is included in the financial statementssince the date of the acquisition.  Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed 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 |   |

 

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            |       |

 

44

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#### **16.**        QUARTERLY FINANCIAL INFORMATION

#### ** **

Accounting errors discovered in the Company’s China operationsincreased the loss applicable to common stockholders by $593,000 for fiscalyear 2004 and $425,000 for the first three quarters of fiscal year 2005 comparedto results that were originally reported. The sale of the Company’s Koreansubsidiary in May 2005, required adjustments to the financial statementsto present Korean operations as “discontinued operations”.  

 

During the fourth quarter of fiscal year 2005, the Company recordedadjustments and accounting entries that increased the loss applicable to commonstockholders by $3,328,000.  The loss onthe sale of the Korean subsidiary was approximately $2,442,000 and the loss onthe sale of the Minneapolis headquarters’ building was $137,000.  The value of accounts receivable andinventories for Ault’s China operations was reduced by $198,000 and $427,000respectively.  The value of inventoriesin the United States was reduced by $124,000.

 

QUARTERLY FINANCIAL DATA

(Unaudited)

(Amounts in Thousands, ExceptPer Share Data)

 
| ** **                                 | ** ** | **FISCAL QUARTERS** | ** ** |
|--------------------------------------------|------------|---------------------|------------|
| ** **                                 | ** ** | **1ST**             | ** ** | **2ND** | ** ** | **3RD** | ** ** | **4TH** | ** ** |
| Fiscal Year 2005 as restated:              |       |                |       |   |   |   |   |   |   |
| Net Sales                                  |       | $                   | 10,336     |   | $ | 8,225 |   | $ | 8,941 |   | $ | 9,714 |   |
|                                       |       |                |       |   |   |   |   |   |   |
| Gross Profit                               |       | 2,675               |       | 2,309 |   | 2,674 |   | 2,138 |   |
|                                       |       |                |       |   |   |   |   |   |   |
| Loss From Continuing Operations            |       | (205                | )          | (649 | ) | (449 | ) | (1,429 | ) |
|                                       |       |                |       |   |   |   |   |   |   |
| Loss From Discontinued Operations          |       | 36                  |       | (5 | ) | (177 | ) | (2,449 | ) |
|                                       |       |                |       |   |   |   |   |   |   |
| Net Loss Applicable to Common Stockholders |       | (205                | )          | (690 | ) | (662 | ) | (3,915 | ) |
|                                       |       |                |       |   |   |   |   |   |   |
| Loss Per Share:                            |       |                |       |   |   |   |   |   |   |
| Basic                                      |       | (0.04               | )          | (0.14 | ) | (0.14 | ) | (0.83 | ) |
| Diluted                                    |       | (0.04               | )          | (0.14 | ) | (0.14 | ) | (0.83 | ) |
|                                       |       |                |       |   |   |   |   |   |   |
| Fiscal Year 2005 as reported:              |       |                |       |   |   |   |   |   |   |
| 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 | ) |
|                                       |       |                |       |   |   |   |   |   |   |
| Income (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 | ) |
|                                            |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

45

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| ** **                                  | ** ** | **FISCAL QUARTERS** | ** ** |
|---------------------------------------------|------------|---------------------|------------|
| ** **                                  | ** ** | **1ST**             | ** ** | **2ND** | ** ** | **3RD** | ** ** | **4TH** | ** ** |
| Fiscal Year  2004 as restated:              |       |                |       |   |   |   |   |   |   |
| Net Sales                                   |       | $                   | 8,430      |   | $ | 8,769 |   | $ | 8,600 |   | $ | 9,562 |   |
|                                        |       |                |       |   |   |   |   |   |   |
| Gross Profit                                |       | 1,803               |       | 2,238 |   | 1,479 |   | 2,405 |   |
|                                        |       |                |       |   |   |   |   |   |   |
| Loss From  Continuing Operations            |       | (1,230              | )          | (781 | ) | (3,270 | ) | (518 | ) |
|                                        |       |                |       |   |   |   |   |   |   |
| Income  (loss) From Discontinued Operations |       | 61                  |       | (11 | ) | 12 |   | 89 |   |
|                                        |       |                |       |   |   |   |   |   |   |
| Net Loss  Applicable to Common Stockholders |       | (1,205              | )          | (828 | ) | (3,295 | ) | (466 | ) |
|                                        |       |                |       |   |   |   |   |   |   |
| Loss Per  Share:                            |       |                |       |   |   |   |   |   |   |
| Basic                                       |       | (0.26               | )          | (0.18 | ) | (0.70 | ) | (0.10 | ) |
| Diluted                                     |       | (0.26               | )          | (0.18 | ) | (0.70 | ) | (0.10 | ) |
|                                        |       |                |       |   |   |   |   |   |   |
|                                        |       |                |       |   |   |   |   |   |   |
| Fiscal Year  2004 as reported:              |       |                |       |   |   |   |   |   |   |
| 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  (loss) 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 | ) |
|                                             |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |

 

46

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#### **17.**        SUBSEQUENT EVENT (unaudited)

#### ** **

On December 16, 2005, SL Industries, Inc., aNew Jersey corporation (“SL Industries”), Lakers Acquisition Corp., a Minnesotacorporation and a wholly owned subsidiary of SL Industries (“Purchaser”), andAult Incorporated, a Minnesota corporation (“Ault” or the “Company”), enteredinto an Agreement and Plan of Merger (the “Merger Agreement”). 

 

Pursuant to the terms of the Merger Agreement, Purchaser will commencea tender offer (the “Offer”) for all of the issued and outstanding shares ofcommon stock, no par value per share (the “Company Common Stock”), of Ault,including associated preferred stock rights (the “Rights” and together with theCompany Common Stock, the “Shares” and each share thereof, a “Share”), at aprice equal to $2.90 per Share net to the seller in cash (or any higher priceper Share paid in the Offer) (the “Offer Price”), without interest (and subjectto applicable withholding taxes).  The Offer commenced on December 23,2005.  Upon the terms and subject to the conditions set forth in theMerger Agreement, following a successful completion of the Offer, Purchaserwill be merged with and into Ault with Ault surviving the merger as a whollyowned subsidiary of SL Industries (the “Merger”). In the Merger, each Share(other than Shares owned by SL Industries, Purchaser, or shareholders, if any,who have perfected statutory dissenters’ rights under Minnesota law) will beconverted into the right to receive the Offer Price, without interest (andsubject to applicable withholding taxes).

 

47

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**ITEM 8 (b). SUPPLEMENTARY FINANCIALINFORMATION****               **

 

Not Applicable.

 

**ITEM 9.  CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not Applicable****

 

**ITEM 9A.   CONTROLS AND PROCEDURES.**

 

(a)   Evaluationof Disclosure Controls and Procedures

 

Management, with the participation of the principalexecutive officer and principal financial officer, has evaluated theeffectiveness of the design and operation of the disclosure controls andprocedures (as defined in rules 13a-15(e) and 15d – 15(e) underthe Securities Exchange Act of 1934, as amended) as of the end of the periodcovered by this annual report.  Subjectto the matters discussed below, management has concluded that the Company’sdisclosure controls and procedures are not effective to ensure that informationrequired to be disclosed in the reports that the Company files under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the rules and forms of the SEC and that thedisclosure controls are also not effective to ensure that information requiredto be disclosed in the Company’s Exchange Act reports is accumulated andcommunicated to management, including the chief executive officer and chieffinancial officer to allow timely decisions regarding required disclosure.

 

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. As of May 29, 2005, the Company did not maintain effective controlsrelating to transactions at its China subsidiary related to inventory build-upand relief, reconciliation of intercompany accounts and the recording of allpayables. 

 

In connection with its audit of the Company’sconsolidated financial statements for the year ended May 30, 2004, GrantThornton LLP (“Grant Thornton”), the Company’s independent registered publicaccounting firm, advised the Audit Committee and management of internal controlmatters with respect to certain inventory transactions that they considered tobe a material weakness as that term is defined under standards established bythe Public Company Accounting Oversight Board (PCAOB).  The Company considered these matters in connectionwith the year-end closing process and the preparation of the May 29, 2005consolidated financial statements included in this Form 10-K.  In response to the observations made by GrantThornton, the Company will implement certain enhancements to its internalcontrols and procedures, which it believes address the matters raised by GrantThornton.

 

*China Subsidiary*

 

The Company did not maintain effective controls overthe preparation of and independent review of accounts at the Chinasubsidiary.  The Company has concludedthat these control deficiencies constitute material weaknesses.

 

*Remediation of Material WeaknessesRelated to China Subsidiary*

 

Management has taken, or is in the process of takingthe following steps with respect to the control deficiencies at its Chinasubsidiary:

 

•      The transfer of a seasoned accountant with experience in Asian operationswho will be headquartered in Minneapolis, and will be the primary liaison withour China accounting staff and operations.

 

•      Commencement of a training program to upgrade the skill sets of our Chinaaccounting staff.

 

48

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•      The hiring of an experienced China-based controller to coordinate allfinancial reporting, monthly physical inventory counts and verification andalso be a part of the weekly conference calls with all of our operations toimprove communications.

 

Management believes that implementation of theseactions will remediate the material weaknesses described above.

 

*Warehouse Control Deficiencies*

 

In a cost-cutting effort in the third quarter offiscal 2004, the Company closed down a manufacturing facility in Minneapolisand terminated a third party warehouse facility in Ireland.  As part of the shutdown of the manufacturingin December 2003, certain personnel were terminated prior to thedisposition of inventory at the location. The Company’s haste in cost elimination resulted in having insufficientstaffing to control the disposition of the inventory.  This was found to be a weakness of $25,569 inthe counting of inventory that was discovered during the course of the audit bythe Company’s external auditors.  Thisshould have been recorded in the third quarter.

 

In addition to the manufacturing shut-down, theCompany also closed a third party warehouse facility to cut costs in January 2004.  This too resulted in the terminations ofpersonnel whose responsibilities including monitoring third party warehousingof customer stock inventory. Approximately $57,581 of inventory was not adequately tracked.  This error was also discovered in the courseof the audit, and should have been recorded in the third quarter.  Taken together the manufacturing and thirdparty warehouse control deficiencies resulted in an adjustment of $83,150,which should have been recorded in the third quarter.  This $83,150 adjustment was extrapolated overthe Company’s entire inventory, which resulted in a total adjustment of$279,987.  The Company believes that thisadjustment is not material.

 

In connection with its audit of the Company’sconsolidated financial statements for the year ended May 30, 2004, GrantThornton LLP (“Grant Thornton”), the Company’s independent registered publicaccounting firm, advised the Company’s audit committee and management that theadjustments described with respect to inventory constituted a material weaknessas that term is defined under standards established by the Public CompanyAccounting 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 the Company determines to enterinto any future third party warehouse agreement, the Company will make surethat is has devoted adequate resources for necessary preventative and detectivecontrols.  The third party warehouse willhave a weekly reconciliation between the inventory in the warehouse and the Company’sinventory system.  The head of sales andthe head of finance will review this reconciliation.  On a quarterly basis, the Company willphysically count the inventory.

 

Similarly, before the Company closes anothermanufacturing location, the Company will make sure there are adequate resourcesin place for necessary preventative and detective controls.  If the Company closes a manufacturinglocation, it will have the necessary resources to maintain a cycle count systemuntil the disposition of the inventory is complete.  Also there will be a physical inventory ofthe inventory before the end of each quarter until the disposition of theinventory is complete.

 

**ITEM 9B.  OTHER INFORMATION**

 

Not Applicable.

 

49

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**PART III.**

 

**ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

The Company’s Board of Directors is presently comprised of sevendirectors:

 
| ** **                   | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                 | ** ** | **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         |

 

50

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Certain information with respect to the executive officers of theCompany 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. Henryresigned from 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.

 

### **Compliance with Section 16(a) of the SecuritiesExchange Act of 1934**

### ** **

Section 16(a) of the Securities Exchange Act of 1934 requiresthe Company’s directors and executive officers, and persons who own more than10% of a registered class of the Company’s equity securities, to file with theSecurities and Exchange Commission initial reports of ownership and reports ofchanges in ownership of common stock and other equity securities of theCompany. These insiders are required by Securities and Exchange Commissionregulations to furnish the Company with copies of all Section 16(a) formsthey file, including Forms 3, 4 and 5. To the Company’s knowledge, and basedsolely on review of the copies of such reports furnished to the Company andwritten representations that no other reports were required, all required Section 16(a) filingsapplicable to directors, executive officers and greater than 10% shareholdersin fiscal 2005 were timely filed.

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

### **Summary of 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 by the Company, as wellas certain other compensation paid or accrued for these years, to Frederick M.Green, the Company’s President and Chief Executive Officer, and to certainother most highly compensated executive officers of the Company (together with Mr. Green,the “Named Executive Officers”) whose total cash compensation exceeded $100,000during fiscal year 2005 in all capacities in which they served:

 

51

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Summary Compensation 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)    Representsbase compensation paid to the named executives; includes bonuses for fiscal2005 and 2004.

(2)    Reflectsthe number of shares that may be purchased pursuant to options granted in theyear indicated.

(3)    Reflects401(k) matching contributions of $2,368, $2,960 and $2,876 under the Company’s ProfitSharing and Retirement Plan in 2005, 2004 and 2003 respectively, and thepayment of $1,654, $2,061 and $1,924 for life insurance premiums in 2005, 2004and 2003 respectively.

(4)    Reflects401(k) matching contributions of $1,847, $1,875 and $1,911 under the Company’sProfit Sharing and Retirement Plan in 2005, 2004 and 2003 respectively, and thepayment of $1,572, $1,572 and $1,457 for life insurance premiums in 2005, 2004and 2003 respectively.

(5)    Reflects401(k) matching contributions of $2,249, $2,339 and $2,285 under the Company’sProfit Sharing and Retirement Plan in 2005, 2004 and 2003 respectively, andpayments of $1,506, $1,506 and $1,422 for life insurance premiums in 2005, 2004and 2003 respectively.

(6)    Reflects401(k) matching contributions of $1,670, $2,077 and $1,023 under the Company’sProfit Sharing and Retirement Plan in 2005, 2004 and 2003 respectively, andpayment of $1,507, $1,507 and $1,421 for life insurance premiums in 2005, 2004and 2003 respectively.

(7)    Mr. Henryreceived a severance payment of $78,270 on September 1, 2005. Theseverance payment is over and above the amounts listed in the annual cashcompensation table.

 

52

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### **Option Grants in Fiscal Year 2005**

 

The following table contains information concerning grants of stockoptions to the Named Executive Officers during the fiscal year ended May 29,2005:

 
| ** **         | ** ** | **Number of  Securities  Underlying  Options** | ** ** | **Percent of  Total  Options  Granted to All  Employees** | ** ** | **Exercise  Price** | ** ** | **Expiration** | ** ** | **Potential Realizable  Value at Assumed  Annual Rate of Stock  Price Appreciation for  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 in Fiscal Year 2005 and Fiscal Year-EndOptions Outstanding**

### ** **

The following table sets forth information with respect to the NamedExecutive Officers concerning exercise of options and employee stock purchaseplan activity during the fiscal year ended May 29, 2005, and unexercisedoptions held as of May 29, 2005. The closing price of $2.25 per share ofthe Company’s Common Stock on May 27, 2005, the last trading day for thefiscal year ended May 29, 2005, was below all the grant exercise prices ofall options outstanding as of May 29, 2005. 

 
| ** **         | ** ** | **Shares  Acquired** | ** ** | **Value (1)** | ** ** | **Number of Securities  Underlying Unexercised  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.

 

53

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

** **

The Compensation Committee of the Board of Directors administers ourexecutive compensation programs.  TheCommittee is currently composed of independent, non-employee directors, none ofwhom was at any time during the past fiscal year an officer or employee of theCompany, was formerly an officer of the Company or any of its subsidiaries, orhad any employment relationship with the Company. 

 

Mr. Green, the Company’s Chairman, President and Chief ExecutiveOfficer, participated in the deliberations of the Compensation Committeeregarding executive compensation that occurred during fiscal 2005, but did nottake part in deliberations regarding his own compensation.  Mr. Green’s participation in thedeliberations of the Compensation Committee included providing information onthe performance of other employees and advisory recommendations regardingthe appropriate levels of compensation for the Company’s officers.

 

**Changein Control Severance Pay Plan**

** **

***Senior Management Change in ControlSeverance Plan.***InAugust 1998, the Board of Directors approved the Senior Management Changein Control Severance Plan (the “Severance Plan”) that provides certain benefitsto executive officers and senior management employees in the event of atermination of employment other than for cause or good reason in the 18-monthperiod following a change in control. There are nine****eligibleemployees under the Severance Plan. The Board adopted the Severance Plan toassist the Company in recruiting and retaining senior employees, assurecontinuity of executive officers upon a change in control, and ease thetransition to new employment for executive officers and senior management thatare terminated as a result of a change in control. 

 

*Summary of Severance Benefits. *Eligible employees are entitled to severance benefits if employment isterminated within 18 months of a change in control for reasons other thandeath, for cause or for a good reason.  Severance benefits are also due if atermination occurs prior to a change in control if the termination ofemployment is a condition to the change in control transaction, or otherwiseinsisted upon by a party to the change in control transaction.  Employees eligible for the Severance Planconsist of selected executive officers and senior management levelemployees.  Severance benefits include: (i) alump sum cash payment of one time or two times the employee’s annual basesalary plus the bonus that would be payable in the year of termination, (ii) continuedor substantially equivalent health, dental, vision, life, disability and otherbenefits for the employee and dependents for one year plus 30% of base salaryin outplacement counseling, or an additional 15% of the lump sum payment inlieu thereof, (iii) additional payments to cover any excise taxes due onaccount of payments under the Severance Plan and (iv) indemnification andadvancement of expenses for any claims arising from the eligible participant’s serviceto the Company subject to applicable law. Mr. Green, Mr. Harris and Mr. Wang are eligible for twotimes annual base salary and bonus, all other eligible employees are entitledto one-times annual base salary and bonus

 

*Summary of key definitions.*The Severance Plan defines termination forcause which would disqualify a participant from severance as: (i) grossmisconduct materially and demonstrably injurious to the Company, (ii) willfuland continued failure by the employee to perform substantially his or herduties after a demand for performance by the Board of Directors unless excusedby incapacity caused by mental or physical illness, or (iii) conviction ofwillfully engaging in illegal conduct constituting a felony or grossmisdemeanor which is materially and demonstrably injurious to the Company orwhich impairs the employee’s ability 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 incontrol under the Severance Plan is defined as: (i) a sale of all orsubstantially all assets of the Company, (ii) approval by shareholders ofa plan to liquidate or dissolve the Company, (iii) a person

 

54

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acquiringmore than 20% but less than 50% of the Company’s Common Stock without priorBoard approval, (iv) a merger in which the Company is owner of at least50% but not more than 80% of the surviving company unless pre-approved theCompany’s Board of Directors, (v) a change in Board of Directors such thatthe directors prior to the change in control do not constitute a majority ofthe Board or (vi) a change in control required to be disclosed under theExchange Act.

 

##### **COMPENSATION COMMITTEE REPORT**

##### ** **

The Compensation Committee is composed exclusively ofnon-employee members of the Company’s Board of Directors who qualify as “independent”directors under the listing rules of Nasdaq.  The Committee determines cash compensationfor the Chief Executive Officer and other executive officers, based onqualitative and quantitative measures of performance, and makes recommendationsto the Board for approval.  The Committeealso determines stock option awards under the Company’s Stock Option Plan.

 

**ExecutiveOfficer Compensation Policy**

** **

The Committee’s policy is to provide executive compensation that isexternally competitive at the various professional levels.  Application of the policy utilizesretrospective quantitative criteria, as well as qualitative evaluation ofindividual initiatives and achievements. It is also the Committee’s policy to encourage and recognize strategicactions that position the Company to better compete in its markets for enhancedoperational results in the longer term. As a result of these factors, the actual change in compensation for anyparticular executive officer for a particular year may not necessarily reflectoperational results of the preceding year. The Company utilizes independently conducted market surveys to obtaincomparative compensation data that it uses to assess and make changes tocompensation program for the Company’s senior executives.

 

**CompensationElements****

 

Compensation currently paid to the Company’s executive officersprincipally consists of three elements: base salary, incentive compensation andannual 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 ofall executive officers are reviewed at the beginning of each fiscal year,although adjustments, if any, to base salary are implemented throughout thefiscal year beginning on the anniversary date of each executive’s date ofemployment.  During the fiscal year endedMay 29, 2005 the Committee did not make any changes to the basecompensation of the Company’s executive officers in effect for the prior fiscalyear, except that the annual base compensation of Mr. Wang was increasedby approximately $8,000 to reflect increased responsibilities.  The Committee regards base compensation paidto the Company’s executive officers as reasonable in relation to publishedinformation regarding compensation of executives with similar responsibilities.

 

*Incentive Compensation. *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 theCompany’s fiscal 2005 revenues in comparison to targets set at the beginning ofthe fiscal year, under this program each executive officer, other than Mr. Henry,is due to received cash incentive compensation equal to 2.5% of his fiscal 2005base salary, or $15,942 in the aggregate.

 

*Options/Stock Based Compensation.*  Stock options are generally awarded at thebeginning of each fiscal year under stock option plans approved by the Company’sshareholders.  Options are granted at anexercise price that is equal to the fair market value of a common share on thedate of the grant.  The Committeebelieves that stock ownership by management derived from granting of stockoptions is beneficial because it aligns the interests of executives with theinterests 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 beginningof fiscal year 2005, the Committee granted stock

 

55

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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.

 

**ChiefExecutive Officer Compensation**

** **

Frederick M. Green, the Company’s President and Chief ExecutiveOfficer, is evaluated by the same factors applicable to the evaluation of otherexecutive officers, as described above, and participates in the same executivecompensation plans provided to the other senior executives.  The Compensation Committee did not make anyadjustment to Mr. Green’s base salary in fiscal 2005.  Following the completion of fiscal 2005,because of the level of the Company’s fiscal 2005 revenues in comparison totargets set at the beginning of the fiscal year, Mr. Green will receivecash incentive compensation of $7,330, which represents 2.5% of his fiscal 2005base salary, under the incentive compensation applicable to all executiveofficers for fiscal year 2005.  Mr. Greenwas also awarded stock options to acquire 12,500 shares of Company common stockat the beginning of fiscal year 2005. The Committee regards Mr. Green’s compensation as reasonable inrelation to published information on compensation of executives with similarresponsibilities. 

 

***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 by the Companyreceive, at the time of election or reelection to the Board, an option topurchase 2,000 shares of the Company’s common stock at a purchase price equalto the fair market value of the Company’s common stock on the date of suchelection or reelection. In addition, each non-employee member of the Board ofDirectors is also paid an annual fee of $4,000, plus $500 for each Boardmeeting or Board committee meeting attended.

 

56

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**STOCK PERFORMANCE GRAPH**

 

The Securities and Exchange Commission requires the Company to includea line graph presenting comparative cumulative, five-year shareholder returnson an indexed basis with a broad market index and either anationally-recognized industry standard or an index of peer companies selectedby the Company. The Company has chosen the Nasdaq Market Index (U.S. Companies)as its broad market index and the S&P 500 Electrical Components &Equipment Index as its peer-group index. The graph below compares thecumulative total return of the Company’s Common Stock over the last five years,assuming a $100 investmrnt on the last business day of fiscal year 2000.

 

 
| ** **                                                  | ** ** | **Base  Period** | ** ** | **INDEXED RETURNS  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 |   |

 

57

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**ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

 

The following table provides information as of September 1, 2005concerning the 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                                       |       |                       |       |           |       |
| 388 Market Street, Suite 700                          |       |                       |       |           |       |
| San Francisco, CA 94111                                    |       | 692,882                    | (2)        | 14.25          | %          |
|                                                       |       |                       |       |           |       |
| Nidec America Corporation                                  |       |                       |       |           |       |
| 318 Industrial Lane                                        |       |                       |       |           |       |
| Torrington, CT 06790                                       |       | 488,000                    | (3)        | 9.12           | %          |
|                                                       |       |                       |       |           |       |
| Royce & Associates, LLC                           |       |                       |       |           |       |
| 1414 Avenue of the Americas                                |       |                       |       |           |       |
| New York, NY 10019                                         |       | 478,500                    | (4)        | 9.84           | %          |
|                                                       |       |                       |       |           |       |
| Fifth Third Bancorp                                        |       |                       |       |           |       |
| Fifth Third Center                                         |       |                       |       |           |       |
| Cincinnati, OH 45263                                       |       | 364,820                    | (5)        | 7.50           | %          |
|                                                       |       |                       |       |           |       |
| Dimensional Fund Advisors Inc.                             |       |                       |       |           |       |
| 1299 Ocean Avenue, 11th Floor                              |       |                       |       |           |       |
| Santa Monica, CA 90401                                     |       | 312,292                    | (6)        | 6.42           | %          |
|                                                       |       |                       |       |           |       |
| 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.

 

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(1)    Foreach director and all officers and directors as a group, share and percentownership information reflects the following number of shares of Common Stockthat may be purchased pursuant to stock options that are exercisable as of May 29,2005: Mr. Green, 269,375 shares; Mr. Birmingham, no 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)    Basedon the Schedule 13 G filed with the Securities and Exchange Commission on July 11,2005.

(3)    Basedon the Schedule 13 G filed with the Securities and Exchange Commission on July 24,2002, the most recent public filing available. The 488,000 shares reportedrepresent shares that are immediately issuable upon conversion of 2,074 sharesof Series B convertible Preferred Stock of the Company. Nidec Corporation,the parent company of Nidec America Corporation, is also deemed to beneficiallyown such shares.

(4)    Basedon Schedule 13 G filed with the Securities and Exchange Commission on January 22,2005.

(5)    Basedon Schedule 13 G filed with the Securities and Exchange Commission on February 14,2005.

(6)    Basedon Schedule 13 G filed with the Securities and Exchange Commission on February 9,2005.

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

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

Not Applicable.

 

**ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

The following schedule is a summary of fees billed to the Companyby Grant Thornton for fiscal 2005 and fiscal 2004 and Deloitte &Touche for the first two 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 and permissible non-auditservices provided by the independent auditors on a case-by-case basis.  In connection with the approval of the annualaudit services 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 ofthe services provided by the Company’s independent auditors during fiscal 2004and 2005, including services related to the audit-related fees and tax fees,have been approved by the audit committee under its pre-approval process.

 

59

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**PART IV.**

 

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

 

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

 
|   | Report of Independent Registered Public Accounting  Firm – Grant Thornton LLP                                                                  |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                |   |
|   | Report of Independent Registered Public Accounting  Firm – Deloitte Anjin LLC                                                                  |   |
|   |                                                                                                                                                |   |
|   | Report of Independent Registered Public Accounting  Firm – Deloitte & Touche LLP                                                      |   |
|   |                                                                                                                                                |   |
|   | Consolidated Financial Statements                                                                                                                   |   |
|   |                                                                                                                                                |   |
|   | •  Balance Sheets, May 29, 2005 and May 30,  2004.                                                                              |   |
|   |                                                                                                                                                |   |
|   | •  Consolidated Statements of Operations for  the Years Ended May 29, 2005, May 30, 2004 and June 1, 2003.                 |   |
|   |                                                                                                                                                |   |
|   | •  Consolidated Statements of Stockholders’  Equity for the Years Ended May 29, 2005, May 30, 2004 and June 1,  2003. |   |
|   |                                                                                                                                                |   |
|   | •  Consolidated Statements of Cash Flows for  the Years Ended May 29, 2005, May 30, 2004 and June 1, 2003.                 |   |
|   |                                                                                                                                                |   |
|   | •  Notes to Consolidated Financial Statements                                                                                             |   |

 

**(2)****     The followingfinancial 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 |   |
|--------|--------------------------------------------------------------------|--------|

 

All otherSchedules 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)      Reportson Form 8-K filed during the three months ended May 29, 2005. TheCompany filed Form 8-K on March 29, 2005 reporting under Item 2.02results for the quarter ended February 27, 2005; the Company filed on May 25,2005 under Item 2.01 announcing the completion of the sale of the Company’swholly owned subsidiary in South Korea; the Company filed Form 8-K on June 2,2005 under Item 1.01 announcing the lease of 13,313 square feet of office spacein its former Minneapolis headquarter building and under Item 2.01 announcedthe completion of the sale of its Minneapolis headquarter building to DaneIndustries Inc.

 

60

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, Ault Incorporated has duly causedAmendment No. 1 to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

**AULT INCORPORATED**

 

 
| /s/ Frederick M. Green                          |                 |   |
|-------------------------------------------------|----------------------|--------|
| Frederick M. Green                              |                 |
|                                            | January 9, 2006 |
| Frederick M. Green                              |                 |
| President, Chief Executive Officer and Director |                 |

 

61

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*******************************************************************

 

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D. C.   20549

 

**FORM 10-K/A**

 

 

ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d)

 

OF THE SECURITIES EXCHANGE ACTOF 1934

 

OF

 

**AULTINCORPORATED**

 

**FOR**

 

**YEAR ENDEDMAY 29, 2005**

 

 

*******************************************************************

 

**FINANCIALSTATEMENT SCHEDULES**

 

*******************************************************************

 

62

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##### **SCHEDULE II**

**AULT INCORPORATED AND SUBSIDIARIES**

**VALUATION AND QUALIFYING ACCOUNTS**

 

**Years Ended 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 ofrecoveries.

 

63

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*******************************************************************

 

 

SECURITIES AND EXCHANGECOMMISSION

 

Washington, D. C.   20549

 

**FORM 10-K/A**

 

 

ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d)

 

OF THE SECURITIES EXCHANGE ACTOF 1934

 

OF

 

**AULTINCORPORATED**

 

**FOR**

 

**YEAR ENDEDMAY 29, 2005**

 

 

*******************************************************************

 

**EXHIBITS**

 

*******************************************************************

 

64

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**AULT INCORPORATED**

 

**EXHIBIT INDEX TO**

**FORM 10-K/A FOR THE YEARENDED**

**May 29, 2005**

 

Required Registration S-K

Exhibit 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 64                                                                                   |
|        |       |                                                                                                                                                              |       |                                                                                                             |
| 23.2        |       | Consent of Independent Auditors                                                                                                                                   |       | Filed herewith at page 65                                                                                   |
|        |       |                                                                                                                                                              |       |                                                                                                             |
| 23.3        |       | Consent of Independent Auditors                                                                                                                                   |       | Filed herewith at page 66                                                                                   |
|        |       |                                                                                                                                                              |       |                                                                                                             |
| 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 67                                                                                   |
|        |       |                                                                                                                                                              |       |                                                                                                             |
| 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 68                                                                                   |
|        |       |                                                                                                                                                              |       |                                                                                                             |
| 32          |       | Certifications pursuant Section 906 of the  Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).                                                               |       | Filed herewith at page 69                                                                                   |

 

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.

 

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