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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended June 30, 2007

OR



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the transition period from  to
.

Commission file number 0-17966



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MICRONETICS,
INC.

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 22-2063614                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|26 Hampshire Drive, Hudson NH            |  | 03051     
|(Address of principal executive offices) |  | (Zip Code)

(603) 883-2900

(Issuers telephone number)



(Former name, former address and former fiscal year, if changed since last report)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

As of August 10, 2007, the issuer had 5,358,217
shares of common stock, par value $.01 per share, outstanding.



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##### Table of Contents

MICRONETICS, INC.

INDEX



|                               |  |          |  |                                                                                                        |  |      
|------------------------------ |  | -------- |  | ------------------------------------------------------------------------------------------------------ |  | -----
|                               |  |          |  | Page No.                                                                                              
|Part I. Financial Information: |  |         
|                               |  |          | 
|                               |  | Item 1.  |  | Financial Statements.                                                                                  |  |      
|                               |  |          | 
|                               |  |          |  | Consolidated Balance Sheets  June 30, 2007 (unaudited) and March 31, 2007 (audited)                   |  | 3    
|                               |  |          | 
|                               |  |          |  | Consolidated Statements of Income - Three Months Ended June 30, 2007 and June 30, 2006 (unaudited)     |  | 4    
|                               |  |          | 
|                               |  |          |  | Consolidated Statement of Shareholders Equity  June 30, 2007 (unaudited)                             |  | 5    
|                               |  |          | 
|                               |  |          |  | Consolidated Statements of Cash Flows - Three Months Ended June 30, 2007 and June 30, 2006 (unaudited) |  | 6    
|                               |  |          | 
|                               |  |          |  | Notes to Interim Consolidated Financial Statements (unaudited)                                         |  | 7-14 
|                               |  |          | 
|                               |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                  |  | 15-18
|                               |  |          | 
|                               |  | Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                             |  | 19   
|                               |  |          | 
|                               |  | Item 4.  |  | Controls and Procedures                                                                                |  | 19   
|                               | 
|Part II. Other Information:    |  |         
|                               |  |          | 
|                               |  | Item 1.  |  | Legal Proceedings                                                                                      |  | 20   
|                               |  |          | 
|                               |  | Item 1A. |  | Risk Factors                                                                                           |  | 20-25
|                               |  |          | 
|                               |  | Item 2.  |  | Unregistered Sales of Equity Securities And Use of Proceeds                                            |  | 26   
|                               |  |          | 
|                               |  | Item 3.  |  | Defaults Upon Senior Securities                                                                        |  | 26   
|                               |  |          | 
|                               |  | Item 4.  |  | Submission of Matters to Vote of Security Holders                                                      |  | 26   
|                               |  |          | 
|                               |  | Item 5.  |  | Other Information                                                                                      |  | 26   
|                               |  |          | 
|                               |  | Item 6.  |  | Exhibits                                                                                               |  | 26   



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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | -------------- | - | ---------- | -
|                                                                                                                                                                     |  | June 30, 2007 |            |   | March 31, 2007 |  
|                                                                                                                                                                     |  | (Unaudited)   |            |   | Audited        |  
|ASSETS                                                                                                                                                               |  |               |            |   |                |   |            |  
|Current assets:                                                                                                                                                      |  |               |            |   |                |   |            |  
|Cash and cash equivalents                                                                                                                                            |  | $             | 2,271,466  |   |                | $ | 7,058,524  |  
|Accounts receivable, net of allowance for doubtful accounts of $298,649 and $297,886 in June 30, 2007 and March 31, 2007,
respectively                               |  |               | 4,405,733  |   |                |   | 3,932,029  |  
|Inventories, net                                                                                                                                                     |  |               | 7,828,579  |   |                |   | 5,548,691  |  
|Deferred tax asset                                                                                                                                                   |  |               | 153,316    |   |                |   |           |  
|Prepaid expenses and other current assets                                                                                                                            |  |               | 1,292,775  |   |                |   | 784,649    |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|Total current assets                                                                                                                                                 |  |               | 15,951,869 |   |                |   | 17,323,893 |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|Property, plant and equipment, net                                                                                                                                   |  |               | 3,951,043  |   |                |   | 4,017,465  |  
|Other assets:                                                                                                                                                        |  |               |            |   |                |   |            |  
|Security deposits                                                                                                                                                    |  |               | 22,777     |   |                |   | 12,302     |  
|Other long term assets                                                                                                                                               |  |               | 42,330     |   |                |   | 138,493    |  
|Intangible assets, net of accumulated amortization                                                                                                                   |  |               | 3,911,271  |   |                |   | 2,344,364  |  
|Goodwill                                                                                                                                                             |  |               | 8,906,561  |   |                |   | 5,982,709  |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|Total other assets                                                                                                                                                   |  |               | 12,882,939 |   |                |   | 8,477,868  |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|TOTAL ASSETS                                                                                                                                                         |  | $             | 32,785,851 |   |                | $ | 29,819,226 |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|                                                                                                                                                                     |  |              
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                 |  |               |            |   |                |   |            |  
|Current liabilities:                                                                                                                                                 |  |               |            |   |                |   |            |  
|Line of credit                                                                                                                                                       |  | $             | 728,528    |   |                | $ |           |  
|Current portion of long-term debt                                                                                                                                    |  |               | 1,438,924  |   |                |   | 1,449,443  |  
|Accounts payable                                                                                                                                                     |  |               | 1,133,255  |   |                |   | 695,142    |  
|Accrued expenses                                                                                                                                                     |  |               | 2,293,727  |   |                |   | 3,342,365  |  
|Current portion of deferred tax liability                                                                                                                            |  |               | 52,502     |   |                |   |           |  
|Income taxes payable                                                                                                                                                 |  |               | 367,346    |   |                |   |           |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|Total current liabilities                                                                                                                                            |  |               | 6,014,282  |   |                |   | 5,486,950  |  
|Long-term debt, net of current portion                                                                                                                               |  |               | 4,974,965  |   |                |   | 5,633,386  |  
|Non-current income taxes payable                                                                                                                                     |  |               | 96,443     |   |                |   |           |  
|Deferred tax liability                                                                                                                                               |  |               | 1,421,917  |   |                |   | 721,917    |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|Total liabilities                                                                                                                                                    |  |               | 12,507,607 |   |                |   | 11,842,253 |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|Shareholders equity:                                                                                                                                                |  |               |            |   |                |   |            |  
|Preferred stock, $0.10 par value; 100,000 shares authorized; no shares issued or outstanding                                                                         |  |               |           |   |                |   |           |  
|Common stock, $0.01 par value; 10,000,000 shares authorized; 5,358,217 and 5,025,457 shares issued and outstanding at June 30, 2007 and
March 31, 2007, respectively |  |               | 53,582     |   |                |   | 50,255     |  
|Additional paid-in capital                                                                                                                                           |  |               | 10,955,752 |   |                |   | 8,541,274  |  
|Retained earnings                                                                                                                                                    |  |               | 11,001,109 |   |                |   | 10,912,458 |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|                                                                                                                                                                     |  |               | 22,010,443 |   |                |   | 19,503,987 |  
|Treasury stock at cost, 383,475 and 358,541 shares at June 30, 2007 and March 31, 2007                                                                               |  |               | (1,732,199 | ) |                |   | (1,527,014 | )
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|Total shareholders equity                                                                                                                                           |  |               | 20,278,244 |   |                |   | 17,976,973 |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                           |  | $             | 32,785,851 |   |                | $ | 29,819,226 |  
|                                                                                                                                                                     |  |               |            |   |                |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                           |  |                             |           |   |      |   |           |  
|------------------------------------------ |  | --------------------------- | --------- | - | ---- | - | --------- | -
|                                           |  | Three months ended June 30, |          
|                                           |  | 2007                        |           |   | 2006 |  
|Net sales                                  |  | $                           | 6,310,665 |   |      | $ | 6,806,438 |  
|Cost of sales                              |  |                             | 3,917,075 |   |      |   | 3,770,618 |  
|                                           |  |                             |           |   |      |   |           |  
|Gross profit                               |  |                             | 2,393,590 |   |      |   | 3,035,820 |  
|                                           |  |                             |           |   |      |   |           |  
|                                           |  |                            
|Operating expenses:                        |  |                             |           |   |      |   |           |  
|Research and development                   |  |                             | 153,864   |   |      |   | 187,503   |  
|Selling, general and administrative        |  |                             | 1,638,655 |   |      |   | 1,699,821 |  
|Amortization of intangible assets          |  |                             | 183,093   |   |      |   | 178,296   |  
|                                           |  |                             |           |   |      |   |           |  
|Total operating expenses                   |  |                             | 1,975,612 |   |      |   | 2,065,620 |  
|                                           |  |                             |           |   |      |   |           |  
|Income from operations                     |  |                             | 417,978   |   |      |   | 970,200   |  
|                                           |  |                             |           |   |      |   |           |  
|                                           |  |                            
|Other (expense) income                     |  |                             |           |   |      |   |           |  
|Interest income                            |  |                             | 40,831    |   |      |   | 40,596    |  
|Interest expense                           |  |                             | (114,746  | ) |      |   | (115,832  | )
|Gain on sale of assets                     |  |                             | 62,509    |   |      |   |          |  
|Other income                               |  |                             | 8,453     |   |      |   | 18,823    |  
|                                           |  |                             |           |   |      |   |           |  
|Total other (expense)                      |  |                             | (2,953    | ) |      |   | (56,413   | )
|                                           |  |                             |           |   |      |   |           |  
|Income before provision for income taxes   |  |                             | 415,025   |   |      |   | 913,787   |  
|Provision for income taxes                 |  |                             | 229,931   |   |      |   | 365,515   |  
|                                           |  |                             |           |   |      |   |           |  
|Net income                                 |  | $                           | 185,094   |   |      | $ | 548,272   |  
|                                           |  |                             |           |   |      |   |           |  
|                                           |  |                            
|Earnings per common share                  |  |                             |           |   |      |   |           |  
|Basic                                      |  | $                           | 0.04      |   |      | $ | 0.12      |  
|                                           |  |                             |           |   |      |   |           |  
|Diluted                                    |  | $                           | 0.04      |   |      | $ | 0.11      |  
|                                           |  |                             |           |   |      |   |           |  
|                                           |  |                            
|Weighted average common shares outstanding |  |                             |           |   |      |   |           |  
|Basic                                      |  |                             | 4,727,500 |   |      |   | 4,611,255 |  
|Diluted                                    |  |                             | 4,758,438 |   |      |   | 4,935,902 |  

The accompanying notes are an integral part of these consolidated financial statements.



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CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(Unaudited)



|                                                                       |  |              |   |                            |           |                   |  |   |                |  |   |            |   |  |   |            |   |  |   |            |  
|---------------------------------------------------------------------- |  | ------------ | - | -------------------------- | --------- | ----------------- |  | - | -------------- |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                       |  | Common Stock |   | Additional Paid-In Capital |           | Retained Earnings |  |   | Treasury Stock |  |   | Total      |  
|                                                                       |  | Shares       |   |                            | Par Value |                   |  |   |               
|Balance at March 31, 2007                                              |  | 5,025,457    |   |                            | $         | 50,255            |  | $ | 8,541,274      |  | $ | 10,912,458 |   |  | $ | (1,527,014 | ) |  | $ | 17,976,973 |  
|                                                                       |  |              |   |                            |           |                  
|Exercise of stock options                                              |  | 109,559      |   |                            |           | 846               |  |   | 268,019        |  |   |           |   |  |   |           |   |  |   | 268,865    |  
|Issuance of common stock for MICA acquisition                          |  | 248,135      |   |                            |           | 2,481             |  |   | 1,997,487      |  |   |           |   |  |   |           |   |  |   | 1,999,968  |  
|Stock based compensation                                               |  |             |   |                            |           |                  |  |   | 148,972        |  |   |           |   |  |   |           |   |  |   | 148,972    |  
|Cumulative effect of the recognition of uncertain income tax positions |  |             |   |                            |           |                  |  |   |               |  |   | (96,443    | ) |  |   |           |   |  |   | (96,443    | )
|Purchase of treasury stock                                             |  | (24,934      | ) |                            |           |                  |  |   |               |  |   |           |   |  |   | (205,185   | ) |  |   | (205,185   | )
|Net income                                                             |  |             |   |                            |           |                  |  |   |               |  |   | 185,094    |   |  |   |           |   |  |   | 185,094    |  
|                                                                       |  |              |   |                            |           |                   |  |   |                |  |   |            |   |  |   |            |   |  |   |            |  
|Balance at June 30, 2007                                               |  | 5,358,217    |   |                            | $         | 53,582            |  | $ | 10,955,752     |  | $ | 11,001,109 |   |  | $ | (1,732,199 | ) |  | $ | 20,278,244 |  
|                                                                       |  |              |   |                            |           |                   |  |   |                |  |   |            |   |  |   |            |   |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                  |  |                             |            |   |      |   |           |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | --------- | -
|                                                                                  |  | Three Months Ended June 30, |           
|                                                                                  |  | 2007                        |            |   | 2006 |  
|Cash flow from operating activities:                                              |  |                             |            |   |      |   |           |  
|Net income                                                                        |  | $                           | 185,094    |   |      | $ | 548,272   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |            |   |      |   |           |  
|Depreciation and amortization                                                     |  |                             | 417,759    |   |      |   | 398,222   |  
|Stock-based compensation                                                          |  |                             | 148,972    |   |      |   | 166,994   |  
|Unrealized gain from marketable securities                                        |  |                             |           |   |      |   | (3,656    | )
|Gain on sale of assets                                                            |  |                             | (62,509    | ) |      |   |          |  
|Provision for allowances on accounts receivable                                   |  |                             | 763        |   |      |   | (3        | )
|Provision for inventory obsolescence and losses                                   |  |                             | 52,629     |   |      |   | 111,241   |  
|Non-cash charges for options issued for services                                  |  |                             |           |   |      |   | 1,540     |  
|Changes in operating assets and liabilities, net of acquisition:                  |  |                             |            |   |      |   |           |  
|Accounts receivable                                                               |  |                             | 201,439    |   |      |   | 1,086,625 |  
|Inventories                                                                       |  |                             | (1,023,937 | ) |      |   | (50,738   | )
|Other long term assets                                                            |  |                             | 96,162     |   |      |   |          |  
|Income taxes payable                                                              |  |                             | 229,931    |   |      |   | (469,385  | )
|Prepaid expenses, other current assets, and other assets                          |  |                             | (477,500   | ) |      |   | (35,906   | )
|Accounts payable                                                                  |  |                             | 60,656     |   |      |   | (28,138   | )
|Accrued expenses and deferred revenue                                             |  |                             | 125,164    |   |      |   | (357,499  | )
|                                                                                  |  |                             |            |   |      |   |           |  
|Net cash (used in) provided by operating activities                               |  |                             | (45,377    | ) |      |   | 1,367,569 |  
|                                                                                  |  |                             |            |   |      |   |           |  
|                                                                                  |  |                            
|Cash flows (used in) provided by investing activities                             |  |                             |            |   |      |   |           |  
|Sale of building                                                                  |  |                             | 461,898    |   |      |   |          |  
|Purchase of equipment                                                             |  |                             | (84,978    | ) |      |   | (341,186  | )
|Additional cash paid for Stealth acquisition                                      |  |                             | (1,500,000 | ) |      |   | (92,455   | )
|Cash paid for MICA acquisition, net of cash acquired                              |  |                             | (3,095,050 | ) |      |   |          |  
|                                                                                  |  |                             |            |   |      |   |           |  
|Net cash used in investing activities                                             |  |                             | (4,218,130 | ) |      |   | (433,641  | )
|                                                                                  |  |                             |            |   |      |   |           |  
|                                                                                  |  |                            
|Cash flows (used in) provided by financing activities:                            |  |                             |            |   |      |   |           |  
|Repayment of the line of credit                                                   |  |                             |           |   |      |   | (475,972  | )
|Proceeds from line of credit                                                      |  |                             | 728,528    |   |      |   |          |  
|Repayments on mortgages and term loan                                             |  |                             | (668,058   | ) |      |   | (207,058  | )
|Repayments of MICA debt                                                           |  |                             | (646,820   | ) |      |   |          |  
|Repayments of capital leases                                                      |  |                             | (881       | ) |      |   | (7,252    | )
|Proceeds from the issuance of common stock                                        |  |                             | 63,680     |   |      |   | 212,559   |  
|                                                                                  |  |                             |            |   |      |   |           |  
|Net cash used in financing activities                                             |  |                             | (523,551   | ) |      |   | (477,723  | )
|                                                                                  |  |                             |            |   |      |   |           |  
|Net (decrease) increase in cash and cash equivalents                              |  |                             | (4,787,058 | ) |      |   | 456,205   |  
|                                                                                  |  |                            
|Cash and cash equivalents at beginning of period                                  |  |                             | 7,058,524  |   |      |   | 5,266,580 |  
|                                                                                  |  |                             |            |   |      |   |           |  
|Cash and cash equivalents at end of period                                        |  | $                           | 2,271,466  |   |      | $ | 5,722,785 |  
|                                                                                  |  |                             |            |   |      |   |           |  
|                                                                                  |  |                            
|Supplemental disclosure of cash flow information:                                 |  |                             |            |   |      |   |           |  
|Cash paid during the period for:                                                  |  |                             |            |   |      |   |           |  
|Interest                                                                          |  | $                           | 125,453    |   |      | $ | 114,344   |  
|                                                                                  |  |                             |            |   |      |   |           |  
|Income taxes                                                                      |  | $                           | 466,000    |   |      | $ | 858,228   |  
|                                                                                  |  |                             |            |   |      |   |           |  
|                                                                                  |  |                            
|Supplemental disclosure of non-cash financing activity:                           |  |                             |            |   |      |   |           |  
|Shares issued to MICA stockholders                                                |  | $                           | 1,999,968  |   |      | $ |          |  
|                                                                                  |  |                             |            |   |      |   |           |  
|Recognition of uncertain tax positions                                            |  | $                           | 96,443     |   |      | $ |          |  
|                                                                                  |  |                             |            |   |      |   |           |  

The accompanying notes are an integral part of these consolidated financial statements.



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MICRONETICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q. It is suggested that these consolidated condensed financial statements be read in conjunction with the Companys Annual Report on Form 10-KSB for its fiscal year ended March 31, 2007. In the
opinion of management, the statements contain all adjustments, including normal recurring adjustments necessary in order to present fairly the financial position as of June 30, 2007, the results of operations for the three months ended
June 30, 2007 and 2006, and the cash flows for the three months ended June 30, 2007 and 2006.

The results of operations for the
three months ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year ended March 31, 2008.

2.
PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Summary of operations and basis of
consolidationMicronetics, Inc. and subsidiaries (collectively the Company or Micronetics) are engaged in the design, development, manufacturing and marketing of a broad range of high performance wireless components
and test equipment used in cellular, microwave, satellite, radar and communication systems around the world.

The consolidated financial
statements include the accounts of Micronetics, Inc. (Micronetics) and its wholly-owned subsidiaries, Microwave & Video Systems, Inc. (MVS), Enon Microwave, Inc. (Enon), Microwave Concepts, Inc.
(MicroCon) Stealth Microwave, Inc. (Stealth) and MICA Microwave Corporation (MICA). The operating results of MICA have been included in the Companys consolidated financial statements since June 5, 2007,
the date of acquisition (See Note 3). All material intercompany balances and transactions have been eliminated in consolidation.

Use of
estimatesUS generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and judgments include revenue recognition, assumptions used in stock option and goodwill valuations, reserves for accounts receivable
and inventories, useful lives of property, plant and equipment, purchase price allocation, intangibles, accrued liabilities, and deferred income taxes and various other assumptions that it believes are reasonable under the circumstances. Actual
results could differ from those estimates.

Revenue recognitionThe Company generates revenue from the sale of products,
technology development, and licensing. Revenue is recognized when persuasive evidence of an arrangement exists, delivery of product has occurred or services have been rendered, the price to the customer is fixed or determinable, collection is
reasonably assured, and no future services are required. The Companys products are primarily hardware components, and to a lesser extent bundled hardware components and software, that are delivered to original equipment manufacturers (OEMs) of
telecommunication and networking products who are considered to be end users.

The Company sells its products using a direct sales force
and sales representatives. Contracts with customers do not include product return rights or price protection. The estimated cost of product warranties are accrued based on historical experience at the time the revenue is recognized. Unless customers
purchase an extended warranty, Micronetics offers a one-year warranty.

Recent accounting pronouncementsIn June 2006, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109 (FIN No. 48). FIN
No. 48 provides guidance with respect to the recognition and measurement in the financial statements of uncertain tax positions taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The Company adopted the provisions of FIN No. 48 in the first quarter of Fiscal 2008. The adoption of FIN No. 48 resulted in an adjustment for unrecognized tax benefits of
$96,443.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements(SFAS 157),which defines fair value, establishes a framework for



7



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##### Table of Contents

measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective in the first quarter of fiscal 2009.
The Company is currently evaluating the effect of this statement on its consolidated financial statements.

In February 2007, the FASB
issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted, provided the Company also elects to
apply the provisions of SFAS 157. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its consolidated results of operations and financial condition.

3. ACQUISITION

On June 5, 2007, the Company
entered into an Agreement of Merger and Plan of Reorganization (the Merger Agreement with MICA Microwave Corporation, a California corporation (MICA) whereby MICA became a wholly-owned subsidiary of Micronetics. Pursuant to
the terms and conditions of the Merger Agreement, the Company acquired all of the common stock of MICA for $3.0 million in cash and $2.0 million in shares of Micronetics common stock (248,135 shares), subject to a post-closing adjustment based
upon MICAs net worth on the closing date.

The acquisition of MICA will provide a broader range of RF/Microwave products, including
high performance mixers and ferrites to the Company, and will provide the Company with further integrated microwave sub-systems and systems solutions.

The following table summarizes the preliminary fair value assigned to the assets acquired and liabilities assumed at the date of acquisition:



|                                             |  |                |       |  
|-------------------------------------------- |  | -------------- | ----- | -
|                                             |  | (Unaudited)    |      
|                                             |  | (in thousands) |      
|Cash and accounts receivable                 |  | $              | 773   |  
|Inventory                                    |  |                | 1,308 |  
|Property, plant and equipment                |  |                | 483   |  
|Other assets                                 |  |                | 41    |  
|Development technology drawings              |  |                | 220   |  
|Customer relationships                       |  |                | 1,180 |  
|Order backlog                                |  |                | 90    |  
|Trade Name                                   |  |                | 260   |  
|Goodwill                                     |  |                | 2,924 |  
|Debt                                         |  |                | (647  | )
|Deferred taxes                               |  |                | 101   |  
|Deferred taxes on acquired intangible assets |  |                | (700  | )
|Income taxes payable                         |  |                | (137  | )
|Accounts payable and accrued expenses        |  |                | (704  | )
|                                             |  |                |       |  
|Subtotal                                     |  |                | 5,192 |  
|Less: cash assumed                           |  |                | (97   | )
|                                             |  |                |       |  
|Net purchase price                           |  | $              | 5,095 |  
|                                             |  |                |       |  

The acquisition of MICA was accounted for as a purchase under SFAS No. 141, Business
Combinations. Accordingly, the operating results of MICA have been included in the Companys consolidated financial statements since the June 5, 2007 acquisition date. The Company estimated the useful lives of the acquired other
intangible assets to be one to ten years and has included them in intangible assets, net, in the accompanying consolidated balance sheet as of June 30, 2007. The values assigned to intangible assets were based on an independent appraisal. The
allocation of the purchase price is preliminary and may be subject to adjustments.



8



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##### Table of Contents

The following table sets forth certain pro forma results for the three months ended June 30, 2007
and June 30, 2006 if the acquisition of MICA had taken place on April 1, 2006:



|                              |  |                                           |       |                                           |   |      
|----------------------------- |  | ----------------------------------------- | ----- | ----------------------------------------- | - | -----
|                              |  | Three Months Ended (Unaudited)           
|                              |  | June 30, 2007                             |       | June 30, 2006                            
|                              |  | (in thousands, except earnings per share) |       | (in thousands, except earnings per share)
|Pro forma revenue             |  | $                                         | 7,125 |                                           | $ | 8,166
|Pro forma net income (1)      |  | $                                         | 153   |                                           | $ | 605  
|Pro forma earnings per share: |  |                                           |       |                                           |   |      
|                              |  |                                          
|Basic                         |  | $                                         | 0.03  |                                           | $ | 0.13 
|Diluted                       |  | $                                         | 0.03  |                                           | $ | 0.12 



|(1) | Amortization costs of approximately $23,000 related to the purchase price in 2007 were assessed to the 2006 income. Management believes that including these adjustments in the above
periods allow investors to better compare results in the future periods.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4. INVENTORIES, NET

At June 30, 2007 and March 31, 2007, inventories consisted of the following:



|                                |  |               |           |   |                |   |           |  
|------------------------------- |  | ------------- | --------- | - | -------------- | - | --------- | -
|                                |  | June 30, 2007 |           |   | March 31, 2007 |  
|                                |  | (Unaudited)   |           |   | (Audited)      |  
|Raw materials                   |  | $             | 4,740,695 |   |                | $ | 4,072,116 |  
|Work in process                 |  |               | 2,993,194 |   |                |   | 1,339,160 |  
|Finished goods                  |  |               | 727,437   |   |                |   | 717,534   |  
|                                |  |               |           |   |                |   |           |  
|                                |  |               | 8,461,326 |   |                |   | 6,128,810 |  
|Less allowance for obsolescence |  |               | (632,747  | ) |                |   | (580,119  | )
|                                |  |               |           |   |                |   |           |  
|                                |  | $             | 7,828,579 |   |                | $ | 5,548,691 |  
|                                |  |               |           |   |                |   |           |  

5. PROPERTY, PLANT AND EQUIPMENT, NET

At June 30, 2007 and March 31, 2007, property, plant and equipment, net consisted of the following:



|                                     |  |               |            |   |                |   |            |  
|------------------------------------ |  | ------------- | ---------- | - | -------------- | - | ---------- | -
|                                     |  | June 30, 2007 |            |   | March 31, 2007 |  
|                                     |  | (Unaudited)   |            |   | (Audited)      |  
|Land                                 |  | $             | 162,000    |   |                | $ | 162,000    |  
|Buildings and leasehold improvements |  |               | 1,128,460  |   |                |   | 1,555,106  |  
|Machinery and equipment              |  |               | 9,185,858  |   |                |   | 7,877,654  |  
|Furniture and fixtures               |  |               | 481,906    |   |                |   | 286,516    |  
|                                     |  |               |            |   |                |   |            |  
|                                     |  |               | 10,958,224 |   |                |   | 9,881,276  |  
|Less accumulated depreciation        |  |               | (7,007,181 | ) |                |   | (5,863,811 | )
|                                     |  |               |            |   |                |   |            |  
|                                     |  | $             | 3,951,043  |   |                | $ | 4,017,465  |  
|                                     |  |               |            |   |                |   |            |  

In May 2007, the commercial condominium housing Micronetics Enon division was sold. The
proceeds from the sale were $461,898. The Company recorded a gain on the sale of the building of $69,609 in the quarter ended June 30, 2007.

6.
INTANGIBLE ASSETS AND GOODWILL

The Companys finite-lived intangible assets include certain identifiable intangible assets
acquired as a result of business combinations, including customer relationships, covenants not to compete, order backlog, trade name and developed technology.



9



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##### Table of Contents

The following table presents details of the Companys finite-lived intangible assets as of
June 30, 2007 and March 31, 2007 (in thousands):



|                                         |  |                           |       |                          |   |           |  |             |       |                          |   |          |  |   |       |  |   |      
|---------------------------------------- |  | ------------------------- | ----- | ------------------------ | - | --------- |  | ----------- | ----- | ------------------------ | - | -------- |  | - | ----- |  | - | -----
|                                         |  | June 30, 2007 (Unaudited) |       | March 31, 2007 (Audited)
|Intangible Assets                        |  | Gross Value               |       | Accumulated Amortization |   | Net Value |  | Gross Value |       | Accumulated Amortization |   | NetValue
|Customer relationships (non-contractual) |  | $                         | 4,130 |                          | $ | 878       |  | $           | 3,252 |                          | $ | 2,950    |  | $ | 761   |  | $ | 2,189
|Covenants not to compete                 |  |                           | 480   |                          |   | 480       |  |             |      |                          |   | 480      |  |   | 433   |  |   | 47   
|Order backlog                            |  |                           | 380   |                          |   | 296       |  |             | 84    |                          |   | 290      |  |   | 290   |  |   |     
|Trade name                               |  |                           | 260   |                          |   | 2         |  |             | 258   |                          |   |         |  |   |      |  |   |     
|Developed technology-drawings            |  |                           | 390   |                          |   | 73        |  |             | 317   |                          |   | 170      |  |   | 62    |  |   | 108  
|                                         |  |                           |       |                          |   |           |  |             |       |                          |   |          |  |   |       |  |   |      
|Total intangibles                        |  | $                         | 5,640 |                          | $ | 1,729     |  | $           | 3,911 |                          | $ | 3,890    |  | $ | 1,546 |  | $ | 2,344
|                                         |  |                           |       |                          |   |           |  |             |       |                          |   |          |  |   |       |  |   |      

The Company amortizes intangible assets with finite lives over the estimated useful lives of the
respective assets. The following is a summary of estimated aggregate amortization expense for each of the five succeeding fiscal years:



|                  |  |                |      
|----------------- |  | -------------- | -----
|                  |  | (in thousands)
|Remainder of 2008 |  | $              | 551  
|2009              |  |                | 660  
|2010              |  |                | 643  
|2011              |  |                | 616  
|2012              |  |                | 618  
|Thereafter        |  |                | 823  
|                  |  |                |      
|Total             |  | $              | 3,911
|                  |  |                |      

Changes in the carrying amount of goodwill at June 30, 2007 and March 31, 2007 are as
follows:



|                                       |  |               |           |                |   |          
|-------------------------------------- |  | ------------- | --------- | -------------- | - | ---------
|                                       |  | June 30, 2007 |           | March 31, 2007
|                                       |  | (Unaudited)   |           | (Audited)     
|Balance at the beginning of the period |  | $             | 5,982,709 |                | $ | 4,390,254
|Acquisitions                           |  |               | 2,923,852 |                |   |         
|Purchase accounting adjustments        |  |               |          |                |   | 1,592,455
|                                       |  |               |           |                |   |          
|Balance at the end of the period       |  | $             | 8,906,561 |                | $ | 5,982,709
|                                       |  |               |           |                |   |          

7. ACCRUED EXPENSES

At June 30, 2007 and March 31, 2007 accrued expenses consisted of the following:



|                                    |  |               |           |                |   |          
|----------------------------------- |  | ------------- | --------- | -------------- | - | ---------
|                                    |  | June 30, 2007 |           | March 31, 2007
|                                    |  | (Unaudited)   |           | (Audited)     
|Unbilled payables                   |  | $             | 466,746   |                | $ | 169,755  
|Professional fees                   |  |               | 124,831   |                |   | 261,372  
|Payroll, benefits and related taxes |  |               | 1,292,121 |                |   | 1,195,273
|Warranty                            |  |               | 100,352   |                |   | 100,178  
|Miscellaneous                       |  |               | 309,677   |                |   | 1,615,787
|                                    |  |               |           |                |   |          
|                                    |  | $             | 2,293,727 |                | $ | 3,342,365
|                                    |  |               |           |                |   |          

Included in accrued payroll are bonuses of $746,270 and $572,951 at June 30, 2007 and
March 31, 2007. Miscellaneous accrued expenses at March 31, 2007 included the $1.5 million earnout payment due to the former stockholders of Stealth that was paid in April 2007.

8. LONG-TERM DEBT

At June 30, 2007 and
March 31, 2007 long-term debt consisted of the following:



|                                      |  |               |            |   |                |   |            |  
|------------------------------------- |  | ------------- | ---------- | - | -------------- | - | ---------- | -
|                                      |  | June 30, 2007 |            |   | March 31, 2007 |  
|                                      |  | (Unaudited)   |            |   | (Audited)      |  
|Term loan                             |  |               | 6,175,000  |   |                |   | 6,500,000  |  
|Mortgage payable, MA                  |  |               |           |   |                |   | 310,531    |  
|Mortgage payable, NH                  |  |               | 231,548    |   |                |   | 264,076    |  
|Capital leases                        |  |               | 7,341      |   |                |   | 8,222      |  
|                                      |  |               |            |   |                |   |            |  
|Total                                 |  |               | 6,413,889  |   |                |   | 7,082,829  |  
|Less current portion                  |  |               | (1,438,924 | ) |                |   | (1,449,443 | )
|                                      |  |               |            |   |                |   |            |  
|Long-term debt net of current portion |  | $             | 4,974,965  |   |                | $ | 5,633,386  |  
|                                      |  |               |            |   |                |   |            |  



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Term Loan and Revolver

In March 2007, the Company entered into a credit facility which consists of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of credit, which replaced the then existing $6.0
million term loan entered into in June 2005.

The term loan is guaranteed by the Companys subsidiaries and secured by substantially
all of the Companys assets. The term loan is payable in quarterly principal installments of $325,000 plus accrued interest at the LIBOR rate plus 1.8%, which at June 30, 2007 was 7.15 %. The term loan expires in June 2012.

The revolving line of credit bears interest at the current LIBOR rate plus 1.8%, which at June 30, 2007 was 7.15%. The company had $4.3 million
available under the line at June 30, 2007.

The Company entered into an interest rate swap agreement in April 2007 to mitigate
interest rate fluctuations on the term loan. At the end of each reporting period the Company records the current fair value of the interest rate swap on the balance sheet. Any unrealized gain or loss is charged to earnings.

Under the terms of the term loan and the revolver, the Company is required to maintain certain financial covenants on a quarterly and annual basis,
including total funded debt to EBITDA not exceeding 2.25:1, minimum debt service coverage of 1.25:1, and minimum tangible net worth of $7.5 million. At June 30, 2007, the Company was in compliance with all financial debt covenants.

Mortgage payable, NH

In February 2004,
Micronetics refinanced the mortgage on its headquarters, entering into a new five-year mortgage payable for $630,000. The note bears interest at 5.75% per annum and is payable in monthly installments, including interest, of $12,107. This loan
is secured by the land and building of Micronetics headquarters.

Mortgage payable, MA

In March 2003, in connection with the purchase of a portion of a commercial condominium housing Micronetics Enon division, Micronetics entered into
a mortgage payable for $352,750. In May 2007, the commercial condominium was sold and the remaining mortgage was settled.

Capital leases

Commercial capital leases payable are reflected at their present value based upon interest rates that range from 8.67% to 8.88% per annum, and are
secured by the underlying assets. The assets are depreciated over their estimated useful lives.

9. STOCK- BASED COMPENSATION

On April 1, 2006, the Company adopted the provisions of SFAS 123R, Share-Based Payment, a revision of SFAS 123, Accounting for Stock-Based
Compensation and superseding Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. SFAS 123R requires the Company to recognize the cost of employee services received in exchange for
grants issued under stock option and employee stock purchase plans, based on the fair value of the awards, and recognized over the vesting period of the plans, using the modified-prospective transition method. Prior to April 1, 2006 the Company
measured employee stock-based compensation cost under the provisions of APB Opinion 25 as permitted by SFAS 123, Accounting for Stock-Based Compensation. APB Opinion 25 provided for compensation cost to be recognized over the vesting
period of the options based on the difference, if any, between the fair market value of the Companys stock and the option price on the grant date. As the Company only issued fixed term stock option grants at or above the quoted market price on
the date of grant, no compensation expense was recognized in the consolidated statements of income prior to April 1, 2006.

Under the
modified-prospective method, the Company recognized compensation expense in the financial statements issued subsequent to April 1, 2006 for all stock-based payments granted, modified or settled subsequent to April 1, 2006 as well as for
any awards that were granted prior to April 1, 2006 which were not fully vested as of that date. Compensation expense for those awards issued prior to April 1, 2006 was recognized using the fair values determined for the pro forma
disclosures on stock-based compensation. The amount of stock based compensation expense recognized on awards that have not fully vested excludes the compensation expense for vested options recognized in the pro forma disclosures for stock-based
compensation.



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##### Table of Contents

The following table summarizes the effects of stock-based compensation resulting from the application of
SFAS No. 123(R) for the three months ended June 30, 2007 and June 30, 2006 (unaudited):



|                                                                       |  |               |         |   |               |   |         |  
|---------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                                       |  | June 30, 2007 |         |   | June 30, 2006 |  
|Cost of sales                                                          |  | $             | 16,612  |   |               | $ | 59,160  |  
|Selling, general and administrative                                    |  |               | 105,140 |   |               |   | 107,834 |  
|Research and development                                               |  |               | 27,220  |   |               |   |        |  
|                                                                       |  |               |         |   |               |   |         |  
|Stock-based compensation effect in income before taxes                 |  |               | 148,972 |   |               |   | 166,994 |  
|Income taxes                                                           |  |               | (23,455 | ) |               |   | (66,798 | )
|                                                                       |  |               |         |   |               |   |         |  
|Net stock-based compensation effect on basic earnings per common share |  | $             | 125,517 |   |               | $ | 100,196 |  
|                                                                       |  |               |         |   |               |   |         |  
|Stock-based compensation effect on basic earnings per common share     |  | $             | 0.03    |   |               | $ | 0.02    |  
|Stock-based compensation effect on diluted earnings per common share   |  | $             | 0.03    |   |               | $ | 0.02    |  

Unrecognized stock-based compensation expense related to the unvested options is approximately
$1.5 million, and will be recorded over the remaining vesting periods of one to ten years. This estimate is based on the number of unvested options currently outstanding and could change based on the number of options granted or forfeited in the
future.

In accordance with SFAS No. 123(R), the Company adjusts share-based compensation on an annual basis for changes to the
estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after April 1, 2006 will be recognized in the period the forfeiture estimate is
changed.

The fair value of options issued in the first quarter of Fiscal 2008 was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions (unaudited):



|                        |  |               |  
|----------------------- |  | ------------- | -
|                        |  | June 30, 2007 |  
|Risk Free Interest Rate |  | 4.98          | %
|Expected Life           |  | 3.97 years    |  
|Expected Volatility     |  | 60            | %
|Expected Dividend Yield |  | 0             | %

The per share weighted average fair value of stock options granted for the three months ended
June 30, 2007 was $4.08. No stock options were granted for the three months ended June 30, 2006.

At June 30, 2007, the
Company had three stock option plans under which grants were outstanding. The stock options outstanding are for grants issued under the Companys 1996 Stock Option Plan, the 2003 Stock Option Plan and the 2006 Equity Incentive Plan.

The 1996 Stock Option Plan

During the fiscal year
ended March 31, 1997, the Company adopted a stock option plan, entitled the 1996 Stock Option Plan (the 1996 Plan), under which the Company may grant options to purchase up to 300,000 shares of common stock. During
the fiscal year ended March 31, 2002, the Board of Directors amended the 1996 Plan to increase the number of shares of common stock that may be granted under the Plan to 900,000. As of June 30, 2007, there were 2,500 options outstanding
under the 1996 Plan. In 2003, the Board of Directors determined that it would not issue any new option awards under the 1996 Plan.

The 2003 Stock
Incentive Plan

During the fiscal year ended March 31, 2004, the Company adopted a stock option plan entitled The 2003 Stock
Incentive Plan (the 2003 Plan) under which the Company may grant options to purchase up to 900,000 shares of common stock plus any shares of common stock remaining available for issuance as of July 22, 2003 under the 1996
Plan. In July 2006 the Board of Directors determined that it would not issue any new option awards under the 2003 Plan. As of June 30, 2007, there were 519,700 options outstanding under the 2003 Plan.



12



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##### Table of Contents

The 2006 Equity Incentive Plan

During the fiscal year ending March 31, 2007, the Company adopted a stock option plan entitled The 2006 Equity Incentive Plan (the 2006 Plan) under which the Company may grant options to
purchase up to 1,000,000 shares of common stock. As of June 30, there were 236,000 options outstanding under the 2006 Plan.

The 1996
Plan, the 2003 Plan and the 2006 Plan are administered by the Board of Directors or a Committee of the Board of Directors which has the authority to determine the persons to whom the options may be granted, the number of shares of common stock to be
covered by each option grant, and the terms and provisions of each option grant. Options granted under the 1996 Plan, the 2003 Plan and the 2006 Plan may be incentive stock options or non-qualified options, and may be issued to employees,
consultants, advisors and directors of the Company and its subsidiaries. The exercise price of options granted under the 1996 Plan, the 2003 Plan and the 2006 Plan may not be less than the fair market value of the shares of common stock on the date
of grant, and may not be granted more than ten years from the date of adoption of each respective plan or exercised more than ten years from the date of grant.

The following table sets forth the Companys stock option activity during the three months ended June 30, 2007 (unaudited):



|                              |  |                           |   |  |                                 |      |                                             |      |                           |   |          
|----------------------------- |  | ------------------------- | - |  | ------------------------------- | ---- | ------------------------------------------- | ---- | ------------------------- | - | ---------
|                              |  | Shares Underlying options |   |  | Weighted Average Exercise price |      | Weighted Average Remaining Contractual life |      | Aggregate Intrinsic value
|Outstanding at March 31, 2007 |  | 796,825                   |   |  | $                               | 7.29 |                                             |      |                           |   |          
|Granted                       |  | 178,000                   |   |  |                                 | 8.06 |                                             |      |                           |   |          
|Exercised                     |  | (84,625                   | ) |  |                                 | 3.18 |                                             |      |                           |   |          
|Canceled                      |  | (132,000                  | ) |  |                                 | 7.89 |                                             |      |                           |   |          
|                              |  |                           |   |  |                                 |      |                                             |      |                           |   |          
|Outstanding at June 30, 2007  |  | 758,200                   |   |  | $                               | 7.82 |                                             | 4.77 |                           | $ | 1,013,021
|                              |  |                           |   |  |                                 |      |                                             |      |                           |   |          
|Exercisable at June 30, 2007  |  | 260,125                   |   |  | $                               | 7.61 |                                             | 2.41 |                           | $ | 402,176  
|                              |  |                           |   |  |                                 |      |                                             |      |                           |   |          

The following table sets forth the status of the Companys non-vested stock options as of
June 30, 2007 (unaudited):



|                                |  |                   |   |  |                                        |     
|------------------------------- |  | ----------------- | - |  | -------------------------------------- | ----
|                                |  | Number of Options |   |  | Weighted-Average Grant-Date Fair
Value
|Non-vested as of March 31, 2007 |  | 481,025           |   |  | $                                      | 3.42
|Granted                         |  | 178,000           |   |  |                                        | 4.08
|Forfeited                       |  | (66,250           | ) |  |                                        | 3.26
|Vested                          |  | (94,700           | ) |  |                                        | 3.26
|                                |  |                   |   |  |                                        |     
|Non-vested as of June 30, 2007  |  | 498,075           |   |  | $                                      | 2.30
|                                |  |                   |   |  |                                        |     

During the year ended March 31, 2004, the Company granted options to purchase an aggregate of
8,000 shares of common stock to consultants for services to be provided. These options are exercisable at $7.12 per share, and vest 25% per year on each anniversary date, with an expiration of five years from the date of grant for all options.
The Company has valued these at their fair value on the date of grant using the Black-Scholes option-pricing model. The consultants have since ceased performance of services. During the fiscal year ended March 31, 2007, the Company expensed the
remaining unamortized amount of $5,940.

10. INCOME TAXES

The Companys effective tax rate was 55% and 40% for the three months ended June 30, 2007 and 2006. The increase in the effective tax rate for the quarter ended June 30, 2007 is due primarily to a
reduction in tax benefits from stock-based compensation expense related to incentive stock options, penalties, as well as a reduction in tax benefits associated with export sales.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109 (FIN No. 48), which clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition threshold and measurement requirements a tax position must meet
before recognized a benefit in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods and disclosures for uncertain tax positions. FIN No. 48
is effective for fiscal years beginning after December 15, 2006.

The Companys adoption of FIN No. 48 on April 1, 2007 resulted in
the recognition of $96,443 of previously unrecognized tax benefits which, in accordance with FIN No. 48, the cumulative amount was accounted for as an adjustment to the April 1, 2007 retained earnings balance.

Following the adoption of FIN No. 48, the Company had $96,443 of unrecognized tax benefits, substantially all of which, if recognized, would be recorded
as a component of the provision for income taxes. There have been no significant changes to these amounts during the three months ended June 30, 2007.

The Companys policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense, if any. No material amount of such expense was recognized during the
three months ended June 30, 2007.

As of April 1, 2007, the Company is subject to tax in the U.S. Federal and various state jurisdictions.
The Company is open to examination for tax years 2003 through 2006.



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11. EARNINGS PER SHARE

Basic earnings per share is computed based on the net income for each period divided by the weighted average actual shares outstanding during the period. Diluted earnings per share is computed based on the net income per period divided by
the weighted average number of common shares and common equivalent shares outstanding during each period. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options. The computations of basic
and diluted EPS for the three months ended June 30, 2007 and 2006 are:



|                                                                 |  |                                |           |               |   |          
|---------------------------------------------------------------- |  | ------------------------------ | --------- | ------------- | - | ---------
|                                                                 |  | Three months ended (unaudited)
|                                                                 |  | June 30, 2007                  |           | June 30, 2006
|Net income                                                       |  | $                              | 185,094   |               | $ | 548,272  
|Weighted average shares outstanding                              |  |                                | 4,727,500 |               |   | 4,611,255
|Basic earnings per share                                         |  | $                              | 0.04      |               | $ | 0.12     
|Common stock equivalents                                         |  |                                | 30,938    |               |   | 324,647  
|Weighted average common and common equivalent shares outstanding |  |                                | 4,758,438 |               |   | 4,935,902
|Diluted earnings per share                                       |  | $                              | 0.04      |               | $ | 0.11     



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|------- | --------------------------------------------------------------------------------------

Forward Looking Statements

Certain statements in this report contain words such as
could, expects, may, anticipates, believes, intends, estimates, plans, envisions, and other similar language and are considered
forward-looking statements. These statements are based on our expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate and are merely our current predictions of future events. In
addition, other written or oral statements which are considered forward-looking may be made by us or others on our behalf. These statements are subject to important risks, uncertainties and assumptions, which are difficult to predict and the actual
outcome may be materially different. Some of the factors which could cause results or events to differ from current expectations include, but are not limited to, the factors described below. We assume no obligation to update our forward-looking
statements to reflect new information or developments. We urge readers to review carefully the risk factors described below and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at
www.sec.gov.

An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors in
evaluating our business. If any of these risks, or other risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition and results of operations could be
adversely affected. If that happens, the market price of our common stock could decline.

Critical Accounting Policies

The discussion and analysis of our financial condition and the results of operations are based on our consolidated financial statements and the data used
to prepare them. Our consolidated financial statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we evaluate our judgments and estimates including those related to
allowances for doubtful accounts and sales returns, inventory valuation, long-lived assets, business combination purchase price allocation and goodwill impairment, stock-based compensation, product returns and warranty obligations, and the valuation
allowance on our deferred tax asset. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business conditions and circumstances. Actual results may differ
from these estimates under different assumptions or conditions. We believe the critical accounting policies and estimates disclosed in Managements Discussion and Analysis in our Annual Report on Form 10-KSB for the fiscal year ended
March 31, 2007 have not changed significantly during the three months ended June 30, 2007.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standard Board (FASB) issued FASB Interpretation (FIN) No. 48,
Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 provides guidance with respect to the recognition and measurement in the financial
statements of uncertain tax positions taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted
the provisions of FIN No. 48 in the first quarter of fiscal 2008. The adoption of FIN No. 48 resulted in an adjustment for unrecognized tax benefits of $96,443 to the April 1, 2007 retained earnings balance.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements(SFAS
157),which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective in the first quarter of fiscal 2009, The Company is
currently evaluating the effect of this statement on its consolidated financial statements.

In February 2007, the FASB issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115(SFAS 159). SFAS 159



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##### Table of Contents

permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. Early adoption is permitted, provided the Company also elects to apply the provisions of SFAS 157. The Company is currently evaluating the effect that the adoption of SFAS 159 will have on its consolidated results of
operations and financial condition.

Acquisition

On June 5, 2007, we entered into an Agreement of Merger and Plan of Reorganization (the Merger Agreement with MICA Microwave Corporation, a California corporation (MICA) whereby MICA
became a wholly-owned subsidiary of Micronetics. Pursuant to the terms and conditions of the Merger Agreement, the holders of MICA common stock were paid $3.0 million in cash and $2.0 million in shares of Micronetics common stock, subject to a
post-closing adjustment based upon MICAs net worth on the closing date.

The acquisition of MICA will provide us with a broader range
of RF/Microwave products, including high performance mixers and ferrites, and will provide us with further integrated microwave sub-systems and systems solutions.

Overview

Micronetics manufactures microwave and radio frequency (RF) components and integrated multifunction
subassemblies used in a variety of commercial wireless, defense and aerospace products, including satellite communications, electronic warfare and electronic counter-measures. We also manufacture and design test equipment, subassemblies and
components that are used to test the strength, durability and integrity of signals in communications equipment. Our products are embedded in a variety of radars, electronic warfare systems, guidance systems, wireless telecommunications and satellite
equipment. Our microwave devices are used on subassemblies and integrated systems in addition to being sold on a component basis.

Micronetics operates through its five wholly owned subsidiaries, Enon, Micro-Con, MVS, Stealth and MICA. These subsidiaries, along with Micronetics NH based facility, manufacture products in three major product categories: RF
Microwave Components, Microwave Integrated Multifunction Subassemblies and Test Solutions.

We sell primarily to original equipment
manufacturers of communications equipment in either the commercial or the defense electronic marketplace. Many of those customers are prime contractors for defense work or larger Fortune 500 companies with world-wide operations.

A key driver of demand for Micronetics products is the pervasive transformation of information from the analog domain to the digital domain.
Because digital technologies require greater degrees of precision and rely more on miniature circuits than analog technologies, testing is critical for the rapid commercialization of reliable products necessitated by broadband and wireless
communication technologies. As the speed to market challenges increase, larger companies are relying increasingly on other companies to manufacture a module or an integrated subassembly to perform such testing. This module or subassembly is then
assembled by the larger company into an integrated piece of equipment and sold to a customer. Micronetics has been seeking to capitalize on this trend by increasing its capability of manufacturing integrated subassemblies. Our goal is to leverage
our high power and noise technology to continue to be the most reliable microwave subsystem supplier in the merchant marketplace.

Results of
Operations

The Consolidated Statements of Income for the three months ended June 30, 2007 includes the operations of MICA from the acquisition
date of June 5, 2007.

Three Months Ended June 30, 2007 compared to June 30, 2006

Net sales

Net sales for the three months ended
June 30, 2007 (Q1 FY 08) were $6,310,665, a decrease of $495,773, or 7% as compared to $6,806,438 for the three months ended June 30, 2006 (Q1 FY 07). The decrease in net sales for Q1 FY 08 is primarily attributable
to a decrease in net sales of high performance power amplifiers to the commercial market of $1.0 million offset by the addition of $547,059 in sales of high performance mixers and ferrites from MICA. Commercial and defense revenues were 68% and 32%,
respectively, as a percent of the total revenues for Q1 FY 08, as compared to 64% and 36%, respectively, for Q1 FY 07.



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Gross profit margin

Gross profit as a percent of sales decreased for Q1 FY 08 to 38% from 45% for Q1 FY 07. The decrease is primarily attributable to the decrease in the net sales from sales of high performance power amplifiers affecting
absorption of fixed manufacturing costs, as well as lower average selling prices of power amplifiers to a major customer.

Research and development

Research and development (R&D) expense decreased $33,639 for Q1 FY 08 as compared to Q1 FY 07. R&D expenses decreased slightly from
2.7% of net sales for Q1 FY 07 to 2.4% of net sales for Q1 FY 08.

Selling, general and administrative

Selling, general and administrative (SG&A) expense increased to 26% of net sales for Q1 FY 08 from 25% for Q1 FY 07. SG&A expenses were
$1,638,655, down $61,166 or 3.6%, for the three months ended June 30, 2007, as compared to $1,699,821 for June 30, 2006. The overall decrease in spending was primarily attributable to a decrease in bonus expense of $244,000 and a decrease
in bad debt expense of $48,000, offset by an increase in salaries of $136,000 and the inclusion of $89,000 in MICA selling expenses.

Amortization of
intangible assets

Amortization expense was $183,093 for Q1 FY 08 as compared to $178,296 for Q1 FY 07.

Interest expense

Interest expense decreased slightly
by $1,085 or .9% for Q1 FY 08 as compared to Q1 FY 07.

Provision for income taxes

Our effective tax rate was 55% for Q1 FY 08 and 40% for Q1 FY 07. The increase in the effective tax rate for Q1 FY 08 is due primarily to a reduction in
tax benefits from stock-based compensation expense related to incentive stock options, penalties, as well as a reduction in tax benefits associated with export sales.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109
(FIN No. 48), which clarifies the accounting for uncertainty in income taxes by prescribing the minimum recognition threshold and measurement requirements a tax position must meet before recognized a benefit in the financial statements.
FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods and disclosures for uncertain tax positions. FIN No. 48 is effective for fiscal years beginning after December
15, 2006.

We adopted FIN No. 48 on April 1, 2007 resulting in the recognition of $96,443 of previously unrecognized tax benefits which, in
accordance with FIN No. 48, the cumulative amount was accounted for as an adjustment to the April 1, 2007 balance of retained earnings.

Following the adoption of FIN No. 48, we had $96,443 of unrecognized tax benefits, substantially all of which, if recognized, would be recorded as a component of the provision for income taxes. There have been no significant changes to
these amounts during the three months ended June 30, 2007.

Our policy is to recognize interest and penalties accrued on any unrecognized
tax positions as a component of income tax expense, if any. No material amount of such expense was recognized during the three months ended June 30, 2007.

Liquidity and Capital Resources

We finance our operating and investment requirements primarily through cash flow and
borrowings. We had cash and working capital at June 30, 2007 of $2,271,466 and $9,937,587, respectively, as compared with cash and working capital of $7,058,524 and $11,836,943, respectively at March 31, 2007. Our current ratio was
approximately 2.7 to 1 at June 30, 2007, as compared to 3.2 to 1 at March 31, 2007. The reduction in cash was primarily related to the cash used in connection with the acquisition of MICA, and the increase in working capital other than
cash.

Net cash used in operating activities was $45,377 during the three months ended June 30, 2007 as compared to net cash provided
by operating activities of $1,367,569 during the three months ended June 30, 2006. Cash used in operating activities primarily resulted from an increase in inventories and prepaid expenses of $1,023,937 and $477,500, respectively, offset by a
reduction in accounts receivable of $201,439 and an increase in income tax payable of $229,931. Inventories increased as a result of product purchases to support increased bookings in the quarter. Prepaid expenses increased primarily as a result of
an increase in prepaid federal and state income taxes. Sources of cash from operating activities were net income of $185,094, adjusted by non-cash charges for depreciation and amortization of $417,759 and stock-based compensation of $148,972.



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Net cash used in investing activities was $4,218,130 during the three months ended June 30, 2007 as
compared to $433,641 during the three months ended June 30, 2006, primarily as a result of the acquisition of MICA of $3,095,050 and the final earnout payment of $1.5 million to the former stockholders of Stealth in Q1 FY 08. Investing
activities incurred by the Company during the three months ended June 30, 2007, also included $84,978 of capital expenditures offset by $461,898 related to the sale of the Enon condominium in Q1 FY 08.

Net cash used by financing activities was $523,551 during the three months ended June 30, 2007 as compared to $477,723 during the three months ended
June 30, 2006 primarily due to repayments on the mortgages and term loans in Q1 FY 08.

Term Loan and Revolver

In March 2007, we entered into a credit facility consisting of a $6.5 million five year secured term loan and a $5.0 million three year revolving line of
credit, which replaced our existing $6.0 million term loan entered into in June 2005.

The term loan is guaranteed by the Companys
subsidiaries and secured by substantially all of our assets. The term loan is payable in quarterly principal installments of $325,000 plus accrued interest at the LIBOR rate plus 1.8%, which at June 30, 2007 was 7.15 %. The term loan expires in
June 2012.

The revolving line of credit bears interest at the current LIBOR rate plus 1.8%, which at June 30, 2007 was 7.15%. We had
$4.3 million available under the line at June 30, 2007.

In April 2007, we entered into an interest rate swap agreement to
mitigate interest rate fluctuations on the term loan. At the end of each reporting period we record the current fair value of the interest rate swap on the balance sheet. Any unrealized gain or loss is charged to earnings.

Under the terms of the term loan and the revolver, we are required to maintain certain financial covenants on a quarterly and annual basis, including
total funded debt to EBITDA not exceeding 2.25:1, minimum debt service coverage of 1.25:1, and minimum tangible net worth of $7.5 million. At June 30, 2007, we were in compliance with all financial debt covenants.

Mortgage payable, NH

In February 2004, Micronetics
refinanced the mortgage on its headquarters, entering into a new five-year mortgage payable for $630,000. The note bears interest at 5.75% per annum and is payable in monthly installments, including interest, of $12,107. This loan is secured by
the land and building of Micronetics headquarters.

Mortgage payable, MA

In March 2003, in connection with the purchase of a portion of a commercial condominium housing Micronetics Enon division, Micronetics entered into
a mortgage payable for $352,750. In May 2007, the commercial condominium was sold and the remaining mortgage was settled.

Capital leases

Commercial capital leases payable are reflected at their present value based upon interest rates that range from 8.67% to
8.88% per annum, and are secured by the underlying assets. The assets are depreciated over their estimated useful lives.

We believe
that cash and cash equivalents on hand, anticipated future cash receipts, and borrowings available under our line of credit will be sufficient to meet our obligations as they become due for the next twelve months. However, a decrease in our sales or
demand for our products would likely adversely affect our working capital amounts. As part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available
cash may be used at any time for the acquisition of complementary products or businesses. These potential transactions may require substantial capital resources, which, in turn, may require us to seek additional debt or equity financing. There are
no assurances that we will be able to consummate any such transaction. There are no current plans to raise additional debt or equity capital, nor is there a projected need to raise any such capital.

Off-Balance Sheet Arrangements

Micronetics
has no off-balance sheet arrangements.



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We are
exposed to a variety of market risks, including changes in interest rates primarily as a result of our borrowing and investing activities. Our investment portfolio consists entirely of money market funds, which are subject to interest rate risk. Due
to the short duration and conservative nature of these instruments, we do not believe we have a material exposure to interest rate risk on investments.

We
are subject to interest rate exposure on our long-term debt. Our long-term borrowings are in variable rate instruments, with interest rates tied to either the Prime Rate or the LIBOR. We have entered into an interest rate swap agreement to minimize
our exposure to interest rate fluctuations on these borrowings. Our interest rate swap has not been designated as a hedging instrument, therefore changes in fair value are recognized in earnings.

We conduct our transactions with foreign customers in U.S. dollars. Although we are not subject to the risks of foreign currency fluctuations directly, demand from
foreign customers may be affected by the relative change in value of the customers currency to the value of the U.S. dollar. Changes in the relative value of the U.S. dollar may also change our prices relative to the prices of our foreign
competitors.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of disclosure controls and
proceduresAs of June 30, 2007, the Company carried out an evaluation, under the supervision and with the Companys management, including the Companys Chief Executive Officer and the Companys Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of June 30, 2007 to provide reasonable assurance that material information relating to the Company was made known to them by
others within the Company.

Changes in internal control-There were no significant changes in the Companys internal controls over financial
reporting that occurred during the quarter ended June 30, 2007 that have materially affected or are reasonably likely to materially affect, the Companys internal control over financial reporting.

Important considerations  The effectiveness of our disclosure controls and procedures is subject to various inherent limitations, including cost
limitations, judgments used in decision making, assumptions about the likelihood of certain events, the soundness of our systems, the possibility of human error, and the risk of fraud. Because of these limitations, there can be no assurance that any
system of disclosure controls and procedures will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

The Company is not a party to
any material pending legal proceedings.



|Item 1A. | Risk Factors.
|-------- | -------------

An investment in our common stock
involves a high degree of risk. You should carefully consider the following risk factors in evaluating our business. If any of these risks, or other risks not presently known to us or that we currently believe are not significant, develops into an
actual event, then our business, financial condition and results of operations could be adversely affected. If that happens, the market price of our common stock could decline.

We may be materially and adversely affected by reductions in spending by certain of our customers.

The significant slowdown in capital spending by certain of our customers, coupled with existing economic and geopolitical uncertainties and the potential impact on customer demand, has created uncertainty as to market demand. As a result,
revenues and operating results for a particular period can be difficult to predict. In addition, there can be no certainty as to the severity or duration of the current industry adjustment. As a result of changes in industry and market conditions,
many of our customers have significantly reduced their capital spending. Our revenues and operating results have been and may continue to be materially and adversely affected by reductions in capital spending by our customers.

Our operating results have historically been subject to yearly and quarterly fluctuations and are expected to continue to fluctuate.



| |  |  | Our operating results have historically been and are expected to continue to be subject to quarterly and yearly fluctuations as a result of a number of factors
including:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully implement programs to stimulate sales by anticipating and offering the kinds of products and services customers will require in the
future to increase the efficiency and profitability of their products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully complete programs on a timely basis, to reduce our cost structure, including fixed costs, to streamline our operations and to reduce
product costs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to focus our business on what we believe to be potentially higher growth, higher margin businesses and to dispose of or exit non-core businesses;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased price and product competition in our markets;
| | - |  | -------------------------------------------------------



| |  |  | the inherent uncertainties of using forecasts, estimates and assumptions for asset valuations and in determining the amounts of accrued liabilities and other items
in our consolidated financial statements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to implement our work plan without negatively impacting our relationships with our customers, the delivery of products based on new and developing
technologies, the delivery of high quality products at competitive prices, the maintenance of technological leadership, the effectiveness of our internal processes and organizations and the retention of qualified personnel;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | fluctuations in our gross margins;
| | - |  | ----------------------------------



| |  |  | the development, introduction and market acceptance of new technologies;
| | - |  | ------------------------------------------------------------------------



| |  |  | variations in sales channels, product costs and the mix of products sold;
| | - |  | -------------------------------------------------------------------------



| |  |  | the size and timing of customer orders and shipments;
| | - |  | -----------------------------------------------------



| |  |  | our ability to maintain appropriate inventory levels;
| | - |  | -----------------------------------------------------



| |  |  | the impact of acquired businesses and technologies;
| | - |  | ---------------------------------------------------



| |  |  | the impact of our product development schedules, product quality variances, manufacturing capacity and lead times required to produce our products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in legislation, regulation and/or accounting rules; the impact of higher insurance premiums and deductibles and greater limitations on insurance coverage;
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acts of terrorism or the outbreak of hostilities or armed conflict between countries.
| | - |  | -------------------------------------------------------------------------------------



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There are a number of trends and factors which affect our markets, including economic conditions in the United States,
Europe and globally, and are beyond our control. These trends and factors may result in reduced demand and pricing pressure on our products.

There are trends and factors affecting our markets that are beyond our control and may affect our operations. Such trends and factors include:



| |  |  | adverse changes in the public and private equity and debt markets and our ability, as well as the ability of our customers and suppliers, to obtain financing or to
fund working capital and capital expenditures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adverse changes in our current credit condition or the credit quality of our customers and suppliers;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | adverse changes in the market conditions in our markets;
| | - |  | --------------------------------------------------------



| |  |  | the trend towards the sale of integrated products;
| | - |  | --------------------------------------------------



| |  |  | visibility to, and the actual size and timing of, capital expenditures by our customers;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | inventory practices, including the timing of product and service deployment, of our customers;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | policies of our customers regarding utilization of single or multiple vendors for the products they purchase;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the overall trend toward industry consolidation and rationalization among our customers, competitors and suppliers;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | conditions in the broader market for military and communications products;
| | - |  | --------------------------------------------------------------------------



| |  |  | governmental regulation or intervention affecting our products; and
| | - |  | -------------------------------------------------------------------



| |  |  | the effects of war and acts of terrorism, such as disruptions in general global economic activity, changes in logistics and security arrangements and reduced
customer demand for our products and services.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Economic conditions affecting the industry, which affect market conditions in the
military and communication infrastructure industry in the United States, Europe and globally, affect our business.

Reduced capital
spending and/or negative economic conditions in the United States, Europe as well as other areas of the world have resulted in, and could continue to result in, reduced demand for or increased pricing pressures on our products.

We have made, and may continue to make, strategic acquisitions in order to enhance our business. If we are not successful in operating or integrating these
acquisitions, our business, results of operations and financial condition may be materially and adversely affected.

In the past, we
acquired companies to enhance the expansion of our business and products. We may consider additional acquisitions which could involve significant risks and uncertainties.

These risks and uncertainties include:



| |  |  | the risk that the industry may develop in a different direction than anticipated and that the technologies we acquire do not prove to be those we need to be
successful in the industry;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the risk that future valuations of acquired businesses may decrease from the market price we paid for these acquisitions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the generation of insufficient revenues by acquired businesses to offset increased operating expenses associated with these acquisitions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential difficulties in completing in-process research and development projects and delivering high quality products to our customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential difficulties in integrating new products, businesses and operations in an efficient and effective manner;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the risk that our customers or customers of the acquired businesses may defer purchase decisions as they evaluate the impact of the acquisitions on our future
product strategy;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the potential loss of key employees of the acquired businesses;
| | - |  | ---------------------------------------------------------------



| |  |  | the risk that acquired businesses will divert the attention of our senior management from the operation of our business; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



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| |  |  | the risks of entering new markets in which we have limited experience and where competitors may have a stronger market presence.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

Our inability to successfully operate and integrate newly-acquired businesses appropriately, effectively and in a timely manner could have a material
adverse effect on our ability to take advantage of further growth in demand for products in our marketplace, as well as on our revenues, gross margins and expenses.

If we cannot effectively manage our growth, our business may suffer.

We have previously expanded our
operations through acquisitions in order to pursue existing and potential market opportunities. If we fail to manage our growth properly, we may incur unnecessary expenses and the efficiency of our operations may decline. To manage our growth
effectively, we must, among other things:



| |  |  | successfully attract, train, motivate and manage a larger number of employees for production and testing, engineering and administration activities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | control higher inventory and working capital requirements; and
| | - |  | --------------------------------------------------------------



| |  |  | improve the efficiencies within our operating, administrative, financial and accounting systems, and our procedures and controls.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

We depend on single manufacturing lines for our products, and any significant disruption in production could impair our ability to deliver our products.

We currently manufacture and assemble our products at our various facilities using individual production lines for certain product
categories. We have experienced manufacturing difficulties in the past, and any significant disruption to one of these production lines will require time either to reconfigure and equip an alternative production line or to restore the original line
to full capacity. Some of our production processes are complex, and we may be unable to respond rapidly to the loss of the use of any production line. This could result in delayed shipments, which could result in customer dissatisfaction, loss of
sales and damage to our reputation.

We depend on sole or limited source suppliers, and any disruption in supply could impair our ability to deliver our
products on time or at expected cost.

We obtain many key components for our products from third-party suppliers, and in some cases we
use a single or a limited number of suppliers. Any interruption in supply could impair our ability to deliver our products until we identify a new source of supply, which could take several weeks, months or longer and could increase our costs
significantly. In general, we do not have written long-term supply agreements with our suppliers but instead purchase components through purchase orders, which expose us to potential price increases and termination of supply without notice or
recourse. If we are required to use a new source of materials or components, it could also result in unexpected manufacturing difficulties and could affect product performance and reliability.

Our gross margins may be negatively affected, which in turn would negatively affect our operating results.

Our gross margins may be negatively affected as a result of a number of factors, including:



| |  |  | increased price competition;
| | - |  | ----------------------------



| |  |  | excess capacity or excess fixed assets;
| | - |  | ---------------------------------------



| |  |  | customer and contract settlements;
| | - |  | ----------------------------------



| |  |  | higher product, material or labor costs;
| | - |  | ----------------------------------------



| |  |  | increased inventory provisions or contract and customer settlement costs;
| | - |  | -------------------------------------------------------------------------



| |  |  | warranty costs;
| | - |  | ---------------



| |  |  | obsolescence charges;
| | - |  | ---------------------



| |  |  | loss of cost savings on future inventory purchases as a result of high inventory levels;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | introductions of new products and costs of entering new markets;
| | - |  | ----------------------------------------------------------------



| |  |  | increased levels of customer services;
| | - |  | --------------------------------------



| |  |  | changes in distribution channels; and
| | - |  | -------------------------------------



| |  |  | changes in product and geographic mix.
| | - |  | --------------------------------------

Lower than expected gross margins would negatively affect our operating results.



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We may not be able to attract or retain the specialized technical and managerial personnel necessary to achieve our
business objectives.

Competition for certain key positions and specialized technical personnel in the high-technology industry is
strong. We believe that our future success depends in part on our continued ability to hire, assimilate, and retain qualified personnel in a timely manner, particularly in key senior management positions and in our key areas of potential growth. An
important factor in attracting and retaining qualified employees is our ability to provide employees with the opportunity to participate in the potential growth of our business through programs such as stock option plans. We may also find it more
difficult to attract or retain qualified employees because of our size. In addition, if we have not properly sized our workforce and retained those employees with the appropriate skills, our ability to compete effectively may be adversely affected.
If we are not successful in attracting, retaining or recruiting qualified employees, including members of senior management, in the future, we may not have the necessary personnel to effectively compete in the highly dynamic, specialized and
volatile industry in which we operate or to achieve our business objectives.

Future cash flow fluctuations may affect our ability to fund our working
capital requirements or achieve our business objectives in a timely manner.

Our working capital requirements and cash flows
historically have been, and are expected to continue to be, subject to quarterly and yearly fluctuations, depending on such factors as timing and size of capital expenditures, levels of sales, timing of deliveries and collection of receivables,
inventory levels, customer payment terms and supplier terms and conditions. We believe our cash on hand will be sufficient to fund our current business model, manage our investments and meet our customer commitments for at least the next 12 months.
However, a greater than expected slow down in capital spending by our customers may require us to adjust our current business model. As a result, our revenues and cash flows may be materially lower than we expect and we may be required to reduce our
capital expenditures and investments or take other measures in order to meet our cash requirements. We may seek additional funds from liquidity- generating transactions and other conventional sources of external financing (which may include a
variety of debt, convertible debt and/or equity financings). We cannot provide any assurance that our net cash requirements will be as we currently expect. Our inability to manage cash flow fluctuations resulting from the above factors could have a
material adverse effect on our ability to fund our working capital requirements from operating cash flows and other sources of liquidity or to achieve our business objectives in a timely manner.

Our business may be materially and adversely affected by increased levels of debt.

In order to finance our business or to finance possible acquisitions we may incur significant levels of debt compared to historical levels, and we may need to secure additional sources of funding, which may include
debt or convertible debt financing, in the future. A high level of debt, arduous or restrictive terms and conditions relating to accessing certain sources of funding, failure to meet the financial and/or other covenants in our credit and/or support
facilities and any significant reduction in, or access to, such facilities, poor business performance or lower than expected cash inflows could have adverse consequences on our ability to fund our business and the operation of our business.

Other effects of a high level of debt include the following:



| |  |  | we may have difficulty borrowing money in the future or accessing sources of funding;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | we may need to use a large portion of our cash flow from operations to pay principal and interest on our indebtedness, which would reduce the amount of cash
available to finance our operations and other business activities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a high debt level, arduous or restrictive terms and conditions, or lower than expected cash flows would make us more vulnerable to economic downturns and adverse
developments in our business; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if operating cash flows are not sufficient to meet our operating expenses, capital expenditures and debt service requirements as they become due, we may be
required, in order to meet our debt service obligations, to delay or reduce capital expenditures or the introduction of new products, sell assets and/or forego business opportunities including acquisitions, research and development projects or
product design enhancements.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We operate in highly dynamic and volatile industries characterized by changing technologies, evolving
industry standards, frequent new product introductions and relatively short product life cycles.

The markets for our products are
characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. We expect our success to depend, in substantial part, on the timely and successful introduction of high
quality, new products and upgrades, as well as cost reductions on current products to address the operational speed, bandwidth, efficiency and cost requirements of our customers. Our success will also depend on our ability to comply with emerging
industry standards, to operate with products of other suppliers, to address emerging



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market trends, to provide our customers with new revenue-generating opportunities and to compete with technological and product developments carried out by
others. The development of new, technologically advanced products, is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. Investments in such development may
result in expenses growing at a faster rate than revenues, particularly since the initial investment to bring a product to market may be high. We may not be successful in targeting new market opportunities, in developing and commercializing new
products in a timely manner or in achieving market acceptance for our new products.

The success of new or enhanced products, depends on a
number of other factors, including the timely introduction of such products, market acceptance of new technologies and industry standards, the quality and robustness of new or enhanced products, competing product offerings, the pricing and marketing
of such products and the availability of funding for such networks. Products and technologies developed by our competitors may render our products obsolete. If we fail to respond in a timely and effective manner to unanticipated changes in one or
more of the technologies affecting telecommunications or our new products or product enhancements fail to achieve market acceptance, our ability to compete effectively in our industry, and our sales, market share and customer relationships could be
materially and adversely affected.

We face significant competition and may not be able to increase or maintain our market share and may suffer from
competitive pricing practices.

We operate in an industry that is characterized by industry rationalization and consolidation, vigorous
competition for market share and rapid technological development. Competition is heightened in periods of slow overall market growth. These factors could result in aggressive pricing practices and growing competition from niche companies,
established competitors, as well as well-capitalized companies, which, in turn, could have a material adverse effect on our gross margins.

We expect that we will face additional competition from existing competitors and from a number of companies that have entered or may enter our existing and future markets. Some of our current and potential competitors have greater
marketing, technical and financial resources, including access to capital markets and/or the ability to provide customer financing in connection with the sale of products. Many of our current and potential competitors have also established, or may
in the future establish, relationships with our current and potential customers. Other competitive factors include the ability to provide new technologies and products, end-to-end solutions, and new product features, as well as conformance to
industry standards. Increased competition could result in price reductions, negatively affecting our operating results, reducing profit margins and potentially leading to a loss of market share.

Our business may suffer if we cannot protect our proprietary technology.

Our ability to compete depends significantly upon our patents and our other proprietary technology. The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as
our technology to compete with us. Our patents could be challenged, invalidated or circumvented, and the rights we have under our patents could provide no competitive advantages. Existing trade secrets, copyright and trademark laws offer only
limited protection. In addition, other companies could independently develop similar or superior technology without violating our intellectual property rights. Any misappropriation of our technology or the development of competing technology could
seriously harm our competitive position, which could lead to a substantial reduction in net sales.

If we resort to legal proceedings to
enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, distract the attention of management, and there can be no assurance that we would prevail.

Claims by others that we infringe their intellectual property rights could harm our business and financial condition.

We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, or other intellectual
property rights of others. We do not conduct exhaustive patent searches to determine whether the technology used in our products infringes patents held by third parties.

Any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. If any of our products are found to
violate third-party proprietary rights, we may be required to pay substantial damages. In addition, we may be required to re-engineer our products or obtain licenses from third parties to continue to offer our products. Any efforts to re-engineer
our products or obtain licenses on commercially reasonable terms may not be successful, which would prevent us from selling our products, and, in any case, could substantially increase our costs and have a material adverse effect on our business,
financial condition and results of operations.



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The market price of our common stock may be volatile.

Our stock price has historically been volatile. From April 1, 2005 to June 30, 2007, the trading price of our common stock ranged from $23.31 to
$6.77. Many factors may cause the market price of our common stock to fluctuate, including:



| |  |  | variations in our quarterly results of operations;
| | - |  | --------------------------------------------------



| |  |  | the introduction of new products by us or our competitors;
| | - |  | ----------------------------------------------------------



| |  |  | the hiring or departure of key personnel;
| | - |  | -----------------------------------------



| |  |  | acquisitions or strategic alliances involving us or our competitors;
| | - |  | --------------------------------------------------------------------



| |  |  | changes in, or adoptions of, accounting principles; and
| | - |  | -------------------------------------------------------



| |  |  | market conditions in our industries.
| | - |  | ------------------------------------

In addition, the stock market can experience extreme price and volume fluctuations. These fluctuations, which are often unrelated to the operating performance of particular companies, may adversely affect the market price of our common
stock.

Declines in the market price of our common stock may negatively impact our ability to make future strategic acquisitions, raise capital, issue
debt or retain employees.

The stock markets have experienced extreme price fluctuations that have affected the market price and trading
volumes of many technology and telecommunications companies in particular, with potential consequential negative effects on the trading of securities of such companies. A major decline in the capital markets generally, or an adjustment in the market
price or trading volumes of our common stock may negatively impact our ability to raise capital, issue debt, retain employees or make future strategic acquisitions. These factors, as well as general economic and political conditions, and continued
negative events within the technology sector, may in turn have a material adverse effect on the market price of our common stock.

The testing of
electronic communications equipment and the accurate transmission of information entail a risk of product liability claims by customers and others.

Claims may be asserted against Micronetics by end-users of any of our products. We maintain product liability insurance coverage with an aggregate annual liability coverage limit, regardless of the number of
occurrences, of $2.0 million. There is no assurance that such insurance will continue to be available at a reasonable cost or will be sufficient to cover all possible liabilities. In the event of a successful suit against us, lack or insufficiency
of insurance coverage could result in substantial cost and could have a material adverse effect on our business.

Our products with military
applications are subject to export regulations, which may be costly.

We are required to obtain export licenses before filling foreign
orders for many of our products with military or other governmental applications. United States Export Administration regulations control high tech exports like our products for reasons of national security and compliance with foreign policy, to
guarantee domestic reserves of products in short supply and, under certain circumstances, for the security of a destination country. Thus, any foreign sales of our products requiring export licenses must comply with these general policies. Although
we have not experienced any significant export licensing problems to date, such problems may arise in the future. In addition, these regulations are subject to change, and any such change may require us to improve our technologies, incur expenses or
both in order to comply with such regulations.

We are subject to recently enacted environmental regulation, compliance with which may be costly.

In 2006 the European Union (EU) implemented two new directives known as the Restriction on Certain Hazardous Substances
Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE). These directives place restrictions on the distribution within the EU of certain substances, and require a manufacturer to recycle products containing the
restricted substances. We believe that the majority of our products are exempt from the directives because they are used for military purposes rather than by consumers. However, we may not be able to rely on such an exemption until regulators review
documentation and issue a ruling on each product. We are redesigning our products that we believe may not be exempt from the directives in order to be able to continue to offer such products for sale in the EU. We may encounter unanticipated delays
in the completion of the redesign or in the delivery of any products that are not exempt from the directives. In addition certain products that we maintain in inventory may be rendered obsolete if not in compliance with the directives and may have
to be written off. Although we cannot predict the ultimate impact of the directives, they will likely result in additional costs or decreased revenue and could require that we redesign or change how we manufacture our products.



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|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

Recent Sales of Unregistered Securities

None.



|Item 3. | Defaults upon Senior Securities.
|------- | --------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

None.



|Item 5. | Other Information.
|------- | ------------------

None.



|Item 6. | Exhibits.
|------- | ---------



|     |  |                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                            
|     | 
|31.2 |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                            
|     | 
|32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.



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SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                       |  |  |  |                   |  |                                             
|---------------------- |  |  |  | ----------------- |  | --------------------------------------------
|                       |  |  |  | MICRONETICS, INC.
|                       |  |  | 
|Dated: August 16, 2007 |  |  |  | By:               |  | /s/ DAVID ROBBINS                           
|                       |  |  |  |                   |  | David Robbins,                              
|                       |  |  |  |                   |  | President and Chief Executive Officer       
|                       |  |  |  |                   |  | (Principal Executive Officer)               
|                       |  |  | 
|Dated: August 16, 2007 |  |  |  | By:               |  | /s/ DIANE BOURQUE                           
|                       |  |  |  |                   |  | Diane Bourque,                              
|                       |  |  |  |                   |  | Vice President and Chief Financial Officer  
|                       |  |  |  |                   |  | (Principal Financial and Accounting Officer)



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