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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549





FORM 10-Q







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

For the quarterly period ended December 25, 2010

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





MICRONETICS, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|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)





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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | 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 January 28, 2011, the issuer had 4,556,135 shares of common stock, par value $.01 per share, outstanding.









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MICRONETICS, INC.

INDEX



|                               |  |                                                                                                         |  |          |    | 
|------------------------------ |  | ------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|                               |  |                                                                                                         |  | Page No. |   
|Part I. Financial Information: |  |                                                                                                         |  |         
|                               |  |                                                                                                        
|Item 1.                        |  | Financial Statements (unaudited)                                                                        |  |          |    | 
|                               |  |                                                                                                        
|                               |  | Consolidated Balance Sheets  December 25, 2010 and March 31, 2010                                      |  |          | 3  | 
|                               |  |                                                                                                        
|                               |  | Consolidated Statements of Operations  Thirteen Weeks Ended December 25, 2010 and December 26, 2009    |  |          | 4  | 
|                               |  |                                                                                                        
|                               |  | Consolidated Statements of Operations  Thirty-nine Weeks Ended December 25, 2010 and December 26, 2009 |  |          | 5  | 
|                               |  |                                                                                                        
|                               |  | Consolidated Statement of Shareholders Equity  Thirty-nine Weeks Ended December 25,
2010              |  |          | 6  | 
|                               |  |                                                                                                        
|                               |  | Consolidated Statements of Cash Flows  Thirty-nine Weeks Ended December 25, 2010 and December 26, 2009 |  |          | 7  | 
|                               |  |                                                                                                        
|                               |  | Notes to Consolidated Financial Statements                                                              |  |          | 8  | 
|                               |  |                                                                                                        
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                   |  |          | 16 | 
|                               |  |                                                                                                        
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                              |  |          | 21 | 
|                               |  |                                                                                                        
|Item 4.                        |  | Controls and Procedures                                                                                 |  |          | 21 | 
|                               | 
|Part II. Other Information:    |  |                                                                                                         |  |         
|                               |  |                                                                                                        
|Item 1.                        |  | Legal Proceedings                                                                                       |  |          | 22 | 
|                               |  |                                                                                                        
|Item 1A                        |  | Risk Factors                                                                                            |  |          | 22 | 
|                               |  |                                                                                                        
|Item 6.                        |  | Exhibits                                                                                                |  |          | 22 | 



2



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | - | -------------- | - | ---------- | -
|                                                                                                                                                                                        |  | December 25, 2010 |            |   | March 31, 2010 |  
|ASSETS                                                                                                                                                                                  |  |                   |            |   |                |   |            |  
|Current assets:                                                                                                                                                                         |  |                   |            |   |                |   |            |  
|Cash and cash equivalents                                                                                                                                                               |  | $                 | 1,058,885  |   |                | $ | 482,442    |  
|Accounts receivable, net of allowance for doubtful accounts of $590,392 and $570,782 at December 25, 2010 and March 31,
2010, respectively                                              |  |                   | 4,133,313  |   |                |   | 5,691,334  |  
|Inventories, net                                                                                                                                                                        |  |                   | 12,680,997 |   |                |   | 10,943,968 |  
|Unbilled revenue                                                                                                                                                                        |  |                   |           |   |                |   | 219,958    |  
|Deferred tax asset                                                                                                                                                                      |  |                   | 1,464,733  |   |                |   | 1,557,093  |  
|Prepaid income taxes                                                                                                                                                                    |  |                   | 622,140    |   |                |   | 434,379    |  
|Prepaid expenses and other current assets                                                                                                                                               |  |                   | 280,546    |   |                |   | 218,554    |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|Total current assets                                                                                                                                                                    |  |                   | 20,240,614 |   |                |   | 19,547,728 |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|Property, plant and equipment, net                                                                                                                                                      |  |                   | 4,644,338  |   |                |   | 4,787,880  |  
|Other assets:                                                                                                                                                                           |  |                   |            |   |                |   |            |  
|Security deposits                                                                                                                                                                       |  |                   | 97,079     |   |                |   | 97,079     |  
|Other long term assets                                                                                                                                                                  |  |                   | 12,365     |   |                |   | 18,547     |  
|Intangible assets, net                                                                                                                                                                  |  |                   | 1,149,221  |   |                |   | 1,396,595  |  
|Goodwill                                                                                                                                                                                |  |                   | 1,117,197  |   |                |   | 1,117,197  |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|Total other assets                                                                                                                                                                      |  |                   | 2,375,862  |   |                |   | 2,629,418  |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|TOTAL ASSETS                                                                                                                                                                            |  | $                 | 27,260,814 |   |                | $ | 26,965,026 |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|                                                                                                                                                                                        |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                    |  |                   |            |   |                |   |            |  
|                                                                                                                                                                                        |  |                  
|Current liabilities:                                                                                                                                                                    |  |                   |            |   |                |   |            |  
|Current portion of long-term debt                                                                                                                                                       |  | $                 | 1,514,715  |   |                | $ | 1,457,267  |  
|Line of credit                                                                                                                                                                          |  |                   | 5,671,405  |   |                |   | 4,234,435  |  
|Accounts payable                                                                                                                                                                        |  |                   | 957,977    |   |                |   | 2,179,422  |  
|Accrued expenses and other current liabilities                                                                                                                                          |  |                   | 2,723,344  |   |                |   | 2,732,429  |  
|Deferred revenue                                                                                                                                                                        |  |                   | 29,418     |   |                |   | 200,000    |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|Total current liabilities                                                                                                                                                               |  |                   | 10,896,859 |   |                |   | 10,803,553 |  
|Long-term debt, net of current portion                                                                                                                                                  |  |                   | 678,776    |   |                |   | 1,786,378  |  
|Other long-term liability                                                                                                                                                               |  |                   |           |   |                |   | 1,740      |  
|Deferred tax liability                                                                                                                                                                  |  |                   | 1,237,668  |   |                |   | 1,033,531  |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|Total liabilities                                                                                                                                                                       |  |                   | 12,813,303 |   |                |   | 13,625,202 |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|                                                                                                                                                                                        |  |                  
|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; 5,393,717 issued, 4,556,135 outstanding at December 25, 2010
and 5,391,217 issued, 4,553,635 outstanding at March 31, 2010 |  |                   | 53,937     |   |                |   | 53,912     |  
|Additional paid-in capital                                                                                                                                                              |  |                   | 12,238,096 |   |                |   | 12,204,124 |  
|Retained earnings                                                                                                                                                                       |  |                   | 5,135,991  |   |                |   | 4,062,301  |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|                                                                                                                                                                                        |  |                   | 17,428,024 |   |                |   | 16,320,337 |  
|Treasury stock at cost, 837,582 shares at December 25, 2010 and March 31, 2010                                                                                                          |  |                   | (2,980,513 | ) |                |   | (2,980,513 | )
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|Total shareholders equity                                                                                                                                                              |  |                   | 14,447,511 |   |                |   | 13,339,824 |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                              |  | $                 | 27,260,814 |   |                | $ | 26,965,026 |  
|                                                                                                                                                                                        |  |                   |            |   |                |   |            |  

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



3



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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                           |  |                      |           |   |                   |   |           |  
|------------------------------------------ |  | -------------------- | --------- | - | ----------------- | - | --------- | -
|                                           |  | Thirteen Weeks Ended |          
|                                           |  | December 25, 2010    |           |   | December 26, 2009 |  
|Net sales                                  |  | $                    | 7,601,372 |   |                   | $ | 9,009,161 |  
|Cost of sales                              |  |                      | 5,265,794 |   |                   |   | 5,702,003 |  
|                                           |  |                      |           |   |                   |   |           |  
|Gross margin                               |  |                      | 2,335,578 |   |                   |   | 3,307,158 |  
|                                           |  |                      |           |   |                   |   |           |  
|                                           |  |                     
|Operating expenses:                        |  |                      |           |   |                   |   |           |  
|Research and development                   |  |                      | 447,197   |   |                   |   | 411,059   |  
|Selling, general and administrative        |  |                      | 1,755,689 |   |                   |   | 1,877,494 |  
|Gain on sale of asset                      |  |                      | (10,000   | ) |                   |   |          |  
|Amortization of intangible assets          |  |                      | 73,326    |   |                   |   | 87,023    |  
|                                           |  |                      |           |   |                   |   |           |  
|Total operating expenses                   |  |                      | 2,266,212 |   |                   |   | 2,375,576 |  
|                                           |  |                      |           |   |                   |   |           |  
|Income from operations                     |  |                      | 69,366    |   |                   |   | 931,582   |  
|                                           |  |                      |           |   |                   |   |           |  
|                                           |  |                     
|Other income (expense):                    |  |                      |           |   |                   |   |           |  
|Interest income                            |  |                      | 258       |   |                   |   | 67        |  
|Interest expense                           |  |                      | (84,222   | ) |                   |   | (131,820  | )
|Change in fair value of interest rate swap |  |                      | 27,084    |   |                   |   | 32,204    |  
|Miscellaneous income                       |  |                      | 2,797     |   |                   |   | 3,162     |  
|                                           |  |                      |           |   |                   |   |           |  
|Total other expense                        |  |                      | (54,083   | ) |                   |   | (96,387   | )
|                                           |  |                      |           |   |                   |   |           |  
|Income before provision for income taxes   |  |                      | 15,283    |   |                   |   | 835,195   |  
|(Benefit) provision for income taxes       |  |                      | (85,840   | ) |                   |   | 331,052   |  
|                                           |  |                      |           |   |                   |   |           |  
|Net income                                 |  | $                    | 101,123   |   |                   | $ | 504,143   |  
|                                           |  |                      |           |   |                   |   |           |  
|Income per common share                    |  |                      |           |   |                   |   |           |  
|Basic                                      |  | $                    | 0.02      |   |                   | $ | 0.11      |  
|                                           |  |                      |           |   |                   |   |           |  
|Diluted                                    |  | $                    | 0.02      |   |                   | $ | 0.11      |  
|                                           |  |                      |           |   |                   |   |           |  
|Weighted average common shares outstanding |  |                      |           |   |                   |   |           |  
|Basic                                      |  |                      | 4,555,119 |   |                   |   | 4,553,635 |  
|Diluted                                    |  |                      | 4,568,344 |   |                   |   | 4,553,753 |  

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



4



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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                           |  |                         |            |   |                   |   |            |  
|------------------------------------------ |  | ----------------------- | ---------- | - | ----------------- | - | ---------- | -
|                                           |  | Thirty-Nine Weeks Ended |           
|                                           |  | December 25, 2010       |            |   | December 26, 2009 |  
|Net sales                                  |  | $                       | 25,952,211 |   |                   | $ | 25,742,328 |  
|Cost of sales                              |  |                         | 17,141,061 |   |                   |   | 17,077,056 |  
|                                           |  |                         |            |   |                   |   |            |  
|Gross margin                               |  |                         | 8,811,150  |   |                   |   | 8,665,272  |  
|                                           |  |                         |            |   |                   |   |            |  
|                                           |  |                        
|Operating expenses:                        |  |                         |            |   |                   |   |            |  
|Research and development                   |  |                         | 1,278,135  |   |                   |   | 1,257,121  |  
|Selling, general and administrative        |  |                         | 5,381,166  |   |                   |   | 5,714,058  |  
|Net loss on disposal of assets             |  |                         | 3,560      |   |                   |   |           |  
|Amortization of intangible assets          |  |                         | 247,374    |   |                   |   | 261,069    |  
|                                           |  |                         |            |   |                   |   |            |  
|Total operating expenses                   |  |                         | 6,910,235  |   |                   |   | 7,232,248  |  
|                                           |  |                         |            |   |                   |   |            |  
|Income from operations                     |  |                         | 1,900,915  |   |                   |   | 1,433,024  |  
|                                           |  |                         |            |   |                   |   |            |  
|                                           |  |                        
|Other income (expense):                    |  |                         |            |   |                   |   |            |  
|Interest income                            |  |                         | 551        |   |                   |   | 135        |  
|Interest expense                           |  |                         | (297,449   | ) |                   |   | (400,263   | )
|Change in fair value of interest rate swap |  |                         | 82,493     |   |                   |   | 86,814     |  
|Miscellaneous income                       |  |                         | 15,615     |   |                   |   | 17,904     |  
|                                           |  |                         |            |   |                   |   |            |  
|Total other expense                        |  |                         | (198,790   | ) |                   |   | (295,410   | )
|                                           |  |                         |            |   |                   |   |            |  
|Income before provision for income taxes   |  |                         | 1,702,125  |   |                   |   | 1,137,614  |  
|Provision for income taxes                 |  |                         | 628,435    |   |                   |   | 459,213    |  
|                                           |  |                         |            |   |                   |   |            |  
|Net income                                 |  | $                       | 1,073,690  |   |                   | $ | 678,401    |  
|                                           |  |                         |            |   |                   |   |            |  
|Income per common share                    |  |                         |            |   |                   |   |            |  
|Basic                                      |  | $                       | 0.24       |   |                   | $ | 0.15       |  
|                                           |  |                         |            |   |                   |   |            |  
|Diluted                                    |  | $                       | 0.24       |   |                   | $ | 0.15       |  
|                                           |  |                         |            |   |                   |   |            |  
|Weighted average common shares outstanding |  |                         |            |   |                   |   |            |  
|Basic                                      |  |                         | 4,554,137  |   |                   |   | 4,553,635  |  
|Diluted                                    |  |                         | 4,565,041  |   |                   |   | 4,553,890  |  

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



5



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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

(Unaudited)



|                                                                                       |  |                   |           |  |                          |   |        |                  |  |   |               |   |  |       |           |  |  |   |            |   |  |   |            |  
|-------------------------------------------------------------------------------------- |  | ----------------- | --------- |  | ------------------------ | - | ------ | ---------------- |  | - | ------------- | - |  | ----- | --------- |  |  | - | ---------- | - |  | - | ---------- | -
|                                                                                       |  | Common Stock      |           |  | AdditionalPaid-InCapital |   |        | RetainedEarnings |  |   | TreasuryStock |   |  | Total |          
|                                                                                       |  | SharesOutstanding |           |  | ParValue                 |   |        |                  |  |  
|Balance at March 31, 2010                                                              |  |                   | 4,553,635 |  |                          | $ | 53,912 |                  |  | $ | 12,204,124    |   |  | $     | 4,062,301 |  |  | $ | (2,980,513 | ) |  | $ | 13,339,824 |  
|Stock-based compensation                                                               |  |                   |          |  |                          |   |       |                  |  |   | 145,032       |   |  |       |          |  |  |   |           |   |  |   | 145,032    |  
|Reduction of deferred tax asset related to cancellation of non-qualified stock options |  |                   |          |  |                          |   |       |                  |  |   | (116,660      | ) |  |       |          |  |  |   |           |   |  |   | (116,660   | )
|Exercise of stock option                                                               |  |                   | 2,500     |  |                          |   | 25     |                  |  |   | 5,600         |   |  |       |          |  |  |   |           |   |  |   | 5,625      |  
|Net income                                                                             |  |                   |          |  |                          |   |       |                  |  |   |              |   |  |       | 1,073,690 |  |  |   |           |   |  |   | 1,073,690  |  
|                                                                                       |  |                   |           |  |                          |   |        |                  |  |   |               |   |  |       |           |  |  |   |            |   |  |   |            |  
|Balance at December 25, 2010                                                           |  |                   | 4,556,135 |  |                          | $ | 53,937 |                  |  | $ | 12,238,096    |   |  | $     | 5,135,991 |  |  | $ | (2,980,513 | ) |  | $ | 14,447,511 |  
|                                                                                       |  |                   |           |  |                          |   |        |                  |  |   |               |   |  |       |           |  |  |   |            |   |  |   |            |  

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



6



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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                         |  |                          |            |   |                   |   |            |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ----------------- | - | ---------- | -
|                                                                                         |  | Thirty-Nine Weeks Ended, |           
|                                                                                         |  | December 25, 2010        |            |   | December 26, 2009 |  
|Cash flow from operating activities:                                                     |  |                          |            |   |                   |   |            |  
|Net income                                                                               |  | $                        | 1,073,690  |   |                   | $ | 678,401    |  
|Adjustments to reconcile net income to net cash provided by operating activities:        |  |                          |            |   |                   |   |            |  
|Depreciation and amortization                                                            |  |                          | 1,191,941  |   |                   |   | 1,156,353  |  
|Stock-based compensation                                                                 |  |                          | 145,032    |   |                   |   | 198,368    |  
|Change in fair value of interest rate swap                                               |  |                          | (82,493    | ) |                   |   | (86,814    | )
|Deferred taxes                                                                           |  |                          | 179,837    |   |                   |   | 22,893     |  
|Net loss on disposal of assets                                                           |  |                          | 3,560      |   |                   |   |           |  
|Provision for allowances on accounts receivable                                          |  |                          | 19,610     |   |                   |   | 176,722    |  
|Provision for inventory obsolescence and losses                                          |  |                          | 207,952    |   |                   |   | 193,949    |  
|Deferred taxes related to non-qualified stock options                                    |  |                          | (116,660   | ) |                   |   |           |  
|Changes in operating assets and liabilities:                                             |  |                          |            |   |                   |   |            |  
|Accounts receivable                                                                      |  |                          | 1,538,411  |   |                   |   | (165,358   | )
|Unbilled revenue                                                                         |  |                          | 219,958    |   |                   |   | (518,626   | )
|Inventories                                                                              |  |                          | (1,944,981 | ) |                   |   | (1,261,705 | )
|Other long term assets                                                                   |  |                          | 6,183      |   |                   |   | 6,183      |  
|Prepaid income taxes                                                                     |  |                          | (189,502   | ) |                   |   | 880,374    |  
|Prepaid expenses, other current assets, and other assets                                 |  |                          | (61,993    | ) |                   |   | 21,992     |  
|Accounts payable                                                                         |  |                          | (1,221,444 | ) |                   |   | 656,633    |  
|Accrued expenses                                                                         |  |                          | 73,408     |   |                   |   | 76,785     |  
|Deferred revenue                                                                         |  |                          | (170,582   | ) |                   |   | 200,000    |  
|                                                                                         |  |                          |            |   |                   |   |            |  
|Net cash provided by operating activities                                                |  |                          | 871,927    |   |                   |   | 2,236,150  |  
|                                                                                         |  |                          |            |   |                   |   |            |  
|Cash flows from investing activities:                                                    |  |                          |            |   |                   |   |            |  
|Capital expenditures                                                                     |  |                          | (690,067   | ) |                   |   | (973,774   | )
|Proceeds from sale of assets                                                             |  |                          | 10,000     |   |                   |   |           |  
|                                                                                         |  |                          |            |   |                   |   |            |  
|Net cash used in investing activities                                                    |  |                          | (680,067   | ) |                   |   | (973,774   | )
|                                                                                         |  |                          |            |   |                   |   |            |  
|Cash flows from financing activities:                                                    |  |                          |            |   |                   |   |            |  
|Net proceeds (payments) from line of credit                                              |  |                          | 1,436,970  |   |                   |   | (7,239     | )
|Repayments on term loan                                                                  |  |                          | (975,000   | ) |                   |   | (975,000   | )
|Repayments of capital leases                                                             |  |                          | (199,672   | ) |                   |   | (233,261   | )
|Proceeds from exercise of stock options                                                  |  |                          | 5,625      |   |                   |   |           |  
|Additional paid in capital charge related to cancellation of non-qualified stock options |  |                          | 116,660    |   |                   |   |           |  
|                                                                                         |  |                          |            |   |                   |   |            |  
|Net cash provided by (used in) financing activities                                      |  |                          | 384,583    |   |                   |   | (1,215,500 | )
|                                                                                         |  |                          |            |   |                   |   |            |  
|Net change in cash and cash equivalents                                                  |  |                          | 576,443    |   |                   |   | 46,876     |  
|Cash and cash equivalents at beginning of period                                         |  |                          | 482,442    |   |                   |   | 620,259    |  
|                                                                                         |  |                          |            |   |                   |   |            |  
|Cash and cash equivalents at end of period                                               |  | $                        | 1,058,885  |   |                   | $ | 667,135    |  
|                                                                                         |  |                          |            |   |                   |   |            |  
|Supplemental disclosure of cash flow information:                                        |  |                          |            |   |                   |   |            |  
|Cash paid (received) during the period for:                                              |  |                          |            |   |                   |   |            |  
|Interest                                                                                 |  | $                        | 303,100    |   |                   | $ | 356,248    |  
|                                                                                         |  |                          |            |   |                   |   |            |  
|Income taxes                                                                             |  | $                        | 638,100    |   |                   | $ | (444,054   | )
|                                                                                         |  |                          |            |   |                   |   |            |  
|Supplemental disclosure of non-cash financing activities:                                |  |                          |            |   |                   |   |            |  
|Equipment acquired under capital leases                                                  |  | $                        | 124,518    |   |                   | $ |           |  

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



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##### Table of Contents

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-K for its fiscal year ended March 31, 2010. 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 December 25, 2010 and the results of operations for the thirteen and thirty-nine weeks ended
December 25, 2010 and December 26, 2009.

The Company evaluated its December 25, 2010 financial statements for
subsequent events through the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in its financial statements.

The results of operations for the thirteen and thirty-nine weeks ended December 25, 2010 are not necessarily indicative of the
results to be expected for the full year ended March 31, 2011.

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, test equipment and integrated multifunction subassemblies used in cellular,
microwave, satellite, radar and communication systems around the world.

The consolidated financial statements include the
accounts of Micronetics and its wholly-owned subsidiaries, Microwave & Video Systems, Inc. (MVS), Microwave Concepts, Inc. (MicroCon), Stealth Microwave, Inc. (Stealth) and MICA Microwave Corporation
(MICA). All intercompany balances and activity have been eliminated in consolidation.

Use of
estimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (US 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, intangible assets, 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 integrated sub-assemblies, which includes microwave hardware and embedded software, that are delivered to original equipment manufacturers (OEMs) of telecommunication and networking products and defense contractors who are considered to be end
users.

The Company occasionally enters into contracts for production of highly customized microwave and radio frequency
components and integrated sub-assemblies which it records revenue based on the percentage of completion method (assuming all other requirements for revenue recognition have been satisfied) typically using labor hours to measure progress toward
completion of the contract as the Company has determined this methodology best reflects the fundamentals of the contract. If estimates to complete the contract change materially from one period to the next, profit levels could significantly vary.
Unbilled revenue represents revenue recognized in excess of billings.

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 typically offers a one-year warranty.



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##### Table of Contents

Recently issued accounting pronouncementsIn October 2009, the FASB issued
ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition: Multiple-Element
Arrangements. ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement.
This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value
method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after
April 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. We are currently evaluating the impact of this ASU on our consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include
Software Elements (a consensus of the FASB Emerging Issues Task Force). ASU No. 2009-14 amends ASC 985-605, Software: Revenue Recognition, such that tangible products, containing both software and non-software components that
function together to deliver the tangible products essential functionality, are no longer within the scope of ASC 985-605. It also amends the determination of how arrangement consideration should be allocated to deliverables in a
multiple-deliverable revenue arrangement. This ASU will become effective for us for revenue arrangements entered into or materially modified on or after April 1, 2011. Earlier application is permitted with required transition disclosures based
on the period of adoption. We are currently evaluating the impact of this ASU on our consolidated financial statements. Both ASU No. 2009-13 and ASU No. 2009-14 must be adopted in the same period and must use the same transition
disclosures.

3. INVENTORIES, NET

At December 25, 2010 and March 31, 2010, inventories consisted of the following:



|                                                      |  |                   |            |   |                |   |            |  
|----------------------------------------------------- |  | ----------------- | ---------- | - | -------------- | - | ---------- | -
|                                                      |  | December 25, 2010 |            |   | March 31, 2010 |  
|Raw materials                                         |  | $                 | 7,384,465  |   |                | $ | 7,170,056  |  
|Work in process                                       |  |                   | 5,375,884  |   |                |   | 3,941,829  |  
|Finished goods                                        |  |                   | 1,328,268  |   |                |   | 1,368,591  |  
|                                                      |  |                   |            |   |                |   |            |  
|                                                      |  |                   | 14,088,617 |   |                |   | 12,480,476 |  
|Less: allowance for obsolescence and excess inventory |  |                   | (1,407,620 | ) |                |   | (1,536,508 | )
|                                                      |  |                   |            |   |                |   |            |  
|                                                      |  | $                 | 12,680,997 |   |                | $ | 10,943,968 |  
|                                                      |  |                   |            |   |                |   |            |  

4. PROPERTY, PLANT AND EQUIPMENT, NET

At December 25, 2010 and March 31, 2010, property, plant and equipment, net consisted of the following:



|                                     |  |                   |            |   |                |   |            |  
|------------------------------------ |  | ----------------- | ---------- | - | -------------- | - | ---------- | -
|                                     |  | December 25, 2010 |            |   | March 31, 2010 |  
|Land                                 |  | $                 | 162,000    |   |                | $ | 162,000    |  
|Buildings and leasehold improvements |  |                   | 2,016,532  |   |                |   | 2,170,278  |  
|Machinery and equipment              |  |                   | 11,643,834 |   |                |   | 10,833,486 |  
|Furniture, fixtures and other        |  |                   | 213,511    |   |                |   | 244,171    |  
|                                     |  |                   |            |   |                |   |            |  
|                                     |  |                   | 14,035,877 |   |                |   | 13,409,935 |  
|Less: accumulated depreciation       |  |                   | (9,391,539 | ) |                |   | (8,622,055 | )
|                                     |  |                   |            |   |                |   |            |  
|                                     |  | $                 | 4,644,338  |   |                | $ | 4,787,880  |  
|                                     |  |                   |            |   |                |   |            |  

5. INTANGIBLE ASSETS AND GOODWILL

The Company tests goodwill for impairment annually and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.



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##### Table of Contents

The following table presents gross intangible assets and the related accumulated
amortization of the Companys finite-lived intangible assets as of December 25, 2010 and March 31, 2010 (in thousands):



|                                         |  |                   |            |  |                   |                         |       |                |          |   |       |            |  |   |                         |  |  |          |       |  |  |   |       |  |  |   |       | 
|---------------------------------------- |  | ----------------- | ---------- |  | ----------------- | ----------------------- | ----- | -------------- | -------- | - | ----- | ---------- |  | - | ----------------------- |  |  | -------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                         |  | UsefulLife(years) |            |  | December 25, 2010 |                         |       | March 31, 2010 |         
|Intangible Assets                        |  |                   | GrossValue |  |                   | AccumulatedAmortization |       |                | NetValue |   |       | GrossValue |  |   | AccumulatedAmortization |  |  | NetValue |      
|Customer relationships (non-contractual) |  |                   | 3-10       |  |                   | $                       | 2,956 |                |          | $ | 2,088 |            |  | $ | 868                     |  |  | $        | 2,956 |  |  | $ | 1,931 |  |  | $ | 1,025 | 
|Trade name                               |  |                   | 10         |  |                   |                         | 260   |                |          |   | 93    |            |  |   | 167                     |  |  |          | 260   |  |  |   | 73    |  |  |   | 187   | 
|Developed technology-drawings            |  |                   | 3-5        |  |                   |                         | 513   |                |          |   | 399   |            |  |   | 114                     |  |  |          | 513   |  |  |   | 328   |  |  |   | 185   | 
|                                         |  |                   |            |  |                   |                         |       |                |          |   |       |            |  |   |                         |  |  |          |       |  |  |   |       |  |  |   |       | 
|                                         |  |                   |            |  |                   | $                       | 3,729 |                |          | $ | 2,580 |            |  | $ | 1,149                   |  |  | $        | 3,729 |  |  | $ | 2,332 |  |  | $ | 1,397 | 
|                                         |  |                   |            |  |                   |                         |       |                |          |   |       |            |  |   |                         |  |  |          |       |  |  |   |       |  |  |   |       | 

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 and thereafter:



|           |  |                |       | 
|---------- |  | -------------- | ----- | 
|           |  | (in thousands) |      
|2011       |  |                | 73    | 
|2012       |  |                | 314   | 
|2013       |  |                | 163   | 
|2014       |  |                | 144   | 
|2015       |  |                | 144   | 
|Thereafter |  |                | 311   | 
|           |  |                |       | 
|Total      |  | $              | 1,149 | 
|           |  |                |       | 

6. ACCRUED EXPENSES

At December 25, 2010 and March 31, 2010 accrued expenses consisted of the following:



|                                    |  |                   |           |  |                |   |           | 
|----------------------------------- |  | ----------------- | --------- |  | -------------- | - | --------- | 
|                                    |  | December 25, 2010 |           |  | March 31, 2010 |  
|Unbilled payables                   |  | $                 | 970,870   |  |                | $ | 837,603   | 
|Professional fees                   |  |                   |          |  |                |   | 15,750    | 
|Payroll, benefits and related taxes |  |                   | 1,183,001 |  |                |   | 1,142,532 | 
|Warranty                            |  |                   | 264,146   |  |                |   | 211,240   | 
|Fair value of interest rate swap    |  |                   | 82,557    |  |                |   | 165,050   | 
|Commissions                         |  |                   | 150,713   |  |                |   | 185,967   | 
|Customer deposits                   |  |                   | 9,215     |  |                |   | 71,348    | 
|Miscellaneous                       |  |                   | 62,842    |  |                |   | 102,939   | 
|                                    |  |                   |           |  |                |   |           | 
|                                    |  | $                 | 2,723,344 |  |                | $ | 2,732,429 | 
|                                    |  |                   |           |  |                |   |           | 

Included in accrued payroll are bonuses of $539,186 and $600,000 at December 25, 2010 and
March 31, 2010, respectively.

7. LONG-TERM DEBT

At December 25, 2010 and March 31, 2010 long-term debt consisted of the following:



|                                       |  |                   |            |   |                |   |            |  
|-------------------------------------- |  | ----------------- | ---------- | - | -------------- | - | ---------- | -
|                                       |  | December 25, 2010 |            |   | March 31, 2010 |  
|Term loan                              |  |                   | 1,950,000  |   |                |   | 2,925,000  |  
|Capital leases                         |  |                   | 243,491    |   |                |   | 318,645    |  
|                                       |  |                   |            |   |                |   |            |  
|                                       |  |                   | 2,193,491  |   |                |   | 3,243,645  |  
|Less current portion                   |  |                   | (1,514,715 | ) |                |   | (1,457,267 | )
|                                       |  |                   |            |   |                |   |            |  
|Long-term debt, net of current portion |  | $                 | 678,776    |   |                | $ | 1,786,378  |  
|                                       |  |                   |            |   |                |   |            |  



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##### Table of Contents

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. In the third quarter of fiscal 2009, the revolving line of credit was extended by two years. On August 13, 2010 the Company entered into an amended term loan and revolving line of credit agreement under
which the revolving line of credit was increased to $7.5 million and extended by one additional year and now expires on March 31, 2013. The term loan is guaranteed by the Company and its 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 rate of 5.2% plus the applicable margin. At December 25, 2010, the interest rate was 7.95%. The final payment for the
term loan is due in April 2012. The revolving line of credit bears interest at LIBOR plus the applicable margin. At December 25, 2010, the interest rate was 3.01%. The Company had approximately $1.8 million available under the line of credit at
December 25, 2010.

In April 2007, the Company entered into an interest rate swap agreement with a notional amount of
$6.5 million in April 2007 to mitigate the effect of interest rate fluctuations on the term loan. The interest rate swap was not designated as a hedging instrument at the initiation of the swap, and therefore the Company has not applied hedge
accounting. As a result, at the end of each reporting period, the change in fair value of the interest rate swap is recorded on the consolidated balance sheet, with any related gains or losses included in earnings. The notional amount of this swap
agreement was $1,950,000 at December 25, 2010.

At December 25, 2010 the Company was in compliance with its bank
covenants. Under the terms of the amended term loan and the revolving line of credit agreement, the Company is required to maintain certain financial covenants on a quarterly and annual basis, including total funded debt to EBITDA not exceeding
2.5:1, minimum debt service coverage of 1.25:1, a minimum current ratio of 1.25:1 and minimum tangible net worth of $9.2 million. For the fiscal year ended March 31, 2011, the debt service coverage covenant is required to be at least 1.10:1
except that for the third quarter of fiscal 2011 the minimum ratio is 0.85:1.

Capital Leases

Commercial capital leases payable are reflected at their present value based upon interest of approximately 6.8% per annum, and are
secured by the underlying assets. The assets are depreciated over their estimated useful lives. Included in the current portion of long-term debt is $214,715 for capital lease obligations. Included in long-term debt net of current portion is $28,776
for capital lease obligations. The remaining interest associated with the Companys capital lease obligations amounts to approximately $9,300 over the lease terms.

8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION

At December 25,
2010, the Company had one stock option plan under which grants were outstanding. The stock options outstanding are for grants issued under the Companys 2006 Equity Incentive 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 Stock Option Plan. In July 2006, the Board of Directors determined that it would
not issue any new option awards under the 2003 Plan. During the third quarter of fiscal 2011, all remaining outstanding options under the 2003 Stock Option Plan expired.

The 2006 Equity Incentive Plan

During the fiscal year ended
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 shares of restricted stock or options to purchase up to 1,000,000 shares
of common stock. As of December 25, 2010 there were 261,000 options outstanding under the 2006 Plan.

The 2006 Plan is
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 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 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 the plan or exercised more
than ten years from the date of grant.



11



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##### Table of Contents

The following table sets forth the Companys stock option activity during the
thirty-nine weeks ended December 25, 2010:



|                                 |  |                         |          |   |                              |   |      |                                         |  |  |                         |  |  |   |         | 
|-------------------------------- |  | ----------------------- | -------- | - | ---------------------------- | - | ---- | --------------------------------------- |  |  | ----------------------- |  |  | - | ------- | 
|                                 |  | SharesUnderlyingoptions |          |   | WeightedAverageExerciseprice |   |      | WeightedAverageRemainingContractuallife |  |  | AggregateIntrinsicValue | 
|Outstanding at March 31, 2010    |  |                         | 511,100  |   |                              | $ | 6.79 |                                         |  |  |                         |  |  | $ |        | 
|Granted                          |  |                         |         |   |                              |   |     |                                         |  |  |                         |  |  |   |        | 
|Exercised                        |  |                         | (2,500   | ) |                              |   | 2.25 |                                         |  |  |                         |  |  |   |        | 
|Expired                          |  |                         | (236,600 | ) |                              |   | 8.12 |                                         |  |  |                         |  |  |   |        | 
|Forfeited                        |  |                         | (11,000  | ) |                              |   | 7.68 |                                         |  |  |                         |  |  |   |        | 
|                                 |  |                         |          |   |                              |   |      |                                         |  |  |                         |  |  |   |         | 
|Outstanding at December 25, 2010 |  |                         | 261,000  |   |                              | $ | 5.59 |                                         |  |  | 7.65                    |  |  | $ | 239,715 | 
|                                 |  |                         |          |   |                              |   |      |                                         |  |  |                         |  |  |   |         | 
|Exercisable at December 25, 2010 |  |                         | 128,375  |   |                              | $ | 7.10 |                                         |  |  | 6.75                    |  |  | $ | 27,261  | 
|                                 |  |                         |          |   |                              |   |      |                                         |  |  |                         |  |  |   |         | 

The following table sets forth the status of the Companys non-vested stock options as of
December 25, 2010:



|                                   |  |                  |         |   |                                      |   |      | 
|---------------------------------- |  | ---------------- | ------- | - | ------------------------------------ | - | ---- | 
|                                   |  | Number ofOptions |         |   | Weighted-AverageGrant-DateFair Value |  
|Non-vested as of March 31, 2010    |  |                  | 191,750 |   |                                      | $ | 2.95 | 
|Granted                            |  |                  |        |   |                                      |   |     | 
|Forfeited                          |  |                  | (6,250  | ) |                                      |   | 4.19 | 
|Vested                             |  |                  | (52,875 | ) |                                      |   | 3.54 | 
|                                   |  |                  |         |   |                                      |   |      | 
|Non-vested as of December 25, 2010 |  |                  | 132,625 |   |                                      | $ | 2.66 | 
|                                   |  |                  |         |   |                                      |   |      | 

The following table summarizes the effects of stock-based compensation for the thirteen weeks ended
December 25, 2010 and December 26, 2009:



|                                                       |  |                      |        |  |                   |   |        | 
|------------------------------------------------------ |  | -------------------- | ------ |  | ----------------- | - | ------ | 
|                                                       |  | Thirteen Weeks Ended |       
|                                                       |  | December 25, 2010    |        |  | December 26, 2009 |  
|Cost of sales                                          |  | $                    | 8,537  |  |                   | $ | 10,590 | 
|Selling, general and administrative                    |  |                      | 34,025 |  |                   |   | 34,352 | 
|                                                       |  |                      |        |  |                   |   |        | 
|Stock-based compensation effect on income before taxes |  | $                    | 42,562 |  |                   | $ | 44,942 | 
|                                                       |  |                      |        |  |                   |   |        | 

The following table summarizes the effects of stock-based compensation for the thirty-nine weeks ended
December 25, 2010 and December 26, 2009:



|                                                       |  |                         |         |  |                   |   |         | 
|------------------------------------------------------ |  | ----------------------- | ------- |  | ----------------- | - | ------- | 
|                                                       |  | Thirty-Nine Weeks Ended |        
|                                                       |  | December 25, 2010       |         |  | December 26, 2009 |  
|Cost of sales                                          |  | $                       | 30,369  |  |                   | $ | 31,290  | 
|Selling, general and administrative                    |  |                         | 114,663 |  |                   |   | 167,078 | 
|                                                       |  |                         |         |  |                   |   |         | 
|Stock-based compensation effect on income before taxes |  | $                       | 145,032 |  |                   | $ | 198,368 | 
|                                                       |  |                         |         |  |                   |   |         | 

Unrecognized stock-based compensation expense related to the unvested options is approximately $0.3 million,
and will be recorded over the remaining vesting periods of 2.54 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.



12



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##### Table of Contents

There were no options granted during the thirteen weeks ended December 25, 2010 and
10,000 options granted during the thirteen weeks ended December 26, 2009. The fair value of options issued was estimated at the date of grant using the following weighted-average assumptions for the thirteen weeks ended December 26, 2009
were as follows:



|                        |  |  |            |  
|----------------------- |  |  | ---------- | -
|Risk free interest rate |  |  | 2.49       | %
|Expected life           |  |  | 6.25 years |  
|Expected volatility     |  |  | 70.18      | %
|Forfeiture rate         |  |  | 2.92       | %
|Expected dividend yield |  |  | 0          | %

The per share fair value
of stock options granted for the thirteen weeks ended December 26, 2009 was $2.04.

9. INCOME TAXES

Before discrete items, the Companys effective tax rate was 39.5% for the thirteen weeks ended December 25, 2010 and 42% for the
thirteen weeks ended December 26, 2009.

In the thirteen weeks ended December 25, 2010, the Company recorded true-up
adjustment credits totaling approximately $42,000 primarily related to the filing of our fiscal 2010 tax returns. In addition, the Company recognized uncertain tax benefits of $1,762 due to the statute of limitations expiration.

In the thirteen weeks ended December 26, 2009, the Company recorded true-up adjustment credits totaling approximately $21,000
primarily related to the filing of our fiscal 2009 tax return.

As of April 1, 2010, the Company is subject to tax in the
U.S. Federal and various state jurisdictions. The Internal Revenue Service (IRS) recently finalized the review of our March 31, 2008 tax return and recommended no changes to the return. The Company is open to examination for tax years
March 31, 2007 through 2010.

10. EARNINGS PER SHARE

Basic earnings per share, or EPS, 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 or loss per period divided by the weighted average number of common shares and common equivalent shares outstanding during each period unless the effect would be anti-dilutive. Common stock equivalents represent the dilutive
effect of the assumed exercise of certain outstanding stock options using the treasury stock method. The computations of basic and diluted EPS for the thirteen weeks ended December 25, 2010 and December 26, 2009 are:



|                                                                 |  |                      |           |  |                   |   |           | 
|---------------------------------------------------------------- |  | -------------------- | --------- |  | ----------------- | - | --------- | 
|                                                                 |  | Thirteen Weeks Ended |          
|                                                                 |  | December 25, 2010    |           |  | December 26, 2009 |  
|Net income                                                       |  | $                    | 101,123   |  |                   | $ | 504,143   | 
|Weighted average shares outstanding                              |  |                      | 4,555,119 |  |                   |   | 4,553,635 | 
|Basic earnings per share                                         |  | $                    | 0.02      |  |                   | $ | 0.11      | 
|Common stock equivalents                                         |  |                      | 13,225    |  |                   |   | 118       | 
|Weighted average common and common equivalent shares outstanding |  |                      | 4,568,344 |  |                   |   | 4,553,753 | 
|Diluted earnings per share                                       |  | $                    | 0.02      |  |                   | $ | 0.11      | 

The computations of
basic and diluted EPS for the thirty-nine weeks ended December 25, 2010 and December 26, 2009 are:



|                                                                 |  |                         |           |  |                   |   |           | 
|---------------------------------------------------------------- |  | ----------------------- | --------- |  | ----------------- | - | --------- | 
|                                                                 |  | Thirty-Nine Weeks Ended |          
|                                                                 |  | December 25, 2010       |           |  | December 26, 2009 |  
|Net income                                                       |  | $                       | 1,073,690 |  |                   | $ | 678,401   | 
|Weighted average shares outstanding                              |  |                         | 4,554,137 |  |                   |   | 4,553,635 | 
|Basic earnings per share                                         |  | $                       | 0.24      |  |                   | $ | 0.15      | 
|Common stock equivalents                                         |  |                         | 10,904    |  |                   |   | 255       | 
|Weighted average common and common equivalent shares outstanding |  |                         | 4,565,041 |  |                   |   | 4,553,890 | 
|Diluted earnings per share                                       |  | $                       | 0.24      |  |                   | $ | 0.15      | 





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##### Table of Contents

At December 25, 2010 and December 26, 2009, 129,000 and 376,600 stock options,
respectively, were excluded from the diluted earnings per share calculation because they would have been anti-dilutive.

11. FAIR VALUE
MEASUREMENTS

The Company assesses fair value as an exit price representing the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumptions, this standard establishes a three-tier value hierarchy, which prioritizes, in descending order, the inputs used in measuring fair value as follows:

Level 1  Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical
assets or liabilities as of the reporting date.

Level 2  Inputs used to measure fair value, other than quoted prices
included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not
active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors,
are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.

Level 3  Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are
generally determined using pricing models for which the assumptions utilize managements estimates of market participant assumptions.

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. Assets and liabilities measured at fair value
on a recurring basis, include the following as of December 25, 2010 and March 31, 2010.



|                                                                                |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|------------------------------------------------------------------------------- |  | ------------------------------------------------- | - |  | ----------------------------------------- | - | --------- | -------------------------------------- |  |  | -------------------------------------- |  |  | - | --------- | 
|                                                                                |  | Fair Value Measurements at December 25, 2010Using |   |  |                                           |  
|                                                                                |  | Quoted Pricesin ActiveMarkets(Level 1)            |   |  | SignificantOtherObservableInputs(Level 2) |   |           | SignificantUnobservableInputs(Level 3) |  |  | Total FairValue as ofDecember 25, 2010 | 
|Assets:                                                                         |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|Money market fund (included in cash and cash equivalents)                       |  |                                                   |  |  |                                           | $ | 1,015,000 |                                        |  |  |                                       |  |  | $ | 1,015,000 | 
|                                                                                |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|Total assets at fair value                                                      |  |                                                   |  |  |                                           | $ | 1,015,000 |                                        |  |  |                                       |  |  | $ | 1,015,000 | 
|                                                                                |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|                                                                                |  |                                                   |   | 
|Liabilities:                                                                    |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|Interest rate swap (included in accrued expenses and other current liabilities) |  |                                                   |  |  |                                           | $ | 83,000    |                                        |  |  |                                       |  |  | $ | 83,000    | 
|                                                                                |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|Total liabilities at fair value                                                 |  |                                                   |  |  |                                           | $ | 83,000    |                                        |  |  |                                       |  |  | $ | 83,000    | 
|                                                                                |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|                                                                                |  |                                                  
|                                                                                |  | Fair Value Measurements at March 31, 2010Using    |   |  |                                           |  
|                                                                                |  | Quoted Pricesin ActiveMarkets(Level 1)            |   |  | SignificantOtherObservableInputs(Level 2) |   |           | SignificantUnobservableInputs(Level 3) |  |  | Total FairValue as ofMarch 31, 2010    | 
|Assets:                                                                         |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|Money market fund (included in cash and cash equivalents)                       |  |                                                   |  |  |                                           | $ | 419,000   |                                        |  |  |                                       |  |  | $ | 419,000   | 
|                                                                                |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|Total assets at fair value                                                      |  |                                                   |  |  |                                           | $ | 419,000   |                                        |  |  |                                       |  |  | $ | 419,000   | 
|                                                                                |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|                                                                                |  |                                                   |   | 
|Liabilities:                                                                    |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|Interest rate swap (included in accrued expenses and other current liabilities) |  |                                                   |  |  |                                           | $ | 165,000   |                                        |  |  |                                       |  |  | $ | 165,000   | 
|                                                                                |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 
|Total liabilities at fair value                                                 |  |                                                   |  |  |                                           | $ | 165,000   |                                        |  |  |                                       |  |  | $ | 165,000   | 
|                                                                                |  |                                                   |   |  |                                           |   |           |                                        |  |  |                                        |  |  |   |           | 



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The following provides a summary of the change in fair value for the interest rate swap for
the thirty-nine weeks ended December 25, 2010:



|                             |  |   |         |  
|---------------------------- |  | - | ------- | -
|Balance at March 31, 2010    |  | $ | 165,000 |  
|Unrealized gain              |  |   | (82,000 | )
|                             |  |   |         |  
|Balance at December 25, 2010 |  | $ | 83,000  |  
|                             |  |   |         |  

The fair value of the money market fund was determined based on pricing provided by a large investment bank.
Since the valuation was not observable, the Company has classified these as level 2 securities. There has been no change in the fair value of the money market fund since December 25, 2010. The fair value of the interest rate swap was determined
by using a market driven valuation model using the LIBOR rate forecast applied to common intervals for the remaining term of the interest rate swap.

The carrying amounts reported in the consolidated balance sheet for cash, trade receivables, accounts payable, and accrued expenses and amounts borrowed under the revolving line of credit and capital
leases approximate fair value because of the relatively short maturity of these instruments. The carrying amount of our term debt approximates fair value primarily because it is based on a variable interest rate.

12. RELATED PARTY TRANSACTION

On September 4, 2008, Micronetics, Inc. entered into a lease with SBJ Development, LLC (the Landlord) for a new headquarters for Stealth Microwave, Inc, its subsidiary. The property is
located in the Township of Ewing, New Jersey. The lease has an initial term of five years and contains three options to extend the lease, each for a term of five years. The annual rent for the initial term of the lease is $225,600.

Kevin Beals, President of Micronetics, is a member of the Landlord. Mr. Beals owns sixteen percent of the outstanding units of
membership interest of the Landlord.

The Audit Committee of the Board of Directors of Micronetics reviewed and approved the
terms of the lease prior to its execution.

13. MAJOR CUSTOMERS

The Company sells 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 Fortune 500 companies with world-wide operations. One customer, ITT Electronic Warfare Systems, accounted for 24% of the Companys consolidated sales for
the thirty-nine weeks ended December 25, 2010 and 25% for the thirty-nine weeks ended December 26, 2009. This same customer accounted for 14% of the Companys accounts receivable at December 25, 2010 and 37% of the Companys
accounts receivable at March 31, 2010.



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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 here, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, and in the other documents that we file with the Securities and Exchange Commission. We assume no obligation to update our
forward-looking statements to reflect new information or developments.

An investment in our common stock involves a high
degree of risk. We urge readers to review carefully the risk factors described herein, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, and in the other documents that we file with the Securities and Exchange
Commission. You can read these documents at www.sec.gov. 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 and Estimates

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 revenue recognition, allowances for doubtful
accounts, inventory valuation and obsolescence, long-lived assets, goodwill impairment, stock-based compensation, warranty obligations, and the valuation of 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.

There have been no changes to our critical accounting policies from those described in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2010.

Recent Accounting Pronouncements

We discuss recently issued accounting standards in Item 1. Notes to Consolidated Financial Statements  Note 2.

Overview

Micronetics designs and manufactures high performance 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 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.

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

A key driver of demand for our 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. This module or subassembly is then integrated by the larger company into a piece of equipment and sold to a customer. Micronetics has been seeking to capitalize on this trend by increasing its capability to manufacture
integrated subassemblies. Our goal is to leverage our high power and noise technology to continue to be a highly reliable supplier of integrated microwave subsystems.



16



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##### Table of Contents

Results of Operations

Thirteen Weeks Ended December 25, 2010 compared to December 26, 2009

Net sales

Net sales for the thirteen weeks ended December 25, 2010 (Q3 FY 11) were $7,601,372, a decrease of $1,407,789, or 16% as compared to $9,009,161 for the thirteen weeks ended
December 26, 2009 (Q3 FY 10). The decrease was due to a delay in shipments of integrated component sub-systems for defense jamming and electronic system modernization applications for a customer while we upgraded procedures in
response to that customers request. We expect to ship the delayed product over the next two to three quarters.

Gross margin

Gross margin for Q3 FY 11 was approximately 31% as compared to 37% for Q3 FY 10. The gross margin decrease is due to lower sales of integrated component sub-systems due to shipping delays, without a
corresponding decrease in costs.

Research and development

Research and development expense for Q3 FY 11 was $447,197 as compared to $411,059 for Q3 FY 10, an increase of $36,138 or 9%. Our
research and development expense varies to a certain degree based upon emerging technologies, shifts in product requirements and our assessment of future business opportunities.

Selling, general and administrative

Selling, general and administrative expense for Q3 FY 11 was $1,755,689 as compared to $1,877,494 for Q3 FY 10, representing a decrease of $121,805 or 6%. Approximately $125,000 of the decrease was due to
lower bad debt expense resulting from improved collections activity.

Amortization of intangible assets

Amortization expense attributable to our intangible assets related to previous acquisitions was $73,326 in Q3 FY 11 as
compared to $87,023 in Q3 FY 10. The decrease of $13,697 was due to completing amortization of certain intangible assets.

Interest expense

Interest expense for Q3 FY 11 was $84,222 as compared to $131,820 for Q3 FY 10, a decrease of $47,598 or 4%. The decrease was primarily due to lower average interest rates.

Interest rate swap

An unrealized gain of $27,084 was recorded for Q3 FY 11 as compared to an unrealized gain of $32,204 recorded in Q3 FY 10 to reflect the change in fair value of the interest rate swap agreement entered
into in April 2007 to mitigate interest rate fluctuations on our term loan.

(Benefit) provision for income taxes

Before considering the effect of discrete items, our effective tax rate for Q3 FY 11 was 39.5% as compared to 42% for
Q3 FY 10. In the thirteen weeks ended December 25, 2010, we recorded true-up adjustment credits totaling approximately $42,000 primarily related to the filing of our fiscal 2010 tax return and $1,762 of uncertain tax benefits recognized due to
the statute of limitations expiration. In the thirteen weeks ended December 26, 2009, we recorded true-up adjustment credits totaling approximately $21,000 primarily related to the filing of our fiscal 2009 tax return.

Thirty-nine Weeks Ended December 25, 2010 compared to December 26, 2009

Net sales

Net sales for the thirty-nine weeks ended December 25, 2010 were $25,952,211, an increase of $209,883, or 1% as compared to $25,742,328 for the thirty-nine weeks ended December 26, 2009. Sales
of integrated component sub-systems for defense jamming and electronic system modernization applications increased by approximately $0.6 million and component sales increased by approximately $1.4 million. These increases were offset by a decrease
of approximately $0.7 million related to the beta test portion of a purchase agreement for a radio frequency identification system product line (RFID) application and a decrease of approximately $1.1 million related to a space based
components application which were recorded in the first half of fiscal 2010.



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Gross margin

Gross margin for the thirty-nine weeks ended December 25, 2010 was 34% as compared to 34% at December 26, 2009. Gross margins
associated with integrated component sub-systems decreased and were offset by an increase in gross margins associated with component products.

Research and development

Research and development expense for the
thirty-nine weeks ended December 25, 2010 was $1,278,135 as compared to $1,257,121 for the thirty-nine weeks ended December 26, 2009, a slight increase of $21,014 or 2%. Spending on a high power digital pre-distortion amplifier product
line decreased and was offset by an increase in spending on new applications for commercial components. Our research and development expense varies to a certain degree based upon emerging technologies, shifts in product requirements and our
assessment of future business opportunities.

Selling, general and administrative

Selling, general and administrative expense for the thirty-nine weeks ended December 25, 2010 was $5,381,166 as compared to
$5,714,058 for the thirty-nine weeks ended December 26, 2009, representing a decrease of $332,892 or 6%. Approximately $240,000 of the decrease was due to lower bad debt expense resulting from the partial recovery of a previously reserved
receivable and strong collections. Approximately $50,000 of the decrease was due to lower stock compensation expense, due to fewer stock options being granted and some outstanding options being fully expensed. All other net spending decreased by
approximately $43,000.

Amortization of intangible assets

Amortization expense attributable to our intangible assets related to previous acquisitions decreased slightly to $247,374 for the
thirty-nine weeks ended December 25, 2010 as compared to $261,069 for the thirty-nine weeks ended December 26, 2009. The decrease of $13,695 was due to completing amortization of certain intangible assets.

Interest expense

Interest expense for the thirty-nine weeks ended December 25, 2010 was $297,449 as compared to $400,263 for the thirty-nine weeks ended December 26, 2009, a decrease of $102,814 or 3%. The
decrease was primarily due to lower average interest rates in fiscal 2011 as compared to fiscal 2010.

Interest rate
swap

An unrealized gain of $82,493 was recorded for the thirty-nine weeks ended December 25, 2010 as compared to
an unrealized gain of $86,814 recorded for the thirty-nine weeks ended December 26, 2009 to reflect the change in fair value of the interest rate swap agreement entered into in April 2007 to mitigate interest rate fluctuations on our term loan.

Provision for income taxes

Our effective tax rate was 39.5% for the thirty-nine weeks ended December 25, 2010 as compared to 42% for the thirty-nine weeks ended December 26, 2009. The decrease is primarily related an
increase in our expected research and development credit of approximately 1% and a reduction in our effective state income tax rate of 1%.

Backlog

Our backlog is approximately $27 million as of
December 25, 2010 as compared to approximately $32 million as of December 26, 2009. The decrease is due primarily to shipments against our components backlog.

Financial Condition, Liquidity and Capital Resources

We finance our
operating and investment requirements primarily through operating cash flows and borrowings. Cash and cash equivalents were $1,058,885 and $482,442, respectively, at December 25, 2010 and March 31, 2010. Working capital defined as accounts
receivable, unbilled revenue, inventory, prepaid expenses, other current assets net of accounts payable, accrued expenses and deferred revenue was $13,384,117 and $11,961,963 at December 25, 2010 and March 31, 2010, respectively.
Borrowings under our revolving line of credit were $5,671,405 and $4,234,435 at December 25, 2010 and March 31, 2010, respectively.

Our current ratio was approximately 1.86 at December 25, 2010 as compared to 1.81 at March 31, 2010.



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In the thirty-nine weeks ended December 25, 2010 net cash provided by operating
activities was $871,927 as compared to $2,236,150 for the thirty-nine weeks ended December 26, 2009.

In the thirty-nine
weeks ended December 25, 2010, cash provided by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and an unrealized gain on interest rate swap was
approximately $2.4 million. Approximately $1.7 million was used for working capital needs. Of this amount, approximately $1.6 million was provided by receivables and unbilled/deferred revenue, approximately $2.0 million was used to fund inventory
requirements, approximately $1.1 million was used to fund accounts payable and accrued expenses, approximately $0.1 million was used to fund prepaid expenses and approximately $0.2 million was used for prepaid tax assets. In addition an approximate
$0.1 million use was the result of a non-cash charge related to a deferred tax asset associated with the expiration of non-qualified stock options. There is an offset to this amount in additional paid in capital. The increase in inventory was due in
part to the delay in shipments in Q3 FY 2011 of integrated component sub-systems for defense jamming and electronic system modernization applications. We expect to ship this product over the next two to three quarters. The increase in inventory was
also due in part to support product shipment requirements associated with our existing backlog.

In the thirty-nine weeks ended
December 26, 2009, cash provided by net income after adjusting for non-cash items including depreciation, amortization, stock-based compensation, changes in working capital reserves and an unrealized gain on interest rate swap was approximately
$2.3 million. Approximately $0.1 million was used to fund working capital needs. Of this amount, approximately $0.7 million was used to fund receivables and unbilled revenue as a result of higher sales and approximately $1.3 million was used to fund
inventory requirements primarily related to specific contracts. A tax refund net of tax payments provided approximately $0.9 million, increases in accounts payable and accrued expenses provided approximately $0.8 million and cash received and
recorded as deferred revenue provided approximately $0.2 million.

Net cash used in investing activities was $680,067 during
the thirty-nine weeks ended December 25, 2010 as compared to $973,774 in the thirty-nine weeks ended December 26, 2009. In the thirty-nine weeks ended December 25, 2010 and December 26, 2009, investing activities was solely
comprised of capital expenditures.

Net cash provided by financing activities was $384,583 during the thirty-nine weeks ended
December 25, 2010 as compared to net cash used for financing activities of $1,215,500 during the thirty-nine weeks ended December 26, 2009.

In the thirty-nine weeks ended December 25, 2010, we borrowed approximately $1.4 million from our line of credit, repaid term debt of approximately $1.0 million and paid approximately $0.2 million
for capital lease obligations. In addition, approximately $0.1 million of a deferred tax asset related to the cancellation of non-qualified stock options was charged to additional paid in capital.

In the thirty-nine weeks ended December 26, 2009, we repaid term debt of approximately $1.0 million and repaid $0.2 million of
capital lease obligations.

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.

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 the then existing $6.0
million term loan entered into in June 2005. In December 2008 we extended the term of the revolving line of credit for two years.

We 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 we record the current fair value of the interest
rate swap on the balance sheet. Any unrealized gain or loss on the swap is included in earnings.



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On August 13, 2010 we entered into an amended term loan and revolving line of credit
agreement. Under the terms of the amended revolving line of credit agreement, the revolving line of credit was increased from $5.0 million to $7.5 million and extended by one year. The revolving line of credit now expires on March 31, 2013. At
December 25, 2010 we were in compliance with our bank covenants. Under the terms of the amended term loan and revolving line of credit agreement we are required to maintain certain financial covenants on a quarterly and annual basis, including
total funded debt to EBITDA not exceeding 2.5:1, minimum debt service coverage of 1.25:1, a minimum current ratio of 1.25:1 and minimum tangible net worth of $9.2 million. For the fiscal year ending March 31, 2011, the debt service coverage
covenant is required to be at least 1.10:1 except that for the third quarter of fiscal 2011 the minimum ratio is 0.85:1.

The
term loan and revolving line of credit are guaranteed by the Company and its 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 rate of
5.2% plus the applicable margin. At December 25, 2010, $1,950,000 was outstanding under the term loan and our interest rate was 7.95%. The final payment for the term loan is in April 2012.

The revolving line of credit bears interest at LIBOR plus the applicable margin. At December 25, 2010, $5,671,405 was outstanding
under our revolving line of credit and our interest rate was 3.01%. We had approximately $1.8 million available under the line of credit at December 25, 2010.

Capital Leases

Commercial capital leases payable are reflected at their
present value based upon interest rates of approximately 6.8% per annum, and are secured by the underlying assets. The assets are depreciated over their estimated useful lives. Included in the current portion of long-term debt is $214,715 for
capital lease obligations. Included in long-term debt net of current portion is $28,776 for capital lease obligations. The remaining interest associated with our capital lease obligations amounts to approximately $9,300 over the lease terms.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements, other than operating leases that have or are, in the opinion of management, likely to have a current or future material effect on our financial
statements.



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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.

We are subject to interest rate exposure on our revolving line of credit. Our revolving line of credit interest rate is tied to LIBOR. We
have entered into an interest rate swap agreement to minimize our exposure to interest rate fluctuations on our term debt. 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 December 25, 2010, the Company carried out an evaluation, under
the supervision and with the Companys management, including the Companys Chief Executive Officer and 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 (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective as of December 25, 2010 to provide reasonable assurance that material information relating to the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to management, including the Companys
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal controlThere were no changes in the Companys internal controls over financial reporting that
occurred during the third quarter of fiscal 2011 that 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 future 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.
|-------- | -------------

This
report contains forward-looking statements that involve risks and uncertainties, such as statements of our objectives, expectations and intentions. You should consider carefully all of the material risks described herein, in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2010, and in our other documents filed with the Securities and Exchange Commission, as well as the cautionary statements made elsewhere in the Annual Report and in this report, before making a
decision to invest in our securities. Such cautionary statements are applicable to all forward-looking statements wherever they appear in this report. If any of the events described therein occur, our business, financial conditions and results of
operations may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment.

There have been no material changes to the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2010.



|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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##### Table of Contents

SIGNATURE

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



|                        |  |  |  |                   |  |                                                                     
|----------------------- |  |  |  | ----------------- |  | --------------------------------------------------------------------
|                        |  |  |  | MICRONETICS, INC.
|                        |  |  | 
|Dated: January 31, 2011 |  |  |  | By:               |  | /S/    DAVID
ROBBINS                                                
|                        |  |  |  |                   |  | David Robbins,                                                      
|                        |  |  |  |                   |  | Chief Executive Officer and Treasurer
(Principal Executive Officer) 
|                        |  |  | 
|Dated: January 31, 2011 |  |  |  | By:               |  | /S/    CARL
LUEDERS                                                 
|                        |  |  |  |                   |  | Carl Lueders,                                                       
|                        |  |  |  |                   |  | Chief Financial Officer (Principal Financial and Accounting Officer)



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