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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-QSB



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

For the quarterly period ended June 30, 2006

OR



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

For the transition period from  to
.

Commission file number 0-17966



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MICRONETICS, INC.

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



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 22-2063614                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|26 Hampshire Drive, Hudson NH                                  |  | 03051                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

(603) 883-2900

(Issuers telephone number)



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



---

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ̈

Transitional Small Business Disclosure Format (Check One):    Yes ̈No  x

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

As of August 7, 2006, the
issuer had 5,000,582 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.                                                                                  |  |         
|                               |  |         | 
|                               |  |         |  | Consolidated Balance Sheets  June 30, 2006 (unaudited) and March 31, 2006 (audited)                   |  | 3-4     
|                               |  |         | 
|                               |  |         |  | Consolidated Statements of Income - Three Months Ended June 30, 2006 and June 30, 2005 (unaudited)     |  | 5       
|                               |  |         | 
|                               |  |         |  | Consolidated Statement of Shareholders Equity  June 30, 2006 (unaudited)                             |  | 6       
|                               |  |         | 
|                               |  |         |  | Consolidated Statements of Cash Flows - Three Months Ended June 30, 2006 and June 30, 2005 (unaudited) |  | 7       
|                               |  |         | 
|                               |  |         |  | Notes to Interim Consolidated Financial Statements (unaudited)                                         |  | 8-16    
|                               |  |         | 
|                               |  | Item 2. |  | Managements Discussion and Analysis Of Financial Condition and Results of Operations                  |  | 17-25   
|                               |  |         | 
|                               |  | Item 3. |  | Controls and Procedures                                                                                |  | 25      
|                               | 
|Part II. Other Information:    |  |        
|                               |  |         | 
|                               |  | Item 1. |  | Legal Proceedings                                                                                      |  | 26      
|                               |  |         | 
|                               |  | Item 2. |  | Unregistered Sales of Equity Securities And Use of Proceeds                                            |  | 26      
|                               |  |         | 
|                               |  | Item 3. |  | Defaults Upon Senior Securities                                                                        |  | 26      
|                               |  |         | 
|                               |  | Item 4. |  | Submission of Matters to Vote of Security Holders                                                      |  | 26      
|                               |  |         | 
|                               |  | Item 5. |  | Other Information                                                                                      |  | 26      
|                               |  |         | 
|                               |  | Item 6. |  | Exhibits                                                                                               |  | 27      



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##### Table of Contents

MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                          |  |               |            |                |   |           
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | -------------- | - | ----------
|                                                                                                                                          |  | June 30, 2006 |            | March 31, 2006
|                                                                                                                                          |  | (Unaudited)   |            | (Audited)     
|ASSETS                                                                                                                                    |  |               |            |                |   |           
|Current assets:                                                                                                                           |  |               |            |                |   |           
|Cash and cash equivalents                                                                                                                 |  | $             | 5,722,785  |                | $ | 5,266,580 
|Marketable securities                                                                                                                     |  |               | 586,386    |                |   | 582,730   
|                                                                                                                                          |  |              
|Accounts receivable, net of allowance for doubtful accounts of $367,265 and $367,268 as of June 30, 2006 and March 31, 2006,
respectively |  |               | 3,181,122  |                |   | 4,267,744 
|                                                                                                                                          |  |              
|Inventories, net                                                                                                                          |  |               | 5,668,087  |                |   | 5,728,590 
|                                                                                                                                          |  |              
|Prepaid expenses and other current assets                                                                                                 |  |               | 121,583    |                |   | 89,553    
|                                                                                                                                          |  |               |            |                |   |           
|Total current assets                                                                                                                      |  |               | 15,279,963 |                |   | 15,935,197
|                                                                                                                                          |  |               |            |                |   |           
|Property, plant and equipment, net                                                                                                        |  |               | 4,438,202  |                |   | 4,316,941 
|                                                                                                                                          |  |              
|Other assets:                                                                                                                             |  |               |            |                |   |           
|Security deposits                                                                                                                         |  |               | 13,637     |                |   | 9,762     
|Intangible assets, net of accumulated amortization                                                                                        |  |               | 2,917,887  |                |   | 3,096,183 
|Goodwill                                                                                                                                  |  |               | 4,482,709  |                |   | 4,390,254 
|                                                                                                                                          |  |               |            |                |   |           
|Total other assets                                                                                                                        |  |               | 7,414,233  |                |   | 7,496,199 
|                                                                                                                                          |  |               |            |                |   |           
|TOTAL ASSETS                                                                                                                              |  | $             | 27,132,398 |                | $ | 27,748,337
|                                                                                                                                          |  |               |            |                |   |           



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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                        |  |               |            |   |                |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | -------------- | - | ---------- | -
|                                                                                                                                                                        |  | June 30, 2006 |            |   | March 31, 2006 |  
|                                                                                                                                                                        |  | (Unaudited)   |            |   | (Audited)      |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                    |  |               |            |   |                |   |            |  
|Current liabilities:                                                                                                                                                    |  |               |            |   |                |   |            |  
|                                                                                                                                                                        |  |              
|Line of credit                                                                                                                                                          |  | $             |           |   |                | $ | 475,972    |  
|Current portion of long term debt                                                                                                                                       |  |               | 890,399    |   |                |   | 882,854    |  
|Accounts payable                                                                                                                                                        |  |               | 556,602    |   |                |   | 584,740    |  
|Accrued expenses                                                                                                                                                        |  |               | 2,288,588  |   |                |   | 2,646,087  |  
|Income taxes payable                                                                                                                                                    |  |               | 539,517    |   |                |   | 1,008,901  |  
|                                                                                                                                                                        |  |               |            |   |                |   |            |  
|                                                                                                                                                                        |  |              
|Total current liabilities                                                                                                                                               |  |               | 4,275,106  |   |                |   | 5,598,554  |  
|                                                                                                                                                                        |  |               |            |   |                |   |            |  
|Long-term debt, net of current portion                                                                                                                                  |  |               | 5,105,897  |   |                |   | 5,327,753  |  
|                                                                                                                                                                        |  |              
|Deferred tax liability                                                                                                                                                  |  |               | 963,059    |   |                |   | 963,059    |  
|                                                                                                                                                                        |  |               |            |   |                |   |            |  
|Total liabilities                                                                                                                                                       |  |               | 10,344,062 |   |                |   | 11,889,366 |  
|                                                                                                                                                                        |  |               |            |   |                |   |            |  
|Commitments and contingencies                                                                                                                                           |  |               |            |   |                |   |            |  
|                                                                                                                                                                        |  |              
|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; 5,000,582 and 4,955,582 shares issued and outstanding as of June 30, 2006
and March 31, 2006, respectively |  |               | 50,006     |   |                |   | 49,556     |  
|                                                                                                                                                                        |  |              
|Additional paid in capital                                                                                                                                              |  |               | 7,845,334  |   |                |   | 7,464,691  |  
|                                                                                                                                                                        |  |              
|Retained earnings                                                                                                                                                       |  |               | 10,420,010 |   |                |   | 9,871,738  |  
|                                                                                                                                                                        |  |               |            |   |                |   |            |  
|                                                                                                                                                                        |  |               | 18,315,350 |   |                |   | 17,385,985 |  
|Treasury stock at cost, 358,541 shares at June 30, 2006 and March 31, 2006, respectively                                                                                |  |               | (1,527,014 | ) |                |   | (1,527,014 | )
|                                                                                                                                                                        |  |               |            |   |                |   |            |  
|Total shareholders equity                                                                                                                                              |  |               | 16,788,336 |   |                |   | 15,858,971 |  
|                                                                                                                                                                        |  |               |            |   |                |   |            |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                              |  | $             | 27,132,398 |   |                | $ | 27,748,337 |  
|                                                                                                                                                                        |  |               |            |   |                |   |            |  

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



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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                           |  |                             |           |   |      |   |           |  
|------------------------------------------ |  | --------------------------- | --------- | - | ---- | - | --------- | -
|                                           |  | Three months ended June 30, |          
|                                           |  | 2006                        |           |   | 2005 |  
|Net sales                                  |  | $                           | 6,806,438 |   |      | $ | 3,941,132 |  
|Cost of sales                              |  |                             | 3,770,618 |   |      |   | 2,350,572 |  
|                                           |  |                             |           |   |      |   |           |  
|Gross profit                               |  |                             | 3,035,820 |   |      |   | 1,590,560 |  
|                                           |  |                             |           |   |      |   |           |  
|Operating expenses:                        |  |                             |           |   |      |   |           |  
|Research and development                   |  |                             | 187,503   |   |      |   | 110,534   |  
|Selling, general and administrative        |  |                             | 1,699,821 |   |      |   | 886,942   |  
|Amortization of intangible assets          |  |                             | 178,296   |   |      |   | 58,490    |  
|                                           |  |                             |           |   |      |   |           |  
|Total operating expenses                   |  |                             | 2,065,620 |   |      |   | 1,055,966 |  
|                                           |  |                             |           |   |      |   |           |  
|Income from operations                     |  |                             | 970,200   |   |      |   | 534,594   |  
|                                           |  |                             |           |   |      |   |           |  
|Other income (expense), net:               |  |                             |           |   |      |   |           |  
|Interest income                            |  |                             | 40,596    |   |      |   | 20,946    |  
|Interest expense                           |  |                             | (115,832  | ) |      |   | (35,744   | )
|Other income                               |  |                             | 18,823    |   |      |   | 40        |  
|                                           |  |                             |           |   |      |   |           |  
|Total other income (expense), net          |  |                             | (56,413   | ) |      |   | (14,758   | )
|                                           |  |                             |           |   |      |   |           |  
|Income before provision for income taxes   |  |                             | 913,787   |   |      |   | 519,836   |  
|Provision for income taxes                 |  |                             | 365,515   |   |      |   | 200,137   |  
|                                           |  |                             |           |   |      |   |           |  
|Net income                                 |  | $                           | 548,272   |   |      | $ | 319,699   |  
|                                           |  |                             |           |   |      |   |           |  
|Earnings per common share:                 |  |                             |           |   |      |   |           |  
|Basic                                      |  | $                           | 0.12      |   |      | $ | 0.07      |  
|                                           |  |                             |           |   |      |   |           |  
|Diluted                                    |  | $                           | 0.11      |   |      | $ | 0.07      |  
|                                           |  |                             |           |   |      |   |           |  
|Weighted average common shares outstanding |  |                             |           |   |      |   |           |  
|Basic                                      |  |                             | 4,611,255 |   |      |   | 4,413,414 |  
|Diluted                                    |  |                             | 4,935,902 |   |      |   | 4,553,138 |  

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



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CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(Unaudited)



|                                |  |              |  |                           |        |                  |   |               |  |   |            |  |   |            |   |  |   |           
|------------------------------- |  | ------------ |  | ------------------------- | ------ | ---------------- | - | ------------- |  | - | ---------- |  | - | ---------- | - |  | - | ----------
|                                |  | Common Stock |  | Additional Paid-InCapital |        | RetainedEarnings |   | TreasuryStock |  |   | Total     
|                                |  | Shares       |  | ParValue                  |        |                  |   |              
|Balance at March 31, 2006       |  | 4,955,582    |  | $                         | 49,556 |                  | $ | 7,464,691     |  | $ | 9,871,738  |  | $ | (1,527,014 | ) |  | $ | 15,858,971
|                                |  |              |  |                           |        |                 
|Exercise of stock options       |  | 45,000       |  |                           | 450    |                  |   | 212,109       |  |   |           |  |   |           |   |  |   | 212,559   
|Issuance of options for service |  |             |  |                           |       |                  |   | 1,540         |  |   |           |  |   |           |   |  |   | 1,540     
|Stock based compensation        |  |             |  |                           |       |                  |   | 166,994       |  |   |           |  |   |           |   |  |   | 166,994   
|Net income                      |  |             |  |                           |       |                  |   |              |  |   | 548,272    |  |   |           |   |  |   | 548,272   
|                                |  |              |  |                           |        |                  |   |               |  |   |            |  |   |            |   |  |   |           
|Balance at June 30, 2006        |  | 5,000,582    |  | $                         | 50,006 |                  | $ | 7,845,334     |  | $ | 10,420,010 |  | $ | (1,527,014 | ) |  | $ | 16,788,336
|                                |  |              |  |                           |        |                  |   |               |  |   |            |  |   |            |   |  |   |           

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



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MICRONETICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                  |  |                             |           |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | ---------- | -
|                                                                                  |  | Three Months Ended June 30, |          
|                                                                                  |  | 2006                        |           |   | 2005 |  
|Cash flow from operating activities:                                              |  |                             |           |   |      |   |            |  
|Net income                                                                        |  | $                           | 548,272   |   |      | $ | 319,699    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |           |   |      |   |            |  
|Depreciation and amortization                                                     |  |                             | 398,222   |   |      |   | 217,080    |  
|Stock-based compensation                                                          |  |                             | 166,994   |   |      |   |           |  
|Unrealized loss from marketable securities                                        |  |                             | (3,656    | ) |      |   | (5,344     | )
|Provision for allowances on accounts receivable                                   |  |                             | (3        | ) |      |   | 13,594     |  
|Provision for inventory reserves                                                  |  |                             | 111,241   |   |      |   | 43,704     |  
|Non-cash charges for options issued for services                                  |  |                             | 1,540     |   |      |   | 1,850      |  
|Tax benefit upon exercise of stock options                                        |  |                             |          |   |      |   | 10,845     |  
|Changes in operating assets and liabilities, net of acquisition                   |  |                             |           |   |      |   |            |  
|Accounts receivable                                                               |  |                             | 1,086,625 |   |      |   | (170,532   | )
|Inventories                                                                       |  |                             | (50,738   | ) |      |   | (384,396   | )
|Income taxes payable                                                              |  |                             | (469,385  | ) |      |   | (35,114    | )
|Prepaid expenses, other current assets, and other assets                          |  |                             | (35,906   | ) |      |   | 152,537    |  
|Accounts payable                                                                  |  |                             | (28,138   | ) |      |   | (9,695     | )
|Accrued expenses and deferred revenue                                             |  |                             | (357,499  | ) |      |   | 182,867    |  
|                                                                                  |  |                             |           |   |      |   |            |  
|Net cash provided by operating activities                                         |  |                             | 1,367,569 |   |      |   | 337,095    |  
|                                                                                  |  |                             |           |   |      |   |            |  
|Cash flows used in investing activities                                           |  |                             |           |   |      |   |            |  
|Purchase of equipment                                                             |  |                             | (341,186  | ) |      |   | (239,120   | )
|Investment in Stealth acquisition, net of cash acquired                           |  |                             | (92,455   | ) |      |   | (5,993,496 | )
|                                                                                  |  |                             |           |   |      |   |            |  
|Net cash used in investing activities                                             |  |                             | (433,641  | ) |      |   | (6,232,616 | )
|                                                                                  |  |                             |           |   |      |   |            |  
|Cash flows from financing activities:                                             |  |                             |           |   |      |   |            |  
|Repayment of the line of credit                                                   |  |                             | (475,972  | ) |      |   |           |  
|Proceeds from the term loan                                                       |  |                             |          |   |      |   | 6,000,000  |  
|Repayments on mortgages                                                           |  |                             | (207,058  | ) |      |   | (81,537    | )
|Repayments of capital leases                                                      |  |                             | (7,252    | ) |      |   | (21,038    | )
|Net proceeds from the issuance of common stock                                    |  |                             | 212,559   |   |      |   | 13,692     |  
|                                                                                  |  |                             |           |   |      |   |            |  
|Net cash (used in) provided by financing activities                               |  |                             | (477,723  | ) |      |   | 5,911,117  |  
|                                                                                  |  |                             |           |   |      |   |            |  
|Net change in cash and cash equivalents                                           |  |                             | 456,205   |   |      |   | 15,596     |  
|                                                                                  |  |                            
|Cash and cash equivalents at beginning of period                                  |  |                             | 5,266,580 |   |      |   | 2,377,893  |  
|                                                                                  |  |                             |           |   |      |   |            |  
|                                                                                  |  |                            
|Cash and cash equivalents at end of period                                        |  | $                           | 5,722,785 |   |      | $ | 2,393,489  |  
|                                                                                  |  |                             |           |   |      |   |            |  
|Supplemental disclosure of cash flow information:                                 |  |                             |           |   |      |   |            |  
|Cash paid during the period for:                                                  |  |                             |           |   |      |   |            |  
|Interest                                                                          |  | $                           | 114,344   |   |      | $ | 18,588     |  
|                                                                                  |  |                             |           |   |      |   |            |  
|Income taxes                                                                      |  | $                           | 858,228   |   |      | $ | 446,500    |  
|                                                                                  |  |                             |           |   |      |   |            |  

Supplemental disclosure of non-cash information:

In Fiscal 2004, the Company issued 8,000 options to purchase shares of common stock for legal services. The Company expensed $1,540 and $1,850 in the first quarter of fiscal 2007 and 2006, respectively related to the
issuance of these options.

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



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MICRONETICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-QSB. It is suggested that these consolidated condensed financial statements be read in conjunction with the Companys Annual Report on Form 10-KSB for its fiscal year ended March 31, 2006. In the
opinion of management, the statements contain all adjustments, including normal recurring adjustments necessary in order to present fairly the financial position as of June 30, 2006, the results of operations for the three months ended
June 30, 2006 and 2005, and the cash flows for the three months ended June 30, 2006 and 2005.

The results of operations for the
three months ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year ended March 31, 2007.

2.
PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The consolidated financial statements include the
accounts of Micronetics, Inc. (Micronetics) and its wholly-owned subsidiaries, Microwave & Video Systems, Inc. (MVS), Enon Microwave, Inc. (Enon), Microwave Concepts, Inc. (MicroCon) and
Stealth Microwave, Inc. (Stealth). The operating results of Stealth have been included in the Companys consolidated financial statements since June 10, 2005, the date of acquisition (see Note 3). All material intercompany
balances and transactions have been eliminated in consolidation.

Use of estimates - The preparation of financial statements in
conformity with US generally accepted accounting principles 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 valuations, reserves for accounts receivable and inventories,
useful lives of property, plant and equipment, purchase price allocation, intangibles, accrued liabilities, and deferred income taxes. Actual results could differ from those estimates.

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

The Company sells its products using a direct sales force and sales representatives. Contracts with customers do not
include product return rights or price protection. The estimated cost of product warranties is accrued based on historical experience at the time the revenue is recognized. Unless customers purchase an extended warranty, Micronetics offers a
one-year warranty. As of June 30, 2006 and June 30, 2005 the Company recorded $30,000 and $9,160 as warranty expense, respectively.

Recent accounting pronouncements - In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income TaxesAn
Interpretation of FASB Statement No. 109. FIN No. 48 provides guidance with respect to the recognition and measurement in the financial statements of uncertain tax positions taken or expected to be taken in a tax return, and also
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The accounting provisions of FIN 48 will be effective for the Company beginning April 1, 2007. The Company is
in the process of evaluating the effect the adoption of FIN 48 will have on its consolidated financial statements.

In November 2005, the
FASB issued FSP FAS123(R), Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards. This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in
SFAS No. 123(R), Share-Based Payment, or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R)



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using the modified prospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one
year from the later of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. The Company is
evaluating the effect of this statement on its consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Opinion No. 20 had required that changes in
accounting principles be recognized by including the cumulative effect of the change in the period in which the new accounting principle was adopted. SFAS No. 154 requires retrospective application of the change to prior periods financial
statements, unless it is impracticable to determine the period-specific effects of the change. The Statement is effective for fiscal years beginning after December 15, 2005. The Companys financial position, results of operations or cash
flows will only be impacted by SFAS No. 154 if it implements changes in accounting principles that are addressed by the standard or corrects accounting errors in future periods.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, Inventory
Pricing. This statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads
to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company adopted this
statement on April 1, 2006, which did not have a material impact on the Companys financial statements.

3. ACQUISITION

On June 10, 2005, the Company acquired all of the issued and outstanding capital stock of Stealth Microwave, Inc., a New Jersey corporation
(Stealth) pursuant to the terms and conditions of a Stock Purchase Agreement between the Company and the stockholders of Stealth (the Sellers). Under the terms of the Stock Purchase Agreement, the Company initially paid $6.7
million in cash to the Sellers, $400,000 of which was placed in escrow for one year to secure certain indemnification obligations of the Sellers to the Company under the Stock Purchase Agreement. Additional legal and accounting related fees for the
acquisition totaled approximately $550,000, bringing the total cash price to approximately $7.2 million. Additionally, subject to Stealth meeting certain financial targets for each of the years ending March 31, 2006 and March 31, 2007, the
Company will pay up to an aggregate of $3.3 million in earnout payments to the Sellers, which may be accelerated upon the occurrence of certain events, including a change of control of the Company or Stealth. In March 2006, the Company recorded as
an adjustment to goodwill $1.8 million in earnout payments made to the Sellers, based on meeting certain financial targets as provided for under the Stock Purchase Agreement. In June 2006, the $400,000 placed in escrow to secure indemnification was
released to the Sellers.

The acquisition of Stealth provides a broader range of RF/Microwave products, including linear power amplifiers
to the Company, and will provide the Company with further integrated systems solutions. The following table summarizes the fair value assigned to the assets acquired and liabilities assumed at the date of acquisition as of June 30, 2006:



|                                             |  |                |        |  
|-------------------------------------------- |  | -------------- | ------ | -
|                                             |  | (in thousands) |       
|Cash and accounts receivable                 |  | $              | 2,228  |  
|Inventory                                    |  |                | 1,187  |  
|Property, plant and equipment                |  |                | 673    |  
|Other assets                                 |  |                | 12     |  
|Development technology drawings              |  |                | 170    |  
|Customer relationships                       |  |                | 2,950  |  
|Order backlog                                |  |                | 290    |  
|Covenants not to compete                     |  |                | 480    |  
|Goodwill                                     |  |                | 3,366  |  
|Deferred taxes                               |  |                | (150   | )
|Deferred taxes on acquired intangible assets |  |                | (1,364 | )
|Accounts payable and accrued expenses        |  |                | (675   | )
|                                             |  |                |        |  
|Subtotal                                     |  |                | 9,167  |  
|Less: cash assumed                           |  |                | (970   | )
|                                             |  |                |        |  
|Net cash paid                                |  | $              | 8,197  |  
|                                             |  |                |        |  



9



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##### Table of Contents

The acquisition of Stealth is accounted for as a purchase under SFAS No. 141, Business
Combinations. Accordingly, the operating results of Stealth have been included in the Companys consolidated financial statements since the June 10, 2005 acquisition date. The Company estimated the useful lives of the acquired other
intangible assets to be one to seven years and has included them in intangible assets, net, in the accompanying consolidated balance sheet as of June 30, 2006. The values assigned to intangible assets were based on an independent appraisal.

The following table presents details of the Companys intangible assets as of June 30, 2006 and March 31, 2006 (in
thousands):



|                                         |  |                   |  |                |       |                         |   |          |  |            |       |                         |   |          |  |   |     |  |   |      
|---------------------------------------- |  | ----------------- |  | -------------- | ----- | ----------------------- | - | -------- |  | ---------- | ----- | ----------------------- | - | -------- |  | - | --- |  | - | -----
|                                         |  | June 30, 2006     |  | March 31, 2006
|Intangible Assets                        |  | UsefulLife(years) |  | GrossValue     |       | AccumulatedAmortization |   | NetValue |  | GrossValue |       | AccumulatedAmortization |   | NetValue
|Customer relationships (non-contractual) |  | 7                 |  | $              | 2,950 |                         | $ | 416      |  | $          | 2,534 |                         | $ | 2,950    |  | $ | 340 |  | $ | 2,610
|Covenants not to compete                 |  | 2                 |  |                | 480   |                         |   | 237      |  |            | 243   |                         |   | 480      |  |   | 193 |  |   | 287  
|Order backlog                            |  | 1                 |  |                | 290   |                         |   | 286      |  |            | 4     |                         |   | 290      |  |   | 234 |  |   | 56   
|Developed technology- drawings           |  | 5                 |  |                | 170   |                         |   | 33       |  |            | 137   |                         |   | 170      |  |   | 27  |  |   | 143  
|                                         |  |                   |  |                |       |                         |   |          |  |            |       |                         |   |          |  |   |     |  |   |      
|Total intangibles                        |  |                   |  | $              | 3,890 |                         | $ | 972      |  | $          | 2,918 |                         | $ | 3,890    |  | $ | 794 |  | $ | 3,096
|                                         |  |                   |  |                |       |                         |   |          |  |            |       |                         |   |          |  |   |     |  |   |      

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



|                  |  |                |      
|----------------- |  | -------------- | -----
|                  |  | (in thousands)
|Remainder of 2007 |  | $              | 535  
|2008              |  |                | 516  
|2009              |  |                | 455  
|2010              |  |                | 455  
|2011              |  |                | 430  
|Thereafter        |  |                | 527  
|                  |  |                |      
|Total             |  | $              | 2,918
|                  |  |                |      



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##### Table of Contents

The following table sets forth certain pro forma results for Q1 FY 06 if the acquisition of Stealth had
taken place on April 1, 2005:



|                             |  |                                          |      
|---------------------------- |  | ---------------------------------------- | -----
|                             |  | Quarter EndedJune 30 2005,              
|                             |  | (in thousands, exceptearnings per share)
|Pro forma revenue            |  | $                                        | 5,258
|Pro forma net income (1)     |  | $                                        | 300  
|Pro forma earnings per share |  |                                          |      
|Basic                        |  | $                                        | .07  
|Diluted                      |  | $                                        | .07  



|(1) | Included in the quarter ended June 30, 2005 was $90,000 of Stealth legal expenses related to the acquisition. Both basic and diluted earnings per share were affected by
$55,000, or $.01, net of taxes.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4. INVENTORIES, NET

At June 30, 2006 and March 31, 2006, inventories consisted of the following:



|                           |  |               |           |   |                |   |           |  
|-------------------------- |  | ------------- | --------- | - | -------------- | - | --------- | -
|                           |  | June 30, 2006 |           |   | March 31, 2006 |  
|                           |  | (Unaudited)   |           |   | (Audited)      |  
|Raw materials              |  | $             | 4,255,242 |   |                | $ | 4,046,085 |  
|Work in process            |  |               | 1,239,846 |   |                |   | 1,207,982 |  
|Finished goods             |  |               | 618,710   |   |                |   | 808,993   |  
|                           |  |               |           |   |                |   |           |  
|                           |  |               | 6,113,798 |   |                |   | 6,063,060 |  
|Less:                      |  |               |           |   |                |   |           |  
|Allowance for obsolescence |  |               | (445,711  | ) |                |   | (334,470  | )
|                           |  |               |           |   |                |   |           |  
|                           |  | $             | 5,668,087 |   |                | $ | 5,728,590 |  
|                           |  |               |           |   |                |   |           |  

5. PROPERTY, PLANT AND EQUIPMENT, NET

At June 30, 2006 and March 31, 2006, property, plant and equipment, net consisted of the following:



|                                     |  |               |            |   |                |   |            |  
|------------------------------------ |  | ------------- | ---------- | - | -------------- | - | ---------- | -
|                                     |  | June 30, 2006 |            |   | March 31, 2006 |  
|                                     |  | (Unaudited)   |            |   | (Audited)      |  
|Land                                 |  | $             | 162,000    |   |                | $ | 162,000    |  
|Buildings and leasehold improvements |  |               | 1,644,610  |   |                |   | 1,638,833  |  
|Machinery and equipment              |  |               | 8,819,635  |   |                |   | 8,484,225  |  
|Furniture and fixtures, and other    |  |               | 286,516    |   |                |   | 286,516    |  
|                                     |  |               |            |   |                |   |            |  
|                                     |  |               | 10,912,761 |   |                |   | 10,571,574 |  
|Less accumulated depreciation        |  |               | (6,474,559 | ) |                |   | (6,254,633 | )
|                                     |  |               |            |   |                |   |            |  
|                                     |  | $             | 4,438,202  |   |                | $ | 4,316,941  |  
|                                     |  |               |            |   |                |   |            |  



11



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##### Table of Contents

6. ACCRUED EXPENSES

At June 30, 2006 and March 31, 2006 accrued expenses consisted of the following:



|                                    |  |               |           |                |   |          
|----------------------------------- |  | ------------- | --------- | -------------- | - | ---------
|                                    |  | June 30, 2006 |           | March 31, 2006
|                                    |  | (Unaudited)   |           | (Audited)     
|Unbilled payables                   |  | $             | 334,272   |                | $ | 269,315  
|Professional fees                   |  |               | 171,678   |                |   | 88,616   
|Payroll, benefits and related taxes |  |               | 1,485,753 |                |   | 2,017,991
|Warranty                            |  |               | 158,401   |                |   | 128,401  
|Other                               |  |               | 138,484   |                |   | 141,764  
|                                    |  |               |           |                |   |          
|                                    |  | $             | 2,288,588 |                | $ | 2,646,087
|                                    |  |               |           |                |   |          

Included in accrued payroll are bonuses of approximately $931,000 and $1,285,000 at June 30,
2006 and March 31, 2006, respectively.

7. LONG-TERM DEBT

At June 30, 2006 and March 31, 2006 long-term debt consisted of the following:



|                                      |  |               |           |   |                |   |           |  
|------------------------------------- |  | ------------- | --------- | - | -------------- | - | --------- | -
|                                      |  | June 30, 2006 |           |   | March 31, 2006 |  
|                                      |  | (Unaudited)   |           |   | (Audited)      |  
|Term loan                             |  | $             | 5,303,627 |   |                | $ | 5,477,720 |  
|Mortgage payable, MA                  |  |               | 319,739   |   |                |   | 322,035   |  
|Mortgage payable, NH                  |  |               | 359,146   |   |                |   | 389,816   |  
|Capital leases                        |  |               | 13,784    |   |                |   | 21,036    |  
|                                      |  |               |           |   |                |   |           |  
|Total                                 |  |               | 5,996,296 |   |                |   | 6,210,607 |  
|Less current portion                  |  |               | (890,399  | ) |                |   | (882,854  | )
|                                      |  |               |           |   |                |   |           |  
|Long-term debt net of current portion |  | $             | 5,105,897 |   |                | $ | 5,327,753 |  
|                                      |  |               |           |   |                |   |           |  



12



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##### Table of Contents

Term loan

In June 2005, the Company secured a Term Loan in the amount of $6.0 million, the proceeds of which were used for the acquisition of Stealth. The Term Loan is guaranteed by Stealth and secured by a first priority security in substantially
all of the Companys and Stealths assets. The Term Loan is payable in monthly principal installments of $62,009 plus accrued interest at the one month LIBOR rate plus 2.25%. The Term Loan matures in June 2012.

Mortgage payable, MA

In March 2003, in connection
with the purchase of a portion of a commercial condominium housing the Companys Enon division, the Company entered into a mortgage payable for $352,750. The note bears interest at 5.25% per annum and is payable in monthly installments of
$2,391, including interest, until March 2013 at which time the balance of approximately $223,000 is due. The commercial condominium and all other tangible property of Enon secure this mortgage.

Mortgage payable, NH

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

Line of credit

In July 2006, the Company secured an extension to its $5,000,000 line of credit expiring on November 30, 2006. The line of credit bears interest at
the current 1-month LIBOR rate plus 2.25%, and is secured by all business assets of the Company. The Company has available $5,000,000 under the line of credit as of June 30, 2006.

Capital leases

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

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

Under the
modified-prospective method, the Company recognized compensation expense in the financial statements issued subsequent to April 1, 2006 for all stock-based payments granted, modified or settled subsequent to April 1, 2006 as well as for
any awards that were granted prior to April 1, 2006 which were not fully vested as of that date. Compensation expense for those awards issued prior to April 1, 2006 was recognized using the fair values determined for the pro forma
disclosures on stock-based compensation. The amount of stock based compensation expense recognized on awards that have not fully vested excludes the compensation expense for vested options recognized in the pro forma disclosures for stock-based
compensation. The Company did not grant any stock-based compensation awards for the quarter ended June 30, 2006, therefore compensation expense recognized for this quarter reflects only the compensation expense for those awards issued prior to
April 1, 2006 that have not fully vested.



13



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##### Table of Contents

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



|                                                                     |  |               |         |  
|-------------------------------------------------------------------- |  | ------------- | ------- | -
|                                                                     |  | June 30, 2006 |        
|Cost of sales                                                        |  | $             | 59,160  |  
|Selling, general and administrative                                  |  |               | 107,834 |  
|                                                                     |  |               |         |  
|Stock-based compensation effect in income before taxes               |  |               | 166,994 |  
|Income taxes                                                         |  |               | (66,798 | )
|                                                                     |  |               |         |  
|Net stock-based compensation effect in net income                    |  | $             | 100,196 |  
|                                                                     |  |               |         |  
|Stock-based compensation effect on basic earnings per common share   |  | $             | 0.02    |  
|Stock-based compensation effect on diluted earnings per common share |  | $             | 0.02    |  

Unrecognized stock-based compensation expense related to the unvested options is approximately
$1.2 million, and will be recorded over the remaining vesting periods of one to four years. This estimate is based on the number of unvested options currently outstanding and could change based on the number of options granted or forfeited in the
future.

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

Pro forma information required under SFAS No. 123 for periods prior to April 1, 2006, as if the company had accounted
for its stock options granted using the fair value method for the first quarter of fiscal 2006 was as follows:



|                                                                                                                     |  |               |        
|-------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------
|                                                                                                                     |  | June 30, 2005
|Net income, as reported                                                                                              |  | $             | 319,699
|Deduct: stock-based employee compensation expense determined under fair-value based method, net of income tax effect |  |               | 88,175 
|                                                                                                                     |  |               |        
|Net income, pro forma                                                                                                |  | $             | 231,524
|                                                                                                                     |  |               |        
|Basic net income per share as reported                                                                               |  | $             | .07    
|Basic net income per share, pro forma                                                                                |  | $             | .05    
|Diluted net income per share as reported                                                                             |  | $             | .07    
|Diluted net income per share, pro forma                                                                              |  | $             | .05    

The fair value of options issued prior to April 1, 2006 was estimated at the date of grant
using the Black-Scholes option pricing model with the following weighted-average assumptions for the quarters ended June 30, 2005: risk-free interest rates of 3.63% to 4.17%; volatility of 75%; the weighted average expected lives of the options
estimated at approximately 2 years; and no dividend yield. The per share weighted average fair value of stock options granted for the quarter ended June 30, 2005 was $3.67.



14



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##### Table of Contents

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

The
1996 Stock Option Plan

During the fiscal year ended March 31, 1997, the Company adopted a stock option plan, entitled the
1996 Stock Option Plan (the 1996 Plan), under which the Company may grant options to purchase up to 300,000 shares of Common Stock. During the fiscal year ended March 31, 2002, the Board of Directors amended the 1996
Plan to increase the number of shares of Common Stock that may be granted under the Plan to 900,000. As of June 30, 2006 there were 132,750 options outstanding under the 1996 Plan.

The 2003 Stock Incentive Plan

During the fiscal year ended March 31, 2004, the Company adopted
a stock option plan entitled The 2003 Stock Incentive Plan (the 2003 Plan) under which the Company may grant options to purchase up to 900,000 shares of Common Stock plus any shares of Common Stock remaining available for
issuance as of July 22, 2003 under the 1996 Plan. As of June 30, 2006 there were 700,250 options outstanding under the 2003 Plan.

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

During the year
ended March 31, 2004, the Company granted options to purchase an aggregate of 8,000 shares of Common Stock to consultants for services to be provided. These options are exercisable at $7.12 per share, and vest 25% per year on each
anniversary date, with an expiration of five years from the date of grant for all options. The Company has valued these at their fair value on the date of grant using the Black-Scholes option-pricing model. During the quarters ended June 30,
2006 and 2005, the Company expensed $1,540 and $1,850, respectively, related to options vesting under these arrangements.

The following
table sets forth the Companys stock option activity during the quarter ended June 30, 2006:



|                              |  |                           |   |  |                                 |      |                                         |      |                           |   |          
|----------------------------- |  | ------------------------- | - |  | ------------------------------- | ---- | --------------------------------------- | ---- | ------------------------- | - | ---------
|                              |  | Shares underlying options |   |  | Weighted average exercise price |      | Weightedaverageremainingcontractuallife |      | Aggregate intrinsic value
|Outstanding at March 31, 2006 |  | 916,875                   |   |  | $                               | 6.95 |                                         |      |                           |   |          
|Granted                       |  |                          |   |  |                                 |     |                                         |      |                           |   |          
|Exercised                     |  | (45,000                   | ) |  |                                 | 4.72 |                                         |      |                           |   |          
|Canceled                      |  | (38,875                   | ) |  |                                 | 6.46 |                                         |      |                           |   |          
|                              |  |                           |   |  |                                 |      |                                         |      |                           |   |          
|Outstanding at June 30, 2006  |  | 833,000                   |   |  | $                               | 7.10 |                                         | 8.30 |                           | $ | 7,240,582
|                              |  |                           |   |  |                                 |      |                                         |      |                           |   |          
|Exercisable at June 30, 2006  |  | 267,525                   |   |  | $                               | 5.94 |                                         | 7.67 |                           | $ | 2,635,253
|                              |  |                           |   |  |                                 |      |                                         |      |                           |   |          



15



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##### Table of Contents

The following table sets forth the status of the Companys non-vested stock options as of June 30, 2006:



|                                |  |                   |   |  |                                        |     
|------------------------------- |  | ----------------- | - |  | -------------------------------------- | ----
|                                |  | Number of Options |   |  | Weighted-Average Grant-Date Fair
Value
|Non-vested as of March 31, 2006 |  | 711,250           |   |  | $                                      | 2.28
|Granted                         |  |                  |   |  |                                        |    
|Forfeited                       |  | (38,875           | ) |  |                                        | 2.77
|Vested                          |  | (106,900          | ) |  |                                        | 3.05
|                                |  |                   |   |  |                                        |     
|Non-vested as of June 30, 2006  |  | 565,475           |   |  | $                                      | 2.12
|                                |  |                   |   |  |                                        |     

9. EARNINGS PER SHARE - Basic earnings per share is computed based on the net income for each period
divided by the weighted average actual shares outstanding during the period. Diluted earnings per share is computed based on the net income per period divided by the weighted average number of common shares and common equivalent shares outstanding
during each period. Common stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options. The computations of basic and diluted EPS for the three months ended June 30, 2006 and 2005 are:



|                                                                 |  |                    |           |               |   |          
|---------------------------------------------------------------- |  | ------------------ | --------- | ------------- | - | ---------
|                                                                 |  | Three months ended
|                                                                 |  | June 30, 2006      |           | June 30, 2005
|Net income                                                       |  | $                  | 548,272   |               | $ | 319,699  
|Weighted average shares outstanding                              |  |                    | 4,611,255 |               |   | 4,413,414
|Basic earnings per share                                         |  | $                  | .12       |               | $ | .07      
|Common stock equivalents                                         |  |                    | 324,647   |               |   | 139,724  
|Weighted average common and common equivalent shares outstanding |  |                    | 4,935,902 |               |   | 4,553,138
|Diluted earnings per share                                       |  | $                  | .11       |               | $ | .07      



16



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##### Table of Contents

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

Critical
Accounting Policies

The discussion and analysis of our financial condition and the results of operations are based on our
consolidated financial statements and the data used to prepare them. Our consolidated financial statements have been prepared based on accounting principles generally accepted in the United States of America. On an on-going basis, we evaluate our
judgments and estimates including those related to allowances for doubtful accounts and sales returns, inventory valuation, long-lived assets, business combination purchase price allocation and goodwill impairment, stock-based compensation, product
returns and warranty obligations, and the valuation allowance on our deferred tax asset. These estimates and judgments are based on historical experience and various other assumptions that are believed to be reasonable under current business
conditions and circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the critical accounting policies and estimates disclosed in Managements Discussion and Analysis in our Annual
Report on Form 10-KSB for the fiscal year ended March 31, 2006 have not changed significantly during the three months ended June 30, 2006, except as follows:

Effective April 1, 2006, we account for stock-based compensation in accordance with the fair value recognition provision of FAS 123R. We use the Black-Scholes option-pricing model, which requires the input of
subjective assumptions. These assumptions include estimates of the length of time employees will retain their vested stock options before exercising them, the volatility of our common stock price over the expected term and the number of options that
will not vest. Changes in these assumptions could materially affect the estimate of fair value stock-based compensation and consequently, the related amount recognized on the consolidated statements of income.

Recent Accounting Pronouncements

In June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109. FIN No. 48
provides guidance with respect to the recognition and measurement in the financial statements of uncertain tax positions taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. The accounting provisions of FIN 48 will be effective for Micronetics beginning April 1, 2007. We are in the process of evaluating the effect the adoption of FIN 48 will have
on our consolidated financial statements.

In November 2005, the FASB issued FSP FAS123(R), Transition Election to Accounting for the
Tax Effects of Share-Based Payment Awards. This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123(R), Share-Based Payment, or the
alternative transition method as described in the FSP. An entity that adopts SFAS No. 123(R) using the modified prospective application may make a one-time election to adopt the transition method described in this FSP. An entity may take up to
one year from the later of its initial adoption of SFAS No. 123(R) or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. We are evaluating
the effect of this statement on our consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Opinion No. 20 had required that changes in accounting
principles be recognized by including the cumulative effect of the change in the period in which the new accounting principle was adopted. SFAS No. 154 requires retrospective application of the change to prior periods financial
statements, unless it is impracticable to determine the period-specific effects of the change. The Statement is effective for fiscal years beginning after December 15, 2005. Our financial position, results of operations or cash flows will only
be impacted by SFAS No. 154 if we implement changes in accounting principles that are addressed by the standard or corrects accounting errors in future periods.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation and superseding APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123R requires the Company to expense grants made under stock option and employee stock purchase plans. The cost will be recognized over the vesting period of the plans. We adopted
SFAS No. 123R in the first quarter of fiscal 2007.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs,
an amendment of ARB No. 43, Chapter 4, Inventory Pricing. This statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage)



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should be recognized as current-period charges and requires the allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The provisions of SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We adopted this statement on
April 1, 2006, which did not have a material impact on our financial statements.

Results of Operations

Three Months Ended June 30, 2006 compared to June 30, 2005

The Consolidated Statement of Income for the three months ended June 30, 2005 includes the operations of Stealth Microwave, Inc., (Stealth) from the acquisition date of June 10, 2005.

Net sales

Net sales for the three months ended
June 30, 2006 (Q1 FY07) were $ 6,806,438, an increase of $2,865,306, or 73% as compared to $3,941,132 for the three months ended June 30, 2005 (Q1 FY06). The increase in net sales for Q1 FY 07 is primarily
attributable to the increase in net sales of high performance power amplifiers to the commercial market as a result of the acquisition of Stealth. Commercial and defense revenues were 64% and 36%, respectively, as a percent of the total revenues for
Q1 FY07, as compared to 51% and 49%, respectively, for Q1 FY06.

Gross profit margin

Gross profit as a percent of sales increased for Q1 FY 07 to 45% from 40% for Q1 FY 06. to the increase in the percentage of net sales resulting from
sales of high performance power amplifiers which have a higher gross profit margin than other products in our product mix, partially offset by the increase in the percentage of net sales resulting from sales of microwave components and subsystems
which have a lower gross profit margin. Stock-based compensation cost included in cost of sales for Q1 FY 07 was $59,160.

Research and development

Research and development (R&D) expense increased $76,969 for Q1 FY 07 as compared to Q1 FY 06 but remained consistent at 2.8% of
net sales. The overall increase in spending was primarily attributable to the increase in R&D salaries as a result of the acquisition of Stealth.

Selling, general and administrative

Selling, general and administrative (SG&A) expense increased to 25% of net sales
for Q1 FY 07 from 23% for Q1 FY 06. SG&A expenses were $1,699,821, up $812,879 or 92%, for the three months ended June 30, 2006 as compared to $886,942 for June 30, 2005. The overall increase in spending was primarily attributable to
an increase in SG&A of approximately $570,000 related to the operations of Stealth, an increase in salary and benefits of approximately $174,000 as a result of stock-based compensation of $108,000 and additional headcount of $66,000, and an
increase in audit fees of approximately $140,000.

Amortization of intangible assets

Amortization expense was $178,296 for Q1 FY 07 as compared to $ 58,490 for Q1 FY 06. The increase is the result of including the amortization of the
acquisition related intangibles of Stealth for the full three months ended June 30, 2006.

Interest expense

Interest expense increased $80,088 or 224% for Q1 FY 07 as compared to Q1 FY 06. The increase in interest expense is primarily attributable to the
increase in borrowings as a result of the $6.0 million term loan used to finance the Stealth acquisition.

Provision for income taxes

The Companys effective tax rate was 40% for Q1 FY07 as compared to 39% for Q1 FY06.



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Liquidity and Capital Resources

We finance our operating and investment requirements primarily through cash flow and borrowings. We had cash and working capital at June 30, 2006 of
$5,722,785 and $11,004,857, respectively, as compared with cash and working capital of $5,266,580 and $10,336,643, respectively at March 31, 2006. Our current ratio was approximately 3.6 to 1 at June 30, 2006, as compared to 2.8 to 1 at
March 31, 2006.

Net cash provided by operating activities was $1,367,569 during the three months ended June 30, 2006 as compared
to $337,095 during the three months ended June 30, 2005. The primary sources of cash from operating activities were net income of $548,272, adjusted by non-cash charges for depreciation and amortization of $398,222, provision for inventories of
$ 111,241 and stock-based compensation of $166,994, and a net decrease in working capital of $144,959. The major changes in working capital were decreases in income taxes payable of $469,385 and accrued expenses of $357,499 as a result of tax
payments and incentive compensation payments made in Q1 FY 07, offset by an increase in accounts receivable of $1,086,625 as a result of increased sales in the quarter.

Net cash used in investing activities was $433,641 during the three months ended June 30, 2006 as compared to $6,232,616 during the three months ended June 30, 2005, as a result of the acquisition of Stealth
in Q1 FY 06.

Net cash used in financing activities was $477,723 during the three months ended June 30, 2006 as compared to net cash
provided by financing activities of $5,911,117 during the three months ended June 30, 2005. In Q1 FY 07, the Company paid the outstanding balance on its line of credit.

Micronetics has various financing arrangements in place. In June 2005, we secured a Term Loan in the amount of $6.0 million, the proceeds of which were
used for the acquisition of Stealth. The Term Loan is guaranteed by Stealth and secured by a first priority security in substantially all of the Companys and Stealths assets. The Term Loan is payable in monthly principal installments of
$62,009 plus accrued interest at the one month LIBOR rate plus 2.25%. The Term Loan matures in June 2012.

In March 2003, in connection
with the purchase of a portion of a commercial condominium housing our Enon division, we entered into a mortgage payable for $352,750. The note bears interest at 5.25% per annum and is payable in monthly installments of $2,391, including
interest, until March 2013 at which time the balance of approximately $223,000 is due. The commercial condominium and all other tangible property of Enon secure this mortgage.

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

In July 2006, we secured an extension to our $5,000,000 line of credit expiring on November 30, 2006. The line of credit bears interest at the current 1-month LIBOR rate plus 2.25%, and is secured by all business
assets of the Company. The Company has available $5,000,000 under the line of credit as of June 30, 2006.

Under the terms of the bank
loans, Micronetics is required to maintain a minimum net worth of at least $8,000,000, a ratio of total debt to net worth not exceeding 1.5:1, and a debt coverage ratio of not less than 1.25:1. At present, we do not anticipate failing to comply with
any of these debt covenants.

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 of these transactions. There are no present
plans to raise additional debt or equity capital, nor is there a projected need to raise any such capital.

Off-Balance Sheet Arrangements

Micronetics has no off-balance sheet arrangements.



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Forward-looking statements

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

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

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

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

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

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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

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



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



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



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



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



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



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



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



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



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



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



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

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

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

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

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

These risks and
uncertainties include:



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



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



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



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



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



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



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



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



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

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

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

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



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



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



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

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

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

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

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

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

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



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



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



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



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



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



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



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



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



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



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



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



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

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



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

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

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

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

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

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

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



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



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



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



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

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

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



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

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

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

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

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

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

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

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

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

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

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

The
market price of our common stock may be volatile.

Our stock price has historically been volatile. From April 1, 2005 to
June 30, 2006, the trading price of our common stock ranged from $23.31 to $7.00. Many factors may cause the market price of our common stock to fluctuate, including:



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



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



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



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



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



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

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

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

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

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

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

Item 3. Controls and Procedures

Evaluation of disclosure controls and procedures - As of June 30, 2006, the
Company carried out an evaluation, under the supervision and with the Companys management, including the Companys Chief Executive Officer and the Companys Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of June 30, 2006 to provide reasonable assurance that material information relating to the Company was made known to them by others within the Company.

Changes in internal control-There were no significant changes in the Companys internal controls over financial reporting that occurred during the three
months ended June 30, 2006 that have materially affected or are reasonably likely to materially affect, the Companys internal control over financial reporting.

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



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##### Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

Recent Sales of Unregistered
Securities

None.

Small Business Issuer Purchases of Equity Securities

None.

Item 3. Defaults upon Senior Securities.

None.

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

None

Item 5. Other Information.

None.



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Item 6. Exhibits.



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



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SIGNATURE

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



|                       |  |                   |  |                                             
|---------------------- |  | ----------------- |  | --------------------------------------------
|                       |  | MICRONETICS, INC.
|                       |  |                  
|Dated: August 14, 2006 |  | By:               |  | /s/ DAVID ROBBINS                           
|                       |  |                   |  | David Robbins,                              
|                       |  |                   |  | President and Chief Executive Officer       
|                       |  |                   |  | (Principal Executive Officer)               
|                       |  |                  
|Dated: August 14, 2006 |  | By:               |  | /s/ DIANE BOURQUE                           
|                       |  |                   |  | Diane Bourque,                              
|                       |  |                   |  | Chief Financial Officer                     
|                       |  |                   |  | (Principal Financial and Accounting Officer)



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