Edgar Filing: MICROPAC INDUSTRIES INC

U. S. Securities and Exchange Commission
Washington, D. C. 20549
Form 10-KSB
Dated February 10, 2006

(Mark One)

(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)

For the fiscal year ended November 30, 2005

(_) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No Fee Required)

For the transition period from ________ to ________
Commission file number 0-5109

MICROPAC INDUSTRIES, INC.

DELAWARE 75-1225149
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

905 E. WALNUT STREET 75040
GARLAND, TEXAS (Zip Code)

Issuer's telephone number (972) 272-3571

Securities to be registered under Section 12 (b) of the Act:

Title of each class Name of each exchange on which registered

------------------------------ -----------------------------------------

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

COMMON STOCK $.10 par value

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

Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

Revenues for its most recent fiscal year: $19,030,000

Based on approximately 32,578 shares publicly traded during November 2005, the
aggregate market value of the voting common stock held by non-affiliates of the
registrant (based on the average prices reported on the Over-the-Counter ("OTC")
Bulletin Board system on November 30, 2005 was approximately $5,762,000. For
purposes of such calculation, shares of Common Stock held by each executive
officer and director and by each person who owns more than 5% of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares outstanding of the issuer's only class of common equity, as
of the latest practicable date was 2,578,315 as of November 30, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement dated February 10, 2006
for the Annual Meeting of Shareholders to be held on March 3, 2006 (the "Proxy
Statement") are incorporated by reference into Part III of this Form 10-KSB.

PART I

Item 1. Description of Business
-------------------------------

INTRODUCTION

Micropac Industries, Inc. (the "Company"), a Delaware corporation, manufactures
and distributes various types of hybrid microelectronic circuits, solid state
relays, power operational amplifiers, and optoelectronic components and
assemblies. The Company's products are used as components in a broad range of
military, space and industrial systems, including aircraft instrumentation and
navigation systems, power supplies, electronic controls, computers, medical
devices, and high-temperature (200o C) products.

The Company's facilities are certified and qualified by Defense Supply Center
Columbus (DSCC) to MIL-PRF-38534 (class K-space level); MIL-PRF-19500 JANS
(space level), MIL-PRF-28750 (class K space level) and is certified to ISO
9001-2002. Micropac is a NASA core supplier, and is compliant to
AS9100-Aerospace Industry standard for supplier certification.

The business was started in 1963 as a sole proprietorship. On March 3, 1969, the
Company was incorporated under the name of "Micropac Industries, Inc." in the
state of Delaware. The stock was publicly held by 540 shareholders on November
30, 2005.

PRODUCTS AND TECHNOLOGIES
-------------------------

The Company's products are either custom (being application specific circuits
designed and manufactured to meet the particular requirements of a single
customer) or standard, proprietary components such as catalog items.
Custom-designed components are estimated to account for approximately 49% of the
Company's sales for the fiscal year ended November 30, 2005, and 50% in fiscal
2004; standard components are estimated to account for approximately 51% of the
Company's sales for the fiscal year ended November 30, 2005, and 50% for fiscal
2004.

Micropac Industries, Inc. provides microelectronic and optoelectronic components
and assemblies along with contract electronic manufacturing services and offers
a wide range of products sold to the industrial, medical, military, aerospace
and space markets.

The Company's core technology is the packaging and interconnect of miniature
electronic components, utilizing thick film and thin film substrates, forming
microelectronics circuits. Other technologies include light emitting and light
sensitive materials and products, including light emitting diodes and silicon
phototransistors used in the Company's optoelectronic components, and
assemblies. The Company's basic products and technologies include:
Custom design hybrid microelectronic circuits
Solid state relays and power controllers
Custom optoelectronic assemblies and components
Optocouplers
Light-emitting diodes
Hall-Effect devices
Displays
Power operational amplifiers
Fiber optic components and assemblies
High temperature (200(0) C) products

Micropac's products are primarily sold to original equipment manufacturers (OEM)
who serve the following major markets:
Military/Aerospace - aircraft instrumentation, guidance and navigations
systems, control circuitry, power supplies, laser positioning
Space - control circuitry, power monitoring and sensing
Industrial - power control equipment, robotics
Medical

The Company has no patents, licenses, franchises, concessions, royalty
agreements or labor contracts. The Company's trademark "Mii" is registered with
the U.S. Patent and Trademark Office.

Sales of our products internationally are subject to government regulations,
including export control regulations of the U.S. Department of State and
Department of Commerce. Violation of these regulations by the company could
result in monetary penalties and denial of export privileges. We are not aware
of any violations of export control regulations.

The Company is not currently impacted by export restrictions on sensitive
technology. Five (5) of the Company's principal product families require

government approval. Further, a significant portion of our business is military
and is dependent on maintaining our facility certifications to MIL-PRF-38534,
MIL-PRF-19500 and MIL-PRF-28750. We expect to maintain these certifications and
qualifications; however, the loss of any of these certifications would have a
significant impact on our business.

Government regulations impose certain controls on chemicals used in electronics
and semiconductor manufacturing. Micropac has obtained all the necessary
environmental permits, and routinely monitors and reports the wastewater stream
results to the local governing agency. Micropac is classified as a small
generator of hazardous waste, and the annual cost of complying with the
regulations is minimal.

In 2005, the Company's investment in technology through research and
development, which was expensed, totals approximately $531,000 ($438,000 in
2004). The Company's research and development expenditures were directed
primarily toward long-term specific customer requirements, some of which have
future potential as Micropac proprietary products, and product development and
improvement associated with the Company's space level and other high reliability
programs.

The Company introduced new Solid State Power Controllers (SPPC) as the next
generation of solid state relays with enhanced ruggedness and voltage and
current carrying capabilities. Micropac's SSPCs feature both an instantaneous
over current trip as well as I^2T which compares power used over time. These
devices range from 28VDC to 400VDC and from 5Amps to 40Amps. The SSPC Product
Family is fully capable of being Class K screened per MIL-PRF 38534. Radiation
tolerant versions of these products are also available. Micropac strives to
provide the greatest power density per package volume and strives to meet the
stringent efficiency requirements of customers in today's market.

In addition to the Company's investment in research and development, various
customers paid the Company approximately $208,000 in non-recurring engineering
costs associated with the development of custom products for specific
applications.

The Company provides a one year warranty from the date of shipment to the
original purchaser. The Company is obligated under this warranty to either
replace or repair defective goods or refund the purchase price paid by the
buyer.

CUSTOMERS
---------

The Company's products are marketed throughout the United States and in Western
Europe, through a direct technical sales staff, independent representatives and
independent stocking distributors. Approximately 10% of the sales for fiscal
year 2005 (25% in 2004) were to international customers. Sales to Western
European customers are made by independent representatives under the
coordination of the Company's office in Bremen, Germany. One major industrial
customer has opened an operation in China and during 2004 moved a major part of
their domestic operations to China. In 2005 this customer, Advanced Energy
Industries, Inc., accounted for 17% of international sales, and their contract
manufacturer in China, Celestica, accounted for 21% of international sales.
During 2005, these two customers accounted for 2% and 2% of the Company's total
sales compared to 9% and 10% for the year ended November 30, 2004. Advanced
Energy has been a major customer since 1996 and averaged 15% of the Company's
sales during this 10 year period from a high of 20% to a low of 2%.

Sales through the Company's distribution channels were $4,672,000 in 2005
compared to $3,041,000 in 2004 or 25% and 20% of sales, respectively.

The Company's major customers include contractors to the United States
government with fixed price contracts. Sales to these customers for Department
of Defense (DOD) and National Aeronautics and Space Administration (NASA)
contracts accounted for approximately 70% of the Company's fiscal net sales in
2005 compared to 64% in 2004.

The Company's major customers are Lockheed Martin, Northrop Grumman, Boeing,
Raytheon, BAE, Honeywell, Rockwell Int'l, Newport, Advanced Energy, and St.
Jude.

At any time a single customer may have a disproportionate and material impact on
the company's operations and profit and loss.

BACKLOG
-------

At November 30, 2005, the Company had a backlog of unfilled orders totaling
approximately $9,319,000 compared to approximately $9,292,000 at November 30,
2004. The Company expects to complete and ship most of its November 30, 2005
backlog during fiscal 2006.

EMPLOYEES
---------

At November 30, 2005, the Company had 146 full-time employees (compared to 121
at November 30, 2004), of which 25 were executive and managerial employees, 31
were engineers and quality-control personnel, 20 were clerical and
administrative employees, and 70 were production personnel. None of the
Company's employees were covered by collective bargaining agreements.

The Company is an Equal Opportunity Employer. It is the Company's policy to
recruit, hire, train and promote personnel in all job classifications, without
regard to race, religion, color, national origin, sex or age. Above and beyond
non-discrimination, we are committed to an Affirmative Action Program, dedicated
to the hiring, training, and advancement within the Company of minority group
members, women and handicapped individuals.

COMPETITION
-----------

The Company competes with two or more companies with respect to each of its
major products, including custom hybrid microcircuits, solid state relays and
power controllers, optocouplers, light-emitting diodes, light sensitive silicon
phototransistors and diodes, hall-effect devices, displays, power operational
amplifier, custom optoelectronic components and assemblies. These products and
technologies are sold into various markets, including military/aerospace, space,
industrial and medical. Some of these competitors are larger and have greater
capital resources than the Company. Management believes the Company's
competitive position is favorable with regard to our product reliability and
integrity, past performance, customer service and responsiveness, timely
delivery and pricing; however, no assurance can be given that the Company can
compete successfully in the future.

The hybrid microcircuits product line, including custom microcircuits, solid
state relays, power operational amplifiers and regulators accounted for 36% of
the Company's business in 2005, and the Optoelectronics product line accounted
for 64% of the Company's business in 2005, compared to 53% and 47% in 2004. One
customer, Newport, accounted for 15% of the revenue increase in the
Optoelectronics product line.

There are approximately 46 independent hybrid microcircuit manufacturing
companies who are certified to supply microcircuits to MIL-PRF-38534, in
addition to OEM's, who manufacture hybrid microcircuits for their internal
needs. Micropac may compete with all of these for hybrid microcircuit business.
Some of the Company's primary competitors are Teledyne Industries, Inc., M.S.
Kennedy, Aeroflex, Agilent, Optek, and Isolink.

SUPPLY CHAIN
------------

The parts and raw materials for the Company's products are generally available
from more than one source. Except for certain optoelectronic products, the
Company does not manufacture the basic parts or materials used in production of
its products. From time to time, the Company has experienced difficulty in
obtaining certain materials when needed. The Company's inability to secure
materials for any reason could have adverse effects on the Company's ability to
deliver products on a timely basis. The Company uses capacitors, active
semiconductor devices (primarily in chip form), hermetic packages, ceramic
substrates, resistor inks, conductor pastes, precious metals and other materials
in its manufacturing operations. However, the Company has not been materially
affected by such shortages. The Company's delivery commitments to customers
allow for adequate lead times for production of the products including lead time
for order and receipt from the supply chain.

Some of the Company's primary suppliers are International Rectifier, Sussex
Semiconductors, Semi-Dice, Accumet Eng. Corp, NTK Technologies, Electrovac, and
Aborn Electronics.

CAUTIONARY STATEMENTS - RISK FACTORS
------------------------------------

This Form 10-KSB contains forward-looking statements that are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Actual results could differ materially. Investors are warned that
forward-looking statements involve risks and unknown factors including, but not
limited to, customer cancellation or rescheduling of orders, problems affecting
delivery of vendor-supplied raw materials and components, unanticipated
manufacturing problems and availability of direct labor resources.

Such risks and uncertainties include, but are not limited to historical
volatility and cyclicality of the semiconductor and semiconductor capital
equipment markets that are subject to significant and often rapid increases and
decreases in demand. In addition, the Company produces silicon phototransistors
and light emitting diode die for use in certain military, standard and custom
products. Fabrication efforts sometimes may not result in successful results,
limiting the availability of these components. Competitors offer commercial
level alternatives and our customers may purchase our competitors' products if
the Company is not able to manufacture the products using these technologies to
meet the customer demands.

The Company disclaims any responsibility to update the forward-looking
statements contained herein, except as may be required by law.

Majority shareholder ability to control the election of the Board of Directors

The majority shareholder has the ability to control the election of the
Company's Board of Directors and elect individuals who may be more sympathetic
to such majority shareholders' desires and not necessarily sympathetic to the
desires of minority shareholders as to the policies and directions of the
Company. However, the ability to control the election of the Board of Directors
does not modify the fiduciary duties of the Board of Directors to represent the
interests of all shareholders

Availability of public share for purchase and sale

A small number of shares is available for public purchase and sale. As a result
the company's reported share price may be subject to extreme fluxuations due in
part to the small number of shares traded at any time.

Pricing pressures from customers for reduction in selling prices

The Company continues to experience pricing pressures from some of its original
equipment manufacturer (OEM) customers. In some cases, the Company customers
request the review of pricing for possible reduction in selling price on future
orders. This requires the Company to improve its productivity and to request
similar price reductions from its supplier chain. If one or both of the
approaches by the Company does not succeed, the Company could be required to
reduce the selling price on future orders reducing the product gross margins and
affecting the Company's net earnings in order to receive future orders from the
customer. However, the Company has no agreement that requires a reduction in the
selling price on any current customer order. All contracts are firm fixed
pricing.

Insurance coverage and exposure to substantial claims or liabilities

The Company operates manufacturing facilities in Garland, Texas and subcontracts
portions of the Company manufacturing to a contract manufacturer in Juarez,
Mexico. These facilities use industrial machines and chemicals that could
provide risks of personal injury and/or property damage. There is no assurance
that accidents will not occur. If accidents do occur, the Company could be
exposed to substantial liability. The Company has no liability for the Mexico
operations. The Company maintains worker's compensation insurance and general
liability insurance for protection of its employees and for protection of the
Company's assets in Garland, Texas. In addition to the basic policies mentioned,
the Company maintains an umbrella insurance policy. The Company reviews all
insurance coverage on an annual basis, and makes any necessary adjustments based
on risk assessment and changes in its business. In the opinion of the Company's
management, and its' insurance advisors, the Company is adequately insured;
however, the Company's financial position could be materially affected by claims
not covered or exceeding coverage currently carried by the Company.

The Company is subject to numerous environmental regulations or changes in
government policy

The Company is subject to governmental regulations pertaining to the use,
storage, handling and disposal of hazardous substances used in connection with
its manufacturing activities. Failure of the Company to control all activities
dealing with hazardous chemicals could subject the Company to significant
liabilities or could cause the Company to cease its manufacturing activities.

The Company could be adversely affected by changes in laws and regulations made
by U.S. and non U.S. governments and agencies dealing with foreign shipments.
Changes by regulatory agencies dealing with environmental issues could affect
the cost of the Company's products and make it hard for a small company to be
competitive with larger companies.

Product liability claims

The use of the Company's products in commercial or government applications may
subject the Company to product liability claims. Although the Company has not
experienced any product liability claims, the sale of any product may provide
risk of such claims. Product liability claims brought against the Company could
have a material adverse effect on the Company's operating results and financial
condition.

Component shortages or obsolescence from suppliers could affect ability to
manufacture or delay shipments of products

The Company relies on suppliers to deliver quality raw materials in a timely and
cost effective manner. Most of the materials and components are generally
available from multiple sources; however, from time to time vendors do not
deliver the product as needed due to manufacturing problems or possibly a
decision not to furnish that product in the future. Such interruption of supply
or price increases could have a material adverse effect on the Company's
operation; however, the Company is not currently materially impacted by
materials shortages.

The ability to develop new products and technologies used in the military, space
or aerospace markets

The Company's base products and technologies generally have long life cycles.
The Company's products are primarily used in military, space or aerospace
applications, which also have long life cycles. There can be no assurance that
the Company will be able to define, develop and market new products and
technologies on a timely and cost effective basis. Failure to respond to
customer's requirements and to competitors' progress in technological changes
could have a material adverse effect on the Company's business.

Item 2. Properties
------------------

The Company occupies approximately 36,000 square feet of manufacturing,
engineering and office space in Garland, Texas. The Company owns 31,200 square
feet of that space and leases an additional 4,800 square feet. The Company
considers its facilities adequate for its current level of operations.

The Company also subcontracts some manufacturing to Inmobiliaria San Jose De
Ciuddad Juarez S.A. DE C.V, a maquila contract manufacturer in Juarez, Mexico.
The Company owns all equipment and inventory with temporary importation into
Mexico under the maquila rules of Mexico. The Company does not lease or own any
real property in Mexico.

The Company employs an International Sales Manager in Bremen, Germany who
coordinates sales to Western European customers made by independent
representatives. The sales manager maintains an office in a private residence.
The Company does not lease or own any real property in Germany, or any other
foreign country.

Item 3. Legal Proceedings
-------------------------

The Company is not involved in any material current or pending legal
proceedings.

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

No matters were submitted to vote of the Company's security holders through the
solicitation of proxies by the Company during the fourth quarter of the fiscal
year ended November 30, 2005.

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
--------------------------------------------------------------------------------
Matters
-------

On November 30, 2005, there were approximately 540 shareholders of record of the
Company's common stock. The stock of the Company is closely held; and,
therefore, certain shareholders have the ability to significantly influence
decisions. Our common stock is quoted on the OTC Bulletin Board under the symbol
"MPAD.OB". The following sets forth the high and low bid prices for each quarter
during the last two fiscal years:

High Low
Fiscal Year Ended November 30, 2005
Fourth Quarter $9.50 $6.60
Third Quarter $8.00 $5.62
Second Quarter $7.75 $5.00
First Quarter $6.31 $3.75

Fiscal Year Ended November, 30, 2004
Fourth Quarter $4.20 $3.50
Third Quarter $4.50 $3.25
Second Quarter $3.75 $2.05
First Quarter $2.50 $1.77

During the three (3) month period ending on November 30, 2005, approximately
109,994 shares of the Company's common stock was reportedly traded in the
over-the-counter market at a reported price range of $6.60 to $9.50 per share.
For the two (2) year period ending November 30, 2005, approximately 996,897
shares of the Company's common stock were reportedly traded in the
over-the-counter market at prices ranging from a low of $2.05 to a high of
$9.50. Due to this average monthly volume of approximately 41,537 shares of
common stock being publicly bought and sold during this two year period, the
Company does not believe this share trading volume represents the market value
of the Company's common stock held by non-affiliates.

Our stock prices quoted on the OTC Bulletin Board represent over-the-counter
market quotations and reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.

On December 29, 2004, the Board of Directors of Micropac Industries, Inc.
approved the payment of a $.12 per share dividend to all shareholders of record
on January 25, 2005. The dividend payment was paid to shareholders on February
8, 2005.

On January 8, 2004, the Board of Directors of Micropac Industries, Inc. approved
the payment of a special dividend of $.05 per share to all shareholders of
record on January 30, 2004. The dividend payment was paid to shareholders on
February 13, 2004.

There are no plans to make the dividend permanent.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------

Liquidity and Capital Resources
-------------------------------

The Company currently has an existing line of credit with a Texas banking
institution. The line of credit agreement provides the Company with up to
$3,000,000 for normal operation of the Company. The interest rate on any
borrowings against this credit agreement is equal to the prime rate less 1/4%.
The line of credit requires the Company to maintain certain financial ratios,
including quick ratio of at least 1:1, maintain a tangible net worth of
$6,250,000 plus 75% of future net income, and maintain a total
liabilities-to-tangible-net-worth of less than 1.25:1. The Company is in
compliance with these covenants. To date, the Company has not used any of the
available line of credit. The Company expects to continue to generate adequate
amounts of cash to meet its liquidity needs from the sale of products and
services and the collection thereof.

The Company realized $1,309,000 net in cash flows from operations in 2005. Cash
influx came primarily from the combination of net income totaling $2,176,000;
recovery of depreciation totaling $247,000, increase of accrued compensation of
$202,000, increase in other accrued liabilities of $106,000, increase in
accounts payable of $381,000, and a decrease in prepaid expense of $14,000. Cash

was used to increase inventory $843,000, accounts receivables increased by
$731,000, net deferred tax assets increased $84,000 and a decrease in income tax
liabilities of $159,000. Inventories increased due to the purchase of long lead
items for shipments within the first half of 2006. Day's sales in accounts
receivables totaled approximately 53.0 days as of November 30, 2005, compared to
53.0 days at November 30, 2004.

The Company used $497,000 in cash for investment in additional manufacturing
equipment, computers and facility improvements in 2005 compared to $182,000 in
2004.

As of November 30, 2005, the Company had $1,722,000 in cash and cash equivalents
and $2,527,000 in short term investments compared to $1,239,000 in cash and cash
equivalents and $2,507,000 in short term investments on November 30, 2004.

Company management believes it will meet its 2006 capital requirements through
the use of cash derived from operations for the year and/or usage of the
Company's short-term investments. There were no significant outstanding
commitments for equipment purchases or improvements at November 30, 2005.

Results of Operations 2005 vs. 2004
-----------------------------------

Three Months Ended Twelve Months Ended
11/30/05 11/30/04 11/30/05 11/30/04

Net Sales 100.0% 100.0% 100.0% 100.0%

Cost of sales 66.5% 57.1% 62.4% 65.0%
R & D 2.6% 5.3% 2.8% 2.9%
S, G, & A 17.3% 18.7% 17.0% 17.6%
Total Cost & Exp 86.4% 81.1% 82.2% 85.5%

Operating Income 13.6% 18.9% 17.8% 14.5%

Other and Interest Income 0.8% 0.3% 0.5% 0.2%

Income Before Income Taxes 14.4% 19.2% 18.3% 14.7%

Provision for taxes 5.1% 7.2% 6.9% 5.6%

Net Income 9.3% 12.0% 11.4% 9.1%

Sales in 2005 were approximately $19,030,000, an increase of 23.9% or $3,674,000
compared to 2004 sales. The increase in sales is primarily attributable to
continued improved business conditions in the Company's major market segments.
Increased sales from the introduction of new solid state power controller
products and standard solid state relays, combined with new custom
optoelectronic assemblies and increased requirements for standard optocouplers
have improved the Company's performance in 2005.

The Company's management expects sales and profits to decrease in 2006, based on
the completion of significant long-term contracts on custom optoelectronics
assemblies, certain space product contracts, and further reduced requirements
for microcircuits supplied to semiconductor equipment manufacturers.

New orders for fiscal year 2005 total $19,077,000 compared to $20,946,000 for
fiscal 2004. Approximately $11,078,000 of the new orders received in 2005 was
delivered to customers in 2005, along with approximately $7,981,000 of the
Company's $9,292,000 ending backlog on November 30, 2004.

The Company's backlog as of November 30, 2005, was approximately $9,319,000,
compared to approximately $9,292,000 on November 30, 2004.

Custom-designed components are estimated to account for approximately 49% of the
Company's sales for the fiscal year ended November 30, 2005, and 50% in fiscal
2004; standard components are estimated to account for approximately 51% of the
Company's sales for the fiscal year ended November 30, 2005, and 50% for fiscal
2004.

Approximately 10% of the sales for fiscal year 2005 (25% in 2004) were to
international customers. Sales to Western European customers are made by
independent representatives under the coordination of the Company's office in
Bremen, Germany. One major industrial customer has opened an operation in China
and during 2004 moved a major part of their domestic operations to China. In
2005 this customer, Advanced Energy Industries, Inc., accounted for 17% of
international sales, and their contract manufacturer in China, Celestica,
accounted for 21% of international sales. During 2005, these two customers
accounted for 2% and 2% of the Company's total sales compared to 9% and 10% for
the year ended November 30, 2004.

During 2005 one customer, Newport accounted for 15% of the Company's sales,
compared to two customers Advanced Energy and Celestica that accounted for 9%
and 10% for the year ended November 30, 2004. During 2005, Advanced Energy and
Celestica accounted for 2% and 2% of the Company's total sales. Advanced Energy
has been a major customer since 1996 and averaged 15% of the Company's sales
during this 10 year period from a high of 20% to a low of 2%.

Sales for 2005 compared to 2004 increased 3% in the commercial market, 44% in
the military market, and 9% in the space market.

Cost of sales, as a percentage of net sales, was 62.4% in 2005 compared to 65.0%
in 2004. The decrease of 2.6% is attributable to stable operating expense on
higher sales volume; changes in product mix, and yield improvements on certain
products. In actual dollars, cost of sales increased $1,898,000 for 2005, versus
2004.

Expenses for research and development total $531,000 in 2005 compared to
$438,000 in 2004. Most of the research and development expenses were
concentrated on expanding the company's line of solid state power controllers,
detectors, hall-effect devices; and enhancing manufacturing processes to improve
the Company's competitive position.

Selling, general, and administrative expenses total 17.0% of net sales in 2005,
compared to 17.6% in 2004, based on higher sales. In dollars expensed, selling,
general and administrative expenses totaled $3,237,000 in 2005 compared to
$2,709,000 in 2004, an increase of $528,000, attributable to increased selling
expense and cost associated with internal control documentation and testing.

Interest income for fiscal 2005 totaled $87,000 compared to $32,000 for fiscal
2004. The increase is related to higher interest rates on the Company's
investments.

Income before taxes for fiscal 2005 was approximately $3,485,000 or 18.3% of net
sales, compared to $2,265,000 or 14.7% of net sales in fiscal 2004. Net income
after taxes totaled approximately $2,176,000 or $.84 per share in 2005 versus
2004 net earnings of $1,408,000 or $.55 per share. Net income after taxes
increased $768,000 in 2005 compared to 2004, primarily attributable to higher
gross profit margin and continued control of overhead and general and
administrative expenses. One customer for custom optoelectronics assemblies
accounted for approximately 25% of the net income. Based on the completion of
this contract, and lower anticipated sales in 2006, the Company's management
expects net income to decrease.

New Accounting Standards
------------------------

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 153, "Exchanges of
Non-monetary assets - an amendment of APB Opinion No. 29". This Statement amends
APB Opinion 29 to eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. We anticipate that
this pronouncement will not have a material effect on the financial statements.

In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment". This
Statement is a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation". This Statement supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related implementation guidance. This
Statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. The Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement does not
change the accounting guidance for share-based payment transactions with parties
other than employees provided in Statement 123 as originally issued and EITF
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." This Statement does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans". The Securities and
Exchange Commission has delayed the adoption requirement of SFAS No. 123R until
January 1, 2006. We expect to adopt SFAS No. 123R as required. We anticipate
that adoption of this Standard could have a material effect on the financial
statements if the Company decided to utilize stock options to compensate
employees and members of the Board of Directors.

In May 2005 the FASB issued SFAS 154 "Accounting Changes and Error Corrections".
This Statement replaces APB Opinion No. 20, "Accounting Changes", and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements",
and changes the requirements for the accounting for and reporting of a change in
accounting principle and also corrections of error in previously issued
financial statements. This Statement harmonizes US accounting standards with
existing international accounting standards by requiring companies to report
voluntary changes in accounting principles via a retrospective application,
unless impracticable. Also, the reporting of an error correction involves
adjustments to previously issued financial statements similar to those generally
applicable to reporting an accounting change retrospectively. This pronouncement
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005

Item 7. Financial Statements
-----------------------------

The financial statements listed below appear on pages 19 through 26 of this
Report. The Company is not required to furnish the Supplementary Data required
by Item 302 of Regulation S-K.

Page No.

18 Report of Independent Registered Public Accounting Firm

19 Balance Sheets as of
November 30, 2005 and 2004

20 Statements of Income for the years ended
November 30, 2005 and 2004

21 Statements of Shareholders' Equity for the years ended
November 30, 2005 and 2004

22 Statements of Cash Flows for the years ended
November 30, 2005 and 2004

23-26 Notes to Financial Statements for the years ended
November 30, 2005 and 2004

Item 8. Changes in and Disagreements with Accountants on Accounting and
--------------------------------------------------------------------------------
Financial Disclosure
--------------------

None

Item 8A. Controls and Procedures
--------------------------------

The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. Disclosure controls are also
designed with the objective of ensuring that this information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. As of the end of the period covered by this report, the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the Company's disclosure controls and procedures.
Based on the evaluation, which disclosed no significant deficiencies or material
weaknesses, the Chief Executive Officer and Chief Financial Officer each
concluded that the Company's disclosure controls and procedures are effective

PART III

In accordance with General Instruction G(3) of Form 10-K, the information
required by this Part III is incorporated by reference to Micropac Industries,
Inc.'s definitive proxy statement relating to its 2006 Annual Meeting of
Stockholders, as set forth below. The 2006 Proxy Statement will be filed with
the Securities and Exchange Commission on or about February 10, 2006.

Item 9. Directors & Executive Officers of The Registrant

The information set forth in the 2006 Proxy Statement under the headings
"Election of Directors", and "Principal Stockholders and Stockholdings of
Management", is incorporated herein by reference.

Position(s) With
Name Age the Company Director Since
---- --- ---------------- --------------

H. Kent Hearn 69 Director and Member of Audit
Committee February 1983

Heinz-Werner Hempel 77 Director and Member of Audit
Committee February 1997

James K. Murphey 63 Director and Member of Audit
Committee March 1990

Nicholas Nadolsky 72 Director and Member of Audit
Committee May 2004

Connie Wood 66 Director and Member of Audit
Committee, Former CEO and President May 2002

Mark King 51 Director, CEO, President and
Member of Audit Committee October 2005

Patrick Cefalu 48 CFO, Vice President

Mr. Hearn is currently employed as a stockbroker by Milkie/Ferguson Investments,
Inc. Mr. Hearn was formerly employed by Harris Securities, Dallas, Texas.

Mr. Hempel is the Chief Operating Officer of Hanseatische Waren-Gesellschaft MBH
& Co, KG, Bremen Germany.

Mr. Murphey is an attorney and member of the law firm Glast, Phillips & Murray,
P.C. in Dallas, Texas. Glast, Phillips & Murray, P.C. serves as legal counsel to
the company. Prior to 2001, Mr. Murphey was a member of the law firm of Secore &
Waller, L.L.P. in Dallas, Texas.

Mr. Nadolsky served as the Company's Chief Executive Officer and Chairman of the
Board until his medical leave of absence beginning May 2002. Mr. Nadolsky
retired from the Company in May 2004.

Mrs. Wood is the former Chief Executive Officer and President of the Company,
having retired in October 2005, and serving as a full-time consultant until
December 31, 2005. Mrs. Wood was elected as Chief Executive Officer in May 2002.
Prior to May 2002, Mrs. Wood was President and Chief Operating Officer of the
Company.

Mr. King is the Chief Executive Officer and President of the Company. Prior to
November 2002, Mr. King was President and Chief Operating Officer of Lucas
Benning Power Electronics. Mr. King joined the company in November of 2002 as
the Chief Operating Officer and was elected as Chief Executive Officer,
President and Board Member in October 2005.

Mr. Cefalu is the Chief Financial Officer and Vice President of the Company. Mr.
Cefalu joined the Company in July of 2001 and was elected as Chief Financial
Officer in February of 2002. Prior to July 2002, Mr. Cefalu held numerous senior
financial positions at Lucent Technologies.

The Company has adopted a Code of Ethics for Principal Executive Officers and
Senior Financial Officers, pursuant to the Sarbanes-Oxley Act of 2002. The Code
of Ethics is published on the Company's web site, www.micropac.com on the
Investor page.

The Board of Directors does not have a nominating or compensation committee or
committees performing similar functions. The Board of Directors formed an Audit
Committee on May 13, 2002. The members of the Audit Committee are the members of
the Board of Directors.

The Board of Directors has discussed with management and the independent
auditors the quality and adequacy of the Company's internal controls. The
Directors have considered and reviewed with the independent auditors their audit
plans, the scope of the audit, and the identification of audit risks.

The Board of Directors has reviewed the Company's audited financial statements
for the fiscal year ended November 30, 2005, and discussed them with management
and the Company's independent auditors. Management has the responsibility for
the preparation and integrity of the Company's financial statements and the
independent auditors have the responsibility for the audit of those statements.
Based on this and discussions with management and the independent auditors, the
Board of Directors has recommended that the Company's audited financial
statements be included in its Annual Report on Form 10-KSB for the fiscal year
ended November 30, 2005, for filing with the Securities and Exchange Commission.
It is not the duty of the Directors to plan or conduct audits, to determine that
the Company's financial statements are complete and accurate and are in
accordance with accounting principles generally accepted in the United States.
Those responsibilities belong to management and the Company's independent
auditors. In giving its recommendations, the Directors considered (a)
management's representation that such financial statements have been prepared
with integrity and objectivity and in conformity with accounting principles
generally accepted in the United States, and (b) the report of the Company's
independent auditors with respect to such financial statements.

The Board of Directors has received and reviewed written disclosures and a
letter from the independent accountants required by the Independence Standards
Board Standard No. 1, entitled "Independence Discussions with Audit Committee,"
as amended to date, and has discussed with the independent accountants their
independence from management.

The Board of Directors held nine (9) board meetings during the year ended
November 2005. Directors receive a fee of $500.00 for each meeting.

The Audit Committee held four (4) meetings during the year ended November 30,
2005. Members of the Audit Committee received a fee of $500.00 for each meeting.

With the exception of Mr. Hearn, members of the Audit Committee are not
considered as independent members under applicable United States statutes.

The Board of Directors has evaluated the credentials of Nicholas Nadolsky, and
has determined that Mr. Nadolsky is an "audit committee financial expert" within
the meaning of 401(e) of Regulation S-B.

The Board does not have a nominating committee due to the Company's small size.
The Board does not provide a process for security holders to send communications
to the Board of Directors due to the infrequent nature of such communications.

Item 10. Executive Compensation
--------------------------------

The information set forth in the 2006 Proxy Statement under the heading
"Management Remuneration and Transactions", is incorporated herein by reference.

The following table shows as of November 30, 2005, all cash compensation paid
to, or accrued and vested for the account of Ms. Connie Wood, Past President and
Chief Executive Officer, Mr. Mark King, President and Chief Executive Officer
and Mr. Patrick Cefalu, Vice President and Chief Financial Officer. Mrs. Wood,
Mr. King and Mr. Cefalu received no non-cash compensation during 2005.

The company does not have any equity compensation plans.

Annual Compensation
-------------------

Name and Annual Other All Other
Principal Position Year Salary Bonus Annual Compensation Compensation
(a) (b)
==================================================================================================

Connie Wood, 2005 $183,294.58 $14,500 $6,500 $23,693.18
Past President and 2004 $172,394.28 $10,000 $6,000 $27,194.25
Chief Executive 2003 $156,000.00 -0- -0- $18,490.51
Officer (1)

Mark King, 2005 $163,395.50 $14,500 $500 $13,383.62
President and 2004 $155,333.82 $ 2,000 -0- $10,225.38
Chief Executive Officer 2003 $150,000.00 -0- -0- $6,467.79

Patrick Cefalu, 2005 $ 90,906.21 $14,500 -0- $10,749.07
Vice President and
Chief Financial Officer (2)

(a) Reflects fees for Board meetings and Audit Committee meetings
(b) Reflects amounts contributed by Micropac Industries, Inc., under
Micropac's 401(k) profit sharing plan; unused vacation pay; and
reimbursement for medical expenses under Micropac's Family Medical
Reimbursement Plan.
================================================================================
(1) Effective May 1, 2002, the Company and Connie Wood entered into a two
(2) year employment agreement at an annual salary of $156,000. The
employment agreement was amended effective May 1, 2004 to increase
Mrs. Wood's salary to $180,000 and to extend the term for a period of
three years from said date. Mrs. Wood retired as President and CEO
effective October 12, 2005, and has remained as a full-time consultant
until December 31, 2005.
(2) Mr. Cefalu joined the Company in July 2001; however, total
compensation is not reported before fiscal year 2005, as annual salary
and bonus did not exceed $100,000.

Amounts included in other annual compensations relating to director and audit
--------------------------------------------------------------------------------
committee fees
--------------

The Board of Directors held nine (9) board meetings during the year ended
November 2004. Directors receive a fee of $500.00 for each meeting. Mrs. Wood
received fees of $4,500 and Mr. King received fees of $500 which amount is
included in the "Other Annual Compensation" column.

The Audit Committee held four (4) meetings during the year ended November 30,
2005. Members of the Audit Committee received a fee of $500.00 for each meeting.
Mrs. Wood received Audit Committee fees of $2,000 which amount is included in
the "Other Annual Compensation" column.

Amount included in all other compensation relating to employee benefit plans
----------------------------------------------------------------------------

The Company maintains a Family Medical Reimbursement Plan for the benefit of its
executive officers and their dependents. The Plan is funded through a group
insurance policy issued by an independent carrier and provides for reimbursement
of 100% of all bona fide medical and dental expenses that are not covered by
other medical insurance plans. During the fiscal year ended November 30, 2005,
Mrs. Wood received $11,875.20, Mr. King received $2,656.24 and Mr. Cefalu
received $7,863.45 which amounts are included in the "All Other Compensation"
column shown in the preceding remuneration table.

In July 1984, the Company adopted a Salary Reduction Plan pursuant to Section
401(k) of the Internal Revenue Code. The Plan's benefits are available to all
Company employees who are at least 18 years of age and have completed at least
six months of service to the Company as of the beginning of a Plan year. Plan
participants may elect to defer up to 15% of their total compensation as their
contributions, subject to the maximum allowed by the Internal Revenue code
401(k), and the Company matches their contributions up to a maximum of 6% of
their total compensation. A participant's benefits vest to the extent of 20%
after two years of eligible service and become fully vested at the end of six
years.

During the fiscal year ended November 30, 2005, the Company made contributions
to the Plan for Mrs. Wood in the amount of $11,817.83 and for Mr. King in the
amount of $10,727.38, which amounts are included in the "All Other Compensation"
column shown in the preceding remuneration table.

Employment agreements of the Company's officers provides that they may elect to
carry over any unused vacation time to subsequent periods or elect to be paid
for such unused vacation time. In 2005, Mr. Cefalu elected to be paid for all
prior unused vacation time in the amount of $2,885.62, which is included in the
"All Other Compensation" column shown in the preceding remuneration table.

On January 15, 2001, the Board of Directors adopted the Micropac Industries,
Inc. 2001 Employee Stock Option Plan. To date, no options have been granted
under the Plan.

Item 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

The information set forth in the 2006 Proxy Statement under the heading
"Principal Stockholders and Stockholdings of Management" is incorporated herein
by reference.

The following table shows the number and percentage of shares of the Company's
common stock beneficially owned (a) by each person known by the Company to own
5% or more of the outstanding common stock, (b) by each director and nominee,
and (c) by all present officers and directors as a group.

Name and Address Number of Shares Percent
of Beneficial Owner Beneficially Owned of Class(1)
------------------- ------------------ -----------

Heinz-Werner Hempel (2)(3) 1,952,577 75.7%
Hanseatische Waren-Gesellschaft
MBH & Co., KG
Am Wall 127
28195 Bremen 1 Germany

H. Kent Hearn (3) 3,500 Less than .2
1409 Briar Hollow
Garland, Texas 75043

James K. Murphey (3) -0- -
2290 One Galleria Tower
13355 Noel Road, L.B.75
Dallas, Texas 75240

Nicholas Nadolsky (3) -0- -
1322 Briar Hollow
Garland, Texas 75043

Connie Wood (3) 6,000 Less than .2%
106 Cedarview
Rockwall, Texas 75087

Mark King(3) -0- -
2905 Wyndham Lane
Richardson, Texas 75082

Patrick Cefalu -0- -
8706 Arborside
Rowlett, Texas 75089

All officers and directors 1,962,077 76.1%
as a group (7 Persons)
-----------------------

(1) Calculated on the basis of the 2,578,315 outstanding shares. There are no
options, warrants, or convertible securities outstanding.

(2) The Company and Mr. Heinz-Werner Hempel are parties to an Ancillary
Agreement entered into in March 1987. The Ancillary Agreement primarily
obligates the Company to register Mr. Hempel's stock and allows Mr. Hempel
to participate in any sale of stock by the Company.

(3) A director of the Company. Each incumbent director has been nominated for
re-election at the Annual Meeting.

Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------

The information set forth in the 2006 Proxy Statement under the heading
"Management Remuneration and Transactions" is incorporated herein by reference.

Since 1980, the Company has leased a 4,800 square-foot building from Mr.
Nadolsky which is used primarily for manufacturing. The lease originally
provided for a monthly rental of $1,900 (an amount based upon a January 1984,
independent appraisal of the building's value) and was to have expired on
January 1, 1987. Since 1987, the Company has extended the term of this lease
from time to time. The rental paid to Mr. Nadolsky pursuant to this lease was
$40,000 for the fiscal year ended November 30, 2005. In April 2004, the lease
was renewed for three (3) years at the same rental rate provided for in the
previous lease subject to increase based upon increases in the Consumer Price
Index.

Item 13. Principal Accountant Fees and Services
------------------------------------------------

The information set forth in the 2006 Proxy Statement under the heading
"Independent Public Accountants" and "Audit Fees" is incorporated herein by
reference.

KPMG LLP was selected as the independent accountants in 2002 and has been
responsible for the Company's financial audit for the fiscal years ended
November 30, 2002 through November 30, 2005.

Management anticipates that a representative from KPMG LLP will be present at
the Annual Meeting and will be given the opportunity to make a statement if he
or she desires to do so. It is also anticipated that such representative will be
available to respond to appropriate questions from stockholders.

KPMG LLP fees for professional services for the audit of the Company's financial
statements for 2005 and the review of the interim financial statements included
in the Quarterly Reports is $96,700.

In addition to the audit fees, KPMG LLP fees for tax advisory and 2005 tax
return preparation services will be $24,500.

Item 14. Exhibits and Reports on Form 8-K
------------------------------------------

(a) Exhibits

10.1 Supplier Contract - incorporated by reference to the
Registrant's 10KSB/A filed on August 23, 2005

10.2 Loan Agreement - incorporated by reference to the
Registrant's 10KSB/A filed on August 23, 2005

10.3 Employment Contract Of Chief Executive Officer -
incorporated by reference to the Registrant's 10KSB/A
filed on August 23, 2005

10.4 Employment Contract of Chief Financial Officer -
incorporated by reference to the Registrant's 10KSB/A
filed on August 23, 2005

10.5 Employment Contract of Chief Operating Officer -
incorporated by reference to the Registrant's 10KSB/A
filed on August 23, 2005

10.6 Code of Conduct for Officers - incorporated by
reference to the Registrant's 10KSB/A filed on August
23, 2005

10.7 Agreement with Mr. Nicholas Nodalsky - incorporated
by reference to the Registrant's 10KSB/A filed on
August 23, 2005

10.8 Agreement with Mr. Hempel - incorporated by reference
to the Registrant's 10KSB/A filed on November 22,
2005

10.9 Micropac Industries, Inc. 2001 Employee Stock Option
Plan -incorporated by reference to the Registrant's
Form S-8 (File No. 333-67560), filed August 16, 2001

10.10 Consent of Independent Third Party on Stock Purchase
- incorporated by reference to the Registrant's
10KSB/A filed on November 22, 2005

10.11 Employment Contract Of Chief Executive Officer

31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes- Oxley Act of 2004

31.2 Certification of Chief Accounting Officer pursuant to
Section 302 of the Sarbanes- Oxley Act of 2004

32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley act of 2004.

32.2 Certification of Chief Accounting Officer pursuant to
U. S. C. section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley act of 2004.

(b) Form 8K -

On December 29, 2004, the Board of Directors of Micropac
Industries, Inc. approved the payment of a $.12 per share
dividend to all shareholders of record on January 25, 2005.
The dividend payment was paid to shareholders on February 8,
2005.

On January 8, 2004, the Board of Directors of Micropac
Industries, Inc. approved the payment of a special dividend of
$.05 per share to all shareholders of record on January 30,
2004. The dividend payment was paid to shareholders on
February 13, 2004.

At a Board of Directors meeting held on May 11, 2004, the
Board of Directors unanimously elected Mr. Nicholas Nadolsky
as a Member and Chairman of the Board, to serve in such
positions until the next annual meeting of shareholders or
until his earlier death, resignation or removal from office.
There is no employment agreement between Mr. Nadolsky and the
Company. Since 1980, the Company has leased a 4800 square foot
building from Mr. Nadolsky, at a current annual rental of
$40,000.

Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers. Ms. Connie Wood,
Chief Executive Officer of Micropac Industries, Inc., has
retired effective October 12, 2005 after more than 36 years of
service. Ms. Wood, 66, remained with the Company on a
consulting basis through the end of the year, and will
continue to serve on the Board of Directors. The Board of
Directors elected Mr. Mark King, 51, as President and Chief
Executive Officer to succeed Mrs. Wood effective October 12,
2005. In, addition, Mr. King was elected as a director and a
member of the audit committee. Mr. King has been an Executive
Vice President and Chief Operating Officer of Micropac
Industries, Inc. since November 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

MICROPAC INDUSTRIES, INC.

By: /s/ Mark King
-----------------------------
Mark King, President
and Chief Executive Officer
(Principal Executive Officer)

By: /s/ Patrick Cefalu
-----------------------------
Patrick Cefalu, CFO and
Principal Accounting Officer

Dated: 02/08/2006

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on 02/10/2006

/s/ Connie Wood /s/ H. Kent Hearn
----------------------------- -----------------------------
Connie Wood, Director H. Kent Hearn, Director

/s/ James K. Murphey /s/ Heinz-Werner Hempel
----------------------------- -----------------------------
James K. Murphey, Director Heinz-Werner Hempel, Director

/s/ Nicholas Nadolsky /s/ Mark King
----------------------------- -----------------------------
Nicholas Nadolsky, Director Mark King, Director

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Micropac Industries, Inc.:

We have audited the accompanying balance sheets of Micropac Industries, Inc. as
of November 30, 2005 and 2004, and the related statements of income,
shareholders' equity, and cash flows for each of the years in the two-year
period ending November 30, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Micropac Industries, Inc. as of
November 30, 2005 and 2004, and the results of its operations and its cash flows
for each of the years in the two-year period ending November 30, 2005 in
conformity with U.S. generally accepted accounting principles.

KPMG LLP

Dallas, Texas,
January 27, 2006

MICROPAC INDUSTRIES, INC.
-------------------------
BALANCE SHEETS
NOVEMBER 30, 2005 AND 2004
(Dollars in thousands except share data)

ASSETS
------

2005 2004
-------- --------

CURRENT ASSETS:
Cash and cash equivalents $ 1,722 $ 1,239
Short-term investments 2,527 2,507
Receivables, net of allowance for doubtful accounts
of $89 for 2005 and $121 for 2004 3,057 2,326
Inventories
Raw materials and supplies 1,825 1,354
Work-in-process 1,718 1,346
-------- --------
Total inventories 3,543 2,700

Deferred income taxes 614 528
Prepaid expenses and other assets 76 90
-------- --------
Total current assets 11,539 9,390

PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land 80 80
Buildings 498 498
Facility improvements 796 796
Machinery and equipment 5,689 5,200
Furniture and fixtures 487 479
-------- --------
Total property, plant, and equipment 7,550 7,053
Less- accumulated depreciation (6,338) (6,091)
-------- --------
Net property, plant, and equipment 1,212 962
-------- --------

Total assets $ 12,751 $ 10,352
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
Accounts payable $ 768 $ 387
Accrued compensation 690 488
Accrued professional fees 28 11
Income taxes payable 147 306
Property taxes 54 66
Commissions payable 52 46
Deferred revenue 499 404
Other accrued liabilities 17 17
-------- --------
Total current liabilities 2,255 1,725

DEFERRED INCOME TAXES 74 72
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value, authorized 10,000,000
shares 3,078,315 issued 2,578,315 outstanding
at November 30, 2005 and November 30, 2004 308 308
Paid-in capital 885 885
Treasury stock, at cost, 500,000 shares (1,250) (1,250)
Retained earnings 10,479 8,612
-------- --------
Total shareholders' equity 10,422 8,555
-------- --------

Total liabilities and shareholders' equity $ 12,751 $ 10,352
======== ========

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.
-------------------------
STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30,
2005 AND 2004 (Dollars in
thousands except share data)

2005 2004
----------- -----------

NET SALES $ 19,030 $ 15,356

COSTS AND EXPENSES:
Cost of sales 11,874 9,976
Research and development 531 438
Selling, general, and administrative expenses 3,237 2,709
----------- -----------

Total costs and expenses 15,642 13,123
----------- -----------

OPERATING INCOME BEFORE INTEREST AND INCOME TAXES 3,388 2,233

Other income 10 --
Interest income 87 32
----------- -----------

INCOME BEFORE INCOME TAXES 3,485 2,265

PROVISION (BENEFIT) FOR INCOME TAXES:
Current 1,393 996
Deferred (84) (139)
----------- -----------

Total provision for current and deferred taxes 1,309 857
----------- -----------

NET INCOME $ 2,176 $ 1,408
=========== ===========

BASIC AND DILUTED EARNINGS PER SHARE $ .84 $ .55
=========== ===========

WEIGHTED AVERAGE NUMBER OF SHARES, basic and diluted 2,578,315 2,578,315
=========== ===========

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.
-------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 2005 AND 2004
(Dollars in thousands)

Common Paid-in Treasury Retained
Stock Capital Stock Earnings Total
-------- -------- -------- -------- --------

BALANCE, November 30, 2003 $ 308 $ 885 $ (1,250) $ 7,333 $ 7,276

Dividend (129) (129)
Net income -- -- -- 1,408 1,408
-------- -------- -------- -------- --------

BALANCE, November 30, 2004 308 885 (1,250) 8,612 8,555
-------- -------- -------- -------- --------

Dividend -- -- -- (309) (309)
Net income -- -- -- 2,176 2,176
-------- -------- -------- -------- --------

BALANCE, November 30, 2005 $ 308 $ 885 $ (1,250) $ 10,479 $ 10,422
======== ======== ======== ======== ========

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.
-------------------------
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 2005 AND 2004
(Dollars in thousands)

2005 2004
------- -------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,176 $ 1,408
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 247 222
Deferred tax benefit (84) (139)
Changes in certain current assets and liabilities-
Increase in receivables, net (731) (449)
Increase in inventories (843) (911)
Decrease (increase) in prepaid expenses and other assets 14 (19)
Increase in accounts payable 381 79
Increase in accrued compensation 202 249
(Decrease) increase in income taxes payable (159) 196
Increase in all other accrued liabilities 106 272
------- -------

Net cash provided by operating activities 1,309 908
------- -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (20) (1,695)
Additions to property, plant, and equipment (497) (182)
------- -------

Net cash used in investing activities (517) (1,877)
------- -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (309) (129)
------- -------

Net cash used in financing activities (309) (129)
------- -------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 483 (1,098)

CASH AND CASH EQUIVALENTS, beginning of year 1,239 2,337
------- -------

CASH AND CASH EQUIVALENTS, end of year $ 1,722 $ 1,239
======= =======

SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for income taxes, net of refunds received $ 1,552 $ 803
======= =======

See accompanying notes to financial statements.

MICROPAC INDUSTRIES, INC.
-------------------------
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2005 AND 2004

1. BUSINESS DESCRIPTION:
---------------------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------

Revenue Recognition
-------------------

Revenues are recorded as deliveries are made based upon contract prices. Any
losses anticipated on fixed price contracts are provided for currently. Sales
are recorded net of sales returns, allowances and discounts.

Short-Term Investments
----------------------

Short-term investments include certificates of deposits with maturities greater
than 90 days. These investments are reported at historical cost, which
approximates fair market value as of November 30, 2005 and 2004. All highly
liquid investments with maturities of 90 days or less are classified as cash
equivalents. All short-term investments are securities which the Company has the
ability and positive intent to hold to maturity. All held-to maturity securities
mature within one year.

Inventories
-----------

Inventories are stated at lower of cost or market value and include material,
labor and manufacturing overhead. All inventories are valued using the FIFO
(first-in, first-out) method of inventory valuation. The Company provides an
allowance for obsolete and overstocked inventory.

Income Taxes
------------

The Company accounts for income taxes using the asset and liability method.
Under this method the Company records deferred income taxes for the temporary
differences between the financial reporting basis and the tax basis of assets
and liabilities at enacted tax rates expected to be in effect when such amounts
are realized or settled. The resulting deferred tax liabilities and assets are
adjusted to reflect changes in tax law or rates in the period that includes the
enactment date.

Property, Plant, and Equipment
------------------------------

Property, plant, and equipment are carried at cost, and depreciation is provided
using the straight-line method at rates based upon the following estimated
useful lives (in years) of the assets:

Buildings................................................................15
Facility improvements..................................................8-15
Machinery and equipment................................................5-10
Furniture and fixtures..................................................5-8

The Company assesses long-lived assets for impairment under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. When events or
circumstances indicate that an asset may be impaired, an assessment is
performed. The estimated future undiscounted cash flows associated with the
asset are compared to the asset's net book value to determine if a write down to
market value or discounted cash flow value is required. The Company adopted SFAS
144 on December 1, 2004. The adoption of SFAS 144 did not affect the Company's
financial statements.

Repairs and maintenance are charged against income when incurred. Improvements,
which extend the useful life of property, plant, and equipment are capitalized.

Research and Development Costs
------------------------------

Costs for the design and development of new products are expensed as incurred.

Comprehensive Income
--------------------

Comprehensive income includes net income and other comprehensive income which is
generally comprised of changes in the fair value of available-for-sale
marketable securities, foreign currency translation adjustments and adjustments
to recognise additional minimum pension liabilities. For each period presented
in the accompanying statement of income, comprehensive income and net income are
the same amount.

Basic and Diluted Earnings Per Share
------------------------------------

Basic and diluted earnings per share are computed based upon the weighted
average number of shares outstanding during the year. Diluted earnings per share
gives effect to all dilutive potential common shares. During 2005 and 2004, the
Company had no dilutive potential common stock.

Use of Estimates
----------------

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

3. NOTES PAYABLE TO BANKS:
-----------------------

The Company currently has an existing line of credit with a Texas banking
institution. The line of credit agreement provides the Company with up to
$3,000,000 for normal operation of the Company. The interest rate on any
borrowings against this credit agreement is equal to the prime rate less 1/4%.
The line of credit requires the Company to maintain certain financial ratios,
including quick ratio of at least 1:1, maintain a tangible net worth of
$6,250,000 plus 75% of future net income, and maintain a total
liabilities-to-tangible-net-worth of less than 1.25:1. The Company is in
compliance with these covenants. The Company has not, to date, used any of the
available line of credit.

4. RELATED PARTIES:
----------------

The Company leases a building from the Company's Chairman of the Board of
Directors. A lease was signed on July 1, 1999, for a term of five (5) years and
renewed in April 2004 for three (3) years under similar terms and conditions as
the prior lease. Amounts paid under the lease agreement approximated $40,000 in
2005 and $39,000 in 2004.

Glast, Phillips & Murray, P.C. serves as the Company's legal counsel. Mr. James
K. Murphey, a director and member of the Company's audit committee, is a member
of Glast, Phillips & Murray, P.C.

Effective May 13, 2003, the Company's Board of Directors approved the formation
of an audit committee composed of the members of the Board. It is possible that
the members of the audit committee may resign from the committee if future
Securities and Exchange Commission rules establish a criteria that such
individuals must be independent, due to their relationships with the Company.
The Board of Directors held nine (9) board meetings during the year ended
November 30, 2005. Directors receive a fee of $500.00 for each meeting. The
Audit Committee held four (4) meetings during the year ended November 30, 2005.
Members of the Audit Committee received a fee of $500.00 for each meeting.

5. PRODUCT WARRANTIES:
------------------

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Currently, the only applicable item of
FIN 45 relates to the impact of paragraph 14, which refers to product
warranties.

Because the Company does not have extended warranties, the exposure is limited
to product returns for defective products. In general, the Company warrants that
the products, when delivered, will be free from defects in material workmanship
under normal use and service. The obligations are limited to replacing,
repairing or giving credit for, at the option of the Company, any products that
are returned within one year after the date of shipment.

The Company reserves for potential warranty expense based on historical warranty
experience claims. While management considers the process to be adequate to
effectively quantify its exposure to warranty claims based on historical
performance, changes in warranty claims on a specific or cumulative basis may
require management to adjust its reserve for potential warranty costs.

Warranty expense to repair or replace products in 2005 and 2004, was $38,600 and
$33,600 respectively.

6. LEASE COMMITMENTS:
-----------------

Rent expenses for the years ended November 30, 2005 and 2004, was approximately
$44,000 and $45,000 respectively per year. The Company's future minimum lease
payments under non-cancellable operating leases (including the related party
lease described in note 4) for office and manufacturing space with remaining
terms in excess of one year are approximately:

2006 $ 40,000
2007 $ 20,000
---------
Total $ 60,000
---------

7. EMPLOYEE BENEFITS:
------------------

The Company sponsors an Employees' Profit Sharing Plan and Trust (the "Plan").
Pursuant to section 401(k) of the Internal Revenue Code, the Plan is available
to substantially all employees of the Company. Employee contributions to the
Plan are matched by the Company at amounts up to 6% of the participant's salary.
Contributions made by the Company were approximately $178,000 in 2005 and
$131,000 in 2004. Employees become vested in Company contributions at 20% after
two years, 40% after three years, 60% after four years, 80% after five years and
100% after six years. If the employee leaves the Company prior to being fully
vested, the unvested portion of the Company's contributions are forfeited and
such forfeitures are used to lower future Company contributions. The Company
does not offer other post retirement benefits to its employees at this time.

8. NEW ACCOUNTING STANDARDS
------------------------

In December 2004, the FASB issued SFAS No. 123R, "Share Based Payment". This
Statement is a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation". This Statement supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related implementation guidance. This
Statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. The Statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This Statement does not
change the accounting guidance for share-based payment transactions with parties
other than employees provided in Statement 123 as originally issued and EITF
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services." This Statement does not address the accounting for employee share
ownership plans, which are subject to AICPA Statement of Position 93-6,
"Employers' Accounting for Employee Stock Ownership Plans". The Securities and
Exchange Commission has delayed the adoption requirement of SFAS No. 123R until
January 1, 2006. We expect to adopt SFAS No. 123R as required. We anticipate
that adoption of this Standard may have a material effect on the financial
statements if the Company decided to utilize stock options to compensate
employees and members of the Board of Directors.

9. INCOME TAXES:
------------
The income tax provision consisted of the following for the years ended November
30:

2005 2004
----------- -----------
Current Provision:
Federal $ 1,200,000 $ 854,000
State 193,000 142,000
----------- -----------
1,393,000 996,000
Deferred Benefit:
Federal (84,000) (139,000)
----------- -----------

Total $ 1,309,000 $ 857,000
=========== ===========

The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:

2005 2004
----------- -----------
Tax at 34% statutory rate $ 1,185,000 $ 770,000
State income taxes, net of federal benefit 119,000 82,000
Permanent differences and other 5,000 5,000
----------- -----------

Income tax provision $ 1,309,000 $ 857,000
=========== ===========

The components of deferred tax assets and liabilities were as follows:

November 30, 2005 November 30, 2004
----------------- -----------------

Current Deferred Taxes -
Allowance for doubtful accounts $ 33,000 $ 45,000
Inventory 319,000 280,000
Accrued liabilities and other 262,000 203,000
----------------- -----------------
Net current deferred tax asset $ 614,000 $ 528,000
----------------- -----------------

Non-current Deferred Taxes Liability
Depreciation and other $ 74,000 $ 72,000
----------------- -----------------

Net deferred taxes $ 540,000 $ 456,000
================= =================

10. SIGNIFICANT CUSTOMER INFORMATION:
---------------------------------

The Company's primary line of business relates to the design, manufacture, and
sale of hybrid microcircuits and optoelectronic components and assemblies. Sales
result primarily from subcontracts with customers for ultimate production and
delivery to the United States government. Sales to primary contractors for
defense and space related contracts accounted for 70% of total sales in 2005 and
64% of total sales in 2004. During 2005 one customer, Newport, accounted for 15%
of the Company's sales, compared to two customers, Advanced Energy and
Celestica, that accounted for 9% and 10% of the Company's sales for the year
ended November 30, 2004. During 2005, Advanced Energy and Celestica accounted
for 2% and 2% of the Company's total sales. Advanced Energy has been a major
customer since 1996 and averaged 15% of the Company's sales during this 10 year
period from a high of 20% to a low of 2%.

11. SHAREHOLDERS' EQUITY:
--------------------

On January 8, 2004, the Board of Directors of Micropac Industries, Inc. approved
the payment of a special dividend of $0.05 per share for shareholders of record
as of January 30, 2004. This dividend was paid to the Company's shareholders on
February 13, 2004.

On March 1, 2001, the Company's shareholders approved the 2001 Employee Stock
Option Plan (the "Stock Plan"). As of November 30, 2005, there were 500,000
options available to be granted; however, no options had been granted at
year-end.

12. SUBSEQUENT EVENTS
-----------------

On December 22, 2005, the Board of Directors of Micropac Industries, Inc.
approved the payment of a $.15 per share dividend to all shareholders of record
on February 3, 2006. The dividend payment will be paid to shareholders on or
about February 10, 2006.

DIRECTORS AND OFFICERS
----------------------
NOVEMBER 30, 2005

NICHOLAS NADOLSKY
Chairman of the Board
Micropac Industries, Inc

CONNIE WOOD
Retired Chief Executive Officer
Micropac Industries, Inc.

HEINZ-WERNER HEMPEL
Chief Operating Officer
Hanseatishe Waren Handelsgesellschaft MBH & Co. KG, Bremen, Germany

H. KENT HEARN
Stockbroker
Milkie-Ferguson, Dallas, Tx.

JAMES K. MURPHEY
Corporate Attorney
Glast, Phillips and Murray, Dallas, Tx.

MARK KING
Chief Executive Officer
Micropac Industries, Inc.

PATRICK CEFALU
Chief Financial Officer
Micropac Industries, Inc.

LEGAL COUNSEL TRANSFER AGENT & REGISTRAR
Glast, Phillips and Murray Securities Transfer
Dallas, Tx Frisco, Texas