**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

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**FORM 10-Q**

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**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**For thequarter ended September 30, 2006**

**Commission File Number 000-02324**

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**AEROFLEX INCORPORATED**

(Exact name of Registrant as specified in its Charter)

| **DELAWARE**                              |   | **11-1974412**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction             |   | (I.R.S. Employer     |
| of incorporation  or organization)        |   | Identification  No.) |
|                                      |   |                 |
| **35  South Service Road**                |   |                 |
| **P.O.  Box 6022**                        |   |                 |
| **Plainview,  N.Y.**                      |   | **11803-0622**       |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

**(516) 694-6700**

(Registrant’s telephone number, including area code)

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Indicateby check mark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

| Yes  x |   | No  o |
|------------------|--------|-----------------|

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer      x | Accelerated filer      o | Non-accelerated filer      o |
|--------------------------------------------------------------|--------------------------------------------------------|------------------------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

| Yes  o |   | No  x |
|------------------|--------|-----------------|

 

Indicatethe number of shares outstanding of each of the issuer’s classes of common stockas of the latest practicable date.
| **November 6, 2006** | ** ** | **73,531,190**     | ** ** |
|----------------------|------------|--------------------|------------|
| (Date)               |       | (Number of Shares) |       |

 

 

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**AEROFLEXINCORPORATED**

**AND SUBSIDIARIES**

**INDEX**
|                | **PART I:  FINANCIAL INFORMATION**                    |
|----------------|-----------------------------------------------------------------|
| ** **     | ** **                                                      |
| Item 1 -       | UNAUDITED  CONDENSED CONSOLIDATED BALANCE SHEETS                |
|           | September 30, 2006 and June  30, 2006                           |
|           |                                                            |
|           | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS        |
|           | Three Months Ended September  30, 2006 and 2005                 |
|           |                                                            |
|           | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      |
|           | Three Months Ended September  30, 2006 and 2005                 |
|           |                                                            |
|           | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS |
|           |                                                            |
| Item 2 -       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL         |
|           | CONDITION AND  RESULTS OF OPERATIONS                            |
|           | Three Months  Ended September 30, 2006 and 2005                 |
|           |                                                            |
| Item 3 -       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     |
|           |                                                            |
| Item 4 -       | CONTROLS AND  PROCEDURES                                        |
|           |                                                            |
| ** **     | **PART II:  OTHER  INFORMATION**                      |
| ** **     | ** **                                                      |
| Item 1 -       | LEGAL PROCEEDINGS                                               |
|           |                                                            |
| Item 1A-       | RISK  FACTORS                                                   |
|           |                                                            |
| Item 2 -       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    |
|           |                                                            |
| Item 3 -       | DEFAULTS UPON  SENIOR SECURITIES                                |
|           |                                                            |
| Item 4 -       | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS            |
|           |                                                            |
| Item 5 -       | OTHER INFORMATION                                               |
|           |                                                            |
| Item 6 -       | EXHIBITS                                                        |
|           |                                                            |
| SIGNATURES     |
|           |
| EXHIBIT  INDEX |
|           |                                                            |
| CERTIFICATIONS |
|                |                                                                 |  |  |

2

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**Aeroflex Incorporated and Subsidiaries**

**Unaudited Condensed ConsolidatedBalance Sheets**

(In thousands)
| ** **                                                                      | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **2006**               | ** ** | **2006**          | ** ** |
| Assets                                                                          |       |                   |       |              |       |
|                                                                            |       |                   |       |              |       |
| Current assets:                                                                 |       |                   |       |              |       |
| Cash and cash  equivalents                                                      |       | $                      | 14,741     |              | $          | 10,387 |   |
| Marketable  securities                                                          |       | 16,271                 |       | 28,332            |       |
| Accounts  receivable, less allowance for doubtful accounts of $1,386 and $1,350 |       | 117,127                |       | 120,296           |       |
| Inventories                                                                     |       | 137,366                |       | 133,420           |       |
| Deferred income  taxes                                                          |       | 24,770                 |       | 24,732            |       |
| Prepaid expenses  and other current assets                                      |       | 10,008                 |       | 11,187            |       |
| Total current  assets                                                           |       | 320,283                |       | 328,354           |       |
|                                                                            |       |                   |       |              |       |
| Property, plant and  equipment, net                                             |       | 77,733                 |       | 77,940            |       |
| Other assets                                                                    |       | 15,968                 |       | 14,276            |       |
| Intangible assets with  definite lives, net                                     |       | 51,330                 |       | 54,215            |       |
| Goodwill                                                                        |       | 173,300                |       | 163,237           |       |
|                                                                            |       |                   |       |              |       |
| Total assets                                                                    |       | $                      | 638,614    |              | $          | 638,022 |   |

 

See notes to unauditedcondensed consolidated financial statements

3

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**Aeroflex Incorporated and Subsidiaries**

**Unaudited Condensed ConsolidatedBalance Sheet (continued)**

(Inthousands, except per share data)
| ** **                                                                                                                                                                | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2006**               | ** ** | **2006**          | ** ** |
| Liabilities and  Stockholders’ Equity                                                                                                                                |       |                   |       |              |       |
|                                                                                                                                                                      |       |                   |       |              |       |
| Current liabilities:                                                                                                                                                      |       |                   |       |              |       |
| Current portion  of long-term debt                                                                                                                                        |       | $                      | 607        |              | $          | 607 |   |
| Accounts payable                                                                                                                                                          |       | 34,621                 |       | 37,832            |       |
| Advance payments  by customers                                                                                                                                            |       | 21,472                 |       | 21,128            |       |
| Income taxes  payable                                                                                                                                                     |       | 9,281                  |       | 9,162             |       |
| Accrued payroll  expenses                                                                                                                                                 |       | 19,268                 |       | 17,440            |       |
| Accrued expenses  and other current liabilities                                                                                                                           |       | 42,826                 |       | 33,046            |       |
| Total current  liabilities                                                                                                                                                |       | 128,075                |       | 119,215           |       |
|                                                                                                                                                                      |       |                   |       |              |       |
| Long-term debt                                                                                                                                                            |       | 3,488                  |       | 3,558             |       |
| Deferred income taxes                                                                                                                                                     |       | 3,340                  |       | 4,631             |       |
| Other long-term  liabilities                                                                                                                                              |       | 22,991                 |       | 22,948            |       |
| Total  liabilities                                                                                                                                                        |       | 157,894                |       | 150,352           |       |
|                                                                                                                                                                      |       |                   |       |              |       |
| Stockholders’ equity:                                                                                                                                                |       |                   |       |              |       |
| Preferred stock,  par value $.10 per share; authorized 1,000 shares Series A Junior Participating  Preferred Stock, par value $.10 per share, authorized 110; none issued |       | —                 |       | —            |       |
| Common stock,  par value $.10 per share; authorized 110,000 shares; issued and outstanding  73,523 and 75,270 shares                                                      |       | 7,352                  |       | 7,527             |       |
| Additional  paid-in capital                                                                                                                                               |       | 368,756                |       | 384,870           |       |
| Accumulated  other comprehensive income                                                                                                                                   |       | 15,648                 |       | 13,468            |       |
| Retained  earnings                                                                                                                                                        |       | 88,964                 |       | 81,805            |       |
| Total  stockholders’ equity                                                                                                                                          |       | 480,720                |       | 487,670           |       |
|                                                                                                                                                                      |       |                   |       |              |       |
| Total liabilities and  stockholders’ equity                                                                                                                          |       | $                      | 638,614    |              | $          | 638,022 |   |

 

See notes tounaudited condensed consolidated financial statements

4

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**Aeroflex Incorporatedand Subsidiaries**

**Unaudited CondensedConsolidated Statements of Earnings**

(In thousands, except per share data)
| ** **                                             | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **September 30,**           | ** ** |
| ** **                                             | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net sales                                              |       | $                                | 136,835    |   | $ | 125,648 |   |
| Cost of sales                                          |       | 73,081                           |       | 66,722 |   |
| Gross profit                                           |       | 63,754                           |       | 58,926 |   |
|                                                   |       |                             |       |   |   |
| Selling, general and  administrative costs             |       | 31,400                           |       | 30,251 |   |
| Research and  development costs                        |       | 17,748                           |       | 17,964 |   |
| Amortization of  acquired intangibles                  |       | 3,237                            |       | 3,457 |   |
|                                                   |       | 52,385                           |       | 51,672 |   |
| Operating income                                       |       | 11,369                           |       | 7,254 |   |
|                                                   |       |                             |       |   |   |
| Other income (expense)                                 |       |                             |       |   |   |
| Interest expense                                       |       | (151                             | )          | (160 | ) |
| Other income  (expense)                                |       | (31                              | )          | 91 |   |
| Total other  income (expense)                          |       | (182                             | )          | (69 | ) |
|                                                   |       |                             |       |   |   |
| Income before income  taxes                            |       | 11,187                           |       | 7,185 |   |
| Provision for income  taxes                            |       | 4,028                            |       | 2,658 |   |
| Net income                                             |       | $                                | 7,159      |   | $ | 4,527 |   |
|                                                   |       |                             |       |   |   |
| Net income per common  share:                          |       |                             |       |   |   |
| Basic                                                  |       | $                                | 0.10       |   | $ | 0.06 |   |
| Diluted                                                |       | $                                | 0.09       |   | $ | 0.06 |   |
|                                                   |       |                             |       |   |   |
| Weighted average number  of common shares outstanding: |       |                             |       |   |   |
| Basic                                                  |       | 74,736                           |       | 74,758 |   |
| Diluted                                                |       | 75,984                           |       | 75,699 |   |

 

See notes tounaudited condensed consolidated financial statements

5

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**AeroflexIncorporatedand Subsidiaries**

**Unaudited Condensed Consolidated Statements of Cash Flows**

(In thousands)
| ** **                                                                                   | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **September 30,**           | ** ** |
| ** **                                                                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                       |       |                             |       |   |   |
| Net income                                                                                   |       | $                                | 7,159      |   | $ | 4,527 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                               |       | 7,611                            |       | 7,624 |   |
| Deferred income  taxes                                                                       |       | (1,443                           | )          | (2,308 | ) |
| Non - cash share  based compensation                                                         |       | 940                              |       | 2,014 |   |
| Excess tax  benefits from share based compensation arrangements                              |       | (1                               | )          | (139 | ) |
| Other, net                                                                                   |       | 98                               |       | 26 |   |
| Change in  operating assets and liabilities, net of effects from purchases of  businesses:   |       |                             |       |   |   |
| Decrease (increase)  in accounts receivable                                                  |       | 2,770                            |       | 5,485 |   |
| Decrease  (increase) in inventories                                                          |       | (3,543                           | )          | (3,705 | ) |
| Decrease  (increase) in prepaid expenses and other assets                                    |       | (458                             | )          | (1,308 | ) |
| Increase  (decrease) in accounts payable, accrued expenses and other liabilities             |       | (446                             | )          | (4,590 | ) |
| Net cash  provided by operating activities                                                   |       | 12,687                           |       | 7,626 |   |
|                                                                                         |       |                             |       |   |   |
| Cash flows from  investing activities:                                                       |       |                             |       |   |   |
| Capital  expenditures                                                                        |       | (3,872                           | )          | (3,511 | ) |
| Purchase of  marketable securities                                                           |       | (193,183                         | )          | (7,952 | ) |
| Proceeds from  sale of marketable securities                                                 |       | 205,244                          |       | 7,952 |   |
| Other, net                                                                                   |       | (135                             | )          | 21 |   |
| Net cash  provided by (used in) investing activities                                         |       | 8,054                            |       | (3,490 | ) |
|                                                                                         |       |                             |       |   |   |
| Cash flows from  financing activities:                                                       |       |                             |       |   |   |
| Purchase and  retirement of treasury stock                                                   |       | (17,233                          | )          | (45 | ) |
| Debt repayments                                                                              |       | (70                              | )          | (101 | ) |
| Excess tax  benefits from share based compensation arrangements                              |       | 1                                |       | 139 |   |
| Proceeds from  the exercise of stock options                                                 |       | 63                               |       | 286 |   |
| Amounts paid for  withholding taxes on stock option exercises                                |       | (7                               | )          | (127 | ) |
| Withholding  taxes collected for stock option exercises                                      |       | 7                                |       | 127 |   |
| Net cash  provided by (used in) financing activities                                         |       | (17,239                          | )          | 279 |   |
| Effect of  exchange rate changes on cash and cash equivalents                                |       | 852                              |       | 104 |   |
|                                                                                         |       |                             |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       | 4,354                            |       | 4,519 |   |
| Cash and cash  equivalents at beginning of period                                            |       | 10,387                           |       | 12,974 |   |
| Cash and cash  equivalents at end of period                                                  |       | $                                | 14,741     |   | $ | 17,493 |   |

 

See notes tounaudited condensed consolidated financial statements

6

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**AEROFLEXINCORPORATED**

**AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**1.****            ****Basis of Presentation**

The condensed consolidatedfinancial statements of Aeroflex Incorporated and Subsidiaries (the “Company”)presented herein have been prepared by the Company and are unaudited.  In the opinion of management, all adjustments(which include only normal recurring adjustments) necessary to present fairlyour financial position, results of operations and cash flows as of and for allperiods presented have been made.  Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”) have been omitted. We suggest that you read these condensed consolidated financialstatements in conjunction with the audited financial statements and notesthereto included in the Company’s June 30, 2006 annual report to shareholders.

Results of operations for the three monthperiods are not necessarily indicative of results of operations for futureinterim periods or for the full fiscal year ended June 30, 2007.

The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reportedperiod.  Actual results could differ fromthose estimates.

**Revenue Recognition**

We recognize revenue whenpersuasive evidence of an arrangement exists, the selling price is fixed ordeterminable, and collectibility of the resulting receivable is reasonablyassured.

For arrangements other thancertain long-term contracts, revenue (including shipping and handling fees) isrecognized when products are shipped and title has passed to the customer.  If title does not pass until the productreaches the customer’s delivery site, then recognition of the revenue isdeferred until that time.  Certain of oursales are to distributors which have a right to return some portion of productwithin eighteen months of sale.  Werecognize revenue on these sales at the time of shipment to the distributor asthe returns under these arrangements have been insignificant and can be reasonablyestimated.  An estimate of such returnsis recorded at the time sales are recognized.

Long-term contracts areaccounted for in accordance with SOP 81-1 “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts.”  We determine estimated contract profit ratesand use the percentage-of-completion method to recognize revenues andassociated costs as work progresses on certain long-term contracts.  We measure the extent of progress towardcompletion generally based upon one of the following methods (based upon anassessment of which method most closely aligns to the underlying earningsprocess): (i) the units-of-delivery method, (ii) the cost-to-cost method, usingthe ratio of contract costs incurred as a percentage of total estimated costsat contract completion (based upon engineering and production estimates), or(iii) the achievement of contractual milestones.  Provisions for anticipated losses orrevisions in estimated profits on contracts-in-process are recorded in the periodin which such anticipated losses or revisions become evident.

Revenue from sales ofproducts where software is other than incidental to their performance,including related software support and maintenance contracts is recognized inaccordance with SOP-97-2, “Software Revenue Recognition.” Accordingly, revenuefor software is recognized when the software is delivered, assuming all of theabove criteria for revenue recognition are met. When a customer purchases software together with post contract support,we allocate a portion of the fee to post contract support for its fair valuebased on the contractual renewal rate.  Postcontract support fees are deferred and recognized as revenue ratably over theterm of the related contract.

7

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**Financial Instruments andDerivatives**

Foreign currency contractsare used to protect us from fluctuations in exchange rates.  We entered into foreign currency contracts,which are not designated as hedges, and the change in fair value is included inincome currently, within other income (expense).  As of September 30, 2006, we had $1.9 millionof notional value foreign currency forward contracts maturing through December2006.  Notional amounts do not quantifyrisk or represent assets or liabilities of the Company, but are used in thecalculation of cash settlements under the contracts.  The fair value of these contracts atSeptember 30, 2006 was immaterial.

Our interest rate swapderivatives are designated as cash flow hedges. As such, they are recorded on the balance sheet as assets or liabilitiesat their fair value, with changes in the fair value of such derivativesrecorded as a component of other comprehensive income.

**Marketable Securities**

Marketable securities areclassified as available-for-sale and are recorded at fair market value withunrealized gains and losses, net of taxes, reported as a separate component ofshareholders’ equity.  Realized gains andlosses and declines in market value judged to be other than temporary, of whichthere were none for the three months ended September 30, 2006 and 2005, areincluded in other income.  Interest anddividends are also included in other income. Marketable securities consist solely of auction rate bonds whose carryingamount equaled their fair value as of September 30, 2006.

**Recently Issued AccountingStandards Not Yet Adopted**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes-aninterpretation of FASB Statement No. 109”  (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes byprescribing a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  Theinterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosure.  FIN 48 becomes effective for us in our fiscalyear ending June 30, 2008.  We are in theprocess of evaluating the impact, if any, FIN 48 will have on our consolidatedfinancial statements.

InSeptember 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”)No. 157, “Fair Value Measurements” (“SFAS No. 157”) to clarify the definitionof fair value, establish a framework for measuring fair value in GAAP andexpand the disclosures on fair value measurements.  SFAS No. 157 defines fair value as the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date (anexit price). SFAS No. 157 also stipulates that, as a market-based measurement,fair value measurement should be determined based on the assumptions thatmarket participants would use in pricing the asset or liability, andestablishes a fair value hierarchy that distinguishes between (a) marketparticipant assumptions developed based on market data obtained from sourcesindependent of the reporting entity (observable inputs) and (b) the reportingentity’s own assumptions about market participant assumptions developed basedon the best information available in the circumstances (unobservableinputs).  SFAS No. 157 applies underother accounting pronouncements that require or permit fair value measurementsand does not require any new fair value measurements.  SFAS No. 157 becomes effective for us in ourfiscal year ending June 30, 2009.  We arecurrently evaluating the impact, if any, of the provisions of SFAS No. 157 onour consolidated financial statements.

8

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InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Post Retirement Plans,” (“SFAS No. 158”)which requires the recognition of a plan’s funded status as an asset orliability in the statement of financial position.  It requires that the plan’s assets and itsobligations that determine its funded status be measured as of the end of theemployer’s fiscal year. The requirement to recognize the funded status and thedisclosure requirements are effective as of the end of our fiscal year endingJune 30, 2007 and the requirement to measure the funded status at the end ofthe fiscal year is effective as of June 30, 2009.  We are currently evaluating the impact of theprovisions of SFAS No. 158 on our consolidated financial statements.

InSeptember 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB No. 108”) to provide guidance on the considerationof the effects of prior year misstatements in quantifying current yearmisstatements for the purpose of determining whether the current year’sfinancial statements are materially misstated. Under SAB No. 108, companies should evaluate a misstatement based on itsimpact on the current year income statement, as well as the effect of thecumulative misstatement on the current year’s ending balance sheet.  SAB No. 108 will become effective for us inour fiscal year ending June 30, 2007.  Weare currently evaluating the impact, if any, of the provisions of SAB No. 108on our consolidated financial statements.

In March 2006, the EmergingIssues Task Force (“EITF”) issued EITF Issue 06-3,“How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That is, Gross versus Net Presentation).”  A consensus was reached that entities mayadopt a policy of presenting sales taxes and other similar taxes in the incomestatement on either a gross or net basis. If taxes are significant, an entity should disclose its policy ofpresenting taxes and the amounts of taxes. The guidance is effective for periods beginning after December 15,2006.  We present sales net of salestaxes.  This issue will not impact themethod for recording these sales taxes in our consolidated financialstatements.

**2.****            ****Acquisition of Businesses andIntangible Assets**

On July 31, 2003, we acquired the RacalInstruments Wireless Solutions Group (“RIWS”) for cash of $38 million and a deferredpayment of up to $16.5 million in either cash or Aeroflex common stock, at ouroption, depending on RIWS achieving certain performance goals for the yearending July 31, 2004. In October 2006, a final determination was made requiringus to pay $9.2 million, which we paid in cash. We did not include this contingent consideration in any previouslyissued balance sheet as the payment of this consideration was not considered tobe certain beyond a reasonable doubt.  Asof September 30, 2006, we have accrued this liability and increased goodwill.

**Intangible Assets with DefiniteLives**

The components of amortizable intangibleassets are as follows:
|                              | ** ** | **September 30, 2006** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **(In thousands)**          | ** ** |
| ** **                   | ** ** | **Gross Carrying**          | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **                   | ** ** | **Amount**                       | ** ** | **Amortization** | ** ** | **Value** | ** ** |   |
|                         |       |                             |       |   |   |   |   |
| Existing technology          |       | $                                | 84,015     |   | $ | 36,323 |   | $ | 47,692 |   |
| Tradenames                   |       | 2,331                            |       | 2,089 |   | 242 |   |
| Customer related intangibles |       | 6,348                            |       | 2,952 |   | 3,396 |   |
| Total                        |       | $                                | 92,694     |   | $ | 41,364 |   | $ | 51,330 |   |
|                              |            |                                  |            |  |  |  |  |  |  |  |  |  |

9

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The aggregate amortization expense for amortizedintangible assets was $3.2 million and $3.5 million for the three months endedSeptember 30, 2006 and 2005, respectively.

The estimated aggregate amortization expensefor each of the twelve month periods ending September 30, is as follows:
|        | ** ** | **(In thousands)** | ** ** |
|--------|------------|-------------------------|------------|
|   |       |                    |       |
| 2007   |       | $                       | 12,419     |   |
| 2008   |       | 11,020                  |       |
| 2009   |       | 9,049                   |       |
| 2010   |       | 6,743                   |       |
| 2011   |       | 3,234                   |       |
|        |            |                         |            |  |

 

**Goodwill**

The carrying amount of goodwill is as follows:
|                                    | ** ** | **Balance**                | ** ** | ** **              | ** ** | **Effect of** | ** ** | **Balance**                      | ** ** |
|------------------------------------|------------|----------------------------|------------|-------------------------|------------|--------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **as of**             | ** ** | **Adjustment**          | ** ** | **Foreign**        | ** ** | **as of**                   | ** ** |
| ** **                         | ** ** | **July 1, 2006** | ** ** | **(Note a)**       | ** ** | **Currency**       | ** ** | **September 30, 2006** | ** ** |
| ** **                         | ** ** | ** **                 | ** ** | **(In thousands)** | ** ** | ** **         | ** ** |
|                               |       |                       |       |                    |       |               |       |                             |       |
| Microelectronic Solutions  segment |       | $                          | 46,688     |                    | $          | —             |       | $                                | —     |   | $ | 46,688 |   |
| Test Solutions segment             |       | 116,549                    |       | 9,309                   |       | 754                |       | 126,612                          |       |
| Total                              |       | $                          | 163,237    |                    | $          | 9,309              |       | $                                | 754        |   | $ | 173,300 |   |

 

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Notea -        This adjustment togoodwill is for the accrual of the final determination of the deferred payment dueon the RIWS acquisition and related legal fees. The payment was made in October2006.

**3.****            ****Restructuring Charges**

In fiscal 2006, we initiatedsteps to consolidate our three Test Solutions businesses in the UnitedKingdom.  Pursuant to the plan, which isexpected to be completed in the first half of fiscal 2007, our manufacturingoperations were moved into one facility and we created a shared-servicesenvironment for all finance and administrative functions.  In connection with this plan, approximately40 employees have been terminated and certain contract positions will beeliminated.  In fiscal 2006, we recordedcharges of $3.2 million primarily for workforce reductions in alldepartments.  In the first quarter offiscal 2007, we recorded an additional charge of $100,000 for workforcereductions.  As of September 30, 2006,approximately $888,000 remains to be paid and is included in accruedliabilities.  The workforce restructuringcharges were allocated primarily to selling, general and administrative costs.

10

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The following table setsforth the charges and payments related to the restructuring reserve, which isincluded in accrued expenses and other current liabilities in the accompanyingbalance sheet, for the period ended September 30, 2006:
|                      | ** ** | ** **                    | ** ** | ** **                                                         | ** ** | ** **   | ** ** | ** **   | ** ** | **Balance**            | ** ** |
|----------------------|------------|-------------------------------|------------|--------------------------------------------------------------------|------------|--------------|------------|--------------|------------|------------------------|------------|
| ** **           | ** ** | **Balance July 1,** | ** ** | ** **                                                         | ** ** | ** **   | ** ** | ** **   | ** ** | **September 30,** | ** ** |
| ** **           | ** ** | **2006**                      | ** ** | **Three Months Ended September 30, 2006** | ** ** | **2006**     | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **(In thousands)**                                            | ** ** | ** **   | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **Net Addition**                                              | ** ** | ** **   | ** ** | ** **   | ** ** | ** **             | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **to**                                                             | ** ** | ** **   | ** ** | **Foreign**  | ** ** | ** **             | ** ** |
| ** **           | ** ** | **Restructuring**             | ** ** | **Restructuring**                                                  | ** ** | **Cash**     | ** ** | **Currency** | ** ** | **Restructuring**      | ** ** |
| ** **           | ** ** | **Reserve**                   | ** ** | **Reserve**                                                        | ** ** | **Payments** | ** ** | **Impact**   | ** ** | **Reserve**            | ** ** |
|                 |       |                          |       |                                                               |       |         |       |         |       |                   |       |
| Work force reduction |       | $                             | 1,091      |                                                               | $          | 100          |       | $            | (317       | )                      | $          | 14 |   | $ | 888 |   |
|                 |       |                          |       |                                                               |       |         |       |         |       |                   |       |
| Other                |       | 100                           |       | —                                                             |       | —       |       | —       |       | 100                    |       |
|                 |       |                          |       |                                                               |       |         |       |         |       |                   |       |
| Total                |       | $                             | 1,191      |                                                               | $          | 100          |       | $            | (317       | )                      | $          | 14 |   | $ | 988 |   |

 

**4.****            ****Earnings Per Share**

Theconsolidated statements of earnings present basic and diluted earnings pershare.  Basic earnings per share isdetermined by dividing income available to common stockholders by the weightedaverage number of common shares outstanding for the period.  Diluted earnings per share considers thepotential effect of dilution on basic earnings per share assuming potentiallydilutive securities that meet certain criteria, such as stock options, wereoutstanding since issuance.  The treasurystock method is used to determine the dilutive effect of potentially dilutivesecurities.

The following table reconciles basic shares outstanding to dilutedshares outstanding:
|                                        | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **September 30,**           | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(In thousands)**          | ** ** |
|                                   |       |                             |       |   |   |
| Basic Shares  Outstanding              |       | 74,736                           |       | 74,758 |   |
| Add: Effect of  dilutive stock options |       | 1,248                            |       | 941 |   |
| Diluted Shares  Outstanding            |       | 75,984                           |       | 75,699 |   |

 

For the three months endedSeptember 30, 2006, options to purchase 8.0 million shares at exercise pricesranging between $8.55 and $34.41 per share were not included in the computationof diluted EPS as their effect would have been anti-dilutive. For the threemonths ended September 30, 2005, options to purchase 10.6 million shares atexercise prices ranging between $8.10 and $34.41 per share were not included inthe computation of diluted EPS as their effect would have been anti-dilutive.

11

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**5.****            ****Comprehensive Income**

The components of comprehensive income are asfollows:
|                                                                                                           | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                | ** ** | **September 30,**           | ** ** |
| ** **                                                                                                | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                                                                                | ** ** | **(In thousands)**          | ** ** |
|                                                                                                      |       |                             |       |   |   |
| Net income                                                                                                |       | $                                | 7,159      |   | $ | 4,527 |   |
|                                                                                                      |       |                             |       |   |   |
| Minimum pension  liability adjustment, net of tax provision (benefit) of $0 and $(16)                     |       | —                           |       | 16 |   |
|                                                                                                      |       |                             |       |   |   |
| Unrealized gain  (loss) on interest rate swap agreements, net of tax provision (benefit) of  $(3) and $15 |       | (6                               | )          | 25 |   |
|                                                                                                      |       |                             |       |   |   |
| Foreign currency  translation adjustment                                                                  |       | 2,186                            |       | (2,255 | ) |
|                                                                                                      |       |                             |       |   |   |
| Total comprehensive income                                                                                |       | $                                | 9,339      |   | $ | 2,313 |   |

 

Accumulated other comprehensive income (loss)is as follows:
|                             | ** ** | ** **                 | ** ** | **Unrealized**             | ** ** | ** **      | ** ** | ** **                 | ** ** |
|-----------------------------|------------|----------------------------|------------|----------------------------|------------|-----------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Minimum**                | ** ** | **Gain (Loss)**       | ** ** | ** **      | ** ** | ** **                 | ** ** |
| ** **                  | ** ** | **Pension**                | ** ** | **on Interest**       | ** ** | **Foreign**     | ** ** | ** **                 | ** ** |
| ** **                  | ** ** | **Liability**              | ** ** | **Rate Swap**         | ** ** | **Currency**    | ** ** | ** **                 | ** ** |
| ** **                  | ** ** | **Adjustment**             | ** ** | **Agreements**             | ** ** | **Translation** | ** ** | **Total**                  | ** ** |
| ** **                  | ** ** | **(net of tax)** | ** ** | **(net of tax)** | ** ** | **Adjustment**  | ** ** | **(net of tax)** | ** ** |
| ** **                  | ** ** | ** **                 | ** ** | **(In thousands)**    | ** ** | ** **      | ** ** |
|                        |       |                       |       |                       |       |            |       |                       |       |
| Balance, June 30, 2006      |       | $                          | (4,180     | )                          | $          | (12             | )          | $                          | 17,660     |   | $ | 13,468 |   |
| Three months’ activity |       | —                     |       | (6                         | )          | 2,186           |       | 2,180                      |       |
| Balance, September 30, 2006 |       | $                          | (4,180     | )                          | $          | (18             | )          | $                          | 19,846     |   | $ | 15,648 |   |

 

The foreign currencytranslation adjustments are not adjusted for income taxes as they relate toindefinite investments in non-U.S. subsidiaries.

12

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**6.****            ****Inventories**

Inventories consist of the following:
|                 | ** ** | **September 30,**  | ** ** | **June 30,** | ** ** |
|-----------------|------------|-------------------------|------------|-------------------|------------|
| ** **      | ** ** | **2006**                | ** ** | **2006**          | ** ** |
| ** **      | ** ** | **(In thousands)** | ** ** |
|            |       |                    |       |              |       |
| Raw materials   |       | $                       | 64,460     |              | $          | 52,796 |   |
| Work in process |       | 53,690                  |       | 57,020            |       |
| Finished goods  |       | 19,216                  |       | 23,604            |       |
|            |       | $                       | 137,366    |              | $          | 133,420 |   |

 

**7.****            ****Product Warranty**

We warrant our productsagainst defects in design, materials and workmanship, generally for one yearfrom their date of shipment.  A provisionfor estimated future costs relating to these warranties is recorded whenrevenue is recognized and is included in cost of sales. Quarterly we analyzeour warranty liability for reasonableness based on a 15-month history ofwarranty costs incurred, the nature of the products shipped subject to warrantyand anticipated warranty trends.

Activity related to our product warranty liabilitywas as follows:
|                                     | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **September 30,**           | ** ** |
| ** **                          | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(In thousands)**          | ** ** |
|                                |       |                             |       |   |   |
| Balance at beginning of  period     |       | $                                | 2,583      |   | $ | 2,056 |   |
| Provision for warranty  obligations |       | 581                              |       | 819 |   |
| Cost of warranty  obligations       |       | (577                             | )          | (547 | ) |
| Foreign currency impact             |       | 7                                |       | (9 | ) |
|                                |       |                             |       |   |   |
| Balance at end of period            |       | $                                | 2,594      |   | $ | 2,319 |   |

 

**8.****           ****Bank Loan Agreements**

On March 21, 2006, weexecuted a loan agreement with four banks for an unsecured multi-currencyrevolving credit facility that provides for borrowings under a line of creditof up to $100 million through March 2011.  Under certain circumstances, upon our request, the commitments under thecredit facility may be increased by an additional $50 million to $150million.  The interest rates onborrowings under this agreement are at varying rates depending on certainfinancial ratios with the current rate substantially equivalent to LIBOR plus..575% (5.9% at September 30, 2006) on the revolving credit borrowings.  We are required to pay an annual facility feeof .175% on the entire credit line.

The terms of the loanagreement, as amended on August 28, 2006, require compliance with certainfinancial covenants including maintenance of various financial ratios,limitations on indebtedness and treasury stock repurchases, and prohibition ofthe payment of cash dividends and certain other payments.  We are currently in full compliance with allof the covenants contained in the loan agreement.  At September 30, 2006 there were noborrowings outstanding under the revolving credit facility and our availableunused line of credit was approximately $89.0 million after consideration of$11.0 million of outstanding letters of credit.

13

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**9.****            ****Defined Benefit Pension Plans**

Effective January 1, 1994,we established a Supplemental Executive Retirement Plan (the “SERP”) whichprovides retirement, death and disability benefits to certain of our officers.  A substantial portion of the obligationsunder the SERP are unfunded.  OnSeptember 3, 2003, we acquired MCE, including its defined benefit pension plan(the “MCE Plan”).  The MCE Plan has beenfrozen since December 31, 1993.

**Components of Net Periodic Benefit Cost**
|                                                    | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **September 30,**           | ** ** |
| ** **                                         | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(In thousands)**          | ** ** |
|                                               |       |                             |       |   |   |
| Service cost                                       |       | $                                | 46         |   | $ | 126 |   |
| Interest cost                                      |       | 270                              |       | 248 |   |
| Expected return  on plan assets                    |       | (40                              | )          | (36 | ) |
| Amortization of  net transition (asset) obligation |       | 9                                |       | 9 |   |
| Recognized  actuarial (gain) loss                  |       | 172                              |       | 113 |   |
| Net periodic  benefit cost                         |       | $                                | 457        |   | $ | 460 |   |

 

We previously disclosed inthe notes to our financial statements for the year ended June 30, 2006, that weexpected to contribute $1.5 million to the MCE pension and SERP plans in thefiscal year ended June 30, 2007.   As ofSeptember 30, 2006, $237,000 of contributions have been made.

Due to the retirement in2005 of one of our officers, we are required to make payments of $674,000 infiscal year ending June 30, 2007 and $628,000 in each fiscal year thereafterpursuant to the SERP.  Payments ceaseDecember 31, 2015 or upon death, whichever is later.

**10.****     ****Share Based Compensation**

Wehave several stock option plans that are described under the caption “StockOptions and Warrants” in footnote 9 of our June 30, 2006 consolidated financialstatements.  As of September 30, 2006,3.1 million shares of the Company’s Common Stock were reserved and available tobe granted pursuant to these plans.

Compensationexpense attributable to share based compensation was $940,000 ($601,000 aftertax), or $.01 for both basic and diluted earnings per share for the threemonths ended September 30, 2006 and $2.0 million ($1.3 million after tax), or$.01 for both basic and diluted earnings per share for the three months endedSeptember 30, 2005.   As of September 30,2006, the total unrecognized compensation cost related to nonvested stockawards was $6.0 million and the related weighted average period over which itis expected to be recognized is approximately 2.2 years.

14

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Asummary of our stock option plans as of September 30, 2006 and changes duringthe three month period then ended, is presented below:
|                                                 | ** ** | ** **              | ** ** | **Weighted** | ** ** | ** **              | ** ** | **Weighted Average** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | ** **              | ** ** | **Average**  | ** ** | **Aggregate**           | ** ** | **Contractual Life** | ** ** |
| ** **                                      | ** ** | ** **              | ** ** | **Exercise** | ** ** | **Intrinsic**           | ** ** | **Remaining in**     | ** ** |
| ** **                                      | ** ** | **Shares**              | ** ** | **Price**    | ** ** | **Value (1)**      | ** ** | **Years**                 | ** ** |
| ** **                                      | ** ** | **(In thousands)** | ** ** | ** **   | ** ** | **(In thousands)** | ** ** | ** **                | ** ** |
|                                            |       |                    |       |         |       |                    |       |                      |       |
| Outstanding at  July 1, 2006                    |       | 14,763                  |       | $            | 11.92      |                    |       |                      |       |   |
| Granted                                         |       | 10                      |       | 10.77        |       |                    |       |                      |       |
| Exercised                                       |       | (7                      | )          | 8.31         |       |                    |       |                      |       |
| Expired                                         |       | —                  |       | —       |       |                    |       |                      |       |
| Forfeited                                       |       | (94                     | )          | 10.71        |       |                    |       |                      |       |
|                                            |       |                    |       |         |       |                    |       |                      |       |
| Outstanding at  September 30, 2006              |       | 14,672                  |       | $            | 11.93      |                    | $          | 18,057                    |       | 5.1 |   |
|                                            |       |                    |       |         |       |                    |       |                      |       |
| Exercisable at  September 30, 2006              |       | 13,509                  |       | $            | 12.09      |                    | $          | 17,193                    |       | 4.8 |   |
|                                            |       |                    |       |         |       |                    |       |                      |       |
| Options expected to  vest at September 30, 2006 |       | 1,080                   |       | $            | 10.06      |                    | $          | 780                       |       | 8.5 |   |

 

----

(1)  Theintrinsic value of a stock option is the amount by which the market value ofthe underlying stock on September 30, 2006 exceeds the exercise price of theoption.

The weighted average grantdate fair value of stock options granted for the three months ended September30, 2006 and 2005 was $7.95 and $7.29, respectively.   The total intrinsic value of stock optionsexercised for the three months ended September 30, 2006 and 2005 was $19,000and $366,000, respectively, on the exercise dates.

The fair value of eachoption grant was estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted average assumptions:
|                                                   | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **September 30,**           | ** ** |
| ** **                                        | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                              |       |                             |       |   |   |
| Weighted average  expected stock price volatility |       | 84                               | %          | 95 | % |
| Weighted average  expected option life            |       | 6.0 years                        |       | 6.2 years |   |
| Average risk  free interest rate                  |       | 4.8                              | %          | 4.1 | % |
| Average dividend  yield                           |       | —                           |       | — |   |
| Discount for  post-vesting restrictions           |       | N/A                              |       | N/A |   |

 

Cash received from stockoption exercises for the three months ended September 30, 2006 and 2005 was$63,000 and $286,000, respectively.   Thetax benefit received from stock option exercises for the three months endedSeptember 30, 2006 and 2005 was $6,000 and $139,000, respectively.

**Restricted Stock**

In fiscal 2006, we granted10,000 shares of Restricted Stock of which none vested and none were forfeitedduring the three months ended September 30, 2006.  At the grant date, this award had anestimated fair value of approximately $105,000 which is being recognized ascompensation expense, on a straight line basis over the requisite serviceperiod of two years.

15

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**11.****         ****Stock Repurchase Program**

During fiscal 2005, ourBoard of Directors authorized a stock repurchase program of up to 3.0 millionshares of the Company’s Common Stock, subject to certain limitations imposed byour lending banks.  Purchases are madefrom time to time, depending upon market conditions at prices deemedappropriate by management.  During the firstquarter of fiscal 2007, a total of 1,753,838 shares were repurchased for $17.2million and retired.  Since the inceptionof this program, 1,838,838 shares have been repurchased for $18.0 million andretired, including 85,000 shares repurchased in prior fiscal years.

**12.****         ****Contingencies**

We are involved in variousroutine legal matters.  We believe theoutcome of these matters will not have a material adverse effect on ourconsolidated financial statements.

**13.****         ****Business Segments**

Our business segments and major products included in each segment, areas follows:

MicroelectronicSolutions (“AMS”)

·      Microelectronic Components, Sub-assemblies and Modules

·      Integrated Circuits

·      MotionControl Systems

TestSolutions (“ATS”)

·      InstrumentProducts and Test Systems

We are a manufacturer ofadvanced technology systems and components for commercial industry, governmentand defense contractors.  Approximately29% and 26% of our sales for the three months ended September 30, 2006 and2005, respectively, were to agencies of the United States government or toprime defense contractors or subcontractors of the United Statesgovernment.  No one customer constitutedmore than 10% of sales during any of the periods presented.  Inter-segment sales were not material and havebeen eliminated from the tables below.

Mostof our operations are located in the United States; however, we also haveoperations in Europe and Asia.  AeroflexInternational Limited, which was acquired in May 2002, RIWS, which was acquiredin July 2003, and SPG, which was acquired in May 2005, all have significantoperations in the United Kingdom. Specifically, net sales from facilities located in the United Kingdomwere approximately $36.8 million and $34.9 million for the three months endedSeptember 30, 2006 and 2005, respectively. Total assets of the United Kingdom operations were $225.6 million as ofSeptember 30, 2006.

16

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Revenues, based on the customers’ locations,attributed to the United States and other regions are as follows:
|                           | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------------------------|------------|
| ** **                | ** ** | **September 30,**                             | ** ** |
| ** **                | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)**                            | ** ** |
|                      |       |                                               |       |   |   |
| United States of  America |       | $                                                  | 77,300     |   | $ | 76,266 |   |
| Europe and Middle East    |       | 40,915                                             |       | 29,888 |   |
| Asia and Australia        |       | 17,421                                             |       | 18,279 |   |
| Other regions             |       | 1,199                                              |       | 1,215 |   |
|                      |       | $                                                  | 136,835    |   | $ | 125,648 |   |

 

Selected financial data by segment is asfollows:
|                                                                             | ** ** | **For the Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **September 30,**                             | ** ** |
| ** **                                                                  | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                                                                  | ** ** | **(In thousands)**                            | ** ** |
| Net sales:                                                                  |       |                                               |       |   |   |
| Microelectronic solutions (“AMS”)                                 |       | $                                                  | 64,627     |   | $ | 54,823 |   |
| Test solutions (“ATS”)                                            |       | 72,208                                             |       | 70,825 |   |
| Net sales                                                                   |       | $                                                  | 136,835    |   | $ | 125,648 |   |
|                                                                        |       |                                               |       |   |   |
| Segment adjusted  operating income (1):                                     |       |                                               |       |   |   |
| AMS                                                                         |       | $                                                  | 16,012     |   | $ | 13,527 |   |
| ATS                                                                         |       | 4,834                                              |       | 4,253 |   |
| General corporate expense                                                   |       | (5,200                                             | )          | (3,967 | ) |
|                                                                        |       | 15,646                                             |       | 13,813 |   |
|                                                                        |       |                                               |       |   |   |
| Amortization of  acquired intangibles                                       |       |                                               |       |   |   |
| - AMS                                                                       |       | (487                                               | )          | (534 | ) |
| - ATS                                                                       |       | (2,750                                             | )          | (2,923 | ) |
| Share based  compensation                                                   |       |                                               |       |   |   |
| - AMS                                                                       |       | (249                                               | )          | (351 | ) |
| - ATS                                                                       |       | (243                                               | )          | (434 | ) |
| - Corporate                                                                 |       | (448                                               | )          | (1,229 | ) |
| Restructuring  charges - ATS (2)                                            |       | (100                                               | )          | — |   |
| Current period  impact of acquisition related adjustment to inventory - ATS |       | —                                             |       | (1,088 | ) |
| Operating income  (GAAP)                                                    |       | 11,369                                             |       | 7,254 |   |
| Interest expense                                                            |       | (151                                               | )          | (160 | ) |
| Other income  (expense), net                                                |       | (31                                                | )          | 91 |   |
| Income before  income taxes                                                 |       | $                                                  | 11,187     |   | $ | 7,185 |   |

 

----

(1)   Management evaluates theoperating results of the two segments based upon pre-tax operating income, beforecosts related to restructuring, amortization of acquired intangibles, sharebased compensation and the impact of any acquisition related adjustments toinventory.

(2)   The operating income of the ATSsegment has been adjusted to exclude the restructuring charges for thereorganization of its ATS segment, primarily its European operations. 

17

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**ITEM 2****– MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

**Overview**

We earn revenues and generate cash from the sale of microelectronic andtest solution products into the broadband communications, aerospace and defensemarkets.  Overall, we seek to strengthenand expand our proprietary technologies and to broaden the applications forexisting technologies.

In the microelectronic solutions segment, our business strategy hasbeen to use our design, engineering and manufacturing know-how of applicationspecific multi-function module and space hybrid microcircuits to provide morecontent on classified satellite programs and position ourselves for increasedoutsourcing by major satellite manufacturers; increase the content ofapplication integrated circuits in the CT scan market; and participate in the “3G”wireless communications build-out. Concerning the test solutions segment, our business strategy has been touse our design, development, and manufacturing capabilities to provide a broadline of test equipment to leading manufacturers and service providers in a) thewireless industry, b) the military and private mobile radio industry and c) thecommercial and military avionics industries. Over the years, we have made acquisitions to enter new markets or to increaseour penetration of existing markets.

Day to day, our management style focuses on driving operatingefficiencies throughout the business and the maintenance of a conservativecapital structure.

In March 2006, we initiated steps to further consolidate our three TestSolutions businesses in the United Kingdom. Pursuant to the plan, which is expected to be completed in the firsthalf of fiscal 2007, our manufacturing operations were moved into one facilityand we created a shared-services environment for all finance and administrativefunctions.  In connection with this plan,approximately 40 employees have been terminated and certain contract positions willbe eliminated.  In fiscal 2006 werecorded a charge of $3.2 million for workforce reductions in alldepartments.  In the first quarter offiscal 2007, we recorded a charge of $100,000 for workforce reductions.  At September 30, 2006, approximately $888,000remains to be paid and is included in accrued liabilities.  The workforce restructuring charges wereallocated primarily to selling, general and administrative costs. Therestructuring is expected to generate a savings of approximately $5.0 millionper year.

**ThreeMonths Ended September 30, 2006 Compared to Three Months Ended September 30,2005**

*Net Sales. *Net sales increased 9% to $136.8 million forthe three months ended September 30, 2006 from $125.6 million for the threemonths ended September 30, 2005.  Netsales in the microelectronic solutions (“AMS”) segment increased 18% to $64.6 million for the threemonths ended September 30, 2006 from $54.8 million for the three months endedSeptember 30, 2005 primarily as a result of increased volume of microelectronicmodules, components and integrated circuits. Net sales in the test solutions (“ATS”) segment increased 2% to $72.2million for the three months ended September 30, 2006 from $70.8 million forthe three months ended September 30, 2005 primarily due to increased volume asa result of new product introductions in our wireless business.

*Gross Profit. *Gross profit equals net sales less cost ofsales.* *Costof sales includes materials, direct labor and overhead expenses such asengineering labor, fringe benefits, allocable occupancy costs, depreciation andmanufacturing supplies.
| Three Months                                     | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **September 30,**                                | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2006                                                  |       | $          | 31,817     |          | 49.2       | %          | $          | 31,937        |       | 44.2       | %          | $             | 63,754     |   | 46.6 | % |
| 2005                                                  |       | 28,001     |       | 51.1          | %          | 30,925     |       | 43.7          | %          | 58,926     |       | 46.9          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

18

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Gross profit increased $3.8 million, or 14%, in the AMS segmentprimarily due to the increased sales volume in integrated circuits andcomponents.  Margin percentages decreased1.9% to 49.2% primarily due to a highly profitable satellite related shipmentfor microelectronic modules, which included a performance bonus, in last year’sfirst quarter.  This decrease waspartially offset by an increase in margin percentage in our integrated circuitsproducts.

Gross profit increased $1.0 million, or 3%, and by 50 basis points as apercentage of sales, in the ATS segment primarily as a result of our radio testproducts.

*Selling, General and Administrative Costs. *Selling, general and administrative costs include office and managementsalaries, fringe benefits, commissions, insurance and professional fees.
| Three Months                                     | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** **    | ** ** | ** ** | ** ** | **% of** | ** ** |
| **September 30,**                                | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** |
| 2006                                                  |       | $          | 9,772      |          | 15.1       | %          | $          | 15,980        |       | 22.1          | %          | $          | 5,648      |          | $          | 31,400 |   | 22.9 | % |
| 2005                                                  |       | 8,752      |       | 16.0          | %          | 16,304     |       | 23.0          | %          | 5,195         |       | 30,251     |       | 24.1          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |               |            |            |            |               |            |  |  |  |  |

 

Selling, general and administrative costs increased by $1.0 million, or12%, in the AMS segment primarily dueto general increases in expenses related to the increase in sales.  As a percentage of sales, AMS selling,general and administrative costs decreased 90 basis points.  Selling,general and administrative costs decreased by $324,000, or 2%, in theATS segment primarily as a result of cost reduction efforts.   Corporate selling, general andadministrative expenses increased by $453,000 resulting from increasedpersonnel and benefits costs partially offset by a reduction in share basedcompensation expense.

*Research and Development Costs. *Research and development costs includematerial, engineering labor and allocated overhead.
| Three Months                                     | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **September 30,**                                | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| 2006                                                  |       | $          | 6,280      |          | 9.7        | %          | $          | 11,468        |       | 15.9       | %          | $             | 17,748     |   | 13.0 | % |
| 2005                                                  |       | 6,074      |       | 11.1          | %          | 11,890     |       | 16.8          | %          | 17,964     |       | 14.3          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

 

Self funded research and development costs increased $206,000, or 3%, in the AMS segment.  Research and development costs decreased $422,000,or 4%, in the ATS segment mainly due to cost savings resulting from ourrestructuring efforts in our UK operations partially offset by increaseddevelopment cost for a new militarized frequency synthesizer.

*Amortization of Acquired Intangibles.* Amortizationdecreased $220,000 or 6%.

*Other Income (Expense). *Interest expense was $151,000 in the currentquarter and $160,000 in the prior year. Other expense of $31,000 for the three months ended September 30, 2006consisted primarily of a foreign currency loss of $410,000 partially offset byinterest income of $364,000.  Otherincome of $91,000 for the three months ended September 30, 2005 consistedprimarily of interest income of $88,000 partially offset by a foreign currencyloss of $71,000.  The increase ininterest income is a result of higher average balances of cash, cashequivalents and marketable securities due to operating cash flow.

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*Provision for Income Taxes. *The income tax provision was $4.0 million (aneffective income tax rate of 36.0%) for the three months ended**September 30, 2006 and $2.7 million (an effective incometax rate of 37.0%) for the three months ended September 30, 2005.  The effective income tax rate for the twoperiods differed from the amount computed by applying the U.S. Federal incometax rate to income before income taxes primarily due to foreign, state andlocal income taxes.   We anticipate therate to be 36% for the balance of the year. We paid $5.6 million and $1.8 million for income taxes for the threemonths ended September 30, 2006 and 2005, respectively.

*Net Income.  *Net income for the three months endedSeptember 30, 2006 was $7.2 million, or 5.2% of sales, versus $4.5 million, or3.6% of sales, for the three months ended September 30, 2005.

**Off-Balance Sheet Arrangements**

We do not maintain any off-balance sheet arrangements, transactions,obligations or other relationships with unconsolidated entities that would beexpected to have a material current or future effect upon our financialcondition or results of operations.

**Liquidity and Capital Resources**

As of September 30, 2006, we had $192 million in working capital andour current ratio was 2.5 to 1.  Ouravailable unused line of credit under an unsecured multi-currency $100 millionrevolving credit facility that expires in March 2011 is approximately $89million at September 30, 2006, after consideration of letters of credit.  Under certain circumstances, at our request,the commitments under the credit facility may be increased by an additional $50million to $150 million.   The interestrate on revolving credit borrowings under this agreement is at various ratesdepending upon certain financial ratios, with the current rate substantiallyequivalent to LIBOR plus .575% (5.9% at September 30, 2006).

The terms of the loan agreement require compliance with certaincovenants including maintenance of various financial ratios, limitation onindebtedness and treasury stock repurchases, and prohibition of the payment ofcash dividends.  We are currently in fullcompliance with all of the covenants contained in our loan agreement, asamended to date.  We expect to be incompliance with all covenants for the foreseeable future.

For the three months ended September 30, 2006, our operations providedcash of $12.7 million, our investing activities provided cash of $8.1 million,primarily from the sale of marketable securities (net of purchases) of $12.1million, partially offset by $3.9 million of capital expenditures, and ourfinancing activities used cash of $17.2 million, primarily for the purchase andretirement of treasury stock.  In October2006, $9.2 million was paid in a final determination of the Racal acquisitionearnout.

We believe our cash, cash equivalents and marketable securities coupledwith internally generated funds and available borrowings under lines of creditwill be sufficient for our working capital requirements, capital expenditureneeds and the servicing of our debt for the foreseeable future.  One of our pension plans currently isunfunded, but is expected to be funded from the cash surrender value of lifeinsurance policies that are being held in a rabbi trust.  We do not believe that the amount of thepension obligations remaining after application of such policy proceeds will bematerial to our annual cash flows.  Ourcash, cash equivalents and marketable securities coupled with our availableborrowings under lines of credit, are available to fund acquisitions and otherpotential large cash needs that may arise.

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The following table summarizes, as of September 30, 2006, ourobligations and commitments to make future payments under debt, operatingleases and employment agreements:
|                                      | ** ** | **Payments due by period** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | ** **                                | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                           | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| ** **                           | ** ** | ** **                                | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                       |       | $                                         | 4,095      |   | $ | 607 |   | $ | 2,403 |   | $ | 700 |   | $ | 385 |   |
| Operating leases                     |       | 34,880                                    |       | 8,225 |   | 10,708 |   | 5,365 |   | 10,582 |   |
| Employment and  consulting contracts |       | 5,094                                     |       | 2,128 |   | 2,668 |   | 298 |   | — |   |
| Total                                |       | $                                         | 44,069     |   | $ | 10,960 |   | $ | 15,779 |   | $ | 6,363 |   | $ | 10,967 |   |

 

The operating lease commitments shown in the above table have not beenreduced by future minimum sub-lease rentals of $5.1 million.

In the normal course of business, we routinely enter into binding andnon-binding purchase obligations primarily covering anticipated purchases ofinventory and equipment.  None of theseobligations are individually significant. We do not expect that these commitments will have a material adverseaffect on our liquidity.

**AccountingPolicies Involving Significant Estimates**

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements and the recognition ofrevenue and expenses during the period reported.  The following accounting policies require usto make estimates and assumptions based on the circumstances, informationavailable and our experience and judgment. These estimates and assumptions are reviewed periodically and theeffects of revisions are reflected in the period that they are determined to benecessary.  If actual results differsignificantly from our estimates, our financial statements could be materiallyimpacted.

Revenueand Cost Recognition

We recognize revenue when persuasive evidence of an arrangement exists,the selling price is fixed or determinable and collectibility of the resultingreceivable is reasonably assured.

For arrangements other than certain long-term contracts, revenue(including shipping and handling fees) is recognized when products are shippedand title has passed to the customer.  Iftitle does not pass until the product reaches the customer’s delivery site,then recognition of the revenue is deferred until that time.  Certain of our sales are to distributorswhich have a right to return some portion of product within eighteen months ofsale.  We recognize revenue on thesesales at the time of shipment to the distributor as the returns under thesearrangements have been insignificant and can be reasonably estimated.  An estimate of such returns is recorded atthe time sales are recognized.

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Long-term contracts are accounted for in accordance with SOP 81-1, “Accountingfor Performance of Construction-Type and Certain Production-Type Contractors.”  We determine estimated contract profit ratesand use the percentage-of-completion method to recognize revenues andassociated costs as work progresses on certain long-term contracts.  We measure the extent of progress towardcompletion generally based upon one of the following methods (based upon anassessment of which method most closely aligns to the underlying earningsprocess): (i) the units-of-delivery method, (ii) the cost-to-cost method, usingthe ratio of contract costs incurred as a percentage of total estimated costsat contract completion (based upon engineering and production estimates), or(iii) the achievement of contractual milestones.  Provisions for anticipated losses orrevisions in estimated profits on contracts-in-process are recorded in theperiod in which such anticipated losses or revisions become evident.

Revenue from sales of products where software is other than incidentalto their performance, including related software support and maintenancecontracts is recognized in accordance with SOP-97-2, “Software RevenueRecognition.”  Accordingly, revenue forsoftware is recognized when the software is delivered, assuming all of theabove criteria for revenue recognition are met. When a customer purchases software together with post contract support,we allocate a portion of the fee to post contract support for its fair valuebased on the contractual renewal rate.  Postcontract support fees are deferred and recognized as revenue ratably over theterm of the related contract.

Inventories

Inventories are valued at the lower of cost (first-in, first-out) ormarket.  Inventory levels are maintainedin relation to expected sales volumes. We periodically evaluate the net realizable value of our inventory.  Numerous analyses are applied including lowerof cost or market analysis, forecasted sales requirements and forecastedwarranty requirements.  After takingthese and other factors into consideration, such as technological changes, ageand physical condition, appropriate adjustments are recorded to the inventorybalance.  If actual conditions differfrom our expectation, then inventory balances may be over or under valued,which could have a material effect on our results of operations and financialcondition.

PurchaseAccounting and Recoverability of Long-Lived and Intangible Assets

Determining the fair value of certain assets and liabilities acquiredin a business combination is judgmental in nature and often involves the use ofsignificant estimates and assumptions. There are various methods used to estimate the value of tangible andintangible assets acquired, such as discounted cash flow and market multipleapproaches.  Some of the more significantestimates and assumptions inherent in the two approaches include:  projected future cash flows (includingtiming); discount rate reflecting the risk inherent in the future cash flows;perpetual growth rate; determination of appropriate market comparables; and thedetermination of whether a premium or a discount should be applied tocomparables.  There are also judgments madeto determine the expected useful lives assigned to each class of assets andliabilities acquired.  Goodwill ismeasured as the excess of the cost of acquisition over the sum of the amountsassigned to identifiable assets acquired less liabilities assumed.    We perform an assessment of whether thereis an indication that goodwill is impaired on an annual basis unless events orcircumstances warrant a more frequent assessment.  The impairment assessment involves, amongother things, an estimation of the fair value of each of our reportingunits.  This estimate is made by anindependent evaluation expert using both a market value approach and an incomebased approach.  Such estimates areinherently subjective, and subject to change in future periods.

In response to changes in industry and market conditions, we could berequired to strategically realign our resources and consider restructuring,disposing of, or otherwise exiting businesses, which could result in theimpairment of goodwill and other long-lived assets, as well as a reduction inthe useful lives of such depreciable or amortizable long lived assets.  Impairment charges and the reduction inuseful lives could have a material impact on our results of operations andfinancial conditions.

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Property, plant and equipment are stated at cost less accumulateddepreciation computed on a straight-line basis over the estimated useful livesof the related assets.  Leaseholdimprovements are amortized over the life of the lease or the estimated life ofthe asset, whichever is shorter.  Changesin circumstances such as technological advances or changes to our businessmodel can result in the actual useful lives differing from our estimates.  To the extent the estimated useful lives areincorrect, the value of these assets may be over or under stated, which in turncould have a material effect on our results of operations and financialcondition.

Long-lived assets other than goodwill are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying value ofany such asset may be impaired.  Weevaluate the recoverability of such assets by estimating future cashflows.  If the sum of the undiscountedcash flows expected to result from the use of the assets and their eventualdisposition is less than the carrying amount of the assets, we will recognizean impairment loss to the extent of the excess of the carrying amount of theassets over the discounted cash flow.

If our actual results are not as favorable as the forecasted resultsused in our impairment reviews of goodwill, and other long-lived assets, impairment charges may be necessary whichcould have a material effect on our results of operations and financialcondition.

Although we did not experience impairment of goodwill and otherlong-lived assets during fiscal 2006, in response to recent operating resultsin certain businesses within our test solutions segment (which has goodwill ofapproximately $126.6 million at September 30, 2006), we may conduct anotherimpairment review prior to June 30, 2007.

Restructuring Charges

When we incur a liability related to a restructuring charge, weestimate and record all appropriate expenses. These expenses include severance, retention bonuses, fringe benefits,asset impairment, buyout of leases and inventory write-downs.  To the extent that our estimates differ fromactual expenses, there could be significant additional expenses or reversals ofpreviously recorded charges in the future.

Income Taxes

Significant judgment is required in determining our worldwide incometax expense provision.  In the ordinarycourse of a global business, there are many transactions and calculations wherethe ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing andcost reimbursement arrangements among related entities, the process ofidentifying items of revenue and expense that qualify for preferential taxtreatment and segregation of foreign and domestic income and expense to avoiddouble taxation.  No assurance can begiven that the final tax outcome of these matters will not be different thanthat which is reflected in our historical income tax provisions andaccruals.  Such differences could have amaterial effect on our income tax provision and net earnings in the period inwhich such determination is made.

We record a valuation allowance to reduce our deferred tax assets tothe amounts of future tax benefit that is more likely than not to berealized.  While we have consideredfuture taxable income and ongoing prudent and feasible tax planning strategiesin assessing the need for the valuation allowance, there is no assurance thatsufficient taxable income will be generated in future years within the relevantjurisdictions or that tax strategies will continue to be prudent.  Accordingly, the valuation allowance mightneed to be increased to cover additional deferred tax assets that may not berealizable.  Any increase in the valuationallowance could have a material adverse impact on our income tax provision andnet earnings in the period in which such determination is made.

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Share-Based Compensation

With the adoption of SFAS No. 123(R) on July 1, 2005, we record thefair value of share based compensation awards as an expense.  In order to determine the fair value of stockoptions on the date of grant, the Company utilizes the Black-Scholesoption-pricing model.  Inherent in thismodel are assumptions related to expected stock price volatility, option life,risk-free interest rate and dividend yield. Expected volatilities are based on historical volatility of our sharesusing daily price observations over a period consistent with the expectedlife.  We use the safe harbor guidance inSAB 107 to estimate the expected life of options granted during fiscal 2006 andthe first quarter of fiscal 2007.  Therisk-free rate is based on the U.S. Treasury yield curve in effect at the timeof grant for periods similar to the expected life.  While the risk-free interest rate anddividend yield are less subjective assumptions, typically based on factual dataderived from public sources, the expected stock price volatility and optionlife assumptions require a greater level of judgment which makes them criticalaccounting estimates.

**Issued But Not Adopted Accounting Pronouncements**

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 clarifies the accounting foruncertainty in income taxes by prescribing a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  The interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods and disclosure.  FIN 48 becomeseffective for us in our fiscal year ending June 30, 2008.  We are in the process of evaluating theimpact, if any, FIN 48 will have on our consolidated financial statements.

In September 2006, the FASB issued Statement ofFinancial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFASNo. 157”) to clarify the definition of fair value, establish a framework formeasuring fair value in GAAP and expand the disclosures on fair valuemeasurements.  SFAS No. 157 defines fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date (an exit price). SFAS No. 157 also stipulates that, as amarket-based measurement, fair value measurement should be determined based onthe assumptions that market participants would use in pricing the asset orliability, and establishes a fair value hierarchy that distinguishes between(a) market participant assumptions developed based on market data obtained fromsources independent of the reporting entity (observable inputs) and (b) thereporting entity’s own assumptions about market participant assumptionsdeveloped based on the best information available in the circumstances(unobservable inputs).  SFAS No. 157applies under other accounting pronouncements that require or permit fair valuemeasurements and does not require any new fair value measurements.  SFAS No. 157 becomes effective for us in ourfiscal year ending June 30, 2009.  We arecurrently evaluating the impact, if any, of the provisions of SFAS No. 157 onour consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Post Retirement Plans,” (“SFASNo. 158”) which requires the recognition of a plan’s funded status as anasset or liability in the statement of financial position.  It requires that the plan’s assets and itsobligations that determine its funded status be measured as of the end of theemployer’s fiscal year. The requirement to recognize the funded status and thedisclosure requirements are effective as of the end of our fiscal year endingJune 30, 2007 and the requirement to measure the funded status at the end ofthe fiscal year is effective as of June 30, 2009.  We are currently evaluating the impact of theprovisions of SFAS No. 158 on our consolidated financial statements.

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In September 2006, the SEC issued Staff AccountingBulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements” (“SAB No.108”) to provide guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose ofdetermining whether the current year’s financial statements are materiallymisstated.  Under SAB No. 108, companiesshould evaluate a misstatement based on its impact on the current year incomestatement, as well as the effect of the cumulative misstatement on the currentyear’s ending balance sheet.  SAB No. 108will become effective for us in our fiscal year ending June 30, 2007.  We are currently evaluating the impact, ifany, of the provisions of SAB No. 108 on our consolidated financial statements.

In March2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (That is, Gross versus NetPresentation).”  A consensus was reachedthat entities may adopt a policy of presenting sales taxes and other similartaxes in the income statement on either a gross or net basis.  If taxes are significant, an entity shoulddisclose its policy of presenting taxes and the amounts of taxes.  The guidance is effective for periodsbeginning after December 15, 2006.  Wepresent sales net of sales taxes.  This issuewill not impact the method for recording these sales taxes in our consolidatedfinancial statements.

**Forward-Looking Statements**

All statements other than statements of historical fact included inthis Quarterly Report, including without limitation statements under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”regarding our financial position, business strategy and plans and objectives ofour management for future operations, are forward-looking statements.  When used in this Quarterly Report, wordssuch as “anticipate,” “believe,” “estimate,” “expect,” “intend” and similarexpressions, as they relate to us or our management, identify forward-lookingstatements.  Such forward-lookingstatements are based on the current beliefs of our management, as well as assumptionsmade by and information currently available to our management.  Actual results could differ materially fromthose contemplated by the forward-looking statements as a result of certainfactors, including but not limited to those set forth above.  Such statements reflect our current viewswith respect to the future and are subject to these and other risks,uncertainties and assumptions relating to our financial condition, results ofoperation, growth strategy and liquidity. We do not undertake any obligation to update such forward-lookingstatements.

**ITEM 3****– QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

We are exposed to market risk related to changes in interest rates andto foreign currency exchange rates.  Mostof our debt is at fixed rates of interest or at a variable rate with aninterest rate swap agreement which effectively converts the variable rate debtinto fixed rate debt.  Therefore, ifmarket interest rates increase by 10% from levels at September 30, 2006, theeffect on our net income as well as the fair value of our swap would beinsignificant.  Most of our investedcash, cash equivalents and marketable securities are at variable rates ofinterest.  If market interest ratesdecrease by 10 percent from levels at September 30, 2006, the effect on our netincome would be insignificant.  Ifforeign currency exchange rates (primarily the British Pound and the Euro)change by 10% from levels at September 30, 2006, the effect on our other comprehensiveincome would be approximately $17.3 million. Foreign currency contracts are used to protect us from short-termfluctuations in exchange rates principally related to outstanding tradereceivables.  We periodically enter intoforeign currency contracts, which are not designated as hedges, and the changein fair value is included in income currently, within other income(expense).  As of September 30, 2006, wehad $1.9 million of notional value foreign currency forward contracts maturingthrough December 2006.  Notional amountsdo not quantify risk or represent assets or liabilities, but are used in thecalculation of cash settlements under the contracts.  The fair value of these contracts atSeptember 30, 2006 was immaterial.

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**ITEM 4****– CONTROLS AND PROCEDURES**

Based on their evaluation as of the end of theperiod covered by this Form 10-Q, our management, with the participation of ourChief Executive Officer and Chief Financial Officer, conducted an evaluation ofthe effectiveness of the design and operation of our disclosure controls and procedures,as required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedureswere effective as of September 30, 2006, to ensure that information to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedby the SEC’s rules and forms.

**Changes in Internal Controls**

There were no changes in our internal controls over financial reportingthat occurred during the three months ended September 30, 2006 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**Limitationson the Effectiveness of Controls**

We believe that a control system, no matter how well designed andoperated, cannot provide absolute assurance that the objectives of the controlsystem are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within a company havebeen detected.  Our disclosure controlsand procedures are designed to provide reasonable assurance of achieving theirobjectives and our Chief Executive Officer and Chief Financial Officer haveconcluded that such controls and procedures are effective at the “reasonableassurance” level.

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**AEROFLEX INCORPORATEDAND SUBSIDIARIESPART II – OTHER INFORMATION**

Item 1.  Legal Proceedings

We are involved in variousroutine legal matters.  We believe theoutcome of these matters will not have a material adverse effect on ourconsolidated financial statements.

Item 1A. Risk Factors

There have been no material changes in ourrisk factors from the risk factors disclosed in the Form 10-K for the yearended June 30, 2006.

Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds
| ** **                                                             | ** ** | ** **                                 | ** ** | ** **                   | ** ** | **Total Number of** | ** ** | **Maximum Number**      | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | ** **                                 | ** ** | ** **                   | ** ** | **Shares Purchased**     | ** ** | **of Shares that** | ** ** |
| **Issuer Purchases of Equity Securities (1)** | ** ** | **to date as Part of** | ** ** | **May Yet be**     | ** ** |
| ** **                                                             | ** ** | **Total Number of**              | ** ** | ** **                   | ** ** | **Publicly**                  | ** ** | **Purchased under**     | ** ** |
| ** **                                                             | ** ** | **Shares**                                 | ** ** | **Average Price**       | ** ** | **Announced Plans**      | ** ** | **the Plans or**   | ** ** |
| **Period**                                                             | ** ** | **Purchased (2)**                     | ** ** | **Paid Per Share** | ** ** | **or Programs**          | ** ** | **Programs**                 | ** ** |
|                                                                   |       |                                       |       |                         |       |                          |       |                         |       |
| July 2006                                                              |       | —                                     |       | $                            | —     |                          | 85,000     |                         | 2,915,000  |   |
| August 2006                                                            |       | 1,064,571                                  |       | $                            | 9.66       |                          | 1,149,571  |                         | 1,850,249  |   |
| September 2006                                                         |       | 689,267                                    |       | $                            | 10.01      |                          | 1,838,838  |                         | 1,161,162  |   |

 

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(1)           For description of our stock repurchase program, see Note 11 to theUnaudited Condensed Consolidated Financial Statements.

(2)          All purchases were made in open market transactions.  Our 3.0 million share stock buyback programhas been in effect since May 23, 2005. There is no time limit on the repurchases to be made under the plan.

Item 3.   Defaults upon Senior Securities

None

Item 4.   Submission of Matters to a Vote of SecurityHolders

None

Item 5.   Other Information

None

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Item 6.  Exhibits
| Exhibits   | ** ** | ** **                                                                                            |
|------------|------------|-------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                            |
| 31.1       |       | Certification of Chief Executive Officer pursuant to  Section 302 of Sarbanes Oxley Act of 2002.      |
|       |       |                                                                                                  |
| 31.2       |       | Certification of Chief Financial Officer pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.      |
|       |       |                                                                                                  |
| 31.3       |       | Certification of Chief Operating Officer pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.      |
|       |       |                                                                                                  |
| 31.4       |       | Certification of Principal Accounting Officer  pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|       |       |                                                                                                  |
| 32.1       |       | Certification of Chief Executive Officer pursuant to  Section 906 of Sarbanes-Oxley Act of 2002.      |
|       |       |                                                                                                  |
| 32.2       |       | Certification of Chief Financial Officer pursuant to  Section 906 of Sarbanes-Oxley Act of 2002.      |

 

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SIGNATURES

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                  | AEROFLEX  INCORPORATED   |                    |
|------------------|--------------------------|-------------------------|
|             | (REGISTRANT)             |                    |
|             |                     |                    |
|             |                     |                    |
| November 8, 2006 | By:                      | /s/John  Adamovich, Jr. |   |
|             | John Adamovich,  Jr.     |                    |
|             | Sr. Vice  President and  |                    |
|             | Chief Financial  Officer |                    |
|                  |                          |                         |  |

 

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EXHIBIT INDEX

31.1            Certification of Chief Executive Officerpursuant to Section 302 of Sarbanes Oxley Act of 2002.

31.2            Certification of Chief Financial Officerpursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.3            Certification of Chief Operating Officerpursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.4            Certification of Principal Accounting Officerpursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1            Certification of Chief Executive Officerpursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2            Certification of Chief Financial Officerpursuant to Section 906 of Sarbanes-Oxley Act of 2002.

30

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