**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

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**FORM 10-Q**

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**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

For the quarterly period ended  **March 31,2007**

**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 befiled by 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 markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated 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 commonstock as of the latest practicable date.
| May 7, 2007 | 74,537,275         |
|------------------|--------------------|
| (Date)           | (Number of Shares) |

 

 

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**AEROFLEXINCORPORATED**

**AND SUBSIDIARIES**

**INDEX**
|                          | ** **                                                                                      | **PAGE** |
|--------------------------|-------------------------------------------------------------------------------------------------|----------|
| ** **               | **PART I          FINANCIAL  INFORMATION**    |     |
|                     |                                                                                            |     |
| Item 1 —  | UNAUDITED  CONDENSED CONSOLIDATED BALANCE SHEETS                                                |     |
|                     | March 31, 2007  and June 30, 2006                                                               | 3        |
|                     |                                                                                            |     |
|                     | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS                                        |     |
|                     | Three Months  Ended March 31, 2007 and 2006                                                     | 4        |
|                     |                                                                                            |     |
|                     | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS                                        |     |
|                     | Nine Months  Ended March 31, 2007 and 2006                                                      | 5        |
|                     |                                                                                            |     |
|                     | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                      |     |
|                     | Nine Months  Ended March 31, 2007 and 2006                                                      | 6        |
|                     |                                                                                            |     |
|                     | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS                                 | 7 - 19   |
|                     |                                                                                            |     |
| Item 2 —  | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS    |     |
|                     | Three and Nine  Months Ended March 31, 2007 and 2006                                            | 20 - 29  |
|                     |                                                                                            |     |
| Item 3 —  | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     | 30       |
|                     |                                                                                            |     |
| Item 4 —  | CONTROLS AND  PROCEDURES                                                                        | 30       |
| ** **               | ** **                                                                                      |     |
| ** **               | **PART II:          OTHER  INFORMATION** |     |
|                     |                                                                                            |     |
| Item 1 —  | LEGAL  PROCEEDINGS                                                                              | 31       |
|                     |                                                                                            |     |
| Item 1A — | RISK  FACTORS                                                                                   | 31       |
|                     |                                                                                            |     |
| Item 2 —  | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                    | 31       |
|                     |                                                                                            |     |
| Item 3 —  | DEFAULTS UPON  SENIOR SECURITIES                                                                | 31       |
|                     |                                                                                            |     |
| Item 4 —  | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                            | 31       |
|                     |                                                                                            |     |
| Item 5 —  | OTHER  INFORMATION                                                                              | 32       |
|                     |                                                                                            |     |
| Item 6 —  | EXHIBITS                                                                                        | 32       |
|                     |                                                                                            |     |
| SIGNATURES               | 33                                                                                              |
|                     |                                                                                            |     |
| EXHIBIT  INDEX           | 34                                                                                              |
|                     |                                                                                            |     |
| CERTIFICATIONS           | 35 - 40                                                                                         |
|                          |                                                                                                 |          |  |

 

2

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**Aeroflex Incorporated**

**and Subsidiaries**

**Unaudited Condensed ConsolidatedBalance Sheets**

(Inthousands)

 
| ** **                                                                                                                                                                                    | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **2007**           | ** ** | **2006**          | ** ** |
| Assets                                                                                                                                                                                        |       |               |       |              |       |
| Current assets:                                                                                                                                                                               |       |               |       |              |       |
| Cash and cash  equivalents                                                                                                                                                                    |       | $                  | 13,476     |              | $          | 10,387 |   |
| Marketable  securities                                                                                                                                                                        |       | 10,576             |       | 28,332            |       |
| Accounts  receivable, less allowance for doubtful accounts of $1,909 and $1,350                                                                                                               |       | 129,192            |       | 120,296           |       |
| Inventories                                                                                                                                                                                   |       | 147,763            |       | 133,420           |       |
| Deferred income  taxes                                                                                                                                                                        |       | 24,159             |       | 24,732            |       |
| Prepaid expenses  and other current assets                                                                                                                                                    |       | 13,159             |       | 11,187            |       |
| Total current  assets                                                                                                                                                                         |       | 338,325            |       | 328,354           |       |
|                                                                                                                                                                                          |       |               |       |              |       |
| Property, plant and  equipment, net                                                                                                                                                           |       | 79,129             |       | 77,940            |       |
| Other assets                                                                                                                                                                                  |       | 16,271             |       | 14,276            |       |
| Intangible assets with  definite lives, net                                                                                                                                                   |       | 46,228             |       | 54,215            |       |
| Goodwill                                                                                                                                                                                      |       | 177,522            |       | 163,237           |       |
|                                                                                                                                                                                          |       |               |       |              |       |
| Total assets                                                                                                                                                                                  |       | $                  | 657,475    |              | $          | 638,022 |   |
|                                                                                                                                                                                          |       |               |       |              |       |
|                                                                                                                                                                                          |       |               |       |              |       |
| Liabilities and  Stockholders’ Equity                                                                                                                                                    |       |               |       |              |       |
| Current liabilities:                                                                                                                                                                          |       |               |       |              |       |
| Current portion  of long-term debt                                                                                                                                                            |       | $                  | 607        |              | $          | 607 |   |
| Accounts payable                                                                                                                                                                              |       | 39,325             |       | 37,832            |       |
| Advance payments  by customers                                                                                                                                                                |       | 21,724             |       | 21,128            |       |
| Income taxes  payable                                                                                                                                                                         |       | 817                |       | 9,162             |       |
| Accrued payroll  expenses                                                                                                                                                                     |       | 20,392             |       | 17,440            |       |
| Accrued expenses  and other current liabilities                                                                                                                                               |       | 39,041             |       | 33,046            |       |
| Total current  liabilities                                                                                                                                                                    |       | 121,906            |       | 119,215           |       |
|                                                                                                                                                                                          |       |               |       |              |       |
| Long-term debt                                                                                                                                                                                |       | 3,327              |       | 3,558             |       |
| Deferred income taxes                                                                                                                                                                         |       | 1,251              |       | 4,631             |       |
| Other long-term  liabilities                                                                                                                                                                  |       | 24,002             |       | 22,948            |       |
| Total  liabilities                                                                                                                                                                            |       | 150,486            |       | 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 shares; none issued |       | —             |       | —            |       |
| Common stock,  par value $.10 per share; authorized 110,000 shares; issued and outstanding  73,689 and 75,270 shares                                                                          |       | 7,369              |       | 7,527             |       |
| Additional  paid-in capital                                                                                                                                                                   |       | 372,187            |       | 384,870           |       |
| Accumulated  other comprehensive income                                                                                                                                                       |       | 23,800             |       | 13,468            |       |
| Retained  earnings                                                                                                                                                                            |       | 103,633            |       | 81,805            |       |
| Total  stockholders’ equity                                                                                                                                                              |       | 506,989            |       | 487,670           |       |
|                                                                                                                                                                                          |       |               |       |              |       |
| Total liabilities and  stockholders’ equity                                                                                                                                              |       | $                  | 657,475    |              | $          | 638,022 |   |

 

Seenotes to unaudited condensed consolidated financial statements.

3

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**Aeroflex Incorporated**

**and Subsidiaries**

**Unaudited Condensed ConsolidatedStatements of Earnings**

(In thousands, except per share data)
| ** **                                             | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                   |       |                                             |       |   |   |
|                                                   |       |                                             |       |   |   |
| Net sales                                              |       | $                                                | 150,271    |   | $ | 140,527 |   |
| Cost of sales                                          |       | 79,460                                           |       | 73,461 |   |
| Gross profit                                           |       | 70,811                                           |       | 67,066 |   |
|                                                   |       |                                             |       |   |   |
| Selling, general  and administrative costs             |       | 33,907                                           |       | 30,863 |   |
| Research and  development costs                        |       | 20,360                                           |       | 20,488 |   |
| Amortization of  acquired intangibles                  |       | 3,225                                            |       | 3,440 |   |
|                                                   |       | 57,492                                           |       | 54,791 |   |
| Operating income                                       |       | 13,319                                           |       | 12,275 |   |
|                                                   |       |                                             |       |   |   |
| Other income  (expense)                                |       |                                             |       |   |   |
| Company Sale Transaction expenses (See note 2)         |       | (4,319                                           | )          | — |   |
| Interest expense                                       |       | (237                                             | )          | (144 | ) |
| Other income (expense)                                 |       | 819                                              |       | 586 |   |
| Total other income (expense)                           |       | (3,737                                           | )          | 442 |   |
|                                                   |       |                                             |       |   |   |
| Income before  income taxes                            |       | 9,582                                            |       | 12,717 |   |
| Provision for  income taxes                            |       | 4,093                                            |       | 4,971 |   |
| Net income                                             |       | $                                                | 5,489      |   | $ | 7,746 |   |
|                                                   |       |                                             |       |   |   |
| Net income per  common share:                          |       |                                             |       |   |   |
| Basic                                                  |       | $                                                | 0.07       |   | $ | 0.10 |   |
| Diluted                                                |       | $                                                | 0.07       |   | $ | 0.10 |   |
|                                                   |       |                                             |       |   |   |
| Weighted average  number of common shares outstanding: |       |                                             |       |   |   |
| Basic                                                  |       | 73,775                                           |       | 75,133 |   |
| Diluted                                                |       | 75,714                                           |       | 77,230 |   |

 

Seenotes to unaudited condensed consolidated financial statements.

4

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**AeroflexIncorporated and Subsidiaries**

**Unaudited Condensed Consolidated Statements of Earnings**

** **

(In thousands, except pershare data)

 
| ** **                                      | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **March 31,**              | ** ** |
| ** **                                      | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                            |       |                            |       |   |   |
| Net sales                                       |       | $                               | 432,420    |   | $ | 401,332 |   |
| Cost of sales                                   |       | 229,310                         |       | 210,785 |   |
| Gross profit                                    |       | 203,110                         |       | 190,547 |   |
|                                            |       |                            |       |   |   |
| Selling, general and  administrative costs      |       | 98,057                          |       | 91,672 |   |
| Research and  development costs                 |       | 56,552                          |       | 56,742 |   |
| Amortization of  acquired intangibles           |       | 9,650                           |       | 10,329 |   |
|                                            |       | 164,259                         |       | 158,743 |   |
| Operating income                                |       | 38,851                          |       | 31,804 |   |
|                                            |       |                            |       |   |   |
| Other income (expense)                          |       |                            |       |   |   |
| Company Sale  Transaction expenses (See note 2) |       | (4,319                          | )          | — |   |
| Interest expense                                |       | (532                            | )          | (451 | ) |
| Other income  (expense)                         |       | 692                             |       | 1,338 |   |
| Total other  income (expense)                   |       | (4,159                          | )          | 887 |   |
|                                            |       |                            |       |   |   |
| Income before income  taxes                     |       | 34,692                          |       | 32,691 |   |
| Provision for income  taxes                     |       | 12,864                          |       | 12,642 |   |
| Net Income                                      |       | $                               | 21,828     |   | $ | 20,049 |   |
|                                            |       |                            |       |   |   |
| Net income per common  share:                   |       |                            |       |   |   |
|                                            |       |                            |       |   |   |
| Basic                                           |       | $                               | 0.29       |   | $ | 0.27 |   |
| Diluted                                         |       | $                               | 0.29       |   | $ | 0.26 |   |
|                                            |       |                            |       |   |   |
| Weighted average number  of common shares       |       |                            |       |   |   |
|  outstanding:                              |       |                            |       |   |   |
| Basic                                           |       | 74,066                          |       | 74,922 |   |
| Diluted                                         |       | 75,713                          |       | 76,306 |   |

 

See notes tounaudited condensed consolidated financial statements.

5

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**Aeroflex Incorporated**

**and Subsidiaries**

**Consolidated Statements of CashFlows**

(Inthousands)

 

|                                                                                              | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**              | ** ** |
| ** **                                                                                   | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                                                                         |       |                            |       |   |   |
| Cash flows from  operating activities:                                                       |       |                            |       |   |   |
| Net income                                                                                   |       | $                               | 21,828     |   | $ | 20,049 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                                |       | 22,824                          |       | 22,780 |   |
| Deferred income taxes                                                                        |       | (3,548                          | )          | (4,966 | ) |
| Share based compensation expense                                                             |       | 3,212                           |       | 5,011 |   |
| Non — cash restructuring charges                                                        |       | 651                             |       | — |   |
| Excess tax benefits from share based compensation  arrangements                              |       | (354                            | )          | (1,167 | ) |
| Other, net                                                                                   |       | 488                             |       | 411 |   |
| Change in operating assets and liabilities, net of  effects from purchases of businesses:    |       |                            |       |   |   |
| Decrease (increase) in accounts receivable                                                   |       | (9,407                          | )          | (3,698 | ) |
| Decrease (increase) in inventories                                                           |       | (11,520                         | )          | (10,692 | ) |
| Decrease (increase) in prepaid expenses and other  assets                                    |       | (3,689                          | )          | 185 |   |
| Increase (decrease) in accounts payable, accrued expenses  and other liabilities             |       | 2,271                           |       | (1,941 | ) |
| Net cash provided by operating activities                                                    |       | 22,756                          |       | 25,972 |   |
|                                                                                         |       |                            |       |   |   |
| Cash flows from  investing activities:                                                       |       |                            |       |   |   |
| Contingent payment for purchase of business                                                  |       | (9,246                          | )          | — |   |
| Capital expenditures                                                                         |       | (13,338                         | )          | (10,577 | ) |
| Purchase of marketable securities                                                            |       | (444,134                        | )          | (205,669 | ) |
| Sale of marketable securities                                                                |       | 461,890                         |       | 187,081 |   |
| Proceeds from preacquisition tax refund                                                      |       | —                          |       | 1,232 |   |
| Other, net                                                                                   |       | 351                             |       | 130 |   |
| Net cash provided by (used in) investing activities                                          |       | (4,477                          | )          | (27,803 | ) |
|                                                                                         |       |                            |       |   |   |
| Cash flows from  financing activities:                                                       |       |                            |       |   |   |
| Purchase of treasury stock                                                                   |       | (17,233                         | )          | (283 | ) |
| Debt repayments                                                                              |       | (231                            | )          | (283 | ) |
| Bank loan transaction fees                                                                   |       | —                          |       | (308 | ) |
| Excess tax benefits from share based compensation  arrangements                              |       | 354                             |       | 1,167 |   |
| Proceeds from the exercise of stock options                                                  |       | 845                             |       | 3,494 |   |
| Withholding taxes paid for stock option exercises                                            |       | (403                            | )          | (895 | ) |
| Withholding taxes collected for stock option  exercises                                      |       | 403                             |       | 895 |   |
| Net cash provided by (used in) financing activities                                          |       | (16,265                         | )          | 3,787 |   |
| Effect of exchange rate changes on cash and cash  equivalents                                |       | 1,075                           |       | 706 |   |
|                                                                                         |       |                            |       |   |   |
|                                                                                         |       |                            |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                         |       | 3,089                           |       | 2,662 |   |
| Cash and cash equivalents at beginning of period                                             |       | 10,387                          |       | 12,974 |   |
| Cash and cash equivalents at end of period                                                   |       | $                               | 13,476     |   | $ | 15,636 |   |

 

See notes tounaudited condensed consolidated financial statements.

6

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**AEROFLEX INCORPORATEDAND 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. Certain information and footnote disclosures normally included in annualfinancial statements prepared in accordance with U.S. generally acceptedaccounting principles (“GAAP”) have been omitted.  We suggest that you read these condensedconsolidated financial statements in conjunction with the audited financialstatements and notes thereto included in the Company’s June 30, 2006 annualreport to shareholders.

Results of operations forthe three and nine month periods are not necessarily indicative of results ofoperations for future interim periods or for the full fiscal year ended June30, 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 bereasonably estimated.  An estimate ofsuch returns is 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 based upon one of the following methods (based upon an assessment ofwhich method most closely aligns to the underlying earnings process): (i) theunits-of-delivery method, (ii) the cost-to-cost method, using the ratio ofcontract costs incurred as a percentage of total estimated costs at contractcompletion (based upon engineering and production estimates), or (iii) theachievement of contractual milestones. Provisions for anticipated losses or revisions in estimated profits oncontracts-in-process are recorded in the period in which such anticipatedlosses 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, revenue for software isrecognized when the software is

7

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delivered, assuming all ofthe above criteria for revenue recognition are met.  When a customer purchases software togetherwith post contract support, we allocate a portion of the fee to the postcontract support for its fair value based on the contractual renewal rate.  Post contract support fees are deferred inAdvance Payments By Customers and recognized as revenue ratably over the termof the related contract.

**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 March 31, 2007, we had $3.0 million ofnotional value foreign currency forward contracts maturing through June 2007.  Notional amounts do not quantify risk orrepresent assets or liabilities of the Company, but are used in the calculationof cash settlements under the contracts. The fair value of these contracts at March 31, 2007 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 ofstockholders’ equity.  Realized gains andlosses and declines in market value judged to be other than temporary, of whichthere were none for the three and nine months ended March 31, 2007 and 2006,are included in other income.  Interestand dividends are also included in other income.  Marketable securities consist solely ofauction rate bonds whose carrying amount equaled their fair value.

**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 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 on July 1, 2007.  We arein the process of evaluating the impact, if any, FIN 48 will have on ourconsolidated financial 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 to otheraccounting pronouncements that require or permit fair value measurements anddoes 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 theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements 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 February 2007, the FASBissued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities,” (“SFAS No. 159”) to permit all entities to elect, at specifiedelection dates, to measure eligible financial instruments at fair value. An entity shall report unrealized gains and losses on items for which the fairvalue option has been elected in earnings at each subsequent reporting date,and recognize upfront costs and fees related to those items in earnings asincurred and not deferred.  SFAS No. 159 applies to fiscal years beginningafter November 15, 2007, with early adoption permitted for an entity that hasalso elected to apply the provisions of SFAS No. 157.  An entity isprohibited from retrospectively applying SFAS No. 159, unless it chooses earlyadoption.  The Company is currently evaluating the impact of the provisionsof SFAS No. 159 on its consolidated financial statements, if any, when itbecomes effective for the fiscal year ending June 30, 2009.

**2.**  **Sale of Aeroflex Incorporated**

On March 2, 2007, we enteredinto an agreement to be acquired by investment entities affiliated with GeneralAtlantic LLC and Francisco Partners II, L.P. (“Company Sale Transaction”).  In the transaction our shareholders wouldreceive $13.50 per share in cash in exchange for their shares. The agreementcontains a provision under which we were permitted to solicit alternativeacquisition proposals from third parties through April 18, 2007. (SeeConditional Acquisition Proposal below). In the event we accept a superiorproposal received prior to April 19, 2007, a break up fee of $15 million plus upto $7.5 million of expenses would be payable by the Company and if receivedafter April 18, 2007, the fee would increase to $30 million plus up to $7.5million of expenses.  The closing of thetransaction is subject to the approval of our shareholders and other customaryconditions.  A special meeting of ourshareholders has been scheduled for May 30, 2007 for shareholders of record onApril 23, 2007.  Through March 31, 2007,we have incurred and accrued $4.3 million of costs related to this transactionSee note 13 for related shareholder litigation.

Conditional AcquisitionProposal

On April 18, 2007, wereceived a non-binding proposal from Veritas Capital, subject to due diligenceand other conditions, for a leveraged recapitalization of Aeroflex. Our shareholderswould receive a cash dividend of $14 per share and retain in the aggregate21.2% of fully diluted common equity in a then significantly leveraged entity.Under the proposal, Veritas Capital and co-investors to be identified wouldacquire convertible preferred stock of Aeroflex, which on an as converted fullydiluted basis would represent 78.8% of our common stock, and the proceeds wouldpartially fund the payment of the cash dividend.  There is no assurance that the proposal fromVeritas Capital will result in a definitive proposal, a definitive agreement ora consummated transaction.

The consummation of either of the two transactionsdiscussed above will constitute a change in control of the Company for purposesof certain plans and agreements.  Suchchange in control may require the payment of certain amounts under certainemployment agreements and would require (a) the full funding of ourSupplemental Executive Retirement Plan and (b) the immediate vesting of allunexpired and unexercised stock options.

9

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**3.**     **Acquisition of Businesses and Intangible Assets**

On July 31, 2003, weacquired the Racal Instruments Wireless Solutions Group (“RIWS”) for cash of$38 million and a deferred payment of up to $16.5 million in either cash orAeroflex common stock, at our option, depending on RIWS achieving certainperformance goals for the year ending July 31, 2004. In October 2006, a finaldetermination of the deferred payment was made requiring us to pay $9.2million, which we paid in cash and recorded as an increase to goodwill.  We did not include this contingentconsideration in any previously issued balance sheet as the payment of thisconsideration was not considered to be certain beyond a reasonable doubt.

**Intangible Assets with DefiniteLives**

The components of amortizable intangibleassets are as follows:

|                              | ** ** | **March 31, 2007** | ** ** |
|------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **(In thousands)**      | ** ** |
| ** **                   | ** ** | **Gross Carrying**      | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **                   | ** ** | **Amount**                   | ** ** | **Amortization** | ** ** | **Value** | ** ** |
|                         |       |                         |       |   |   |   |   |
| Existing technology          |       | $                            | 86,745     |   | $ | 43,790 |   | $ | 42,955 |   |
| Tradenames                   |       | 2,342                        |       | 2,150 |   | 192 |   |
| Customer related intangibles |       | 6,483                        |       | 3,402 |   | 3,081 |   |
| Total                        |       | $                            | 95,570     |   | $ | 49,342 |   | $ | 46,228 |   |

 

The aggregate amortizationexpense for amortizable intangible assets was $3.2 million and $3.4 million forthe three months ended March 31, 2007 and 2006, respectively and $9.6 millionand $10.3 million for the nine months ended March 31, 2007 and 2006,respectively.

The estimated aggregateamortization expense for each of the twelve month periods ending March 31, isas follows:

|        |   | (In thousands) |   |
|--------|--------|----------------|--------|
|   |   |           |   |
| 2008   |   | $              | 12,184 |   |
| 2009   |   | 9,821          |   |
| 2010   |   | 8,579          |   |
| 2011   |   | 5,288          |   |
| 2012   |   | 2,470          |   |
|        |        |                |        |  |

 

10

----

 

**Goodwill**

Thecarrying amount of goodwill is as follows:

 
| ** **                         | ** ** | **Balance**                | ** ** | ** **        | ** ** | **Effect of** | ** ** | **Balance**                  | ** ** |
|------------------------------------|------------|----------------------------|------------|-------------------|------------|--------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **as of**             | ** ** | **Adjustment**    | ** ** | **Foreign**        | ** ** | **as of**               | ** ** |
| ** **                         | ** ** | **July 1, 2006** | ** ** | **(Note a)** | ** ** | **Currency**       | ** ** | **March 31, 2007** | ** ** |
| ** **                         | ** ** | **(In thousands)**    | ** ** |
|                               |       |                       |       |              |       |               |       |                         |       |
|                               |       |                       |       |              |       |               |       |                         |       |
| Microelectronic Solutions  segment |       | $                          | 46,688     |              | $          | —             |       | $                            | —     |   | $ | 46,688 |   |
| Test Solutions segment             |       | 116,549                    |       | 9,246             |       | 5,039              |       | 130,834                      |       |
| Total                              |       | $                          | 163,237    |              | $          | 9,246              |       | $                            | 5,039      |   | $ | 177,522 |   |

 

----

| Note a - |   | This adjustment to goodwill is for the payment of  the final determination of the deferred payment |
|----------|--------|----------------------------------------------------------------------------------------------------|
|     |   | due on the RIWS acquisition. The payment was made in  October 2006.                                |

 

**4.         Restructuring Charges**

In fiscal 2006, we initiatedsteps to consolidate our three Test Solutions businesses in the UnitedKingdom.  Pursuant to the plan, which issubstantially complete, 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 were terminated and certain contract positions wereeliminated.  In fiscal 2006, we recordedcharges of $3.2 million primarily for workforce reductions in alldepartments.  During the nine monthsended March 31, 2007, we recorded an additional charge of $100,000 for theseworkforce reductions.  As of March 31,2007, approximately $110,000 remains to be paid and is included in accruedliabilities.  The workforce restructuringcharges were allocated solely to general and administrative costs.

In the third quarter offiscal 2007, we initiated and completed restructuring activity in the Wirelessdivision of our Test Solutions businesses in the United Kingdom.  Pursuant to the plan, 23 employees wereterminated resulting in $1.4 million of severence costs and, certaincontract positions were eliminated. We abandoned a leased facility and recordeda fixed asset impairment charge, which in the aggregate amounted to$651,000.  During the nine months endedMarch 31, 2007, we recorded approximately $2.0 million in restructuring costs allof which was paid as of March 31, 2007.

11

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|  | The following table sets  forth the charges and payments related to the restructuring reserve, which is  included in accrued expenses and other current liabilities in the  accompanying balance sheet, for the nine months ended March 31, 2007: |
|--|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **           | ** ** | **Balance July 1,** | ** ** | ** **                                                    | ** ** | **Balance**                  | ** ** |
|----------------------|------------|-------------------------------|------------|---------------------------------------------------------------|------------|------------------------------|------------|
| ** **           | ** ** | **2006**                      | ** ** | **Nine Months Ended March 31, 2007** | ** ** | **March 31, 2007** | ** ** |
| ** **           | ** ** | ** **                    | ** ** | ** **                                                    | ** ** | **(In thousands)**      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **Net Addition**                                         | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **to**                                                        | ** ** | ** **                   | ** ** | **Foreign** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Restructuring**             | ** ** | **Restructuring**                                             | ** ** | **Cash**                     | ** ** | **Currency** | ** ** | **Restructuring** | ** ** |
| ** **           | ** ** | **Reserve**                   | ** ** | **Reserve**                                                   | ** ** | **Payments**                 | ** ** | **Impact** | ** ** | **Reserve** | ** ** |
| ** **           | ** ** | ** **                    | ** ** | ** **                                                    | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Work force reduction |       | $                        | 1,091      |                                                          | $     | 1,490                        |       | $  | (2,540 | ) | $  | 69 |   | $  | 110 |   |
|                 |       |                          |       |                                                          |       |                         |       |   |   |   |   |
| Other                |       | 100                           |       | —                                                        |       | (100                         | )          | — |   | — |   |
|                 |       |                          |       |                                                          |       |                         |       |   |   |   |   |
| Total                |       | $                             | 1,191      |                                                          | $          | 1,490                        |       | $ | (2,640 | ) | $ | 69 |   | $ | 110 |   |

 
| **5.**     | **Earnings Per Share**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** | The consolidated  statements of earnings present basic and diluted earnings per share.  Basic earnings per share is determined by  dividing income available to common stockholders by the weighted average  number of common shares outstanding for the period.  Diluted earnings per share considers the  potential effect of dilution on basic earnings per share assuming potentially  dilutive securities that meet certain criteria, such as stock options, were  outstanding since issuance.  The treasury  stock method is used to determine the dilutive effect of potentially dilutive  securities. |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | The following table  reconciles basic shares outstanding to diluted shares outstanding:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **March 31,**          | ** ** | **March 31,**         | ** ** |
| ** **                            | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **(In thousands)**     | ** ** |
|                                  |       |                   |       |                  |       |   |   |   |   |
| Basic Shares Outstanding              |       | 73,775                 |       | 75,133                |       | 74,066 |   | 74,922 |   |
| Add: Effect of dilutive stock options |       | 1,939                  |       | 2,097                 |       | 1,647 |   | 1,384 |   |
|                                  |       |                   |       |                  |       |   |   |   |   |
| Diluted Shares Outstanding            |       | 75,714                 |       | 77,230                |       | 75,713 |   | 76,306 |   |

 
|  | Options to purchase 7.0  million shares at exercise prices ranging between $10.72 and $34.41 per share  were outstanding as of March 31, 2007 but were not included in the  computation of diluted EPS as their effect would have been anti-dilutive.  Options to purchase 7.1 million shares at exercise prices ranging between  $9.22 and $34.41 per share were outstanding as of March 31, 2006 but were not  included in the computation of diluted EPS as their effect would have been  anti-dilutive. |
|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

12

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| **6.**     | **Comprehensive Income**                                |
|------------|---------------------------------------------------------|
| ** ** | ** **                                              |
| ** ** | The components of  comprehensive income are as follows: |

 
| ** **                                                                                                                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                         | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                                                                                                                                         | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                                                                         | ** ** | **(In thousands)**          | ** ** |
|                                                                                                                                                               |       |                             |       |                            |       |   |   |   |   |
| Net income                                                                                                                                                         |       | $                                | 5,489      |                            | $          | 7,746 |   | $ | 21,828 |   | $ | 20,049 |   |
|                                                                                                                                                               |       |                             |       |                            |       |   |   |   |   |
| Minimum pension  liability adjustment,  net of tax  provision (benefit) of  $0 and $0 in  2007 and  $0 and $(16) in 2006                            |       | —                           |       | —                          |       | — |   | 16 |   |
|                                                                                                                                                               |       |                             |       |                            |       |   |   |   |   |
| Unrealized gain (loss)  on  interest rate swap  agreements, net of tax  provision (benefit)  of $1 and $0 in 2007  and $9 and $31 in 2006 |       | 2                                |       | 15                              |       | — |   | 52 |   |
|                                                                                                                                                               |       |                             |       |                            |       |   |   |   |   |
| Foreign currency  translation adjustment                                                                                                                      |       | (260                             | )          | 478                             |       | 10,332 |   | (4,571 | ) |
|                                                                                                                                                               |       |                             |       |                            |       |   |   |   |   |
| Total comprehensive income                                                                                                                                         |       | $                           | 5,231      |                            | $     | 8,239 |   | $  | 32,160 |   | $  | 15,546 |   |

 

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 |   |
| Nine months activity    |       | —                     |       | —                     |       | 10,332          |       | 10,332                     |       |
| Balance, March 31, 2007 |       | $                          | (4,180     | )                          | $          | (12             | )          | $                          | 27,992     |   | $ | 23,800 |   |

 

The foreign currency translation adjustmentsare not adjusted for income taxes as they relate to indefinite investments innon-U.S. subsidiaries.

13

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| **7.**     | **Inventories**                        |
|------------|----------------------------------------|
| ** ** | ** **                             |
| ** ** | Inventories consist of the  following: |

 
| ** **      | ** ** | **March 31,**      | ** ** | **June 30,** | ** ** |
|-----------------|------------|-------------------------|------------|-------------------|------------|
| ** **      | ** ** | **2007**                | ** ** | **2006**          | ** ** |
| ** **      | ** ** | **(In thousands)** | ** ** |
|            |       |                    |       |              |       |
| Raw materials   |       | $                       | 69,877     |              | $          | 52,796 |   |
| Work in process |       | 54,872                  |       | 57,020            |       |
| Finished goods  |       | 23,014                  |       | 23,604            |       |
|            |       | $                       | 147,763    |              | $          | 133,420 |   |

 
| **8.**     | **Product Warranty**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | We warrant our products  against defects in design, materials and workmanship, generally for one year  from their date of shipment.  A  provision for estimated future costs relating to these warranties is recorded  when revenue is recognized and is included in cost of sales. Quarterly we  analyze our warranty liability for reasonableness based on a 15-month history  of warranty costs incurred, the nature of the products shipped subject to  warranty and anticipated warranty trends. |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | Activity related to our  product warranty liability was as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 
| ** **                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **March 31,**              | ** ** |
| ** **                          | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(In thousands)**         | ** ** |
|                                |       |                            |       |   |   |
| Balance at beginning of  period     |       | $                               | 2,583      |   | $ | 2,056 |   |
| Provision for warranty  obligations |       | 2,407                           |       | 2,753 |   |
| Cost of warranty  obligations       |       | (2,266                          | )          | (2,148 | ) |
| Foreign currency impact             |       | 45                              |       | (18 | ) |
|                                |       |                            |       |   |   |
| Balance at end of period            |       | $                               | 2,769      |   | $ | 2,643 |   |

 
| **9.**     | **Bank Loan Agreements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | On March 21, 2006, we  executed a loan agreement with four banks for an unsecured multi-currency  revolving credit facility that provides for borrowings under a line of credit  of up to $100 million through March 2011.    Under certain circumstances, upon our request, the commitments under  the credit facility may be increased by an additional $50 million to $150  million.  The interest rates on  borrowings under this agreement are at varying rates depending on certain  financial ratios with the current rate substantially equivalent to LIBOR plus  .575% (5.9% at March 31, 2007) on the revolving credit borrowings.  We are required to pay an annual facility  fee of .175% on the entire credit line. |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | The terms of the loan  agreement, as amended on August 28, 2006, require compliance with certain  financial covenants including maintenance of various financial ratios,  limitations on indebtedness and treasury stock repurchases, and prohibition  of the payment of cash dividends and certain other payments.  We are currently in full compliance with  all of the covenants contained in the loan agreement.  At March 31, 2007 there were no borrowings  outstanding under the revolving credit facility and our available unused line  of credit was approximately $89.0 million after consideration of $11.0  million of outstanding letters of credit.                                                                         |

 

14

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| **10.**    | **Defined Benefit Pension  Plans**                                                                                                                                                                                                                                                                                                                                                                                       |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | Effective January 1, 1994,  we established a Supplemental Executive Retirement Plan (the “SERP”) which  provides retirement, death and disability benefits to certain of our  officers.  A substantial portion of the  obligations under the SERP are unfunded.   On September 3, 2003, we acquired MCE, including its defined benefit  pension plan, which has been frozen since December 31, 1993. |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | **Components  of Net Periodic Benefit Cost**                                                                                                                                                                                                                                                                                                                                                                             |

 
| ** **                                         | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **March 31,**              | ** ** |
| ** **                                         | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **                                         | ** ** | **(In thousands)**         | ** ** |
|                                               |       |                            |       |   |   |
| Service cost                                       |       | $                               | 141        |   | $ | 385 |   |
| Interest cost                                      |       | 809                             |       | 743 |   |
| Expected return on plan  assets                    |       | (121                            | )          | (109 | ) |
| Amortization of net  transition (asset) obligation |       | 28                              |       | 28 |   |
| Recognized actuarial  (gain) loss                  |       | 515                             |       | 338 |   |
| Net periodic benefit cost                          |       | $                               | 1,372      |   | $ | 1,385 |   |

 
|            | We previously disclosed in  the notes to our financial statements for the year ended June 30, 2006 that  we expected to contribute $1.5 million to the MCE pension and SERP plans in  the fiscal year ended June 30, 2007.    As of March 31, 2007, $583,000 of contributions have been made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | Due to the retirement in  2005 of one of our officers, we are required to make payments of $674,000 in  fiscal year ending June 30, 2007 and $628,000 in each fiscal year thereafter  pursuant to the SERP.  Payments cease  December 31, 2015 or upon death, whichever is later.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **11.**    | **Share Based Compensation**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | We have several stock option plans that are described under the  caption “Stock Options and Warrants” in note 9 of our June 30, 2006  consolidated financial statements.  As  of March 31, 2007, 3.0 million shares of the Company’s Common Stock were  reserved and available to be granted pursuant to these plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | Compensation expense attributable to share based compensation was  $1.3 million ($807,000 after tax), or $.01 for both basic and diluted  earnings per share, for the three months ended March 31, 2007 and $1.6  million ($943,000 after tax), or $.01 for both basic and diluted earnings per  share, for the three months ended March 31, 2006.   Compensation expense attributable to share  based compensation was $3.2 million ($2.1 million after tax), or $.03 for  both basic and diluted earnings per share, for the nine months ended March  31, 2007 and $5.0 million ($3.1 million after tax), or $.04 for both basic and  diluted earnings per share, for the nine months ended March 31, 2006.  As of March 31, 2007, the total  unrecognized compensation cost related to nonvested stock awards was $5.0  million and the related weighted average period over which it is expected to  be recognized is approximately 1.6 years. |

 

15

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|  | A summary of our stock option plans as of March 31,  2007 and changes during the nine 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                                    |       | 185                     |       | 12.94        |       |                    |       |                      |       |
| Exercised                                  |       | (229                    | )          | 6.72         |       |                    |       |                      |       |
| Expired                                    |       | —                  |       | —       |       |                    |       |                      |       |
| Forfeited                                  |       | (225                    | )          | 12.39        |       |                    |       |                      |       |
|                                       |       |                    |       |         |       |                    |       |                      |       |
| Outstanding at March 31, 2007              |       | 14,494                  |       | $            | 12.01      |                    | $          | 38,779                    |       | 4.7 |   |
|                                       |       |                    |       |         |       |                    |       |                      |       |
| Exercisable at March 31, 2007              |       | 13,545                  |       | $            | 12.14      |                    | $          | 35,905                    |       | 4.5 |   |
|                                       |       |                    |       |         |       |                    |       |                      |       |
| Options expected to vest at March 31, 2007 |       | 883                     |       | $       | 10.18      |                    | $     | 2,628                     |       | 8.3 |   |

----

(1) The intrinsicvalue of a stock option is the amount by which the market value of theunderlying stock on March 31, 2007 exceeds the exercise price of the option.

 
|        | The weighted average grant  date fair value of stock options granted for the three months ended March 31,  2007 and 2006 was $8.25 and $9.67, respectively.   The weighted average grant date fair value  of stock options granted for the nine months ended March 31, 2007 and 2006  was $8.23 and $8.85, respectively. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                               |
|   | The fair value of each  option grant was estimated on the date of grant using the Black-Scholes  option-pricing model with the following weighted average assumptions:                                                                                                                                                             |

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                        | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Weighted average  expected stock price volatility |       | 67                               | %          | 89                              | %          | 68 | % | 92 | % |
| Weighted average  expected option life            |       | 5.8 years                        |       | 6.0 years                       |       | 5.8 years |   | 6.1 years |   |
| Average risk free  interest rate                  |       | 4.5                              | %          | 4.6                             | %          | 4.6 | % | 4.5 | % |
| Average dividend yield                            |       | —                           |       | —                          |       | — |   | — |   |
| Discount for post-vesting restrictions            |       | N/A                              |       | N/A                             |       | N/A |   | N/A |   |

 
|  | The total intrinsic value  of stock options exercised for the three months ended March 31, 2007 and 2006  was $384,000 and $2.1 million, respectively, on the exercise dates.   The total intrinsic value of stock options  exercised for the nine months ended March 31, 2007 and 2006 was $1.2 million  and $3.1 million, respectively, on the exercise dates. |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

16

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|            | Cash received from stock  option exercises for the three months ended March 31, 2007 and 2006 was  $340,000 and $1.7 million, respectively.    Cash received from stock option exercises for the nine months ended  March 31, 2007 and 2006 was $845,000 and $3.5 million, respectively.  The tax benefit received from stock option  exercises for the three months ended March 31, 2007 and 2006 was $140,000 and  $766,000, respectively.    The tax  benefit received from stock option exercises for the nine months ended March  31, 2007 and 2006 was $445,000 and $1.2 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|       | **Restricted Stock**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|       | In fiscal 2006, we granted  10,000 shares of Restricted Stock of which 5,000 vested and none were  forfeited during the nine months ended March 31, 2007.  At the grant date, this award had an  estimated fair value of approximately $105,000 which is being recognized as  compensation expense, on a straight line basis over the requisite service  period of two years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|       | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **12.**    | **Stock Repurchase Program**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | During fiscal 2005, our  Board of Directors authorized a stock repurchase program of up to 3.0 million  shares of the Company’s Common Stock, subject to certain limitations imposed  by our lending banks.  Purchases are  made from time to time, depending upon market conditions at prices deemed  appropriate by management.  For the  nine months ended March 31, 2007, approximately 1.8 million shares were  repurchased for $17.2 million and retired.   Since the inception of this program, approximately 1.8 million shares  have been repurchased for $18.0 million and retired, including 85,000 shares  repurchased in prior fiscal years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **13.**    | **Contingencies**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | In March 2007, four  separate plaintiffs filed putative class action lawsuits in the Supreme  Court, State of New York, County of Nassau concerning the proposed  acquisition of the Company by entities directly and indirectly owned by an  investment group consisting of investment entities affiliated with General  Atlantic LLC and Francisco Partners II, L.P. pursuant to a merger agreement  dated March 2, 2007 (see note 2).  Plaintiffs have since moved to  consolidate the four putative class action lawsuits.  The plaintiffs  seek, among other things, an order of the court that would prevent the  consummation of the merger and direct defendants to obtain a transaction in  the best interest of the shareholders.  On April 23, 2007, plaintiff  Jack Trugman (“Trugman”) filed an amended putative class action complaint,  generally alleging that the Company’s directors breached their fiduciary  duties by approving a transaction that benefits themselves, to the detriment  of the Company’s stockholders, and that the Company, General Atlantic LLC and  Francisco Partners II, L.P. aided and abetted the directors’ alleged breach  of fiduciary duties.  On April 23, 2007, defendants (i) moved to dismiss  Trugman’s amended complaint for failure to state a claim upon which relief  may be granted and (ii) filed their opposition to Trugman’s application for  expedited discovery.  On May 3, 2007, the Court denied Trugman’s  application for expedited discovery.  A hearing on defendants’ motion to  dismiss has been set for May 10, 2007. |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** | During the quarter ended  March 31, 2007, we became aware that certain Bidirectional Multipurpose  Transceivers sold by the Company’s Colorado Springs subsidiary since 1999,  may have been subject to International Traffic in Arms Regulations  (“ITAR”).  Accordingly, we filed a  detailed Voluntary Disclosure with the Directorate of Defense Trade Controls,  United States Department of State, describing the details of the possible  inadvertent misclassification.   Simultaneously, the Company has filed a Commodity Jurisdiction  Application explaining its belief that the product is not subject to ITAR and  requesting a determination that such product is not ITAR controlled.  At this time, it is not possible to determine  whether any fines or other penalties will be asserted against us, or the  materiality of any outcome.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | We are involved in various  routine legal matters.  We believe the  outcome of these matters will not have a material adverse effect on our  consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

** **

17

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| **14.**    | **Business Segments**                                                               |
|------------|-------------------------------------------------------------------------------------|
| ** ** | ** **                                                                          |
| ** ** | Our business segments and  major products included in each segment, are as follows: |
| ** ** |                                                                                |

MicroelectronicSolutions (“AMS”)

·                  Microelectronic Components, Sub-assembliesand Modules

·                  Integrated Circuits

·                  Motion Control Systems

TestSolutions (“ATS”)

·                  Instrument Products and Test Systems
|            | We are a manufacturer of  advanced technology systems and components for commercial industry,  government and defense contractors.   Approximately 35% and 31% of our sales for the three months ended  March 31, 2007 and 2006, and 31% and 29% for the nine months ended March 31,  2007 and 2006, respectively, were to agencies of the United States government  or to prime defense contractors or subcontractors of the United States  government.  No one customer  constituted more than 10% of sales during any of the periods presented.  Inter-segment sales were not material and  have been eliminated from the tables below.                     |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | Most of our operations are  located in the United States; however, we also have operations in Europe and  Asia.  Aeroflex International Limited,  which was acquired in May 2002, RIWS, which was acquired in July 2003, and  the SPG division of UbiNetics Holdings Limited, which was acquired in May  2005, all have significant operations in the United Kingdom.  Specifically, net sales from facilities  located in the United Kingdom were approximately $118.2 million and $116.0  million for the nine months ended March 31, 2007 and 2006, respectively.  Total assets of the United Kingdom  operations were $229.8 million as of March 31, 2007. |
| ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | Revenues, based on the  customers’ locations, attributed to the United States and other regions are  as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 
| ** **                | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------------------------|------------|
| ** **                | ** ** | **March 31,**                                 | ** ** |
| ** **                | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(In thousands)**                            | ** ** |
|                      |       |                                               |       |   |   |
| United States of  America |       | $                                                  | 88,225     |   | $ | 76,074 |   |
| Europe and Middle East    |       | 40,565                                             |       | 46,586 |   |
| Asia and Australia        |       | 18,994                                             |       | 15,052 |   |
| Other regions             |       | 2,487                                              |       | 2,815 |   |
|                      |       | $                                                  | 150,271    |   | $ | 140,527 |   |

 
| ** **                | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **March 31,**                                | ** ** |
| ** **                | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(In thousands)**                           | ** ** |
|                      |       |                                              |       |   |   |
| United States of  America |       | $                                                 | 255,086    |   | $ | 234,933 |   |
| Europe and Middle East    |       | 119,890                                           |       | 107,553 |   |
| Asia and Australia        |       | 52,578                                            |       | 53,548 |   |
| Other regions             |       | 4,866                                             |       | 5,298 |   |
|                      |       | $                                                 | 432,420    |   | $ | 401,332 |   |

 

18

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Selected financial data by segment is asfollows:
| ** **                                                                       | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**                                 | ** ** | **March 31,**                                | ** ** |
| ** **                                                                       | ** ** | **2007**                                           | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | **(In thousands)**                            | ** ** | **(In thousands)**                           | ** ** |
| Net sales:                                                                       |       |                                               |       |                                              |       |   |   |   |   |
| Microelectronic  solutions (“AMS”)                                     |       | $                                                  | 67,087     |                                              | $          | 61,126 |   | $ | 194,306 |   | $ | 174,818 |   |
| Test solutions  (“ATS”)                                                |       | 83,184                                             |       | 79,401                                            |       | 238,114 |   | 226,514 |   |
| Net sales                                                                        |       | $                                                  | 150,271    |                                              | $          | 140,527 |   | $ | 432,420 |   | $ | 401,332 |   |
|                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| Segment adjusted  operating income(1):                                           |       |                                               |       |                                              |       |   |   |   |   |
| AMS                                                                              |       | $                                                  | 16,693     |                                              | $          | 12,854 |   | $ | 47,547 |   | $ | 41,778 |   |
| ATS                                                                              |       | 6,959                                              |       | 9,296                                             |       | 19,601 |   | 19,448 |   |
| General  corporate expense                                                       |       | (3,810                                             | )          | (3,704                                            | )          | (13,295 | ) | (11,816 | ) |
| Adjusted  operating income                                                       |       | 19,842                                             |       | 18,446                                            |       | 53,853 |   | 49,410 |   |
|                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| Amortization of  acquired intangibles                                            |       |                                               |       |                                              |       |   |   |   |   |
| — AMS                                                                       |       | (441                                               | )          | (534                                              | )          | (1,368 | ) | (1,601 | ) |
| — ATS                                                                       |       | (2,784                                             | )          | (2,906                                            | )          | (8,282 | ) | (8,728 | ) |
| Share based  compensation                                                        |       |                                               |       |                                              |       |   |   |   |   |
| — AMS                                                                       |       | (210                                               | )          | (258                                              | )          | (736 | ) | (984 | ) |
| — ATS                                                                       |       | (250                                               | )          | (361                                              | )          | (752 | ) | (1,172 | ) |
| — Corporate                                                                 |       | (798                                               | )          | (933                                              | )          | (1,724 | ) | (2,854 | ) |
| Restructuring charges —  ATS(2)                                             |       | (2,040                                             | )          | (1,179                                            | )          | (2,140 | ) | (1,179 | ) |
| Current period impact  of acquisition related adjustment to inventory — ATS |       | —                                             |       | —                                            |       | — |   | (1,088 | ) |
| Operating income (GAAP)                                                          |       | 13,319                                             |       | 12,275                                            |       | 38,851 |   | 31,804 |   |
| Company Sale  Transaction expenses                                               |       | (4,319                                             | )          | —                                            |       | (4,319 | ) | — |   |
| Interest expense                                                                 |       | (237                                               | )          | (144                                              | )          | (532 | ) | (451 | ) |
| Other income (expense),  net                                                     |       | 819                                                |       | 586                                               |       | 692 |   | 1,338 |   |
| Income before income taxes                                                       |       | $                                                  | 9,582      |                                              | $          | 12,717 |   | $ | 34,692 |   | $ | 32,691 |   |

 

(1)             Managementevaluates the operating results of the two segments based upon pre-taxoperating income, before costs related to restructuring, amortization ofacquired intangibles, share based compensation and the impact of anyacquisition related adjustments to inventory.

(2)             Theoperating income of the ATS segment has been adjusted to exclude therestructuring charges for the reorganization of its ATS segment, primarily itsEuropean operations.
| **15.**    | **Subsequent Event**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | On April 12, 2007, we  purchased 100% of the outstanding stock of Micro-Metrics, Inc. (“MMI”) for  $9.9 million of cash and repaid approximately $700,000 of MMI’s bank  debt.  MMI, located in Londonderry, New  Hampshire, is a design and full service manufacturer of both standard and  application specific RF/Microwave diodes and semiconductor devices.  MMI strengthens our hi-reliability,  hi-performance RF/Microwave product portfolio of semiconductor solutions. |

 

19

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

**Sale ofAeroflex Incorporated**

On March 2, 2007, we entered into an agreement to be acquired byinvestment entities affiliated with General Atlantic LLC and Francisco PartnersII, L.P. (“Company Sale Transaction”). In the transaction our shareholders would receive $13.50 per share incash in exchange for their shares. The agreement contains a provision underwhich we were permitted to solicit alternative acquisition proposals from thirdparties through April 18, 2007. (See Conditional Acquisition Proposal below).In the event we accept a superior proposal received prior to April 19, 2007, abreak up fee of $15 million plus up to $7.5 million of expenses would bepayable by the Company and if received after April 18, 2007, the fee wouldincrease to $30 million plus up to $7.5 million of expenses.  The closing of the transaction is subject tothe approval of our shareholders and other customary conditions.  A special meeting of our shareholders hasbeen scheduled for May 30, 2007 for shareholders of record on April 23, 2007.  Through March 31, 2007, we have incurred andaccrued approximately $4.3 million of cost related to this transaction. Seenote 13 for related shareholder litigation.

Conditional Acquisition Proposal

On April 18, 2007, we received a non-binding proposal from VeritasCapital, subject to due diligence and other conditions, for a leveragedrecapitalization of Aeroflex. Our shareholders would receive under thisproposal a cash dividend of $14 per share and retain in the aggregate 21.2% offully diluted common equity in a then significantly leveraged entity. Under theproposal, Veritas Capital and co-investors to be identified would acquireconvertible preferred stock of Aeroflex, which on an as converted fully dilutedbasis would represent 78.8% of our common stock, and the proceeds wouldpartially fund the payment of the cash dividend.  There is no assurance that the proposal fromVeritas Capital will result in a definitive proposal, a definitive agreement ora consummated transaction.

**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 thewireless industry, the military and private mobile radio industry and the commercialand military avionics industries.  Overthe years, we have made acquisitions to enter new markets or to increase ourpenetration of existing markets.

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

20

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In fiscal 2006, we initiated steps to consolidate our three TestSolutions businesses in the United Kingdom. Pursuant to the plan, which is substantially complete, 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 were terminated and certain contract positions wereeliminated.  In fiscal 2006, we recordedcharges of $3.2 million primarily for workforce reductions in alldepartments.  During the nine monthsended March 31, 2007, we recorded an additional charge of $100,000 for theseworkforce reductions.  As of March 31,2007, approximately $110,000 remains to be paid and is included in accruedliabilities.  The workforce restructuringcharges were allocated solely to general and administrative costs.

In the third quarter of fiscal 2007, we initiated and completedrestructuring activity in the Wireless division of our Test Solutionsbusinesses in the United Kingdom. Pursuant to the plan, 23 employees wereterminated resulting in $1.4 million of severance costs and, certain contractpositions were eliminated. We abandoned a leased facility and recorded a fixedasset impairment charge, which in the aggregate amounted to $651,000. Duringthe nine months ended March 31, 2007, we recorded approximately $2.0 millionin restructuring costs, all of which was paid as of March 31, 2007.

**ThreeMonths ended March 31, 2007 Compared to Three Months Ended March 31, 2006**

*Net Sales. *Net sales increased 7%**to$150.3 million for the three months ended March 31, 2007 from $140.5million for the three months ended March 31, 2006.  Net sales in the microelectronic solutions (“AMS”)segment increased 10%**to**$67.1million for the three months ended March 31, 2007 from $61.1 million for thethree months ended March 31, 2006 primarily as a result of increased volume ofintegrated circuits and to a lesser extent microelectronic modules andcomponents.  Net sales in the testsolutions (“ATS”) segment increased 5%**to $83.2 million for the threemonths ended March 31, 2007 from $79.4 million for the three months ended March31, 2006 as a result of an increase in volume in our radio test and radar testbusinesses.

*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** | ** ** |
| **March 31,**                                    | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2007                                                  |       | $          | 34,242     |          | 51.0       | %          | $          | 36,569        |       | 44.0       | %          | $             | 70,811     |   | 47.1 | % |
| 2006                                                  |       | 28,933     |       | 47.3          | %          | 38,133     |       | 48.0          | %          | 67,066     |       | 47.7          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

 

Gross profit increased $5.3 million, or 18%, in the AMS segment as aresult of higher sales and increased margins. Margin percentages increased 4%to 51.0% primarily due to a change in sales mix related to integrated circuits,microelectronic modules and to a lesser extent components.

Gross profit decreased $1.6 million, or 4%, in the ATS segmentprimarily as a result of a decrease in volume in wireless and frequencysynthesizer products partially offset by increase sales volume of radio testequipment. Margin percentages decreased 4% to 44.0% primarily due to sales mixresulting partially from the delay of the scheduled shipment of a high marginproduct into the fourth quarter of 2007.

21

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*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** | ** ** |
| **March 31,**                                    | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2007                                                  |       | $          | 10,260     |          | 15.3       | %          | $          | 19,039        |       | 22.9          | %          | $          | 4,608      |          | $          | 33,907 |   | 22.6 | % |
| 2006                                                  |       | 9,569      |       | 15.7          | %          | 16,657     |       | 21.0          | %          | 4,637         |       | 30,863     |       | 22.0          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |               |            |            |            |               |            |  |  |  |  |

 

Selling, general and administrative costs increased by $691,000, or 7%*,*inthe AMS segment primarily due to general increases in expenses related to theincrease in sales.   Selling, general andadministrative costs increased by**$2.4million, or 14%, in the ATS segment primarily as a result of general increasesin expenses related to the increase in sales and a $1.1 million increase inrestructuring expenses.

*Research and Development Costs. *Research and development costs includematerial, engineering labor and allocated overhead.
| **Three Months**                                 | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **March 31,**                                    | ** ** | ** ** | ** ** | **AMS**       | ** ** | **sales**  | ** ** | **ATS**       | ** ** | **sales**  | ** ** | **Total**     | ** ** | **sales** | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2007                                                  |       | $          | 7,499      |          | 11.2       | %          | $          | 12,861        |       | 15.5       |       | $             | 20,360     |   | 13.5 | % |
| 2006                                                  |       | 6,767      |       | 11.1          | %          | 13,721     |       | 17.3          | %          | 20,488     |       | 14.6          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |  |  |

 

Self funded research and development costs increased $732,000, or 11%,in the AMS segment primarily due to development costs for integrated circuitsand microelectronic modules.  Researchand development costs decreased $860,000 or 6%, in the ATS segment mainly due tonon-repeat expenses in the prior year for frequency synthesizer products andcost saving initiatives in radar, partially offset by increased developmentcosts in radio test.

*Amortization of Acquired Intangibles.* Amortization decreased $215,000, or 6%.

*Other Income (Expense). *Interest expense was $237,000 in the currentquarter and $144,000 in the prior year’s comparable quarter.  Other income of $819,000 for the three monthsended March 31, 2007 consisted primarily of interest income of $177,000,foreign exchange gain of $79,000 and miscellaneous income of $563,000.  Other income of $586,000 for the three monthsended March 31, 2006 consisted primarily of interest income of $447,000.  The decrease of $270,000 in interest incomewas due to the lower balances in cash, cash equivalents and marketablesecurities.   In the three months endedMarch 31, 2007, $4.3 million of expenses, consisting primarily of professionalfees, were incurred in connection with the sale of the company.

*Provision for Income Taxes. *The income tax provision was $4.1 million (aneffective income tax rate of 42.7%) for the three months ended**March 31, 2007 and $5.0 million (an effective income taxrate of 39.1%) for the three months ended March 31, 2006.  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 and the impact of Company Sale Transaction expenses incurredin fiscal 2007, certain of which are not deductible for tax purposes.  These non-deductible transaction expenses arethe primary reason for the increase in the effective income tax rate in fiscal2007.    We anticipate the effective rateto be 37% for the balance of the year.  We paid $6.8 million for the three months ended March 31, 2007 and $8.3million for the three months ended March 31, 2006 for income taxes.

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**NineMonths ended March 31, 2007 Compared to Nine Months Ended March 31, 2006**

*Net Sales. *Net sales increased 8% to $432.4 million forthe nine months ended March 31, 2007 from $401.3 million for the nine monthsended March 31, 2006.  Net sales in theAMS segment increased 11% to $194.3million for the nine months ended March 31, 2007 from $174.8 million for thenine months ended March 31, 2006 as a result of an increase in volume ofintegrated circuits, components and microelectronic modules.   Net sales in the ATS segment increased 5%**to$238.1 million for the nine months ended March 31, 2007 from $226.5million for the nine months ended March 31, 2006 as a result of an increase involume of radio test and radar test and new product introductions in our wirelessbusiness.

*GrossProfit.*
| **Nine Months**                                  | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **March 31,**                                    | ** ** | ** ** | **AMS**    | ** **    | **sales**  | ** ** | **ATS**    | ** **    | **sales**  | ** ** | **Total**  | ** **    | **sales**  | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2007                                                  |       | $          | 97,932     |          | 50.4       | %          | $          | 105,178       |       | 44.2       | %          | $             | 203,110    |   | 47.0 | % |
| 2006                                                  |       | 87,136     |       | 49.8          | %          | 103,411    |       | 45.7          | %          | 190,547    |       | 47.5          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |  |  |

 

AMS gross profit increased $10.8 million, or 12%, primarily due toincreased sales volumes of integrated circuits, components  and microelectronic modules.   Margin percentages increased 0.6% to 50.4%primarily due to sales mix.

ATS gross profit increased $1.8 million, or 2%, primarily due toincreases in radio test sales volume partially offset by decreased sales volumeof frequency synthesizers and changes in sales mix of wireless products, Marginpercentages declined 1.5% to 44.2% primarily due to product mix.

*Selling, General and Administrative Costs.*
| **Nine Months**                                  | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** **    | ** ** | ** ** | ** ** | **% of** | ** ** |
| **March 31,**                                    | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2007                                                  |       | $          | 30,498     |          | 15.7       | %          | $          | 52,540        |       | 22.0          | %          | $          | 15,019     |          | $          | 98,057 |   | 22.7 | % |
| 2006                                                  |       | 27,954     |       | 16.0          | %          | 49,048     |       | 21.7          | %          | 14,670        |       | 91,672     |       | 22.8          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |               |            |            |            |               |            |  |  |  |  |

 

Selling, general and administrative costs increased by $2.5 million, or9%, in the AMS segment primarily due to general increases in expenses relatedto the increase in sales.  Selling,general and administrative costs increased by $3.5 million, or 7%, in the ATS segment primarily as a resultof a general increase in sales and a $1.2 million increase in restructuringexpenses, partially offset by cost reduction efforts in our wireless business.

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*Research and Development Costs.*
| **Nine Months**                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Ended**                              | ** ** | ** ** | ** ** | **% of**   | ** ** | ** ** | ** ** | **% of**   | ** ** | ** ** | ** ** | **% of**   | ** ** |
| **March 31,**                          | ** ** | ** ** | **AMS**    | ** ** | **sales**  | ** ** | **ATS**    | ** ** | **sales**  | ** ** | **Total**  | ** ** | **sales**  | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2007                                   |       | $20,623    |       | 10.6       | %          | $35,929    |       | 15.1       | %          | $56,552    |       | 13.1       | %          |
| 2006                                   |       | 18,387     |       | 10.5       | %          | 38,355     |       | 16.9       | %          | 56,742     |       | 14.1       | %          |
|                                        |            |            |            |            |            |            |            |            |            |            |            |            |            |  |

 

Self funded research and development costs increased $2.2 million, or12%, in the AMS segment primarily due to development costs for microelectronicmodules and integrated circuits. Research and development costs decreased $2.4million, or 6%, in the ATS segment primarily due to restructuring efforts inour wireless business, combined with cost saving initiatives in radar, offset byincreased development costs in radio test.

*Amortization of Acquired Intangibles.* Amortization decreased $679,000, or 7%.

*Other Income (Expense).*   Interest expense increased to$532,000 for the nine months ended March 31, 2007 from $451,000 for the nine monthsended March 31, 2006.  Other income of$692,000 for the nine months ended March 31, 2007 consisted primarily ofinterest income of $702,000 and other miscellaneous income of $688,000, offsetby foreign currency transaction losses of $698,000.  Other income of $1.3 million for the ninemonths ended March 31, 2006 consisted primarily of interest income of $784,000and a favorable building lease termination gain of $459,000.   The increase in interest income was due tohigher levels of cash in the first three months of the current year and anincrease in interest rates.  In the ninemonths ended March 31, 2007, $4.3 million of expenses, consisting primarily ofprofessional fees, were incurred in connection with the sale of the Company.

*Provision for Income Taxes. *The income tax provision was $12.9 million(an effective income tax rate of 37.1%) for the nine months ended**March 31, 2007 and $12.6 million (an effective income taxrate of 38.7%) for the nine months ended March 31, 2006.  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, and for the nine months ended March 31, 2006, a state rate changeand a tax audit adjustment and for the nine months ended March 31, 2007, theimpact of Company Sale Transaction expenses incurred in fiscal 2007, certain ofwhich are not deductible for tax purposes. We anticipate the effective rate to be 37% for the balance of theyear.  We paid $24.2 million for the ninemonths ended March 31, 2007, and $19.9 million for the nine months ended March31, 2006, for income taxes.

*Net Income. *Net income for the nine months ended March31, 2007 was $21.8 million, or 5.0% of sales, versus $20.0 million, or 5.0% ofsales, for the nine months ended March 31, 2006.

**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.

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**Liquidity and Capital Resources**

As of March 31, 2007, we had $216.4 million in working capital and ourcurrent ratio was 2.8 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 March 31, 2007, 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 March 31, 2007).

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 nine months ended March 31, 2007, our operations provided cashof $22.8 million. Our investing activities used cash of $4.5 million, primarilydue to $13.3 million of capital expenditures and $9.2 million paid in a finaldetermination of the Racal acquisition earnout, partially offset by the sale ofmarketable securities (net of purchases) of $17.8 million.  Our financing activities used cash of $16.3million, primarily for the purchase and retirement of treasury stock.

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.

The following table summarizes, as of March 31, 2007, our obligationsand commitments to make future payments under debt, operating leases andemployment agreements:
| ** **                           | ** ** | **Payments due by period** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | ** **                                | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                           | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| ** **                           | ** ** | **(In thousands)**                   | ** ** |
|                                 |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                       |       | $                                         | 3,934      |   | $ | 607 |   | $ | 2,242 |   | $ | 700 |   | $ | 385 |   |
| Operating leases                     |       | 37,780                                    |       | 8,299 |   | 11,394 |   | 5,792 |   | 12,295 |   |
| Employment and  consulting contracts |       | 6,011                                     |       | 2,632 |   | 3,379 |   | — |   | — |   |
| Total                                |       | $                                         | 47,725     |   | $ | 11,538 |   | $ | 17,015 |   | $ | 6,492 |   | $ | 12,680 |   |

 

The operating lease commitments shown in the above table have not beenreduced by future minimum sub-lease rentals of $4.3 million through 2011.

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.

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**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.

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 based upon one of the following methods (based upon an assessment ofwhich method most closely aligns to the underlying earnings process): (i) theunits-of-delivery method, (ii) the cost-to-cost method, using the ratio ofcontract costs incurred as a percentage of total estimated costs at contractcompletion (based upon engineering and production estimates), or (iii) theachievement of contractual milestones. Provisions for anticipated losses or revisions in estimated profits oncontracts-in-process are recorded in the period in which such anticipatedlosses 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 the post contract support for its fairvalue based on the contractual renewal rate. Post contract support fees are deferred and recognized as revenueratably over the term 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.

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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 judgmentsmade to determine the expected useful lives assigned to each class of assetsand liabilities 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, disposingof, or otherwise exiting businesses, which could result in the impairment ofgoodwill and other long-lived assets, as well as a reduction in the usefullives 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.

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.

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, assetimpairment, 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.

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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 sharingand cost 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 and accruals.  Such differences could have a material effecton our income tax provision and net earnings in the period in which suchdetermination 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 thevaluation allowance could have a material adverse impact on our income taxprovision and net earnings in the period in which such determination is made.

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 andyear to date through the third quarter of fiscal 2007.  The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of grant for periods similar to theexpected life.  While the risk-freeinterest rate and dividend yield are less subjective assumptions, typicallybased on factual data derived from public sources, the expected stock pricevolatility and option life assumptions require a greater level of judgmentwhich makes them critical accounting 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 on July 1, 2007. We are in the process of evaluating the impact, if any, FIN 48 will haveon 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

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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 to otheraccounting pronouncements that require or permit fair value measurements anddoes 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 an assetor 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.

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 February 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities,” (“SFAS No. 159”) to permit allentities to choose to elect, at specified election dates, to measure eligiblefinancial instruments at fair value.  An entity shall report unrealizedgains and losses on items for which the fair value option has been elected inearnings at each subsequent reporting date, and recognize upfront costs andfees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, withearly adoption permitted for an entity that has also elected to apply the provisionsof SFAS No. 157.  An entity is prohibited from retrospectively applyingSFAS No. 159, unless it chooses early adoption.  The Company is currentlyevaluating the impact of the provisions of SFAS No. 159 on its consolidatedfinancial statements, if any, when it becomes effective for the fiscalyear ending June 30, 2009.

**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, words suchas “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 asassumptions made 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.

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**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 March 31, 2007, the effecton 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 March 31, 2007, 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 March 31, 2007, the effect on our other comprehensiveincome would be approximately $18.0 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 March 31, 2007, we had$3.0 million of notional value foreign currency forward contracts maturingthrough June 2007.  Notional amounts donot quantify risk or represent assets or liabilities, but are used in thecalculation of cash settlements under the contracts.  The fair value of these contracts at March31, 2007 was immaterial.

**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 andprocedures, as required by Exchange Act Rule 13a-15.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures were effective as of March 31, 2007, to ensure that informationto be disclosed by us in the reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified by the SEC’s rules and forms.

**Changes in Internal Controls**

There were no changes in our internal controls over financial reportingthat occurred during the quarter ended March 31, 2007 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover 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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**AEROFLEXINCORPORATED**

**ANDSUBSIDIARIES**

**PART II — OTHER INFORMATION**
| Item 1.  | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|     | In March 2007, four separate plaintiffs filed  putative class action lawsuits in the Supreme Court, State of New York,  County of Nassau concerning the proposed acquisition of the Company by  entities directly and indirectly owned by an investment group consisting of  investment entities affiliated with General Atlantic LLC and Francisco  Partners II, L.P. pursuant to a merger agreement dated March 2, 2007.   Plaintiffs have since moved to consolidate the four putative class action  lawsuits.  The plaintiffs seek, among other things, an order of the  court that would prevent the consummation of the merger and direct defendants  to obtain a transaction in the best interest of the shareholders.  On  April 23, 2007, plaintiff Jack Trugman (“Trugman”) filed an amended putative  class action complaint, generally alleging that the Company’s directors  breached their fiduciary duties by approving a transaction that benefits  themselves, to the detriment of the Company’s stockholders, and that the  Company, General Atlantic LLC and Francisco Partners II, L.P. aided and  abetted the directors’ alleged breach of fiduciary duties.  On April 23,  2007, defendants (i) moved to dismiss Trugman’s amended complaint for failure  to state a claim upon which relief may be granted and (ii) filed their  opposition to Trugman’s application for expedited discovery.  On May 3,  2007, the Court denied Trugman’s application for expedited discovery.  A  hearing on defendants’ motion to dismiss has been set for May 10, 2007. |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|     | During the quarter ended March 31, 2007, we became  aware that certain Bidirectional Multipurpose Transceivers sold by the  Company’s Colorado Springs subsidiary since 1999, may have been subject to  International Traffic in Arms Regulations (“ITAR”). Accordingly, the Company  has filed a detailed Voluntary Disclosure with the Directorate of Defense  Trade Controls, United States Department of State, describing the details of  the possible inadvertent misclassification. Simultaneously, the Company has  filed a Commodity Jurisdiction Application explaining its belief that the  product is not subject to ITAR and requesting a determination that such  product is not ITAR controlled. At this time, it is not possible to determine  whether any fines or other penalties will be asserted against the Company, or  the materiality of any outcome.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|     | We are involved in other routine legal matters. We  believe the outcome of these matters will not have a material adverse effect  on our consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item 1A. | Risk Factors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|     | There have been no material changes in our risk  factors from the risk factors disclosed in the Form10-K for the year ended  June 30, 2006, except for risks related to the proposed acquisition of the  Company as described in note 2.  If the  merger is not consummated, under certain circumstances we may be required to  pay a termination fee plus reimbursement of out-of-pocket expenses to the  proposed acquirers, which amounts could be significant.  The proposed transaction may disrupt our  current plans and operations and create potential difficulties in employee  retention.  The effect of the  announcement of the merger or any subsequent announcements related to the  merger may affect our business relationships.   We have incurred and may continue to incur significant amounts of  costs and fees related to the merger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item 2.  | Unregistered Sales of  Equity Securities and Use of Proceeds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|     | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item 3.  | Defaults upon Senior  Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|     | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| Item 4.  | Submission of  Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|     | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |

 

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| Item 5. | Other Information |                                                                                                                                                                                                                                                                                                                                                         |
|---------|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |              |                                                                                                                                                                                                                                                                                                                                                         |
|    | None              |                                                                                                                                                                                                                                                                                                                                                         |
|    |              |                                                                                                                                                                                                                                                                                                                                                         |
| Item 6. | Exhibits          |                                                                                                                                                                                                                                                                                                                                                         |
|    |              |                                                                                                                                                                                                                                                                                                                                                         |
|    | Exhibits          |                                                                                                                                                                                                                                                                                                                                                         |
|    |              |
|    | 2.1               | Agreement and Plan of Merger, dated as of March 2,  2007, among Aeroflex Incorporated, AF Holdings, Inc. and AF Merger Sub, Inc.  (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K  (Date of Report: March 2, 2007) filed with the Commission on March 5,  2007)                                                             |
|    |              |                                                                                                                                                                                                                                                                                                                                                         |
|    | 4.1               | Amendment to Rights Agreement, dated as of March 2,  2007, to the Rights Agreement dated as of August 13, 1998 between Aeroflex  Incorporated and American Stock Transfer & Trust Company (Incorporated by  reference to Exhibit 4.1 to the Current Report on Form 8-K (Date of Report:  March 2, 2007) filed with the Commission on March 5, 2007) |
|    |              |                                                                                                                                                                                                                                                                                                                                                         |
|    | 10.1              | Amendment No. 2 to Employment Agreement, dated  January 30, 2007, between Aeroflex Incorporated and John Adamovich, Jr.  (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K  (Date of Report: January 30, 2007) filed with the Commission on  February 2, 2007)                                                               |
|    |              |                                                                                                                                                                                                                                                                                                                                                         |
|    | 10.2              | Amendment to 2002 Outside Directors’ Stock Option  Plan dated as of March 1, 2007 (Incorporated by reference to Exhibit 10.1 to  the Current Report on Form 8-K (Date of Report: March 2, 2007) filed with the  Commission on March 5, 2007)                                                                                                       |
|    |              |                                                                                                                                                                                                                                                                                                                                                         |
|    | 10.3              | Letter Agreement between Harvey R. Blau and the  Company dated as of March 2, 2007 (Incorporated by reference to Exhibit 10.2  to the Current Report on Form 8-K (Date of Report: March 2, 2007) filed with  the Commission on March 5, 2007)                                                                                                           |
|    |              |                                                                                                                                                                                                                                                                                                                                                         |
|    | 10.4              | Letter Agreement between Leonard Borow and the  Company dated as of March 2, 2007 (Incorporated by reference to Exhibit 10.3  to the Current Report on Form 8-K (Date of Report: March 2, 2007) filed with  the Commission on March 5, 2007)                                                                                                            |
|    |              |                                                                                                                                                                                                                                                                                                                                                         |
|    | 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)           |   |   |   |   |   |   |
|        |                   |   |   |   |   |   |   |
|        |                   |   |   |   |   |   |   |
|        |                   |   |   |   |   |   |   |
| May 8, 2007 |                   |   |   |   |   |   |   | By: |   | /s/ John Adamovich, Jr. |   |
|        |                   |   |   |   |   |   |   |   |   | John Adamovich,  Jr. |   |   |   |   |   |   |
|        |                   |   |   |   |   |   |   |   |   | Sr. Vice  President and |   |   |   |   |   |   |
|        |                   |   |   |   |   |   |   |   |   | Chief Financial  Officer |   |   |   |   |   |   |
|        |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|             |                        |        |        |        |        |        |        |  |  |  |  |  |  |  |  |  |  |

 

33

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EXHIBIT INDEX
| 2.1    | Agreement and Plan of Merger, dated as of March 2,  2007, among Aeroflex Incorporated, AF Holdings, Inc. and AF Merger Sub, Inc.  (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K  (Date of Report: March 2, 2007) filed with the Commission on March 5,  2007)                                                             |   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                                                                                                                                                                                                                                         |   |
| 4.1    | Amendment to Rights Agreement, dated as of March 2,  2007, to the Rights Agreement dated as of August 13, 1998 between Aeroflex  Incorporated and American Stock Transfer & Trust Company (Incorporated by  reference to Exhibit 4.1 to the Current Report on Form 8-K (Date of Report:  March 2, 2007) filed with the Commission on March 5, 2007) |   |
|   |                                                                                                                                                                                                                                                                                                                                                         |   |
| 10.1   | Amendment No. 2 to Employment Agreement, dated  January 30, 2007, between Aeroflex Incorporated and John Adamovich, Jr.  (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K  (Date of Report: January 30, 2007) filed with the Commission on  February 2, 2007)                                                               |   |
|   |                                                                                                                                                                                                                                                                                                                                                         |   |
| 10.2   | Amendment to 2002 Outside Directors’ Stock Option  Plan dated as of March 1, 2007 (Incorporated by reference to Exhibit 10.1 to  the Current Report on Form 8-K (Date of Report: March 2, 2007) filed with the  Commission on March 5, 2007)                                                                                                       |   |
|   |                                                                                                                                                                                                                                                                                                                                                         |   |
| 10.3   | Letter Agreement between Harvey R. Blau and the  Company dated as of March 2, 2007 (Incorporated by reference to Exhibit 10.2  to the Current Report on Form 8-K (Date of Report: March 2, 2007) filed with  the Commission on March 5, 2007)                                                                                                           |   |
|   |                                                                                                                                                                                                                                                                                                                                                         |   |
| 10.4   | Letter Agreement between Leonard Borow and the  Company dated as of March 2, 2007 (Incorporated by reference to Exhibit 10.3  to the Current Report on Form 8-K (Date of Report: March 2, 2007) filed with  the Commission on March 5, 2007)                                                                                                            |   |
|   |                                                                                                                                                                                                                                                                                                                                                         |   |
| 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                                                                                                                                                                                                                                                              |   |

 

34

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