**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**

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

**THESECURITIES EXCHANGE ACT OF 1934**

** **
| For the quarter ended                | March 31,  2006 |   |   |
|--------------------------------------|----------------------|--------|--------|
| **Commission File Number 000-02324** | ** **           |   |   |   |
|                                 |                 |   |   |   |
|                                      |                      |        |        |  |  |

 

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**AEROFLEX INCORPORATED**

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

** **

**(516) 694-6700**

*(Registrant’s telephone number, including area code)*

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Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements 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   o | Accelerated  filer   x | Non-accelerated  filer   o |
|--------------------------------------------|---------------------------------------|-------------------------------------------|

 

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

Indicatethe number of shares outstanding of each of the issuer’s classes of common stockas of the latest practicable date.
|          | May 9, 2006 | 75,192,455            |     |
|----------|------------------|-----------------------|----------|
|     |             |                  |     |
| * * | *(Date)*         | *(Number  of Shares)* | * * |

 

 

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**AEROFLEXINCORPORATED**

**AND SUBSIDIARIES**

**INDEX**
|                   | ** **                                                                                  | ** ** | ** ** |
|-------------------|---------------------------------------------------------------------------------------------|------------|------------|
| **PART I:**  | **FINANCIAL INFORMATION**                                                                   |       |       |
| ** **        | ** **                                                                                  |       |       |
| Item  1 -         | UNAUDITED  CONDENSED CONSOLIDATED BALANCE SHEETS                                            |       |       |
|              | March 31,  2006 and June 30, 2005                                                 |       |       |
|              |                                                                                        |       |       |
|              | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS                                    |       |       |
|              | Three Months  Ended March 31, 2006 and 2005                                            |       |       |
|              |                                                                                        |       |       |
|              | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS                                    |       |       |
|              | Nine Months  Ended March 31, 2006 and 2005                                             |       |       |
|              |                                                                                        |       |       |
|              | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                  |       |       |
|              | Nine Months  Ended March 31, 2006 and 2005                                             |       |       |
|              |                                                                                        |       |       |
|              | NOTES TO  UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                             |       |       |
|              |                                                                                        |       |       |
| Item 2 -          | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |       |       |
|              | Three and Nine Months  Ended March 31, 2006 and 2005                                   |       |       |
|              |                                                                                        |       |       |
| Item 3 -          | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |       |       |
|              |                                                                                        |       |       |
| Item 4 -          | CONTROLS AND  PROCEDURES                                                                    |       |       |
|              |                                                                                        |       |       |
| **PART II:** | **OTHER INFORMATION**                                                                       | ** ** |       |
| ** **        | ** **                                                                                  | ** ** |       |
| Item  1 -         | LEGAL  PROCEEDINGS                                                                          |       |       |
|              |                                                                                        |       |       |
| Item  1A-         | RISK  FACTORS                                                                               |       |       |
|              |                                                                                        |       |       |
| Item 2 -          | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                |       |       |
|              |                                                                                        |       |       |
| Item 3 -          | DEFAULTS UPON  SENIOR SECURITIES                                                            |       |       |
|              |                                                                                        |       |       |
| Item 4 -          | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                        |       |       |
|              |                                                                                        |       |       |
| Item  5 -         | OTHER  INFORMATION                                                                          |       |       |
|              |                                                                                        |       |       |
| Item 6  -         | EXHIBITS                                                                                    |       |       |
|              |                                                                                        |       |       |
| SIGNATURES        |                                                                                        |
|              |                                                                                        |
| EXHIBIT  INDEX    |                                                                                        |
|              |                                                                                        |
| CERTIFICATIONS    |                                                                                        |

 

2

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**AeroflexIncorporatedand SubsidiariesUnaudited Condensed Consolidated Balance Sheets(In thousands)**

 
| ** **                                                                      | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Assets                                                                          |       |               |       |              |       |
| Current assets:                                                                 |       |               |       |              |       |
| Cash and cash equivalents                                                       |       | $                  | 15,636     |              | $          | 12,974 |   |
| Marketable securities                                                           |       | 18,588             |       | —            |       |
| Accounts receivable, less allowance for doubtful  accounts of $1,483 and $1,210 |       | 103,796            |       | 101,317           |       |
| Inventories                                                                     |       | 129,594            |       | 118,906           |       |
| Deferred income taxes                                                           |       | 20,255             |       | 18,499            |       |
| Prepaid expenses and other current assets                                       |       | 11,018             |       | 11,107            |       |
| Total current assets                                                            |       | 298,887            |       | 262,803           |       |
|                                                                            |       |               |       |              |       |
| Property, plant  and equipment, net                                             |       | 75,387             |       | 78,195            |       |
| Other assets                                                                    |       | 13,807             |       | 13,537            |       |
| Intangible  assets with definite lives, net                                     |       | 55,882             |       | 67,266            |       |
| Goodwill                                                                        |       | 164,277            |       | 168,048           |       |
|                                                                            |       |               |       |              |       |
| Total assets                                                                    |       | $                  | 608,240    |              | $          | 589,849 |   |

 

See notes tounaudited condensed consolidated financial statements

3

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**AeroflexIncorporatedand SubsidiariesUnaudited Condensed Consolidated Balance Sheets(continued)(In thousands, except per share data)**

 
| ** **                                                                                                                                                                     | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **2006**           | ** ** | **2005**          | ** ** |
| Liabilities and  Stockholders’ Equity                                                                                                                                     |       |               |       |              |       |
| ** **                                                                                                                                                                     | ** ** | ** **         | ** ** | ** **        | ** ** |
| Current liabilities:                                                                                                                                                           |       |               |       |              |       |
| Current portion of long-term debt                                                                                                                                              |       | $                  | 618        |              | $          | 634 |   |
| Accounts payable                                                                                                                                                               |       | 29,023             |       | 35,907            |       |
| Advance payments by customers                                                                                                                                                  |       | 22,943             |       | 15,183            |       |
| Income taxes payable                                                                                                                                                           |       | 1,697              |       | 3,657             |       |
| Accrued payroll expenses                                                                                                                                                       |       | 17,536             |       | 15,222            |       |
| Accrued expenses and other current liabilities                                                                                                                                 |       | 29,638             |       | 30,451            |       |
| Total current liabilities                                                                                                                                                      |       | 101,455            |       | 101,054           |       |
|                                                                                                                                                                           |       |               |       |              |       |
| Long-term debt                                                                                                                                                                 |       | 3,923              |       | 4,190             |       |
| Deferred income  taxes                                                                                                                                                         |       | 13,711             |       | 17,146            |       |
| Other long-term  liabilities                                                                                                                                                   |       | 20,236             |       | 23,479            |       |
| Total liabilities                                                                                                                                                              |       | 139,325            |       | 145,869           |       |
|                                                                                                                                                                           |       |               |       |              |       |
| Stockholders’ equity:                                                                                                                                                     |       |               |       |              |       |
| Preferred stock, par value $.10 per share;  authorized 1,000 shares Series A Junior Participating Preferred Stock,  par value $.10 per share, authorized 110; none issued |       | —             |       | —            |       |
| Common stock, par value $.10 per share; authorized  110,000 shares; issued 75,159 and 74,618 shares                                                   |       | 7,516              |       | 7,462             |       |
| Additional paid-in capital                                                                                                                                                     |       | 381,987            |       | 372,666           |       |
| Accumulated other comprehensive income                                                                                                                                         |       | 4,517              |       | 9,020             |       |
| Retained earnings                                                                                                                                                              |       | 74,895             |       | 54,846            |       |
|                                                                                                                                                                           |       | 468,915            |       | 443,994           |       |
|                                                                                                                                                                           |       |               |       |              |       |
| Less: Treasury  stock, at cost (4 shares)                                                                                                                                      |       | —             |       | 14                |       |
|                                                                                                                                                                           |       |               |       |              |       |
| Total stockholders’ equity                                                                                                                                                |       | 468,915            |       | 443,980           |       |
|                                                                                                                                                                           |       |               |       |              |       |
| Total  liabilities and stockholders’ equity                                                                                                                               |       | $                  | 608,240    |              | $          | 589,849 |   |

 

See notes tounaudited condensed consolidated financial statements

4

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**AeroflexIncorporatedand SubsidiariesUnaudited Condensed Consolidated Statements of Earnings(In thousands, except per share data)**

 
| ** **                                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Net sales                                                                                       |       | $                                                | 140,527    |   | $ | 113,755 |   |
| Cost of sales  (including restructuring charges of $259 and $0)                                 |       | 73,461                                           |       | 59,963 |   |
| Gross profit                                                                                    |       | 67,066                                           |       | 53,792 |   |
|                                                                                            |       |                                             |       |   |   |
|                                                                                            |       |                                             |       |   |   |
| Selling, general  and administrative costs (including restructuring charges of $920 and $1,678) |       | 30,863                                           |       | 30,110 |   |
| Research and  development costs                                                                 |       | 20,488                                           |       | 15,379 |   |
| Amortization of  acquired intangibles                                                           |       | 3,440                                            |       | 2,063 |   |
|                                                                                            |       | 54,791                                           |       | 47,552 |   |
| Operating income                                                                                |       | 12,275                                           |       | 6,240 |   |
|                                                                                            |       |                                             |       |   |   |
| Other income (expense)                                                                          |       |                                             |       |   |   |
| Interest expense                                                                                |       | (144                                             | )          | (316 | ) |
| Other income (expense)                                                                          |       | 586                                              |       | 406 |   |
| Total other income (expense)                                                                    |       | 442                                              |       | 90 |   |
|                                                                                            |       |                                             |       |   |   |
| Income from  continuing operations before income taxes                                          |       | 12,717                                           |       | 6,330 |   |
| Provision for  income taxes                                                                     |       | 4,971                                            |       | 2,464 |   |
| Income from continuing operations                                                               |       | 7,746                                            |       | 3,866 |   |
|                                                                                            |       |                                             |       |   |   |
| Discontinued operations                                                                         |       |                                             |       |   |   |
| Income (loss) from discontinued operations, net of tax  provision (benefit) of $0 and $(66)     |       | —                                           |       | 4 |   |
| Income (loss) on disposal of operations, net of tax  provision (benefit) of $0 and $574         |       | —                                           |       | 102 |   |
| Income (loss) from discontinued operations, net of tax                                          |       | —                                           |       | 106 |   |
| Net income                                                                                      |       | $                                                | 7,746      |   | $ | 3,972 |   |
|                                                                                            |       |                                             |       |   |   |
| Income per common  share:                                                                       |       |                                             |       |   |   |
| Basic                                                                                           |       |                                             |       |   |   |
| Continuing operations                                                                           |       | $                                                | 0.10       |   | $ | 0.05 |   |
| Discontinued operations                                                                         |       | —                                           |       | — |   |
| Net income                                                                                      |       | $                                                | 0.10       |   | $ | 0.05 |   |
|                                                                                            |       |                                             |       |   |   |
| Diluted                                                                                         |       |                                             |       |   |   |
| Continuing operations                                                                           |       | $                                                | 0.10       |   | $ | 0.05 |   |
| Discontinued operations                                                                         |       | —                                           |       | — |   |
| Net income                                                                                      |       | $                                                | 0.10       |   | $ | 0.05 |   |
|                                                                                            |       |                                             |       |   |   |
| Weighted average number  of common shares outstanding:                                          |       |                                             |       |   |   |
| Basic                                                                                           |       | 75,133                                           |       | 74,714 |   |
| Diluted                                                                                         |       | 77,230                                           |       | 75,842 |   |

 

See notes tounaudited condensed consolidated financial statements

5

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**AeroflexIncorporatedand SubsidiariesUnaudited Condensed Consolidated Statements of Earnings(In thousands, except per share data)**

 
| ** **                                                                                      | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Net sales                                                                                       |       | $                                               | 401,332    |   | 335,406 |   |
| Cost of sales  (including restructuring charges of $259 and $0)                                 |       | 210,785                                         |       | 176,802 |   |
| Gross profit                                                                                    |       | 190,547                                         |       | 158,604 |   |
|                                                                                            |       |                                            |       |   |   |
|                                                                                            |       |                                            |       |   |   |
| Selling, general  and administrative costs (including restructuring charges of $920 and $1,678) |       | 91,672                                          |       | 81,597 |   |
| Research and  development costs                                                                 |       | 56,742                                          |       | 45,122 |   |
| Amortization of  acquired intangibles                                                           |       | 10,329                                          |       | 6,164 |   |
|                                                                                            |       | 158,743                                         |       | 132,883 |   |
| Operating income                                                                                |       | 31,804                                          |       | 25,721 |   |
|                                                                                            |       |                                            |       |   |   |
| Other income (expense)                                                                          |       |                                            |       |   |   |
| Interest expense                                                                                |       | (451                                            | )          | (738 | ) |
| Other income (expense)                                                                          |       | 1,338                                           |       | 1,371 |   |
| Total other income (expense)                                                                    |       | 887                                             |       | 633 |   |
|                                                                                            |       |                                            |       |   |   |
| Income from  continuing operations before income taxes                                          |       | 32,691                                          |       | 26,354 |   |
| Provision for  income taxes                                                                     |       | 12,642                                          |       | 9,947 |   |
| Income from continuing operations                                                               |       | 20,049                                          |       | 16,407 |   |
|                                                                                            |       |                                            |       |   |   |
| Discontinued operations                                                                         |       |                                            |       |   |   |
| Income (loss) from discontinued operations, net of tax  provision (benefit) of $0 and $(319)    |       | —                                          |       | (538 | ) |
| Income (loss) on disposal of operations, net of tax  provision (benefit) of $0 and $574         |       | —                                          |       | (958 | ) |
| Income (loss) from discontinued operations, net of  tax                                         |       | —                                          |       | (1,496 | ) |
| Net income                                                                                      |       | $                                               | 20,049     |   | 14,911 |   |
|                                                                                            |       |                                            |       |   |   |
| Income (loss) per  common share:                                                                |       |                                            |       |   |   |
| Basic                                                                                           |       |                                            |       |   |   |
| Continuing operations                                                                           |       | $                                               | 0.27       |   | 0.22 |   |
| Discontinued operations                                                                         |       | —                                          |       | (0.02 | ) |
| Net income                                                                                      |       | $                                               | 0.27       |   | 0.20 |   |
|                                                                                            |       |                                            |       |   |   |
| Diluted                                                                                         |       |                                            |       |   |   |
| Continuing operations                                                                           |       | $                                               | 0.26       |   | 0.22 |   |
| Discontinued operations                                                                         |       | —                                          |       | (0.02 | ) |
| Net income                                                                                      |       | $                                               | 0.26       |   | 0.20 |   |
|                                                                                            |       |                                            |       |   |   |
|                                                                                            |       |                                            |       |   |   |
| Weighted average number  of common shares outstanding:                                          |       |                                            |       |   |   |
| Basic                                                                                           |       | 74,922                                          |       | 74,595 |   |
| Diluted                                                                                         |       | 76,306                                          |       | 76,047 |   |

 

See notes tounaudited condensed consolidated financial statements

6

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**AEROFLEXINCORPORATEDAND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

 
| ** **                                                                                                           | ** ** | **Nine Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
|                                                                                                                 |       |                                            |       |   |   |
| Cash flows from  operating activities:                                                                               |       |                                            |       |   |   |
| Net income                                                                                                           |       | $                                               | 20,049     |   | $ | 14,911 |   |
| Loss from discontinued operations                                                                                    |       | —                                          |       | 1,496 |   |
| Income from continuing operations                                                                                    |       | 20,049                                          |       | 16,407 |   |
| Adjustments to  reconcile income from continuing operations to net cash provided by (used in)  operating activities: |       |                                            |       |   |   |
| Depreciation and amortization                                                                                        |       | 22,780                                          |       | 17,592 |   |
| Deferred income taxes                                                                                                |       | (4,966                                          | )          | (1,222 | ) |
| Non - cash share based compensation                                                                                  |       | 5,011                                           |       | — |   |
| Excess tax benefits from stock based compensation  arrangements                                                      |       | (1,167                                          | )          | — |   |
| Other, net                                                                                                           |       | 411                                             |       | (256 | ) |
| Change in  operating assets and liabilities, net of effects from purchases of  businesses:                           |       |                                            |       |   |   |
| Decrease (increase) in accounts receivable                                                                           |       | (3,698                                          | )          | 6,568 |   |
| Decrease (increase) in inventories                                                                                   |       | (10,692                                         | )          | (16,454 | ) |
| Decrease (increase) in prepaid expenses and other  assets                                                            |       | 185                                             |       | (1,677 | ) |
| Increase (decrease) in accounts payable, accrued expenses  and other liabilities                                     |       | (1,941                                          | )          | 7,944 |   |
|                                                                                                                 |       |                                            |       |   |   |
| Net cash provided by (used in) continuing operations                                                                 |       | 25,972                                          |       | 28,902 |   |
| Net cash provided by (used in) discontinued operations                                                               |       | —                                          |       | (1,127 | ) |
| Net cash provided by operating activities                                                                            |       | 25,972                                          |       | 27,775 |   |
|                                                                                                                 |       |                                            |       |   |   |
| Cash flows from  investing activities:                                                                               |       |                                            |       |   |   |
| Capital expenditures                                                                                                 |       | (10,577                                         | )          | (11,163 | ) |
| Purchase of marketable securities                                                                                    |       | (205,669                                        | )          | (514,978 | ) |
| Sale of marketable securities                                                                                        |       | 187,081                                         |       | 397,190 |   |
| Preacquisition tax refund received                                                                                   |       | 1,232                                           |       | — |   |
| Other, net                                                                                                           |       | 130                                             |       | 11 |   |
|                                                                                                                 |       |                                            |       |   |   |
| Net cash provided by (used in) continuing operations                                                                 |       | (27,803                                         | )          | (128,940 | ) |
| Net cash provided by (used in) discontinued  operations                                                              |       | —                                          |       | 14,186 |   |
| Net cash provided by (used in) investing activities                                                                  |       | (27,803                                         | )          | (114,754 | ) |
|                                                                                                                 |       |                                            |       |   |   |
| Cash flows from  financing activities:                                                                               |       |                                            |       |   |   |
| Purchase of treasury stock                                                                                           |       | (283                                            | )          | — |   |
| Borrowings under debt agreements                                                                                     |       | —                                          |       | 37 |   |
| Debt repayments                                                                                                      |       | (283                                            | )          | (5,045 | ) |
| Bank loan transaction costs                                                                                          |       | (308                                            | )          | — |   |
| Excess tax benefits from share based compensation  arrangements                                                      |       | 1,167                                           |       | — |   |
| Proceeds from the exercise of stock options                                                                          |       | 3,494                                           |       | 1,548 |   |
| Withholding taxes paid for stock options                                                                             |       | (895                                            | )          | (220 | ) |
| Withholding taxes collected for stock options                                                                        |       | 895                                             |       | 220 |   |
| Net cash provided by (used in) financing activities                                                                  |       | 3,787                                           |       | (3,460 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                                                        |       | 706                                             |       | 123 |   |
|                                                                                                                 |       |                                            |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                                                 |       | 2,662                                           |       | (90,316 | ) |
| Cash and cash equivalents at beginning of period                                                                     |       | 12,974                                          |       | 98,502 |   |
| Cash and cash  equivalents at end of period                                                                          |       | $                                               | 15,636     |   | $ | 8,186 |   |

 

See notes to unauditedcondensed consolidated financial statements

 

7

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**AEROFLEXINCORPORATEDAND SUBSIDIARIES**

**NOTES TO UNAUDITEDCONDENSED CONSOLIDATED 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 theopinion of management, all adjustments (which include only normal recurringadjustments) necessary to present fairly the financial position, results ofoperations and cash flows as of and for all periods presented have been made. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been omitted. It is suggested that thesecondensed consolidated financial statements be read in conjunction with theaudited financial statements and notes thereto included in the Company’s June 30,2005 annual report to shareholders.

Results of operations for the three and ninemonth periods are not necessarily indicative of results of operations for thecorresponding full fiscal years.

**Revenue Recognition**

The Company recognizesrevenue when persuasive evidence of an arrangement exists, delivery hasoccurred or services have been rendered (except as described below), theselling price is fixed or determinable and collectibility of the resultingreceivable is reasonably assured.

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. Iftitle does not pass until the product reaches the customer’s delivery site,then recognition of the revenue is deferred until that time. Revenuesassociated with certain long-term contracts are recognized in accordance withStatement of Position No. 81-1 “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts” (“SOP 81-1”). UnderSOP 81-1, the Company uses the percentage-of-completion method, wherebyrevenues and associated costs are recognized as work on a contract progresses. TheCompany measures the extent of progress toward completion generally based uponone of the following methods (based upon an assessment of which method mostclosely 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 orrevisions in estimated profits on contracts-in-process are recorded in theperiod in which such anticipated losses or revisions become evident. Revenuefrom sales of products where software is other than incidental to theirperformance, including related software support and maintenance contracts isrecognized in accordance with SOP-97-2, “Software RevenueRecognition.”

Certain of the Company’ssales are to distributors which have a right to return some portion of productwithin eighteen months of sale. The Company recognizes revenue on these salesat the time of shipment to the distributor as these sales meet all of thecriteria of Statement of Financial Accounting Standards (“SFAS”) No. 48, “RevenueRecognition When Right of Return Exists.” Historically, the returns under these arrangements have beeninsignificant and can be reasonably estimated. An estimate of such returns isrecorded at the time sales are recognized.

8

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**Financial Instruments andDerivatives**

Foreign currency contractsare used to protect the Company from fluctuations in exchange rates. TheCompany entered into foreign currency contracts, which are not designated ashedges, and the change in fair value is included in income currently, withinother income (expense). As of March 31, 2006, the Company had $2.0 millionof notional value foreign currency forward contracts maturing through June 2006.Notional amounts do not quantify risk or represent assets or liabilities of theCompany, but are used in the calculation of cash settlements under thecontracts. The fair value of these contracts at March 31, 2006 was $38,000less than the notional value.

The Company accounts for itsinterest rate swap derivatives in accordance with SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138,“Accounting for Certain Derivative Instruments and Hedging Activities.”  This statement requires  derivatives to be recorded on the balancesheet as assets or liabilities at their fair value. The Company’s derivativesare designated as cash flow hedges under SFAS No. 133, with changes in thefair value of such derivatives being recorded as components of othercomprehensive income. For derivatives that are deemed ineffective, the changesare recorded as gains or losses in other income (expense).

**Marketable Securities**

Marketable securities areclassified as available-for-sale and are recorded at fair market value withunrealized gains and losses, net of taxes, reported as a separate component ofshareholders’ equity. Realized gains and losses and declines in market valuejudged to be other than temporary, of which there were none, for the threemonths and nine months ended March 31, 2006 are included in other income. Interestand dividends are also included in other income. Marketable securities consistsolely of auction rate bonds.

**Accounting for Stock BasedCompensation**

Prior to fiscal 2006, theCompany applied the intrinsic value method as outlined in Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”)and related interpretations in accounting for stock options granted. Under theintrinsic value method, no compensation expense was recognized if the exerciseprice of the Company’s employee stock options equaled the market price of theunderlying stock on the date of the grant. Accordingly, no compensation costwas recognized in the accompanying consolidated statements of earnings prior tofiscal year 2006 on stock options granted to employees, since all optionsgranted under the Company’s share incentive programs had an exercise priceequal to the market value of the underlying common stock on the date of grant.

Effective July 1, 2005, the Companyadopted SFAS No. 123(R), “Stock-Based Payment” (“SFAS No. 123(R)”). Thisstatement replaces SFAS No. 123, “Accounting for Stock-based Compensation”  and supersedes APB No. 25. SFAS No. 123(R) requiresthat all stock based compensation be recognized as an expense in the financialstatements and that such cost be measured at the fair value of the award. Thisstatement was adopted using the modified prospective method, which requires usto recognize compensation expense on a prospective basis. Therefore, priorperiod financial statements have not been restated. Under this method, inaddition to reflecting compensation expense for new share based awards, expenseis also recognized to reflect the remaining service period of outstandingawards that had been included in pro forma disclosures in prior periods. SFAS No. 123(R) alsorequires that excess tax benefits related to stock option exercises bereflected as financing cash inflows instead of operating cash inflows. Theadoption of this pronouncement resulted in compensation expense of $1.6 millionand $5.0 million for the three and nine months ended March 31, 2006,respectively, as well as cash flows from financing activities of $1.2 millionfor nine months ended March 31, 2006 which reduced cash flows from operatingactivities by the same amount.

9

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SFAS 123(R) requiredoptions to be classified as liabilities if the issuer could be required underany circumstances to settle the option in cash. In February 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)No. FAS 123(R)-4 “Classification of Options and Similar InstrumentsIssued as Employee Compensation That Allow for Cash Settlement upon theOccurrence of a Contingent Event” which amends FASB 123(R) by stipulatingthat if a cash settlement feature can be exercised only upon the occurrence ofa contingent event that is outside the employee’s control then it should betreated as an equity award until it becomes probable that the event will occur.The Company has applied the principles set forth in this FSP since its adoptionof FASB 123(R) on July 1, 2005.

In November 2005, theFASB published FSP No. FAS 123(R)-3, “Transition Election Related toAccounting for the Tax Effects of Stock-Based Payment Awards,” to provide analternative transition method for accounting for the tax effects of share-basedpayment awards to employees. The FASB learned, subsequent to adoption of SFAS No. 123(R),that a number of constituents did not have the information necessary to complywith the transition requirements of SFAS No. 123(R), and has provided anelective alternative transition method in FSP No. FAS 123(R)-3. Entitiescan choose to follow either the transition guidance of SFAS No. 123(R) orthe alternative transition method described in FSP No. FAS 123(R)-3.The guidance in FSP No. FAS 123(R)-3 became effective uponpublication. The Company has applied the principles originally set forth inSFAS No. 123(R). Therefore the guidance set forth in this FSP will not beapplicable to the Company.

In October 2005, theFASB issued FSP No. FAS 123(R)-2, “Practical Accommodation to theApplication of the Grant Date as Defined in FASB Statement No. 123(R),” toprovide guidance on determining the grant date for an award as defined in SFAS No. 123(R).This FSP stipulates that assuming all other criteria in the grant datedefinition are met, a mutual understanding of the key terms and conditions ofan award to an individual employee is presumed to exist upon the award’sapproval in accordance with the relevant corporate governance requirements,provided that the key terms and conditions of an award (a) cannot benegotiated by the recipient with the employer because the award is a unilateralgrant, and (b) are expected to be communicated to an individual recipientwithin a relatively short time period from the date of approval. The Companyhas applied the principles set forth in this FSP upon its adoption of SFAS No. 123(R).

**Reclassifications**

Certain reclassifications have been made tothe 2005 consolidated financial statements to conform to the 2006 presentation.

**Recently Issued AccountingStandards Not Yet Adopted**

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and ErrorCorrections,” (“SFAS No. 154”) which establishes, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. The statement provides guidance fordetermining whether retrospective application of a change in accountingprinciple is impracticable. The statement also addresses the reporting of acorrection of an error by restating previously issued financial statements. SFASNo. 154 is effective for accounting changes and corrections of errors madein fiscal years beginning after December 15, 2005. The adoption of thisstatement is not expected to have any effect on the Company’s consolidatedfinancial statements.

10

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InApril 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accountingfor Conditional Asset Retirement Obligations — An Interpretation of FASBStatement No. 143.”  FIN 47clarifies the terms of FASB Statement No. 143 and requires an entity torecognize a liability for a conditional asset retirement obligation if theentity has sufficient information to reasonably estimate its fair value. FIN 47is effective no later than the end of fiscal years ending after December 15,2005. The Company is currently evaluating the impact of this standard on itsconsolidated financial statements.

OnDecember 31, 2004, the FASB issued FASB Staff Position FAS 109-1, “Applicationof FASB Statement No. 109, Accounting for Income Taxes, to the TaxDeduction on Qualified Production Activities Provided by the American JobsCreation Act of 2004,” (“FSP No. 109-1”), and FASB Staff Position No. FAS109-2, “Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creation Act of 2004,” (“FSP No. 109-2”).These staff positions provide accounting guidance on how companies shouldaccount for the effects of the American Jobs Creation Act of 2004 (“AJCA”) thatwas signed into law on October 22, 2004. FSP No. 109-1 statesthat the tax relief (special tax deduction for domestic manufacturing) fromthis legislation should be accounted for as a “special deduction” instead of atax rate reduction. FSP No. 109-2 gives a company additional time toevaluate the effects of the legislation on any plan for reinvestment orrepatriation of foreign earnings for purposes of applying FASB Statement No. 109.The Company is investigating the repatriation provision to determine whether itmight repatriate extraordinary dividends, as defined in the AJCA.

**2. Acquisition ofBusinesses and Intangible Assets**

**JcAIR Test Systems**

On April 19, 2005, theCompany acquired all of the outstanding stock of JcAIR Test Systems (“JcAIR”)for cash of $35 million. JcAIR provides customized avionics test solutions inall areas of manual and automatic test equipment for manufacturing, repair andground support operation. The addition of JcAIR has enhanced the Company’savionics product portfolio and provides more complete testing solutions for theavionics system test market.

The Company evaluated theacquired tangible and identifiable intangible assets to serve as a basis forallocation of the purchase price. The Company allocated the purchase price,including the acquisition costs of approximately $445,000, based on theestimated fair value of the assets acquired and liabilities assumed as follows:

 

 

|                                              | ** ** | **In thousands** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
| Current assets  (excluding cash of $568,000) |       | $                     | 9,897      |   |
| Property, plant  and equipment               |       | 1,525                 |       |
| Developed  technology                        |       | 12,000                |       |
| Customer related  intangibles                |       | 1,100                 |       |
| Goodwill                                     |       | 20,422                |       |
| In-process research  and development         |       | 200                   |       |
| Total assets acquired                        |       | 45,144                |       |
| Current  liabilities                         |       | (5,898                | )          |
| Deferred taxes                               |       | (4,369                | )          |
| Total liabilities assumed                    |       | (10,267               | )          |
| Net assets  acquired                         |       | $                     | 34,877     |   |

 

11

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The developed technology andcustomer related intangibles are being amortized on a straight-line basis overa range of 3 to 15 years. The goodwill is not deductible for tax purposes. Atthe acquisition date, the acquired in-process research and development was notconsidered to have reached technological feasibility and had no alternativefuture uses. Therefore, in accordance with accounting principles generallyaccepted in the United States of America, the value of such was expensed at thetime of the acquisition in operating costs. The allocation to in-process researchand development represents the estimated fair value of such incomplete researchand development, at the acquisition date, based on future cash flows that havebeen adjusted by the respective projects’ completion percentage. As of theacquisition date, cash flows from these projects were expected to commence infiscal 2006. A 24% risk adjusted discount rate was applied to the projects’cash flows in determining fair value.  Atthe acquisition date, JcAIR was conducting development activities associated withthe completion of the Mode 5 General Avionic Test Equipment sets.

**SPG Division of UbiNeticsHoldings Limited**

On May 23, 2005, theCompany acquired all of the stock of UbiNetics Limited, as well as certainassets located in India, Japan and Hong Kong, all of which constitutedUbiNetics Holdings Limited’s SPG test and measurement business (“SPG”) for cashof $84 million and a deferred payment of up to approximately $4 milliondepending on SPG achieving certain performance goals for the year ending June 30,2006. The Company did not include this contingent consideration in its initialpurchase price allocation as the payment of this consideration was notconsidered to be certain beyond a reasonable doubt at the date of acquisition. Asa result, the Company will adjust goodwill for any contingent consideration inthe future if and when it is earned. SPG develops, manufactures and integrateswireless test and measurement solutions specific to commercial wireless productdevelopment organizations and service operators. The addition of SPG’s wirelesstest and measurement products and technologies has enhanced the Company’swireless product portfolio and enabled the Company to provide more completetesting solutions for the development, manufacturing and service markets.

The Company evaluated theacquired tangible and identifiable intangible assets to serve as a basis forallocation of the purchase price. The Company allocated the purchase price,including the acquisition costs of approximately $3.0 million, based on theestimated fair value of the assets acquired and liabilities assumed as follows:

 

|                                                  | ** ** | **In thousands** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| Current assets  (excluding cash of $4.0 million) |       | $                     | 5,320      |   |
| Property, plant  and equipment                   |       | 2,283                 |       |
| Developed  technology                            |       | 21,000                |       |
| Customer related  intangibles                    |       | 750                   |       |
| Goodwill                                         |       | 64,083                |       |
| In-process  research and development             |       | 2,800                 |       |
| Total assets acquired                            |       | 96,236                |       |
| Current  liabilities                             |       | (5,794                | )          |
| Deferred taxes                                   |       | (7,026                | )          |
| Other long term  liabilities                     |       | (468                  | )          |
| Total liabilities assumed                        |       | (13,288               | )          |
| Net assets  acquired                             |       | $                     | 82,948     |   |

 

12

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The developed technology andcustomer related intangibles are being amortized on a straight-line basis overa range of 1 to 5 years. The goodwill is not deductible for tax purposes. Atthe acquisition date, the acquired in-process research and development was notconsidered to have reached technological feasibility and had no alternativefuture uses. Therefore, in accordance with accounting principles generallyaccepted in the United States of America, the value of such was expensed at thetime of the acquisition in operating costs. The allocation to in-processresearch and development represents the estimated fair value of such incompleteresearch and development, at the acquisition date, based on future cash flowsthat have been adjusted by the respective projects’ completion percentage. Asof the acquisition date, cash flows from these projects were expected tocommence in fiscal year 2006. As of the acquisition date, cash flows wereexpected under two scenarios — base case (assumes the contingent payment is notearned) and earnout case (assumes the contingent payment is earned). Indetermining fair value, a 24% risk adjusted discount rate was applied to theprojects’ cash flows under the base case, and a 40% risk adjusted discount ratewas applied to the projects’ cash flows under the earnout case.  At the acquisition date, SPG was conductingdevelopment activities associated with the completion of test mobile productsused to test evolving 3G (third-generation) mobile communications networks andequipment that tests the functionality and performance ofWide-Band-Code-Division-Multiple-Access technology.

The operating results ofJcAIR and SPG have been included in the consolidated statement of earnings fromtheir respective acquisition dates. JcAIR and SPG are included in the TestSolutions segment.

Summarized below are theunaudited pro forma results of operations of the Company as if JcAIR and SPGhad been acquired at the beginning of the nine month period presented. Thein-process research and development write-offs for JcAIR and SPG have beenexcluded from the March 31, 2005 pro forma income in order to providecomparability to the respective historical period.

 

|                       | ** ** | **Pro Forma  Nine Months Ended  March 31, 2005** | ** ** |
|-----------------------|------------|---------------------------------------------------------------------------|------------|
| ** **            | ** ** | **(In thousands, except per share data)**        | ** ** |
| Net sales             |       | $                                                                         | 383,905    |   |
| Net income            |       | $                                                                         | 24,508     |   |
| Net income per  share |       |                                                                      |       |
| Basic                 |       | $                                                                         | 0.33       |   |
| Diluted               |       | $                                                                         | 0.32       |   |

 

The pro forma financialinformation presented above is not necessarily indicative of either the resultsof operations that would have occurred had the acquisitions taken place at thebeginning of the nine month period presented or of future operating results ofthe combined companies.

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**Intangibles with Definite Lives**

The components of amortizable intangibleassets are as follows:

 

|                               | ** ** | **As of March 31, 2006** | ** ** |
|-------------------------------|------------|----------------------------------------------|------------|
| ** **                    | ** ** | **(In thousands)**                      | ** ** |
| ** **                    | ** ** | **Gross Carrying  Amount**              | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Existing  technology          |       | $                                            | 80,814     |   | $ | 29,174 |   | $ | 51,640 |   |
| Tradenames                    |       | 2,315                                        |       | 1,860 |   | 455 |   |
| Customer related  intangibles |       | 6,161                                        |       | 2,374 |   | 3,787 |   |
| Total                         |       | $                                            | 89,290     |   | $ | 33,408 |   | $ | 55,882 |   |

 

The aggregate amortizationexpense for amortized intangible assets was $3.4 million and $2.1 million forthe three months ended March 31, 2006 and 2005, respectively, and $10.3million and $6.2 million for the nine months ended March 31, 2006 and2005, respectively.

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

|      | ** ** | **(In thousands)** | ** ** |
|------|------------|-------------------------|------------|
| 2007 |       | $                       | 12,352     |   |
| 2008 |       | 11,627                  |       |
| 2009 |       | 9,241                   |       |
| 2010 |       | 8,116                   |       |
| 2011 |       | 4,246                   |       |
|      |            |                         |            |  |

 

**Goodwill**

The carrying amount ofgoodwill is as follows:

 

|                                    | ** ** | **Balance  as of  July 1, 2005** | ** ** | **Adjustment  (Note a)** | ** ** | **Effect of   Foreign  Currency** | ** ** | **Balance  as of  March 31, 2006** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------|------------|
| Microelectronic  solutions segment |       | $                                               | 46,688     |                          | $          | —                                      |       | $                                                 | —     |   | $ | 46,688 |   |
| Test solutions  segment            |       | 121,360                                         |       | (1,257                        | )          | (2,514                                      | )          | 117,589                                           |       |
| Total                              |       | $                                               | 168,048    |                          | $          | (1,257                                      | )          | $                                                 | (2,514     | ) | $ | 164,277 |   |

 

Note a-               Thisadjustment to goodwill is primarily the result of a tax refund received byAeroflex International Ltd., which pertains to a pre-acquisition tax period.

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**3.****             ****Discontinued Operations**

As a result of continued operating losses, inFebruary 2004, the Board of Directors of the Company approved a formalplan to divest the Company’s thin film interconnect manufacturing operation (“MIC”)and to seek a strategic buyer. This operation had previously been included inthe Microelectronic Solutions segment. As a result of this decision, the Companyrecorded a $9.1 million ($6.2 million, net of tax) loss on disposal in thequarter ended December 31, 2003. This charge included a cash requirementof $2.6 million primarily for existing equipment leases, and a non-cash chargeof $6.5 million for the write down of goodwill, other intangibles and ownedequipment.

In September 2004, the Company sold thestock of MIC for $8.8 million and recorded an additional net loss on disposalof $1.3 million ($1.3 million, net of tax). Since the sale of the stock createda capital loss for tax purposes and the Company had no current capital gains tooffset it, the Company recorded a full valuation allowance against the taxbenefit. Under the terms of the sale agreements, the Company had retainedcertain liabilities relating to potential adverse environmental conditions thatmay exist as of the date of sale, litigation pending against MIC as of the dateof sale and product defects in products designed, developed, manufactured orsold by MIC prior to the sale date which result in a recall, withdrawal ormarket suspension of the product or result in injury to persons or property. Managementbelieves these contingencies will not have a material adverse effect on theCompany’s consolidated financial statements.

In June 2004, the Boardof Directors of the Company approved a formal plan to divest the Company’sshock and vibration control device manufacturing business (“VMC”) and to seek astrategic buyer. This operation had previously comprised the Isolator Productssegment. In March 2005, the Company sold the net assets of VMC for $8.4million in cash. The Company recorded an $860,000 ($505,000 net of tax) gain ondisposition. Under the terms of the sale agreements, the Company has retainedcertain liabilities relating to adverse environmental conditions that currentlyexist at the premises occupied by VMC, litigation pending against VMC as of thedate of sale, and to the extent covered by insurance, for product liability forproducts sold prior to the closing date. The Company has recorded a reserve forthe estimated remediation costs related to adverse environmental conditionsthat existed at the VMC premises when it was sold.

In accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, thesebusiness units and TriLink (which was discontinued in December 2002) havebeen reported as discontinued operations and, accordingly, income and lossesfrom operations and the net loss on disposal have been reported separately fromcontinuing operations. Net sales and income (loss) from discontinued operations(including the net loss on disposal) for the nine months ended March 31,2005:

 

|                                             | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **March 31, 2005**    | ** ** |
| ** **                                  | ** ** | **(In thousands)**         | ** ** |
| Net Sales                                   |       |                            |       |
| MIC                                         |       | $                               | 3,313      |   |
| VMC                                         |       | 12,406                          |       |
| TriLink                                     |       | —                          |       |
|                                        |       | $                               | 15,719     |   |
|                                        |       |                            |       |
| Income (Loss)  From Discontinued Operations |       |                            |       |
| MIC                                         |       | $                               | (1,081     | ) |
| VMC                                         |       | (429                            | )          |
| TriLink                                     |       | 14                              |       |
|                                        |       | $                               | (1,496     | ) |

 

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

In accordance with SFAS No. 128,“Earnings Per Share,” net income per common share (“Basic EPS”) is computed bydividing net income by the weighted average common shares outstanding. Netincome per common share, assuming dilution (“Diluted EPS”) is computed bydividing net income by the weighted average common shares outstanding plus potentialdilution from the exercise of stock options and restricted stock. As of July 1,2005, the Company adopted SFAS 123(R) and did not restate prior periods(see note 1 “Accounting for Stock-based Compensation”). A reconciliation of thedenominators of the Basic EPS and Diluted EPS calculations for continuingoperations is as follows:

 

|                                                                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                        | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                                                                                        | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                        | ** ** | **(In thousands)**          | ** ** |
| Computation of Adjusted  Weighted Average  Shares Outstanding:                                                    |       |                             |       |                            |       |   |   |   |   |
| Weighted average shares  outstanding                                                                              |       | 75,133                           |       | 74,714                          |       | 74,922 |   | 74,595 |   |
| Add: Effect of dilutive  options                                                                                  |       | 2,097                            |       | 1,128                           |       | 1,384 |   | 1,452 |   |
| Weighted average shares  and common share  equivalents used for computation of diluted  earnings per common share |       | 77,230                           |       | 75,842                          |       | 76,306 |   | 76,047 |   |

 

Options to purchase 7.1million shares at exercise prices ranging between $9.22 and $34.41 per sharewere not included in the computation of diluted EPS as their effect would havebeen anti-dilutive, as per the provisions of SFAS No. 128.

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

 

The components of comprehensive income are asfollows:

 

|                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                           | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                           | ** ** | **(In thousands)**                          | ** ** |
|                                                                 |       |                                             |       |                                            |       |   |   |   |   |
| Net income                                                           |       | $                                                | 7,746      |                                            | $          | 3,972 |   | $ | 20,049 |   | $ | 14,911 |   |
|                                                                 |       |                                             |       |                                            |       |   |   |   |   |
| Accrued pension  liability, net of tax                               |       |                                             |       | —                                          |       | 16 |   | — |   |
|                                                                 |       |                                             |       |                                            |       |   |   |   |   |
| Unrealized gain (loss)  on interest rate swap agreements, net of tax |       | 15                                               |       | 37                                              |       | 52 |   | 57 |   |
|                                                                 |       |                                             |       |                                            |       |   |   |   |   |
| Foreign currency  translation adjustment                             |       | 478                                              |       | (1,894                                          | )          | (4,571 | ) | 5,170 |   |
|                                                                 |       |                                             |       |                                            |       |   |   |   |   |
| Total comprehensive income                                           |       | $                                                | 8,239      |                                            | $          | 2,115 |   | $ | 15,546 |   | $ | 20,138 |   |

 

Accumulated othercomprehensive income (loss) is as follows:

** **

|                              | ** ** | **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, July 1,  2005  |       | $                          | (3,632     | )                          | $          | (75             | )          | $                          | 12,727     |   | $ | 9,020 |   |
| Nine months activity         |       | 16                         |       | 52                         |       | (4,571          | )          | (4,503                     | )          |
| Balance, March 31, 2006 |       | $                          | (3,616     | )                          | $          | (23             | )          | $                          | 8,156      |   | $ | 4,517 |   |

** **

** **

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

** **

Inventories consist of thefollowing:

 

|                 | ** ** | **March 31,**      | ** ** | **June 30,** | ** ** |
|-----------------|------------|-------------------------|------------|-------------------|------------|
| ** **      | ** ** | **2006**                | ** ** | **2005**          | ** ** |
| ** **      | ** ** | **(In thousands)** | ** ** |
| ** **      | ** ** | ** **              | ** ** | ** **        | ** ** |
| Raw materials   |       | $                       | 46,398     |              | $          | 43,158 |   |
| Work in process |       | 58,730                  |       | 53,115            |       |
| Finished goods  |       | 24,466                  |       | 22,633            |       |
|            |       | $                       | 129,594    |              | $          | 118,906 |   |

 

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

 

The Company warrants itsproducts against defects in design, materials and workmanship, generally forone year from their date of shipment. A provision for estimated future costsrelating to these warranties is recorded when revenue is recognized and isincluded in cost of goods sold.

Activity related to the Company’s productwarranty liability was as follows:

 

|                                     | ** ** | **Nine Months Ended  March 31,** | ** ** |     |
|-------------------------------------|------------|-------------------------------------------------|------------|----------|
| ** **                          | ** ** | **2006**                                        | ** ** | **2005** | ** ** |   |
| ** **                          | ** ** | **(In thousands)**                         |
|                                |       |                                            |       |     |   |   |
| Balance at  beginning of period     |       | $                                               | 2,056      |     | $ | 1,702 |   |   |
| Provision for  warranty obligations |       | 2,753                                           |       | 1,510    |   |   |
| Charges incurred                    |       | (2,148                                          | )          | (1,377   | ) |   |
| Acquired  warranty obligations      |       | —                                          |       | (194     | ) |   |
| Foreign currency  impact            |       | (18                                             | )          | 27       |   |   |
| Balance at end  of period           |       | $                                               | 2,643      |     | $ | 1,668 |   |   |

 

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

 

On March 21, 2006, theCompany executed a loan agreement with four banks which replaced a previous $50million loan agreement. The unsecured multi-currency revolving credit facilityincreased the Company’s line of credit to $100 million through March 2011.Approximately $10.9 million in letters of credit issued under the previousfacility constitute letters of credit issued under the new facility. Under certaincircumstances, upon request of the Company, the commitments under the creditfacility may be increased by $50 million. The interest rates on borrowingsunder this agreement are at varying rates depending on certain financial ratioswith the current rate substantially equivalent to LIBOR plus .575% (5.4% at March 31,2006) on the revolving credit borrowings. The company paid closing fees of $308,000including legal costs and is required to pay an annual facility fee of .175% onthe entire credit line.

The terms of the loanagreement require compliance with certain financial covenants includingmaintenance of various financial ratios, limitations on indebtedness andprohibition of the payment of cash dividends. The Company is currently in fullcompliance with all of the covenants contained in the loan agreement. At March 31,2006 the company’s available unused line of credit was approximately $89.1million after consideration of outstanding letters of credit.

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

Effective January 1, 1994, the Company established a SupplementalExecutive Retirement Plan (the “SERP”) which provides retirement, death anddisability benefits to certain of its officers. On September 3, 2003, theCompany acquired MCE, including its defined benefit pension plan (the “MCE Plan”).The MCE Plan has been frozen since December 31, 1993.

**Components of Net Periodic BenefitCost**

|                                                    | ** ** | **Nine Months Ended  March 31,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(In thousands)**                              | ** ** |
| ** **                                         | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Service cost                                  |       | $                                               | 385        |   | $ | 403 |   |
| Interest cost                                      |       | 743                                             |       | 509 |   |
| Expected return  on plan assets                    |       | (109                                            | )          | (93 | ) |
| Amortization of  net transition (asset) obligation |       | 28                                              |       | 28 |   |
| Recognized  actuarial (gain) loss                  |       | 338                                             |       | 150 |   |
| Net periodic  benefit cost                         |       | $                                               | 1,385      |   | $ | 997 |   |
|                                               |       |                                            |       |   |   |

The Company previouslydisclosed in its financial statements for the year ended June 30, 2005,that it expected to contribute $164,000 to its pension plan in the fiscal yearended June 30, 2006.  As of March 31,2006, $100,000 of the contributions had been made.

Due to the retirement of oneof its officers, the Company is required to make payments of $133,000 in thefiscal year ended June 30, 2006, $674,000 in fiscal year ended June 30,2007 and $628,000 each fiscal year thereafter pursuant to the SERP. Paymentscease December 31, 2015 or upon death, whichever is later.

**10.****               ****Stock Options and Warrants**

TheCompany has several stock option plans that are described under the caption “StockOption Plans” in footnote 9 to the consolidated financial statements includedin the Company’s June 30, 2005 Securities and Exchange Commission Form 10K.In November 2005, the shareholders approved an amendment to the 2002Directors’ Plan to increase the number of shares covered to 1.1 million shares.Options under all plans expire not later than ten years from the date of grant.As of March 31, 2006, 3.0 million shares of the Company’s Common Stockwere reserved and available to be granted pursuant to these plans.

Sharebased compensation expense is attributable to the granting, and the remaining requisiteservice periods, of stock options. Compensation expense attributable to sharebased compensation in the three and nine months ended March 31, 2006 was$1.6 million ($943,000 after tax), or $.01 for both basic and diluted earningsper share, and $5.0 million ($3.1 million after tax), or $.04 for both basicand diluted earnings per share, respectively. As of March 31, 2006, thetotal unrecognized compensation cost related to nonvested stock awards was $8.1million and the related weighted average period over which it is expected to berecognized is approximately 2.5 years.

19

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Priorto the Company’s adoption of SFAS No. 123(R), SFAS No. 123 requiredthat the Company provide pro forma information regarding net earnings and netearnings per common share as if compensation cost for the Company’s share basedawards had been determined in accordance with the fair value method prescribedtherein. The Company had previously adopted the disclosure portion of SFAS No. 148,“Accounting for Stock Based Compensation — Transition and Disclosure,”requiring quarterly SFAS No. 123 pro forma disclosure. The pro formacharge for compensation cost related to share based awards granted wasrecognized over the service period. For stock options, the service periodrepresents the period of time between the date of grant and the date eachoption becomes exercisable without consideration of certain accelerationprovisions (e.g., change of control).

Thefollowing table illustrates the effect on the net earnings per common share as ifthe fair value method had been applied to all outstanding awards for the threeand nine months ended March 31, 2005:

 

|                          | ** **                                                                                                              | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |   |
|--------------------------|-------------------------------------------------------------------------------------------------------------------------|----------------------------------|------------|---------------------------------|------------|--------|
| ** **               | ** **                                                                                                              | **March 31, 2005**     | ** ** | **March 31, 2005**    | ** ** |   |
| ** **               | ** **                                                                                                              | **(In thousands)**          | ** ** |                            |
| ** **               | ** **                                                                                                              | ** **                       | ** ** |                            |
| Net income, as  reported |                                                                                                                    | $                                | 3,972      |                            | $          | 14,911 |   |   |
| Deduct:                  | Total share based  compensation expense  determined under fair value method for all awards,  net of related tax effects |                             | (3,070     | )                               | (9,545     | )      |   |
|                     |                                                                                                                    |                             |       |                            |       |
| Pro forma net  income    |                                                                                                                    | $                                | 902        |                            | $          | 5,366  |   |   |
|                     |                                                                                                                    |                             |       |                            |       |   |
| Net income per share:    |                                                                                                                    |                             |       |                            |       |   |
| Basic, as reported       |                                                                                                                    | $                                | 0.05       |                            | $          | 0.20   |   |   |
|                     |                                                                                                                    |                             |       |                            |       |   |
| Basic, pro forma         |                                                                                                                    | $                                | 0.01       |                            | $          | 0.07   |   |   |
|                     |                                                                                                                    |                             |       |                            |       |   |
| Diluted, as reported     |                                                                                                                    | $                                | 0.05       |                            | $          | 0.20   |   |   |
|                     |                                                                                                                    |                             |       |                            |       |   |
| Diluted, pro forma       |                                                                                                                    | $                                | 0.01       |                            | $          | 0.07   |   |   |
|                     |                                                                                                                    |                             |       |                            |       |   |
|                          |                                                                                                                         |                                  |            |                                 |            |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

20

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Asummary of the Company’s stock option plans as of March 31, 2006 andchanges 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, 2005   |       | 15,384                  |       | $            | 11.72      |                    |       |                      |       |   |
| Granted                             |       | 523                     |       | 11.39        |       |                    |       |                      |       |
| Exercised                           |       | (570                    | )          | 6.13         |       |                    |       |                      |       |
| Expired                             |       | —                  |       | —       |       |                    |       |                      |       |
| Forfeited                           |       | (419                    | )          | 12.59        |       |                    |       |                      |       |
|                                |       |                    |       |         |       |                    |       |                      |       |
| Outstanding at  March 31, 2006 |       | 14,918                  |       | $            | 11.90      |                    | $          | 47,071                    |       | 5.7 |   |
|                                |       |                    |       |         |       |                    |       |                      |       |
| Exercisable at  March 31, 2006 |       | 13,362                  |       | $            | 12.14      |                    | $          | 40,923                    |       | 5.3 |   |
|                                |       |                    |       |         |       |                    |       |                      |       |

----

(1) The intrinsic value of a stock option is theamount by which the current market value of the underlying stock exceeds theexercise price of the option.

Theexercise period for all stock options does not exceed ten years from the dateof grant. Stock option grants to individuals generally become exercisable insubstantively equal tranches over a service period of up to five years and theexercise price is equal to the stock price at the grant date for all plans.

The weighted average grantdate fair value of stock options granted for the three months ended March 31,2006 and 2005 was $9.67 and $5.21, respectively. The weighted average grantdate fair value of stock options granted for the nine months ended March 31,2006 and 2005 was $8.85 and $5.05, respectively. The total intrinsic value ofstock options exercised for the three months ended March 31, 2006 and 2005was $2.1 million and $212,000, respectively. The total intrinsic value of stockoptions exercised for the nine months ended March 31, 2006 and 2005 was$3.1 million and $2.1 million, respectively.

The fair value of eachoption grant was estimated on the date of grant using the Black-Scholesoption-pricing model with the following weighted average assumptions:

 
| ** **                                        | ** ** | **Three Months Ended  March 31,** | ** ** | **Nine Months Ended  March 31,** | ** ** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|------------|
| ** **                                        | ** ** | **2006**                               | ** ** | **2005**                              | ** ** | **2006**   | ** ** | **2005** | ** ** | ** ** |
|                                              |       |                                   |       |                                  |       |       |   |   |   |   |
| Weighted average  expected stock price volatility |       | 89                                     | %          | 44                                    | %          | 92         | % | 46 | % |   |
| Weighted average  expected option life            |       | 6.0 years                              |       | 6.8 years                             |       | 6.1 years  |   | 6.1 years |   |   |
| Average risk free  interest rate                  |       | 4.6                                    | %          | 4.3                                   | %          | 4.5        | % | 4.3 | % |   |
| Average dividend yield                            |       | —                                 |       | —                                |       | —     |   | — |   |   |
| Discount for  post-vesting restrictions           |       | N/A                                    |       | N/A                                   |       | N/A        |   | N/A |   |   |

 

Cash received from shareoption exercises for the three months ended March 31, 2006 and 2005 was$1.7 million and $42,000, respectively. The cash received from share optionexercises for the nine months ended March 31, 2006 and 2005 was $3.5million and $1.5 million, respectively.

The Company recorded creditsto additional paid-in capital during the three months ended March 31, 2006and 2005 of $766,000 and $78,000, respectively, and for the nine months ended March 31,2006 and 2005 of $1.2 million and $766,000, respectively, in connection withthe actual tax benefit related to compensation deductions on the exercise ofstock options in excess of related deferred tax assets.

21

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**11.****                               StockRepurchase Program**

** **

During fiscal 2005, theCompany’s Board of Directors authorized a stock repurchase program of up to 3.0million shares of its Common Stock, subject to certain limitations imposed bythe Company’s lending banks. Purchases will be made from time to time,depending upon market conditions at prices deemed appropriate by management. Duringthe first nine months of fiscal 2006, a total of 25,000 shares were repurchasedand retired for $283,000. As of March 31, 2006, 75,000 shares have beenrepurchased and retired since the inception of this program for $699,000.

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

In fiscal 2005, the Companylearned that it inadvertently may have violated certain International Trafficin Arms Regulations (ITAR) by exporting certain products and services withoutlicenses. These violations resulted from an error in classifying the productsand services as commercial rather than military. At that time, the Companyprepared and filed a voluntary disclosure with the State Department whichdescribed the details of the exports and erroneous classifications.  On March 13, 2006, the Company received aletter from the State Department indicating that the case was closed withoutany enforcement action.

On July 31, 2003, theCompany acquired the Racal Instruments Wireless Solutions Group (“RIWS”) forcash of $38 million and a deferred payment of up to $16.5 million in eithercash or Aeroflex common stock, at the Company’s option, depending on RIWSachieving certain performance goals for the year ending July 31, 2004. Althoughthe Company believes that the performance goals have not been met, thedetermination is not final.

We are involved in variousother legal matters incidental to our business. We believe the outcome of theseother legal matters will not have a material effect upon us.

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

The Company’s businesssegments and major products included in each segment, are as follows:

Microelectronic Solutions (“AMS”)

·                  MicroelectronicComponents, Sub-assemblies and Modules

·                  IntegratedCircuits

·                  MotionControl Systems

Test Solutions (“ATS”)

·                  InstrumentProducts and Test Systems

The Company is amanufacturer of advanced technology systems and components for commercialindustry, government and defense contractors. Approximately 31% of the Company’ssales for both the three months ended March 31, 2006 and 2005, and 29% and32% for the nine months ended March 31, 2006 and 2005, respectively, wereto agencies of the United States government or to prime defense contractors orsubcontractors of the United States government. No one customer constitutedmore than 10% of the Company’s sales during any of the periods presented. Inter-segmentsales were not material and have been eliminated from the tables below.

22

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Most of the Company’s operations are locatedin the United States; however, it also has operations in Europe and Asia. Eachof Aeroflex International Limited, which was acquired in May 2002, RIWS,which was acquired in July 2003, and SPG, which was acquired in May 2005,have significant operations in the United Kingdom. Specifically, net sales fromfacilities located in the United Kingdom were approximately $116.0 million forthe nine months ended March 31, 2006. Total assets of the United Kingdomoperations were $243.9 million as of March 31, 2006.

Revenues, based on the customers’ locations,attributed to the United States and other regions are as follows:

|                           | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)**                                            | ** ** |
|                      |       |                                                               |       |   |   |
| United States of  America |       | $                                                                  | 76,074     |   | $ | 62,560 |   |
| Europe and  Middle East   |       | 46,586                                                             |       | 29,716 |   |
| Asia and  Australia       |       | 15,052                                                             |       | 19,907 |   |
| Other regions             |       | 2,815                                                              |       | 1,572 |   |
|                      |       | $                                                                  | 140,527    |   | $ | 113,755 |   |

 

 

|                           | ** ** | **For the Nine Months Ended  March 31,** | ** ** |
|---------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)**                                           | ** ** |
|                      |       |                                                              |       |   |   |
| United States of  America |       | $                                                                 | 234,933    |   | $ | 197,917 |   |
| Europe and  Middle East   |       | 107,553                                                           |       | 89,057 |   |
| Asia and  Australia       |       | 53,548                                                            |       | 44,019 |   |
| Other regions             |       | 5,298                                                             |       | 4,413 |   |
|                      |       | $                                                                 | 401,332    |   | $ | 335,406 |   |

 

23

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Selectedfinancial data by segment is as follows:
| ** **                                                                  | ** ** | ** **                                                         | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** **        | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                                  | ** ** | **For the Three Months Ended  March 31,** | ** ** | **For the Nine Months Ended  March 31,** | ** ** |
| ** **                                                                  | ** ** | **2006**                                                           | ** ** | **2005**                                                          | ** ** | **2006**   | ** ** | **2005**          | ** ** |
| ** **                                                                  | ** ** | **(In thousands)**                                            | ** ** |
| ** **                                                                  | ** ** | ** **                                                         | ** ** | **(Restated)(1)**                                                 | ** ** | ** ** | ** ** | **(Restated)(2)** | ** ** |
| Net sales:                                                                  |       |                                                               |       |                                                              |       |       |       |              |       |
| Microelectronic  solutions                                                  |       | $                                                                  | 61,126     |                                                              | $          | 51,627     |       | $                 | 174,818    |   | $ | 151,763 |   |
| Test solutions                                                              |       | 79,401                                                             |       | 62,128                                                            |       | 226,514    |       | 183,643           |       |
| Net sales                                                                   |       | $                                                                  | 140,527    |                                                              | $          | 113,755    |       | $                 | 401,332    |   | $ | 335,406 |   |
|                                                                        |       |                                                               |       |                                                              |       |       |       |              |       |
| Segment adjusted  operating income (3):                                     |       |                                                               |       |                                                              |       |       |       |              |       |
| Microelectronic  solutions (“AMS”)                                |       | $                                                                  | 12,854     |                                                              | $          | 12,143     |       | $                 | 41,778     |   | $ | 32,735 |   |
| Test solutions  (“ATS”)                                           |       | 9,296                                                              |       | 4,547                                                             |       | 19,448     |       | 15,446            |       |
| General  corporate expense                                                  |       | (3,704                                                             | )          | (6,709                                                            | )          | (11,816    | )          | (14,618           | )          |
|                                                                        |       | 18,446                                                             |       | 9,981                                                             |       | 49,410     |       | 33,563            |       |
| Amortization of  acquired intangibles                                       |       |                                                               |       |                                                              |       |       |       |              |       |
| — AMS                                                                  |       | (534                                                               | )          | (534                                                              | )          | (1,601     | )          | (1,621            | )          |
| — ATS                                                                  |       | (2,906                                                             | )          | (1,529                                                            | )          | (8,728     | )          | (4,543            | )          |
| Share based  compensation                                                   |       |                                                               |       |                                                              |       |       |       |              |       |
| — AMS                                                                  |       | (258                                                               | )          | —                                                            |       | (984       | )          | —            |       |
| — ATS                                                                  |       | (361                                                               | )          | —                                                            |       | (1,172     | )          | —            |       |
| — Corporate                                                            |       | (933                                                               | )          | —                                                            |       | (2,854     | )          | —            |       |
| Restructuring charges -  ATS (4)                                            |       | (1,179                                                             | )          | (1,678                                                            | )          | (1,179     | )          | (1,678            | )          |
| Current period impact  of acquisition related adjustment to inventory - ATS |       | —                                                             |       | —                                                            |       | (1,088     | )          | —            |       |
| Operating income (GAAP)                                                     |       | 12,275                                                             |       | 6,240                                                             |       | 31,804     |       | 25,721            |       |
| Interest expense                                                            |       | (144                                                               | )          | (316                                                              | )          | (451       | )          | (738              | )          |
| Other income (expense),  net                                                |       | 586                                                                |       | 406                                                               |       | 1,338      |       | 1,371             |       |
| Income from continuing  operations before income taxes                      |       | $                                                                  | 12,717     |                                                              | $          | 6,330      |       | $                 | 32,691     |   | $ | 26,354 |   |

----

(1) Restated for thetransfer of the Motion Control Systems business from ATS to AMS. Sales and operatingincome (loss) for the Motion Control Systems business was $3.7 million and $281,000,respectively for the three months ended March 31, 2005.

(2)  Restated forthe transfer of the Motion Control Systems business from ATS to AMS. Sales and operatingincome (loss) for the Motion Control Systems business was $11.2 million and and$299,000, respectively for the nine months ended March 31, 2005.

(3)  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.

(4)  The operatingincome of the ATS segment has been adjusted to exclude the restructuringcharges for the reorganization of its ATS segment, primarily its Europeanoperations.

24

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**14.****                  ****Restructuring Charges**

In March 2005, theCompany initiated strategic plans to reorganize certain of its European operationsin its Test Solutions business segment. The Company recorded a charge of$1.7 million ($1.0 million, net of taxes) for workforce reductionsprimarily in management, sales, and engineering. The restructuring charge wasallocated entirely to selling, general and administrative costs. In March 2006,the Company initiated further  steps toconsolidate its three Test Solutions businesses in the United Kingdom. The currentplan, which is expected to be completed in the first half of fiscal 2007,contemplates the move of manufacturing operations into one facility and thecreation of a shared-services environment for all finance and administrativefunctions. In connection with this plan, approximately 40 employee and contractpositions will be eliminated. In the third quarter of fiscal 2006 the Companyrecorded a charge of $1.2 million ($723,000, net of taxes) for workforcereductions in all departments. The Company plans to accrue approximately $1.0million in the fourth quarter of fiscal year 2006 for these workforcereductions plus an undetermined amount (that is not expected to be material)for facilities closures. At March 31, 2006, approximately $503,000 remainsto be paid and is included in accrued liabilities. The workforce restructuringcharge was allocated primarily to selling, general and administrative costs.

 

**ITEM 2****             ****—   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Overview**

We use our advanced design, engineering and manufacturing capabilitiesto produce microelectronic and test solutions that we sell primarily into thebroadband communications, aerospace and defense markets. We also design andmanufacture motion control systems which are used for industrial and defenseapplications.

**MicroelectronicSolutions**

We have been a designer and supplier of microelectronics for more than20 years. Our products include (i) custom and standard integrated circuits,such as databuses, transceivers, microcontrollers, microprocessors and memoriesand (ii) components, sub-assemblies and modules for military andcommercial communication systems. We also design, develop and produce motioncontrol systems including stabilization and tracking devices, magnetic motorsand scanning devices.

**TestSolutions**

Wedesign, develop and manufacture a broad line of test equipment which includes:

·                  WirelessTest Equipment

·                  FrequencySynthesizers

·                  RadioTest Equipment

·                  SyntheticTest Systems

·                  AvionicsTest Equipment

·                  OtherGeneral Purpose Test Equipment

Ouroperating strategy is based on the following key objectives:

·                  tostrengthen and expand our portfolio of proprietary technologies;

·                  tobroaden the applications and target markets for our existing products;

·                  toexpand the scope of our content in our customers’ products;

·                  toincrease our operating efficiencies;

·                  tomaintain a conservative capital structure; and

·                  toopportunistically pursue strategic acquisitions.

25

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InApril 2005, we acquired JcAIR Test Systems, which manufactures customizedavionics test solutions, both manual and automated, for manufacturing, repairand ground support operations.

InMay 2005, we acquired the SPG division of UbiNetics Holdings Limited, whichis a developer, manufacturer and integrator of wireless test and measurementsolutions specific to commercial wireless development organizations and serviceoperators.

Ourproduct development efforts primarily involve engineering and design relatingto:

·                  developingnew products

·                  improvingexisting products

·                  adaptingexisting products to new applications

·                  developingprototype components to bid on specific programs

Some of our development efforts are reimbursed under contractualarrangements. Product development and similar costs which are not reimbursedunder contractual arrangements are expensed in the period incurred.

In March 2005, we initiated strategic plans to reorganize certain ofour European operations in our Test Solutions business segment. We recorded acharge of $1.7 million ($1.0 million, net of taxes) for workforcereductions primarily in management, sales and engineering. The restructuringcharge was allocated entirely to selling, general and administrative costs.

In March 2006, we initiated further steps to consolidate our three TestSolutions businesses in the United Kingdom. The current plan, which is expectedto be completed in the first half of fiscal 2007, contemplates the move ofmanufacturing operations into one facility and the creation of ashared-services environment for all finance and administrative functions. Inconnection with this plan, approximately 40 employee and contract positionswill be eliminated. In the third quarter of fiscal 2006 we recorded a charge of$1.2 million ($723,000, net of taxes) for workforce reductions in alldepartments. We plan to accrue approximately $1.0 million in the fourthquarter of fiscal year 2006 for these workforce reductions plus an undeterminedamount (that is not expected to be material) for facilities closures. AtMarch 31, 2006, approximately $503,000 remains to be paid and is includedin accrued liabilities. The workforce restructuring charge was allocatedprimarily to selling, general and administrative costs and is expected togenerate a savings of approximately $4.5 million per year.

**ThreeMonths ended March 31, 2006 Compared to Three Months Ended March 31,2005**

*Net Sales.*Netsales increased 24% to $140.5 million for the three months ended March 31,2006 from $113.8 million for the three months ended March 31, 2005. Netsales in the microelectronic solutions (“AMS”) segment increased 18% to $61.1 million for the threemonths ended March 31, 2006 from $51.6 million for the three months ended March 31,2005 primarily as a result of increased volume of microelectronic modules andcomponents.  Net sales in the testsolutions (“ATS”) segment increased 28% to $79.4 million for the three monthsended March 31, 2006 from $62.1 million for the three months ended March 31,2005 primarily as a  result of theaddition of sales from our fourth quarter fiscal 2005 acquisitions of JcAIR andSPG.

*Gross Profit.*Grossprofit equals net sales less cost of sales. Cost of sales includes materials,direct labor and overhead expenses such as engineering labor, fringe benefits,allocable occupancy costs, depreciation and manufacturing supplies.
| **Three Months**                                 | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **March 31,**                                    | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| 2006                                                  |       | $          | 28,933     |          | 47.3       | %          | $          | 38,133        |       | 48.0       | %          | $             | 67,066     |   | 47.7 | % |
| 2005                                                  |       | 25,746     |       | 49.9          | %          | 28,046     |       | 45.1          | %          | 53,792     |       | 47.3          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

 

Gross profit increased $3.2 million, or 12%, in the AMS segmentprimarily due to the increased sales volume partially offset by decreasedmargin percentages. Margin percentages decreased 2.6% to 47.3% primarily due toproduct mix.

Gross profit increased $10.1 million, or 36%, in the ATS segmentprimarily as a result of the increased sales volume and increased marginpercentages. Margin percentages increased 2.9% to 48.0% primarily due to thehigher SPG margins.

26

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*Selling, General and Administrative Costs.*Selling, general and administrative costsinclude office and management salaries, fringe benefits, commissions, insuranceand professional fees.
| **Three Months**                                 | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** **    | ** ** | ** ** | ** ** | **% of** | ** ** |
| **March 31,**                                    | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** |
| 2006                                                  |       | $          | 9,569      |          | 15.7       | %          | $          | 16,657        |       | 21.0          | %          | $          | 4,637      |          | $          | 30,863 |   | 22.0 | % |
| 2005                                                  |       | 7,427      |       | 14.4          | %          | 15,974     |       | 25.7          | %          | 6,709         |       | 30,110     |       | 26.5          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |               |            |            |            |               |            |  |  |  |  |

 

Selling, general and administrative costs increased by $2.1 million, or29%, in the AMS segment primarily dueto general increases in expenses related to the increase in sales and the recognition of share based compensation of$224,000. Share based compensation was initially recognized as anexpense as of July 1, 2005 pursuant to SFAS 123(R). Selling, general and administrative costsincreased by $683,000, or 4%, in the ATS segment primarily as a resultof our fiscal 2005 fourth quarter acquisitions of JcAIR and SPG and share basedcompensation of $238,000.  Corporateselling, general and administrative expenses decreased by $2.1 millionprimarily due to a $3.2 million reduction in Sarbanes-Oxley consultingcost partially offset by share-based compensation of $933,000.

*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)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2006                                   |       | $6,767     |       | 11.1       | %          | $13,721    |       | 17.3       | %          | $20,488    |       | 14.6       | %          |
| 2005                                   |       | 6,176      |       | 12.0       | %          | 9,203      |       | 14.8       | %          | 15,379     |       | 13.5       | %          |

 

Self funded research and development costs increased $591,000, or 10%, in the AMS segment primarily due to thedevelopment of integrated circuit products. Research and development costsincreased $4.5 million, or 49%, in the ATS segment mainly due to theacquisition of SPG, which spent $2.5 million in the quarter ended March 31,2006, and the development of a radar tracking system.

*Amortization of Acquired Intangibles.*Amortization increased $1.4 million, or 67%,primarily due to the acquisitions of JcAIR and SPG.

*Other Income (Expense).*Interest expense decreased $172,000 to $144,000 for the three monthsended March 31, 2006 from $316,000 for the three months ended March 31,2005 primarily due to lower outstanding debt. Other income of $586,000 for thethree months ended March 31, 2006 consisted primarily of interest incomeof $447,000. Other income of $406,000 for the three months ended March 31,2005 consisted primarily of interest income of $545,000, partially offset byforeign currency transaction losses of $116,000.  The decline in interest income was due to thelower balances in cash, cash equivalents and marketable securities due to ourfourth quarter 2005 acquisitions.

*Provision for Income Taxes.*The income tax provision was $5.0 million (an effective income tax rateof 39.1%) for the three months ended**March 31,2006 and $2.5 million (an effective income tax rate of 38.9%) for the threemonths ended March 31, 2005. The effective income tax rate for the twoperiods differed from the amount computed by applying the U.S. Federal incometax rate to income before income taxes primarily due to foreign, state andlocal income taxes. We anticipate the rate to be 37% for the balance of theyear.

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*Income from Continuing Operations.  *Income from continuing operations for the three months ended March 31,2006 was $7.7 million, or 5.5% of sales, versus $3.9 million, or 3.4% of sales,for the three months ended March 31, 2005. The three months ended March 31,2006 reflect additional intangible amortization expense of $1.4 million beforetax due to our fourth quarter 2005 acquisitions and share based compensationexpense of  $1.6 million before tax, notrequired to be recognized in the prior year.

**NineMonths ended March 31, 2006 Compared to Nine Months Ended March 31,2005**

*Net Sales.*Netsales increased 20% to $401.3 million for the nine months ended March 31,2006 from $335.4 million for the nine months ended March 31, 2005. Netsales in the AMS segment increased 15%to $174.8 million for the nine months ended March 31, 2006 from$151.8 million for the nine months ended March 31, 2005 as a result ofincreased volume of microelectronic modules, components and integrated circuitssales.  Net sales in the ATS segmentincreased 23% to $226.5 million for the nine months ended March 31, 2006from $183.6 million for the nine months ended March 31, 2005 as a resultof the addition of sales from our fourth quarter fiscal 2005 acquisitions ofJcAIR and SPG.

*Gross Profit.*
| **Nine Months**                                  | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **March 31,**                                    | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2006                                                  |       | $          | 87,136     |          | 49.8       | %          | $          | 103,411       |       | 45.7       | %          | $             | 190,547    |   | 47.5 | % |
| 2005                                                  |       | 73,956     |       | 48.7          | %          | 84,648     |       | 46.1          | %          | 158,604    |       | 47.3          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

 

AMS gross profit increased approximately $13.2 million, or 18%, due tothe increased sales volume and increased margin percentages.  Margin percentages increased 1.1% to 49.8%largely due to product mix.

ATS gross profit increased $18.8 million, or 22%, primarily due to theincreased sales volume, offset in part, by reduced margins. Margin percentagesdecreased .4% to 45.7% primarily due to the lower margins on JcAIR’s avionicsproducts and decreased margins in wireless test solutions, as fixed cost werespread over lower sales, partially offset by higher SPG margin percentages.

*Selling, General and Administrative Costs.*
| **Nine Months**                                  | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** **    | ** ** | ** ** | ** ** | **% of** | ** ** |
| **March 31,**                                    | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** |
| 2006                                                  |       | $          | 27,954     |          | 16.0       | %          | $          | 49,048        |       | 21.7          | %          | $          | 14,670     |          | $          | 91,672 |   | 22.8 | % |
| 2005                                                  |       | 24,012     |       | 15.8          | %          | 42,967     |       | 23.4          | %          | 14,618        |       | 81,597     |       | 24.3          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |               |            |            |            |               |            |  |  |  |  |

 

Selling, general and administrative costs increased by $3.9 million, or16%, in the AMS segment primarily due to general increases in expenses relatedto the increase in sales and the recognition of share based compensation of$893,000.   Selling, general and administrative costsincreased by $6.1 million, or 14%, in the ATS segment primarily as a result ofour fiscal 2005 fourth quarter acquisitions of JcAIR and SPG and share basedcompensation of $734,000.  Corporateselling, general and administrative expenses increased by $52,000 primarily dueto share based compensation of $2.9 million (there was no comparable expenselast year), partially offset by a reduction of $2.7 million of Sarbanes-Oxleyconsulting costs.

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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)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2006                                                  |       | $          | 18,387     |          | 10.5       | %          | $          | 38,355        |       | 16.9       | %          | $             | 56,742     |   | 14.1 | % |
| 2005                                                  |       | 17,208     |       | 11.3          | %          | 27,914     |       | 15.2          | %          | 45,122     |       | 13.5          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

 

Self funded research and development costs increased $1.2 million, or 7%*,*in the AMS segment primarily due to increased development of mixed signalintegrated circuits. Research and development increased $10.4 million,or 37%, in the ATS segment primarily due to the addition of the expense of SPGof $7.8 million and the development of a radar tracking system.

*Amortization of Acquired Intangibles.*Amortization increased $4.2 million, or 68%,primarily due to the acquisitions of JcAIR and SPG in the fourth quarter offiscal 2005.

*Other Income (Expense).* Interest expense decreased to$451,000 for the nine months ended March 31, 2006 from $738,000 for thenine months ended March 31, 2005 due to lower outstanding debt. Otherincome of $1.3 million for the nine months ended March 31, 2006 consistedprimarily of interest income of $784,000 and a favorable building leasetermination gain of $459,000. Other income of $1.4 million for the nine monthsended March 31, 2005 consisted primarily of interest income of $1.4million.  The decline in interest incomewas due to the lower balances in cash, cash equivalents and marketablesecurities due to our fourth quarter fiscal 2005 acquisitions.

*Provision for Income Taxes.*The income tax provision was $12.6 million (an effective income taxrate of 38.7%) for the nine months ended**March 31,2006 and $9.9 million (an effective income tax rate of 37.7%) for the ninemonths ended March 31, 2005. The effective income tax rate for the twoperiods differed from the amount computed by applying the U.S. Federal incometax rate to income before income taxes primarily due to foreign, state andlocal income taxes, and for the nine months ended March 31, 2006, a staterate change and a tax audit adjustment, both of which were fully reflected inthe current period.  Excluding the staterate change and tax audit adjustment, we anticipate the rate to be 37% for thebalance of the year.

*Income from Continuing Operations.*Income from continuing operations for thenine months ended March 31, 2006 was $20.0 million, or 5.0% of sales,versus $16.4 million, or 4.9% of sales, for the nine months ended March 31,2005. The nine months ended March 31, 2006 reflects the additionalintangible amortization expense of $4.2 million before tax due to our fourthquarter fiscal 2005 acquisitions and share based compensation expense of $5.0million before tax, not required to be recognized in the prior year.

**Off-Balance Sheet Arrangements**

We are not a party to any off-balance sheet arrangements other thanletters of credit totaling $10.9 million to guarantee our performance undercertain government contracts.

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**Liquidity and Capital Resources**

As of March 31, 2006, we had $197 million in working capital andour current ratio was 2.9 to 1. The Company’s available unused line of creditunder a $100 million revolving credit facility that expires 2011 isapproximately $89.1 million at March 31, 2006, after consideration ofletters of credit.  The interest rate onrevolving credit borrowings under this agreement is at various rates dependingupon certain financial ratios, with the current rate substantially equivalentto LIBOR plus .575% (5.4% at March 31, 2006).

The terms of the loan agreement require compliance with certaincovenants including maintenance of various financial ratios, limitation onindebtedness and prohibition of the payment of cash dividends. We are currentlyin full compliance with all of the covenants contained in our loan agreement,as amended to date. We expect to be in compliance with all covenants for theforeseeable future.

On July 31, 2003, we acquired the Racal Instruments WirelessSolutions Group (“RIWS”) for cash of $38 million and a deferred payment of upto $16.5 million in either cash or Aeroflex common stock, at our option, dependingon RIWS achieving certain performance goals for the year ending July 31,2004. Although we believe that the performance goals have not been met, thedetermination is not final.

On May 23, 2005, we acquired SPG for $84 million in cash and acontingent payment of up to $4 million in cash depending on SPG achievingcertain performance goals for the year ending June 30, 2006.

For the nine months ended March 31, 2006, our operations providedcash from continuing operations of $26.0 million, our investing activities usedcash of $27.8 million, primarily for capital expenditures and the purchase ofmarketable securities, (net of sales) and our financing activities providedcash of $3.8 million, primarily due to the proceeds from stock optionexercises.

We believe our cash, cash equivalents and marketable securities coupledwith internally generated funds and available lines of credit will besufficient for our working capital requirements, capital expenditure needs andthe servicing of our debt for the foreseeable future. One of our pension planscurrently is unfunded, but is expected to be funded from the cash surrendervalue of life insurance policies that are being held in a rabbi trust. We donot believe that the amount of the pension obligations remaining afterapplication of such policy proceeds will be material. Our cash, cashequivalents and marketable securities coupled with our available lines ofcredit, are available to fund acquisitions and other potential large cash needsthat may arise.

The following table summarizes, as of March 31, 2006, ourobligations and commitments to make future payments under debt, operating leaseand employment agreements:
| ** **                           | ** ** | **Payments due by period** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | ** **                                | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                           | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| ** **                           | ** ** | **(In thousands)**                   | ** ** |
| Long-term debt                       |       | $                                         | 4,541      |   | $ | 618 |   | $ | 2,515 |   | $ | 663 |   | $ | 745 |   |
| Operating leases                     |       | 34,218                                    |       | 7,502 |   | 10,285 |   | 5,240 |   | 11,191 |   |
| Employment and  consulting contracts |       | 6,478                                     |       | 2,600 |   | 3,012 |   | 866 |   | — |   |
| Total                                |       | $                                         | 45,237     |   | $ | 10,720 |   | $ | 15,812 |   | $ | 6,769 |   | $ | 11,936 |   |

 

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The operating lease commitments shown in the above table have not beenreduced by future minimum sub-lease rentals of $3.3 million.

In the normal course of business, we routinely enter into binding andnon-binding purchase obligations primarily covering anticipated purchases ofinventory and equipment. None of these obligations are individually significant.We do not expect that these commitments, as of March 31, 2006, will have amaterial adverse affect on our liquidity.

**AccountingPolicies Involving Significant Estimates**

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements and the recognition ofrevenue and expenses during the period reported. The following accountingpolicies require us to make estimates and assumptions based on thecircumstances, information available and our experience and judgment. Theseestimates and assumptions are reviewed periodically and the effects ofrevisions are reflected in the period that they are determined to be necessary.If actual results differ significantly from our estimates, our financialstatements could be materially impacted.

Revenueand Cost Recognition Under Long-Term Contracts

We recognize revenue when persuasive evidence of an arrangement exists,delivery has occurred or services have been rendered (except as describedbelow), the selling price is fixed or determinable and collectibility of theresulting receivable 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. If title does not pass until the productreaches the customer’s delivery site, then recognition of the revenue isdeferred until that time. Revenues associated with certain long-term contractsare recognized in accordance with Statement of Position No. 81-1 “Accountingfor Performance of Construction-Type and Certain Production-Type Contracts” (“SOP81-1”). Under SOP 81-1, we use the percentage-of-completion method,whereby revenues and associated costs are recognized as work on a contractprogresses. We measure the extent of progress toward completion generally basedupon one of the following methods (based upon an assessment of which methodmost 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 orrevisions in estimated profits on contracts-in-process are recorded in theperiod in which such anticipated losses or revisions become evident. Revenuefrom sales of products where software is other than incidental to theirperformance, including related software support and maintenance contracts isrecognized in accordance with SOP-97-2, “Software RevenueRecognition.”

Inventories

Inventories are stated at the lower of cost (first-in, first-out) ormarket. Inventory levels are maintained in relation to the expected salesvolume. We periodically evaluate the net realizable value of our inventory. Numerousanalyses are applied including lower of cost or market analysis, forecastedsales requirements and forecasted warranty requirements. After taking these andother factors into consideration, such as technological changes, age andphysical condition, appropriate adjustments are recorded to the inventory balance.If actual conditions differ from our expectation, then inventory balances maybe over or under valued, which could have a material effect on our results ofoperations and financial condition.

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Recoverabilityof Long-Lived and Intangible Assets

Property, plant and equipment are stated at cost less accumulateddepreciation computed on a straight-line basis over the estimated useful livesof the related assets. Leasehold improvements are amortized over the life ofthe lease or the estimated life of the asset, whichever is shorter. Changes incircumstances such as technological advances or changes to our business modelcan result in the actual useful lives differing from our estimates. To theextent the estimated useful lives are incorrect, the value of these assets maybe over or under stated, which in turn could have a material effect on ourresults of operations and financial condition.

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. We evaluate the recoverability of such assetsby estimating future cash flows. If the sum of the undiscounted cash flowsexpected to result from the use of the assets and their eventual disposition isless than the carrying amount of the assets, we will recognize an impairmentloss to the extent of the excess of the carrying amount of the assets over thediscounted cash flow.

SFAS No. 142 requires that we perform an assessment of whetherthere is an indication that goodwill is impaired on an annual basis unlessevents or circumstances warrant a more frequent assessment. The impairmentassessment involves, among other things, an estimation of the fair value ofeach of our reporting units (as defined in SFAS No. 142). Such estimatesare inherently subjective, and subject to change in future periods.

If the impairment review of goodwill, intangible assets and otherlong-lived assets differ significantly from actual results, it could have amaterial effect on our results of operations and financial condition.

Income Taxes

The carrying value of our net deferred tax assets assumes that we willbe able to generate sufficient future taxable income in certain taxjurisdictions. If this assumption changes in the future, we may be required torecord additional valuation allowances against our deferred tax assetsresulting in additional income tax expense in our consolidated statement ofoperations. We evaluate the realizability of the deferred tax assets and assessthe adequacy of the valuation allowance quarterly.

Share Based Compensation

With the adoption of SFAS No. 123(R) on July 1, 2005, weare required to record the fair value of share based compensation awards as anexpense. In order to determine the fair value of stock options on the date ofgrant, the Company utilizes the Black-Scholes option-pricing model. Inherent inthis model are assumptions related to expected stock price volatility, optionlife, risk-free interest rate and dividend yield. While the risk-free interestrate and dividend yield are less subjective assumptions, typically based onfactual data derived from public sources, the expected stock price volatilityand option life assumptions require a greater level of judgment which makesthem critical accounting estimates.

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**Recently Issued Accounting Standards Not Yet Adopted**

In May 2005, the Financial Accounting StandardBoard (“FASB”) issued SFAS No. 154, “Accounting Changes and ErrorCorrections,” (“SFAS No. 154”) which establishes, unless impracticable,retrospective application as the required method for reporting a change inaccounting principle in the absence of explicit transition requirementsspecific to the newly adopted accounting principle. The statement providesguidance for determining whether retrospective application of a change inaccounting principle is impracticable. The statement also addresses thereporting of a correction of an error by restating previously issued financialstatements. SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. The adoption of this statement is not expected to have any effect on ourconsolidated financial statements.

In April 2005, the FASB issued FASBInterpretation No. 47 (“FIN 47”), “Accounting for Conditional AssetRetirement Obligations — An Interpretation of FASB Statement No. 143.”  FIN 47 clarifies the terms of FASB Statement No. 143and requires an entity to recognize a liability for a conditional assetretirement obligation if the entity has sufficient information to reasonablyestimate its fair value. FIN 47 is effective no later than the end of fiscalyears ending after December 15, 2005. We are currently evaluating theimpact of this standard on our consolidated financial statements.

On December 31, 2004, the FASB issued FASBStaff Position FAS 109-1, “Application of FASB Statement No. 109,Accounting for Income Taxes, to the Tax Deduction on Qualified ProductionActivities Provided by the American Jobs Creation Act of 2004,” (“FSP No. 109-1”),and FASB Staff Position No. FAS 109-2, “Accounting and DisclosureGuidance for the Foreign Earnings Repatriation Provision within the AmericanJobs Creation Act of 2004,” (“FSP No. 109-2”). These staff positionsprovide accounting guidance on how companies should account for the effects ofthe American Jobs Creation Act of 2004 (“AJCA”) that was signed into law on October 22,2004. FSP No. 109-1 states that the tax relief (special taxdeduction for domestic manufacturing) from this legislation should be accountedfor as a “special deduction” instead of a tax rate reduction. FSP No. 109-2gives a company additional time to evaluate the effects of the legislation onany plan for reinvestment or repatriation of foreign earnings for purposes ofapplying FASB Statement No. 109. We are investigating the repatriationprovision to determine whether we might repatriate extraordinary dividends, asdefined in the AJCA.

**Risks Relating to our Business**

*General economic conditions could adversely affect our revenues, grossmargins and expenses*.

Our revenues and gross margins will depend significantly on the overalldemand for microelectronic products and testing solutions, particularly in theproduct and service segments in which we compete. Weaker demand for ourproducts and services caused by economic weakness may result in decreasedrevenues, earnings levels or growth rates and problems with the saleability ofinventory and realizability of customer receivables. In the past, we haveobserved effects of the global economic downturn in many areas of our business.Delays or reductions in spending for our products could have a material adverseeffect on our business, results of operations and financial condition.

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*Our operating results may fluctuate significantly on a quarterly basis.*

Our sales and other operating results have fluctuated significantly inthe past, and we expect this trend will continue. Factors which affect ourresults include:

·                  thetiming, cancellation or rescheduling of customer estimates, orders andshipments;

·                  thepricing and mix of products sold;

·                  newproduct introductions;

·                  ourability to obtain components and subassemblies from contract manufacturers andsuppliers;

        and

·                  variationsin manufacturing efficiencies.

Many of these factors are beyond our control. Our performance in anyone fiscal quarter is not necessarily indicative of any financial trends orfuture performance.

*In theevent that certain of our customers encounter financial difficulties and failto pay us, it could adversely affect our results of operations and financialcondition.*

We manufacture products to customer specifications and purchaseproducts in response to customer orders. In addition, we may commit significantamounts to maintain inventory in anticipation of customer orders. In the eventthat any customer, for whom we maintain inventory, experiences financialdifficulties, we may be unable to sell such inventory at its current profitmargin, if at all. In such an event, our gross margins would decline. Inaddition, if the financial condition of any customer deteriorates, resulting inan impairment of that customer’s ability to pay us amounts owed in respect of asignificant amount of outstanding receivables, our financial condition would beadversely affected.

*If we cannot continue to develop, manufacture and market innovativeproducts and services rapidly that meet customer requirements for performanceand reliability, we may lose market share and our revenues may suffer*.

The process of developing new high technology products and services iscomplex and uncertain, and failure to anticipate customers’ changing needs andemerging technological trends accurately and to develop or obtain appropriateintellectual property could significantly harm our results of operations. Wemust make long-term investments and commit significant resources before knowingwhether our predictions will eventually result in products that the market willaccept. We must accurately forecast volumes, mix of products and configurationsthat meet customer requirements, and we may not succeed.

*Due tothe international nature of our business, political or economic changes couldharm our future revenues, costs and expenses and financial condition.*

Our future revenues, costs and expenses could be adversely affected bya variety of international factors, including:

·                  changesin a country’s or region’s political or economic conditions;

·                  longeraccounts receivable cycles;

·                  tradeprotection measures;

·                  unexpectedchanges in regulatory requirements;

·                  differingtechnology standards and/or customer requirements; and

·                  importor export licensing requirements, which could affect our ability to obtainfavorable terms for components or lead to penalties or restrictions.

 

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A portion of our product and component manufacturing, along with keysuppliers, is located outside of the United States, and also could be disruptedby some of the international factors described above.

*We areexposed to foreign currency exchange rate risks that could adversely affect ourbusiness, results of operations and financial condition.*

We are exposed to foreign currency exchange rate risks that areinherent in our sales commitments, anticipated sales, and assets andliabilities that are denominated in currencies other than the United Statesdollar. Failure to sufficiently hedge or otherwise manage foreign currencyrisks properly could adversely affect our business, results of operations andfinancial condition.

*As part of our business strategy, we may complete acquisitions ordivest non-strategic businesses and product lines. These actions couldadversely affect our business, results of operations and financial condition.*

As part of our business strategy, we engage in discussions with third partiesregarding, and enter into agreements relating to, possible acquisitions,strategic alliances, ventures and divestitures in order to manage our productand technology portfolios and further our strategic objectives. In order topursue this strategy successfully, we must identify suitable acquisition,alliance or divestiture candidates, complete these transactions, some of whichmay be large and complex, and integrate acquired companies. Integration andother risks of acquisitions and strategic alliances can be more pronounced forlarger and more complicated transactions, or if multiple acquisitions arepursued simultaneously.

The integration of acquisitions may make the completion and integrationof subsequent acquisitions more difficult. However, if we fail to identify andcomplete these transactions, we may be required to expend resources tointernally develop products and technology or may be at a competitivedisadvantage or may be adversely affected by negative market perceptions, whichmay have a material effect on our revenues and selling, general andadministrative expenses taken as a whole.

Acquisitions and strategic alliances may require us to integrate with adifferent company culture, management team and business infrastructure andotherwise manage integration risks. Even if an acquisition or alliance issuccessfully integrated, we may not receive the expected benefits of thetransaction. Managing acquisitions, alliances and divestitures requires varyinglevels of management resources, which may divert management’s attention fromthe other business operations. Acquisitions, including abandoned acquisitions,also may result in significant costs and expenses and charges to earnings. As aresult, any completed, pending or future transactions may contribute to ourfinancial results differing from the investment community’s expectations in agiven quarter.

*In order to be successful, we must retain and motivate key employees,and failure to do so could seriously harm us.*

In order to be successful, we must retain and motivate executives andother key employees, including those in managerial, technical, marketing andinformation technology support positions. In particular, our product generationefforts depend on hiring and retaining qualified engineers. Attracting andretaining skilled workers and qualified sales representatives is also criticalto us. Experienced management and technical, marketing and support personnel inthe microelectronics and test solutions industries are in demand andcompetition for their talents is intense. Employee retention may be aparticularly challenging issue following our recent acquisitions since we alsomust continue to motivate employees and keep them focused on our strategies andgoals, which may be particularly difficult due to the potential distractionsrelated to integrating the acquired operations.

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*Terroristacts or acts of war may seriously harm our business, results of operations andfinancial condition.*

Terrorist acts or acts of war (wherever located around the world) maycause damage or disruption to us, our employees, facilities, partners,suppliers, distributors and resellers, and customers, which could significantlyimpact our revenues, expenses and financial condition. The potential for futureterrorist attacks, the national and international responses to terroristattacks, and other acts of war or hostility have created many economic andpolitical uncertainties, which could adversely affect our business and resultsof operations in ways that cannot presently be predicted. In addition, as acompany with headquarters and significant operations located in the UnitedStates, we may be impacted by actions against the United States. We will bepredominantly uninsured for losses and interruptions caused by terrorist actsor acts of war.

*Our stock price has historically fluctuated and may continue tofluctuate.*

Our stock price, like that of other technology companies, can bevolatile. Some of the factors that can affect our stock price are:

·                  theannouncement of new products, services or technological innovations by us orour competitors;

·                  quarterlyincreases or decreases in our revenue or earnings;

·                  changesin quarterly revenue or earnings estimates by the investment community; and

·                  speculationin the press or investment community about our strategic position, financialcondition, results of operations, business or significant transactions.

General market conditions and domestic or international macroeconomicand geopolitical factors unrelated to our performance may also affect our stockprice. In addition, following periods of volatility in a Registrant’ssecurities, securities class action litigation against a Registrant issometimes instituted. This type of litigation could result in substantial costsand the diversion of management time and resources.

**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 usedin this Quarterly Report, words such as “anticipate,” “believe,” “estimate,” “expect,”“intend” and similar expressions, as they relate to us or our management,identify forward-looking statements. Such forward-looking statements are basedon the current beliefs of our management, as well as assumptions made by andinformation currently available to our management. Actual results could differmaterially from those contemplated by the forward-looking statements as aresult of certain factors, including but not limited to those set forth above. Suchstatements reflect our current views with respect to the future and are subjectto these and other risks, uncertainties and assumptions relating to ourfinancial condition, results of operation, growth strategy and liquidity. We donot undertake any obligation to update such forward-looking statements.

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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. Most of our debt is at fixed rates ofinterest or at a variable rate with an interest rate swap agreement whicheffectively converts the variable rate debt into fixed rate debt. Therefore, ifmarket interest rates increase by 10% from levels at March 31, 2006, theeffect on our net income as well as the fair value of our swap would beinsignificant. Most of our invested cash, cash equivalents and marketablesecurities are at variable rates of interest. If market interest rates decreaseby 10 percent from levels at March 31, 2006, the effect on our net incomewould be insignificant. If foreign currency exchange rates (primarily theBritish Pound and the Euro) change by 10% from levels at March 31, 2006,the effect on our other comprehensive income would be approximately $18.1million. Foreign currency contracts are used to protect us from short-termfluctuations in exchange rates principally related to outstanding tradereceivables. We periodically enter into foreign currency contracts, which arenot designated as hedges, and the change in fair value is included in incomecurrently, within other income (expense). As of March 31, 2006, we had$2.0 million of notional value foreign currency forward contracts maturingthrough June 2006. Notional amounts do not quantify risk or representassets or liabilities, but are used in the calculation of cash settlementsunder the contracts. The fair value of these contracts at March 31, 2006was $38,000 less than the notional value.

**ITEM 4****— CONTROLS AND PROCEDURES**

Based on their evaluation as of the end of theperiod covered by this Form 10-Q, our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,conducted an evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures, as required by Exchange Act Rule 13a-15.Based on that evaluation, the Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective to ensure that information to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified 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 three months ended March 31, 2006 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**Limitationson the Effectiveness of Controls**

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

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**AEROFLEX INCORPORATEDAND SUBSIDIARIESPART II — OTHER INFORMATION**

Item 1. Legal Proceedings

In fiscal 2005, the Companylearned that it inadvertently may have violated certain International Trafficin Arms Regulations (ITAR) by exporting certain products and services withoutlicenses. These violations resulted from an error in classifying the productsand services as commercial rather than military. At that time, the Companyprepared and filed a voluntary disclosure with the State Department whichdescribed the details of the exports and erroneous classifications.  On March 13, 2006, the case was closedwithout any enforcement action.

Item 1A. Risk Factors

Not applicable.

Item2. Unregistered Sales of Equity Securities and Use of Proceeds

      
| ** **                                                             | ** ** | ** **                    | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                                                             | ** ** | ** **                    | ** ** | ** **                   | ** ** | **Total Number of** | ** ** | **Maximum Number**    | ** ** |
| **Issuer purchases of equity securities (1)** | ** ** | **Shares Purchased**     | ** ** | **of Shares that** | ** ** |
| ** **                                                             | ** ** | **Total Number of** | ** ** | ** **                   | ** ** | **Publicly**                  | ** ** | **Purchased under**   | ** ** |
| ** **                                                             | ** ** | **Shares**                    | ** ** | **Average Price**       | ** ** | **Announced Plans**      | ** ** | **the Plans or** | ** ** |
| **Period**                                                             | ** ** | ** **                    | ** ** | **Purchased (2)**       | ** ** | **Paid Per Share**  | ** ** | **or Programs**       | ** ** | **Programs** | ** ** |
|                                                                   |       |                          |       |                         |       |                          |       |                       |       |
| January 2006                                                      |       | —                        |       | $                            | —     |                          | 65,000     |                       | 2,935,000  |   |
| February 2006                                                     |       | —                        |       | —                       |       | 65,000                        |       | 2,935,000                  |       |
| March 2006                                                        |       | 10,000                        |       | $                            | 13.02      |                          | 75,000     |                       | 2,925,000  |   |
|                                                                        |            |                               |            |                              |            |                               |            |                            |            |  |  |  |

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(1)            Fordescription of plans, see Note 11 to the Unaudited Condensed ConsolidatedFinancial Statements.

(2)            Allpurchases were made in open market transactions. Our 3.0 million share stockbuyback program has been in effect since May 23, 2005. There is no timelimit on the repurchases to be made under the Plan.

Item 3.     Defaults upon SeniorSecurities

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
| 10.1   | Credit Agreement, dated March 21, 2006, between  and among Aeroflex Incorporated, Aeroflex Test Solutions Limited, the Lenders  party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent  (incorporated by reference to the Current Report on Form 8-K (Date of  Report: March 21, 2006) of Aeroflex Incorporated filed with the  Securities and Exchange Commission on March 27, 2006)                                                                |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2   | Guarantee Agreement, dated March 21, 2006,  between Aeroflex Incorporated and certain of its domestic subsidiaries, and  JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by  reference to the Current Report on Form 8-K (Date of Report:  March 21, 2006) of Aeroflex Incorporated filed with the Securities and  Exchange Commission on March 27, 2006)                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3   | Eighth Amendment Agreement dated March 21,  2006, between and among Aeroflex Incorporated, and certain of its domestic  subsidiaries, Bank of America, N.A. as the Fronting Bank and  Administrative Agent and JPMorgan Chase Bank, N.A., as Syndication Agent  (incorporated by reference to the Current Report on Form 8-K (Date of  Report: March 21, 2006) of Aeroflex Incorporated filed with the  Securities and Exchange Commission on March 27, 2006) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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 and of Chief Financial Officer pursuant to Section 906  of Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.
|        | AEROFLEX INCORPORATED |
|--------|-----------------------|
|   | (REGISTRANT)          |
|   |                  |

 
| May 10, 2006 | By:    | /s/ John  Adamovich, Jr. |   |
|-------------------|--------|-------------------------------|--------|
|              |   | John  Adamovich, Jr.     |   |
|              |   | Sr. Vice  President and       |   |
|              |   | Chief Financial  Officer      |   |

 

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EXHIBIT INDEX
| 10.1   | Credit Agreement, dated March 21, 2006, between  and among Aeroflex Incorporated, Aeroflex Test Solutions Limited, the Lenders  party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent  (incorporated by reference to the Current Report on Form 8-K (Date of  Report: March 21, 2006) of Aeroflex Incorporated filed with the Securities  and Exchange Commission on March 27, 2006)                                                                |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2   | Guarantee Agreement, dated March 21, 2006,  between Aeroflex Incorporated and certain of its domestic subsidiaries, and  JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by  reference to the Current Report on Form 8-K (Date of Report:  March 21, 2006) of Aeroflex Incorporated filed with the Securities and  Exchange Commission on March 27, 2006)                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3   | Eighth Amendment Agreement dated March 21,  2006, between and among Aeroflex Incorporated, and certain of its domestic  subsidiaries, Bank of America, N.A. as the Fronting Bank and  Administrative Agent and JPMorgan Chase Bank, N.A., as Syndication Agent  (incorporated by reference to the Current Report on Form 8-K (Date of  Report: March 21, 2006) of Aeroflex Incorporated filed with the  Securities and Exchange Commission on March 27, 2006) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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 and of  Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                                       |

 

 

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