**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

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**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

** **

| For the quarter ended  **September 30, 2005** |
|----------------------------------------------------|
| **Commission File Number 000-02324**               |   |   |

 

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**AEROFLEX INCORPORATED**

(Exactname 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’stelephone number, including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filing requirementsfor the past 90 days.

 

| Yes  ý |   | No  o |   |   |
|-----------------------|--------|-----------------|--------|--------|

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

| Yes  ý |   | No  o |   |   |
|-----------------------|--------|-----------------|--------|--------|

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

| Yes  o |   | No  ý |   |   |
|------------------|--------|----------------------|--------|--------|

 

 

Indicate by the number of shares outstanding of each of the issuer’s classesof common stock as of the latest practicable date.

 

| **November  7, 2005** | ** ** | **74,689,926**     |
|-----------------------|------------|--------------------|
| (Date)                |       | (Number of Shares) |

 

 

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**AEROFLEXINCORPORATED**

**ANDSUBSIDIARIES**

 

**INDEX**
|           |                                                                                                                                              |                       |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------|
| ** **     | **PART I****:**                                                                                                                                   | **FINANCIAL  INFORMATION** |
|           |                                                                                                                                              |                       |
| Item 1 -       | UNAUDITED CONDENSED  CONSOLIDATED BALANCE SHEETS  September 30, 2005 and June 30, 2005                                                            |
|           |                                                                                                                                              |                       |
|           | UNAUDITED CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS  Three Months Ended September 30, 2005 and 2004                                        |
|           |                                                                                                                                              |                       |
|           | UNAUDITED CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS  Three Months Ended September 30, 2005 and 2004                                        |
|           |                                                                                                                                              |                       |
|           | NOTES TO UNAUDITED CONDENSED  CONSOLIDATED FINANCIAL STATEMENTS                                                                                   |
|           |                                                                                                                                              |                       |
| Item 2 -  | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Three Months Ended September 30, 2005 and 2004  |
|           |                                                                                                                                              |                       |
| Item 3 -       | QUANTITIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK                                                                                         |
|           |                                                                                                                                              |                       |
| Item 4 -       | CONTROLS AND PROCEDURES                                                                                                                           |
|           |                                                                                                                                              |                       |
| ** **     | **PART II:**                                                                                                                                      | **OTHER INFORMATION**      |
|           |                                                                                                                                              |                       |
| Item 1 -       | LEGAL PROCEEDINGS                                                                                                                                 |
|           |                                                                                                                                              |                       |
| Item 6 -       | EXHIBITS                                                                                                                                          |                       |
|           |                                                                                                                                              |                       |
| SIGNATURES     |
|           |                                                                                                                                              |                       |
| CERTIFICATIONS |

 

2

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**Aeroflex Incorporated**

**and Subsidiaries**

** **

**Unaudited Condensed ConsolidatedBalance Sheets**

(In thousands)

 

 
| ** **                                                                      | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------|------------|--------------|------------|
| ** **                                                                      | ** ** | **2005**          | ** ** | **2005**     | ** ** |
| **Assets**                                                                      |       |              |       |         |       |
|                                                                            |       |              |       |         |       |
| Current Assets:                                                                 |       |              |       |         |       |
| Cash and cash  equivalents                                                      |       | $                 | 17,493     |         | $          | 12,974 |   |
| Accounts  receivable, less allowance for doubtful accounts of $1,225 and $1,210 |       | 95,542            |       | 101,317      |       |
| Inventories                                                                     |       | 122,421           |       | 118,906      |       |
| Deferred income  taxes                                                          |       | 19,511            |       | 18,499       |       |
| Prepaid expenses  and other current assets                                      |       | 12,736            |       | 11,107       |       |
| Total current  assets                                                           |       | 267,703           |       | 262,803      |       |
|                                                                            |       |              |       |         |       |
| Property, plant  and equipment, net                                             |       | 77,260            |       | 78,195       |       |
| Other assets                                                                    |       | 13,289            |       | 13,537       |       |
| Intangible  assets with definite lives, net                                     |       | 63,287            |       | 67,266       |       |
| Goodwill                                                                        |       | 166,729           |       | 168,048      |       |
|                                                                            |       |              |       |         |       |
| Total assets                                                                    |       | $                 | 588,268    |         | $          | 589,849 |   |

 

See notes to unauditedcondensed consolidated financial statements

 

3

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| **Aeroflex  Incorporated**                           |
|------------------------------------------------------|
| **and  Subsidiaries**                                |
| ** **                                           |
| **Unaudited  Condensed Consolidated Balance Sheets** |
| **(continued)**                                      |
| (In thousands, except  per share data)               |

 
| ** **                                                                                                                                                                | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------|------------|
| ** **                                                                                                                                                                | ** ** | **2005**          | ** ** | **2005**     | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                             |       |              |       |         |       |
|                                                                                                                                                                      |       |              |       |         |       |
| Current liabilities:                                                                                                                                                      |       |              |       |         |       |
| Current portion  of long-term debt                                                                                                                                        |       | $                 | 635        |         | $          | 634 |   |
| Accounts payable                                                                                                                                                          |       | 29,936            |       | 35,907       |       |
| Advance payments  by customers                                                                                                                                            |       | 15,859            |       | 15,183       |       |
| Income taxes  payable                                                                                                                                                     |       | 6,619             |       | 3,657        |       |
| Accrued payroll  expenses                                                                                                                                                 |       | 14,009            |       | 15,222       |       |
| Accrued expenses  and other current liabilities                                                                                                                           |       | 31,519            |       | 30,451       |       |
| Total current  liabilities                                                                                                                                                |       | 98,577            |       | 101,054      |       |
|                                                                                                                                                                      |       |              |       |         |       |
| Long-term debt                                                                                                                                                            |       | 4,088             |       | 4,190        |       |
| Deferred income taxes                                                                                                                                                     |       | 15,772            |       | 17,146       |       |
| Other long-term liabilities                                                                                                                                               |       | 21,143            |       | 23,479       |       |
| Total  liabilities                                                                                                                                                        |       | 139,580           |       | 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 74,678 and 74,618  shares                                                                      |       | 7,468             |       | 7,462        |       |
| Additional  paid-in capital                                                                                                                                               |       | 375,041           |       | 372,666      |       |
| Accumulated  other comprehensive income                                                                                                                                   |       | 6,806             |       | 9,020        |       |
| Retained  earnings                                                                                                                                                        |       | 59,373            |       | 54,846       |       |
|                                                                                                                                                                      |       | 448,688           |       | 443,994      |       |
|                                                                                                                                                                      |       |              |       |         |       |
| Less: Treasury stock, at cost (4 shares)                                                                                                                                  |       | —            |       | 14           |       |
| Total  stockholders’ equity                                                                                                                                          |       | 448,688           |       | 443,980      |       |
|                                                                                                                                                                      |       |              |       |         |       |
| Total liabilities  and stockholders’ equity                                                                                                                          |       | $                 | 588,268    |         | $          | 589,849 |   |

 

See notes to unauditedcondensed consolidated financial statements

 

4

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| **Aeroflex  Incorporated**                                     |
|----------------------------------------------------------------|
| **and  Subsidiaries**                                          |
| ** **                                                     |
| **Unaudited  Condensed Consolidated Statements of Operations** |
| (In thousands, except  per share data)                         |

 

| ** **                                                                                 | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Net sales                                                                                  |       | $125,648                             |       | $109,183 |   |
| Cost of sales                                                                              |       | 66,722                               |       | 57,851 |   |
| Gross profit                                                                               |       | 58,926                               |       | 51,332 |   |
|                                                                                       |       |                                 |       |   |   |
| Selling, general  and administrative costs                                                 |       | 30,251                               |       | 24,767 |   |
| Research and  development costs                                                            |       | 17,964                               |       | 14,544 |   |
| Amortization of  acquired intangibles                                                      |       | 3,457                                |       | 2,060 |   |
|                                                                                       |       | 51,672                               |       | 41,371 |   |
| Operating income                                                                           |       | 7,254                                |       | 9,961 |   |
|                                                                                       |       |                                 |       |   |   |
| Other income  (expense)                                                                    |       |                                 |       |   |   |
| Interest expense                                                                           |       | (160                                 | )          | (260 | ) |
| Other income  (expense)                                                                    |       | 91                                   |       | 424 |   |
| Total other  income (expense)                                                              |       | (69                                  | )          | 164 |   |
|                                                                                       |       |                                 |       |   |   |
| Income from  continuing operations before income taxes                                     |       | 7,185                                |       | 10,125 |   |
| Provision for  income taxes                                                                |       | 2,658                                |       | 3,725 |   |
| Income from  continuing operations                                                         |       | 4,527                                |       | 6,400 |   |
|                                                                                       |       |                                 |       |   |   |
| Discontinued  operations                                                                   |       |                                 |       |   |   |
| Income (loss)  from discontinued operations, net of tax provision (benefit) of $0 and $204 |       | —                               |       | 350 |   |
| Income (loss) on  disposal of operations, net of tax provision (benefit) of $0 and $0      |       | —                               |       | (1,133 | ) |
| Income (loss)  from discontinued operations, net of tax                                    |       | —                               |       | (783 | ) |
|                                                                                       |       |                                 |       |   |   |
| Net income                                                                                 |       | $4,527                               |       | $5,617 |   |
|                                                                                       |       |                                 |       |   |   |
| Income (loss)  per common share:                                                           |       |                                 |       |   |   |
| Basic                                                                                      |       |                                 |       |   |   |
| Continuing  operations                                                                     |       | $0.06                                |       | $0.09 |   |
| Discontinued  operations                                                                   |       | —                               |       | (0.01 | ) |
| Net income                                                                                 |       | $0.06                                |       | $0.08 |   |
|                                                                                       |       |                                 |       |   |   |
| Diluted                                                                                    |       |                                 |       |   |   |
| Continuing  operations                                                                     |       | $0.06                                |       | $0.08 |   |
| Discontinued  operations                                                                   |       | —                               |       | (0.01 | ) |
| Net income                                                                                 |       | $0.06                                |       | $0.07 |   |
|                                                                                       |       |                                 |       |   |   |
| Weighted average  number of common shares outstanding:                                     |       |                                 |       |   |   |
| Basic                                                                                      |       | 74,758                               |       | 74,446 |   |
| Diluted                                                                                    |       | 75,699                               |       | 75,988 |   |

 

| See notes to unaudited  condensed consolidated financial statements |
|---------------------------------------------------------------------|

 

5

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| **Aeroflex Incorporated**                                     |
|---------------------------------------------------------------|
| **and Subsidiaries**                                          |
| ** **                                                    |
| **Unaudited Condensed Consolidated Statements of Cash flows** |
| (In  thousands)                                               |

 

| ** **                                                                                                           | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                                               |       |                                 |       |   |   |
| Net income                                                                                                           |       | $                                    | 4,527      |   | $ | 5,617 |   |
| Loss from  discontinued operations                                                                                   |       | —                               |       | 783 |   |
| Income from  continuing operations                                                                                   |       | 4,527                                |       | 6,400 |   |
| Adjustments to  reconcile income from continuing operations to net cash provided by (used in)  operating activities: |       |                                 |       |   |   |
| Depreciation and  amortization                                                                                       |       | 7,624                                |       | 5,989 |   |
| Deferred income  taxes                                                                                               |       | (2,308                               | )          | (469 | ) |
| Non - cash stock  based compensation                                                                                 |       | 2,014                                |       | — |   |
| Excess tax  benefits from stock based compensation arrangements                                                      |       | (139                                 | )          | — |   |
| Other, net                                                                                                           |       | 26                                   |       | 5 |   |
| Change in  operating assets and liabilities, net of effects from purchases of  businesses:                           |       |                                 |       |   |   |
| Decrease  (increase) in accounts receivable                                                                          |       | 5,485                                |       | 3,354 |   |
| Decrease  (increase) in inventories                                                                                  |       | (3,705                               | )          | (3,249 | ) |
| Decrease  (increase) in prepaid expenses and other assets                                                            |       | (1,308                               | )          | (4,364 | ) |
| Increase  (decrease) in accounts payable, accrued expenses and other liabilities                                     |       | (4,590                               | )          | 3,342 |   |
|                                                                                                                 |       |                                 |       |   |   |
| Net cash  provided by (used in) continuing operations                                                                |       | 7,626                                |       | 11,008 |   |
| Net cash  provided by (used in) discontinued operations                                                              |       | —                               |       | (1,046 | ) |
| Net cash  provided by operating activities                                                                           |       | 7,626                                |       | 9,962 |   |
|                                                                                                                 |       |                                 |       |   |   |
| Cash flows from  investing activities:                                                                               |       |                                 |       |   |   |
| Capital  expenditures                                                                                                |       | (3,511                               | )          | (4,640 | ) |
| Purchase of  marketable securities                                                                                   |       | (7,952                               | )          | (250,678 | ) |
| Sale of  marketable securities                                                                                       |       | 7,952                                |       | 154,530 |   |
| Other, net                                                                                                           |       | 21                                   |       | 10 |   |
|                                                                                                                 |       |                                 |       |   |   |
| Net cash  provided by (used in) continuing operations                                                                |       | (3,490                               | )          | (100,778 | ) |
| Net cash  provided by (used in) discontinued operations                                                              |       | 0                                    |       | 6,280 |   |
| Net cash  provided by (used in) investing activities                                                                 |       | (3,490                               | )          | (94,498 | ) |
|                                                                                                                 |       |                                 |       |   |   |
| Cash flows from  financing activities:                                                                               |       |                                 |       |   |   |
| Purchase of  treasury stock                                                                                          |       | (45                                  | )          | — |   |
| Debt repayments                                                                                                      |       | (101                                 | )          | (2,096 | ) |
| Proceeds from  the exercise of stock options                                                                         |       | 286                                  |       | 796 |   |
| Excess tax  benefits from stock based compensation arrangements                                                      |       | 139                                  |       | — |   |
| Withholding  taxes collected for stock options                                                                       |       | 127                                  |       | 10 |   |
| Withholding  taxes paid for stock options                                                                            |       | (127                                 | )          | (10 | ) |
| Net cash  provided by (used in) financing activities                                                                 |       | 279                                  |       | (1,300 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                                                        |       | 104                                  |       | 76 |   |
|                                                                                                                 |       |                                 |       |   |   |
| Net increase  (decrease) In cash and cash equivalents                                                                |       | 4,519                                |       | (85,760 | ) |
| Cash and cash equivalents  at beginning of period                                                                    |       | 12,974                               |       | 98,502 |   |
| Cash and cash  equivalents at end of period                                                                          |       | $                                    | 17,493     |   | $ | 12,742 |   |

 

| See  notes to unaudited condensed consolidated financial statements |
|---------------------------------------------------------------------|

 

6

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**AEROFLEXINCORPORATED**

**ANDSUBSIDIARIES**

 

**NOTESTO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                                     ****Basisof Presentation**

 

The condensed consolidatedbalance sheet of Aeroflex Incorporated and Subsidiaries (the “Company”) as ofSeptember 30, 2005, the related condensed consolidated statements of operationsfor the three months ended September 30, 2005 and 2004, and the condensedconsolidated statements of cash flows for the three months ended September 30,2005 and 2004 have been prepared by the Company and are unaudited. In theopinion of management, all adjustments (which include normal recurringadjustments) necessary to present fairly the financial position, results ofoperations and cash flows at September 30, 2005 and for all periods presentedhave been made. Certain information and footnote disclosures normally includedin financial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been omitted. It issuggested that these condensed consolidated financial statements be read inconjunction with the audited financial statements and notes thereto included inthe Company’s June 30, 2005 annual report to shareholders. There have been nochanges to significant accounting policies since June 30, 2005.

 

Results of operations for thethree month periods are not necessarily indicative of results of operations forthe corresponding years.

 

**RevenueRecognition**

 

The Company recognizesrevenue when persuasive evidence of an arrangement exists, delivery has occurredor services have been rendered, the selling price is fixed or determinable andcollectibility of the resulting receivable 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 of Construction-Typeand Certain Production-Type Contracts” (“SOP 81-1”). Under SOP 81-1, theCompany uses the percentage-of-completion method, whereby revenues andassociated costs are recognized as work on a contract progresses. The Companymeasures the extent of progress toward completion generally based upon one ofthe following (based upon an assessment of which method most closely aligns tothe underlying earnings process): (i) the units-of-delivery method, (ii) thecost-to-cost method, using the ratio of contract costs incurred as a percentageof total estimated costs at contract completion (based upon engineering andproduction estimates), or (iii) the achievement of contractual milestones. Provisionsfor anticipated losses or revisions in estimated profits oncontracts-in-process are recorded in the period in which such anticipatedlosses or revisions become evident. Revenue from software support andmaintenance contracts is recognized ratably over the term of the contract inaccordance with SOP-97-2, “Software Revenue Recognition.”

 

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 thesearrangements have been insignificant and can be reasonably estimated. Anestimate of such returns is recorded at the time sales are recognized.

 

7

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**FinancialInstruments and Derivatives**

 

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 September 30, 2005, the Company had $2.4 millionof notional value foreign currency forward contracts maturing through December2005. Notional amounts do not quantify risk or represent assets or liabilitiesof the Company, but are used in the calculation of cash settlements under thecontracts. The fair value of these contracts at September 30, 2005 was $44,000less than the notional value.

 

The Company accounts for itsinterest rate swap derivatives in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” as amended by SFAS 138, “Accountingfor Certain Derivative Instruments and Hedging Activities.” This statementrequires companies to record derivatives on the balance sheet as assets orliabilities at their fair value. For derivatives designated and qualifying aseffective cash flow hedges under SFAS No. 133, changes in the fair value ofsuch derivatives are recorded as components of other comprehensive income. Forderivatives that are deemed ineffective, the changes are recorded as gains orlosses in other income (expense).

 

**MarketableSecurities**

 

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, are included inother income. Interest and dividends are also included in other income. Marketablesecurities consist solely of auction rate bonds.

 

**Accountingfor Stock Based Compensation**

 

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, theCompany adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). Thisstatement replaces SFAS No. 123, “Accounting for Stock-based Compensation” andsupersedes APB No. 25. SFAS No. 123(R) requires that all stock basedcompensation be recognized as an expense in the financial statements and that suchcost be measured at the fair value of the award. This statement was adoptedusing the modified prospective method of application, which requires us torecognize compensation expense on a prospective basis. Therefore, prior periodfinancial statements have not been restated. Under this method, in addition toreflecting compensation expense for new share based awards, expense is alsorecognized to reflect the remaining service period of awards that had beenincluded 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. For thethree months ended September 30, 2005, this new treatment resulted in expenseof $2.0 million and cash flows from financing activities of $139,000, whichreduced cash flows from operating activities by the same amount.

 

8

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In October 2005, theFinancial Accounting Standards Board (“FASB”) issued FSP No. FAS 123(R)-2, “PracticalAccommodation to the Application of the Grant Date as Defined in FASB StatementNo. 123(R),” to provide guidance on determining the grant date for an award asdefined in SFAS No. 123(R). This FSP stipulates that assuming all othercriteria in the grant date definition are met, a mutual understanding of thekey terms and conditions of an award to an individual employee is presumed toexist upon the award’s approval in accordance with the relevant corporategovernance requirements, provided that the key terms and conditions of an award(a) cannot be negotiated by the recipient with the employer because the awardis a unilateral grant, and (b) are expected to be communicated to an individualrecipient within a relatively short time period from the date of approval. TheCompany has applied the principles set forth in this FSP upon its adoption ofSFAS No. 123(R).

 

In September 2005, the FASB issuedFASB Staff Position (“FSP”) No. FAS 123(R)-1, “Classification and Measurementof Freestanding Financial Instruments Originally Issued in Exchange forEmployee Services under FASB Statement No. 123(R),” to defer the requirement ofSFAS No. 123(R), “Share-Based Payment,” that a freestanding financialinstrument originally subject to SFAS No. 123(R) becomes subject to therecognition and measurement requirements of other applicable GAAP when therights conveyed by the instrument to the holder are no longer dependent on theholder being an employee of the entity. The rights under stock based paymentawards issued to employees are all dependent on the recipient being an employeeof the Company. Therefore, this FSP currently does not have an impact on theCompany’s consolidated financial statements and the measurement of stock basedcompensation in accordance with SFAS No. 123(R).

 

**Reclassifications**

 

Reclassifications have beenmade to the 2005 consolidated financial statements to conform to the 2006presentation.

 

**RecentlyIssued Accounting Standards Not Yet Adopted**

 

InMay 2005, the 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 and corrections oferrors made in fiscal years beginning after December 15, 2005. The adoption ofthis statement is not expected to have any effect on the Company’s consolidatedfinancial statements.

 

InApril 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accountingfor Conditional Asset Retirement Obligations — An Interpretation of FASBStatement No. 143.” FIN 47 clarifies the terms of FASB Statement No. 143 andrequires an entity to recognize a liability for a conditional asset retirementobligation if the entity has sufficient information to reasonably estimate itsfair value. FIN 47 is effective no later than the end of fiscal years endingafter December 15, 2005. The Company is currently evaluating the impact of thisstandard on its consolidated financial statements.

 

9

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OnDecember 31, 2004, the FASB issued FASB Staff Position FAS 109-1, “Applicationof FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004,” (“FSP No. 109-1”), and FASB Staff Position No. FAS 109-2, “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004,” (“FSP No. 109-2”). These staffpositions provide accounting guidance on how companies should account for theeffects of the American Jobs Creation Act of 2004 (“AJCA”) that was signed intolaw 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. The Company is investigating the repatriationprovision to determine whether it might repatriate extraordinary dividends, asdefined in the AJCA. The Company is currently evaluating all available U.S.Treasury guidance.

 

**2.**                                      **Acquisitionof Businesses and Intangible Assets**

** **

**JcAIRTest 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 is expected to enhance theCompany’s avionics product portfolio and to provide more complete testingsolutions for the avionics system test market.

 

The Company evaluated theacquired intangible and identifiable intangible assets to serve as a basis forallocation of the purchase price. The Company preliminarily allocated thepurchase price, including the acquisition costs of approximately $445,000,based on the estimated fair value of the assets acquired and liabilitiesassumed 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                                     |       | 20,651           |       |
| In-process  research and development         |       | 200              |       |
| Total assets  acquired                       |       | 45,373           |       |
| Current  liabilities                         |       | (6,127           | )          |
| Deferred taxes                               |       | (4,369           | )          |
| Total  liabilities assumed                   |       | (10,496          | )          |
| Net assets  acquired                         |       | $                | 34,877     |   |

 

As of September 30, 2005,the Company is completing its assessment of the fair value of certain assetsand liabilities as of the date of acquisition which is expected to be finalizedupon the receipt and completion of additional information and analysis duringfiscal 2006.

 

10

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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 Untied States of America, the value of such was expensed in thequarter ended June 30, 2005 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 2006. A 24% risk adjusted discount rate was applied to theprojects’ cash flows in determining fair value. At the acquisition date, JcAIRwas conducting development activities associated with the completion of theMode 5 General Avionic Test Equipment sets.

 

**SPGDivision of UbiNetics Holdings Limited**

 

On May 23, 2005, the Companyacquired all of the stock of UbiNetics Limited, as well as certain assetslocated in India, Japan and Hong Kong, all of which constituted UbiNeticsHoldings Limited’s SPG test and measurement business (“SPG”) for cash of $84million and a deferred payment of up to approximately $4 million depending onSPG achieving certain performance goals for the year ending June 30, 2006. TheCompany did not include this contingent consideration in its initial purchaseprice allocation as the payment of this consideration was not considered to becertain beyond a reasonable doubt at the date of acquisition. As a result, theCompany will adjust goodwill for any contingent consideration in the future ifand when it is earned. SPG develops, manufactures and integrates wireless testand measurement solutions specific to commercial wireless product developmentorganizations and service operators. The addition of SPG’s wireless test andmeasurement products and technologies is expected to enhance the Company’swireless product portfolio and to enable 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 preliminarily allocated thepurchase price, including the acquisition costs of approximately $3.0 million,based on the estimated fair value of the assets acquired and liabilitiesassumed as follows:

 
| ** **                                      | ** ** | **In thousands** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| Current assets (excluding cash of $4.0 million) |       | $                | 5,358      |   |
| Property, plant and equipment                   |       | 2,300            |       |
| Developed technology                            |       | 21,000           |       |
| Customer related intangibles                    |       | 750              |       |
| Goodwill                                        |       | 63,898           |       |
| In-process research and development             |       | 2,800            |       |
| Total assets  acquired                          |       | 96,106           |       |
| Current liabilities                             |       | (5,664           | )          |
| Deferred taxes                                  |       | (7,026           | )          |
| Other long term liabilities                     |       | (468             | )          |
| Total  liabilities assumed                      |       | (13,158          | )          |
| Net assets  acquired                            |       | $                | 82,948     |   |

 

11

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As of September 30, 2005,the Company is completing its assessment of the fair value of certain assetsand liabilities as of the date of acquisition which is expected to be finalizedupon the receipt and completion of additional information and analysis duringfiscal 2006.

 

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 in thequarter ended June 30, 2005 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 theacquisition date, SPG was conducting development activities associated with thecompletion of test mobile products used to test evolving 3G (third-generation)mobile communications networks and equipment that tests the functionality andperformance of Wide-Band-Code-Division-Multiple-Access technology.

 

Summarized below are theunaudited pro forma results of operations of the Company as if JcAIR and SPGhad been acquired at the beginning of the fiscal period presented. The in-processresearch and development write-offs for JcAIR and SPG have been excluded fromthe September 30, 2004 pro forma income in order to provide comparability tothe respective historical period.

 

| ** **           | ** ** | **Pro Forma  Three Months Ended  September 30, 2004** | ** ** |
|----------------------|------------|-------------------------------------------------------|------------|
| ** **           | ** ** | **(In thousands, except per share data)**             | ** ** |
| Net sales            |       | $                                                     | 125,619    |   |
| Net income           |       | $                                                     | 11,170     |   |
| Net income per share |       |                                                  |       |
| Basic                |       | $                                                     | 0.15       |   |
| Diluted              |       | $                                                     | 0.15       |   |

 

 

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 period presented or of future operating results of thecombined companies. The operating results of JcAIR and SPG have been includedin the consolidated statement of operations from their respective acquisitiondates. JcAIR and SPG are included in the Test Solutions segment.

 

12

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**Intangibleswith Definite Lives**

 

The components ofamortizable intangible assets are as follows:

 

| ** **                    | ** ** | **September 30, 2005** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **Gross Carrying**     | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **                    | ** ** | **Amount**             | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| ** **                    | ** ** | **(In thousands)**     | ** ** |
| Existing  technology          |       | $                      | 81,533     |   | $ | 23,491 |   | $ | 58,042 |   |
| Tradenames                    |       | 2,319                  |       | 1,591 |   | 728 |   |
| Customer related  intangibles |       | 6,203                  |       | 1,686 |   | 4,517 |   |
| Total                         |       | $                      | 90,055     |   | $ | 26,768 |   | $ | 63,287 |   |

 

 

The aggregate amortizationexpense for amortized intangible assets was $3.5 million and $2.1 million forthe three months ended September 30, 2005 and 2004, respectively.

 

The estimated aggregateamortization expense for each of the twelve month periods ending September 30,is as follows:

 

| ** ** | ** ** | **(In thousands)** | ** ** |
|------------|------------|--------------------|------------|
| 2006       |       | $13,356            |       |
| 2007       |       | 12,016             |       |
| 2008       |       | 10,675             |       |
| 2009       |       | 8,698              |       |
| 2010       |       | 6,513              |       |

 

**Goodwill**

The carrying amount ofgoodwill is as follows:

 
| ** **                         | ** ** | **Balance as of  July 1, 2005** | ** ** | **Adjustments  (Note a)** | ** ** | **Effect of Foreign  Currency** | ** ** | **Balance as of  September 30, 2005** | ** ** |
|------------------------------------|------------|---------------------------------|------------|---------------------------|------------|---------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **(In thousands)**              | ** ** |
|                               |       |                            |       |                      |       |                            |       |                                  |       |
| Microelectronic solutions  segment |       | $                               | 46,688     |                      | $          | —                          |       | $                                     | —     |   | $ | 46,688 |   |
| Test solutions segment             |       | 121,360                         |       | (69                       | )          | (1,250                          | )          | 120,041                               |       |
| Total                              |       | $                               | 168,048    |                      | $          | (69                             | )          | $                                     | (1,250     | ) | $ | 166,729 |   |

 

----

Note a -      These adjustments to goodwill recorded during theperiod pertain to adjustments to the fair value of assets acquired andliabilities assumed in the acquisitions.

 

13

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**3.****                                     ****DiscontinuedOperations**

 

As a result of continuedoperating losses, the Board of Directors of the Company, in February 2004,approved a formal plan to divest the Company’s thin film interconnectmanufacturing operation (“MIC”) and to seek a strategic buyer. This operationhad previously been included in the Microelectronic Solutions segment. As aresult of this decision, the Company recorded a $9.1 million ($6.2 million, netof tax) loss on disposal in the quarter ended December 31, 2003. This chargeincluded a cash requirement of $2.6 million primarily for existing equipmentleases, and a non-cash charge of $6.5 million for the write down of goodwill,other intangibles and owned equipment.

 

In September 2004, theCompany sold the stock of MIC for $8.8 million and recorded an additional netloss on disposal of $1.3 million ($1.3 million, net of tax). Since the sale ofthe stock created a capital loss for tax purposes and the Company has nocurrent capital gains to offset it, the Company recorded a full valuationallowance against the tax benefit. Under the terms of the sale agreements, theCompany has retained certain liabilities relating to potential adverseenvironmental conditions that may exist as of the date of sale, litigationpending against MIC as of the date of sale and product defects in productsdesigned, developed, manufactured or sold by MIC prior to the sale date whichresult in a recall, withdrawal or market suspension of the product or result ininjury to persons or property. Management believes these contingencies will nothave a material adverse effect on the Company’s consolidated financialstatements.

 

In June 2004, the Board ofDirectors of the Company approved a formal plan to divest the Company’s shock andvibration control device manufacturing business (“VMC”) and to seek a strategicbuyer. This operation had previously comprised the Isolator Products segment. InMarch 2005, the Company sold the net assets of VMC for $8.4 million in cash. TheCompany recorded an $860,000 ($505,000 net of tax) gain on disposition. Underthe terms of the sale agreements, the Company has retained certain liabilitiesrelating to adverse environmental conditions that currently exist at thepremises occupied by VMC, litigation pending against VMC as of the date ofsale, 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 currently exist at the premises occupied by VMC.

 

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) have beenreported as discontinued operations and, accordingly, income and losses fromoperations and the losses on disposal have been reported separately fromcontinuing operations. Net sales and income (loss) from discontinued operations(including loss on disposal) for the three months ended September 30, 2004:

 

| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **September 30, 2004** | ** ** |
| ** **                                 | ** ** | **(In thousands)**     | ** ** |
| Net Sales                                  | ** ** | ** **             | ** ** |
| MIC                                        |       | $                      | 3,313      |   |
| VMC                                        |       | 4,263                  |       |
| TriLink                                    |       | —                 |       |
|                                       |       | $                      | 7,576      |   |
|                                       |       |                   |       |
| Income (Loss) From Discontinued Operations |       |                   |       |
| MIC                                        |       | $                      | (956       | ) |
| VMC                                        |       | 159                    |       |
| TriLink                                    |       | 14                     |       |
|                                       |       | $                      | (783       | ) |

 

14

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**4.****                                     ****EarningsPer Share**

 

In accordance with SFAS No.128, “Earnings Per Share,” net income per common share (“Basic EPS”) iscomputed by dividing net income by the weighted average common sharesoutstanding. Net income per common share, assuming dilution (“Diluted EPS”) iscomputed by dividing net income by the weighted average common sharesoutstanding plus potential dilution from the exercise of stock options. As ofJuly 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 thenumerators and denominators of the Basic EPS and Diluted EPS calculations forcontinuing operations is as follows:

 
| ** **                                                                                                       | ** ** | **Three Months Ended September 30,**          | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| ** **                                                                                                       | ** ** | **(In  thousands, except per share amounts)** | ** ** |
| Cash flows from  operating activities:                                                                           |       |                                          |       |   |   |
| Computation of  adjusted net income                                                                              |       |                                          |       |   |   |
| Income from  continuing operations                                                                               |       | $                                             | 4,527      |   | $ | 6,400 |   |
| Loss from  discontinued operations, net of tax                                                                   |       | —                                        |       | (783 | ) |
| Net income                                                                                                       |       | $                                             | 4,527      |   | $ | 5,617 |   |
| Computation of  Adjusted Weighted Average Shares Outstanding:                                                    |       |                                          |       |   |   |
| Weighted average  shares outstanding                                                                             |       | 74,758                                        |       | 74,446 |   |
| Add: Effect of  dilutive options                                                                                 |       | 941                                           |       | 1,542 |   |
| Weighted average  shares and common share equivalents used for computation of diluted earnings  per common share |       | 75,699                                        |       | 75,988 |   |
| Income (loss)  per share - Basic                                                                                 |       |                                          |       |   |   |
| Income from  continuing operations                                                                               |       | $                                             | 0.06       |   | $ | 0.09 |   |
| Discontinued operations                                                                                          |       | —                                        |       | (0.01 | ) |
| Net income                                                                                                       |       | $                                             | 0.06       |   | $ | 0.08 |   |
| Income (loss)  per diluted share - Diluted:                                                                      |       |                                          |       |   |   |
| Income from  continuing operations                                                                               |       | $                                             | 0.06       |   | $ | 0.08 |   |
| Discontinued  operations                                                                                         |       | —                                        |       | (0.01 | ) |
| Net income                                                                                                       |       | $                                             | 0.06       |   | $ | 0.07 |   |

 

Options to purchase 9.6 millionshares at exercise prices ranging between $9.22 and $34.41 per share wereoutstanding as of September 30, 2005 but were not included in the computationof diluted EPS because the exercise prices of these options were greater thanthe average market price of the common shares.

 

15

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**5.****                                     ****ComprehensiveIncome**

 

The components ofcomprehensive income are as follows:

 
| ** **                                                           | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                                           | ** ** | **(In thousands)**                   | ** ** |
| Net income                                                           |       | $                                    | 4,527      |   | $ | 5,617 |   |
|                                                                 |       |                                 |       |   |   |
| Accrued pension liability, effect of tax rate change                 |       | 16                                   |       | — |   |
|                                                                 |       |                                 |       |   |   |
| Unrealized gain (loss) on interest rate swap agreements,  net of tax |       | 25                                   |       | (2 | ) |
|                                                                 |       |                                 |       |   |   |
| Foreign currency translation adjustment                              |       | (2,255                               | )          | 1,453 |   |
|                                                                 |       |                                 |       |   |   |
| Total comprehensive income                                           |       | $                                    | 2,313      |   | $ | 7,068 |   |

 

Accumulated othercomprehensive income (loss) is as follows:

 
| ** **                   | ** ** | **Gain (Loss) on Interest Rate Swap Agreements  (net of tax)** | ** ** | **Minimum Pension Liability Adjustment  (net of tax)** | ** ** | **Foreign Currency Translation Adjustment** | ** ** | **Total  (net of tax)** | ** ** |
|------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **(In thousands)**                                             | ** ** |
|                         |       |                                                           |       |                                                        |       |                                        |       |                    |       |
| Balance, July 1,  2005       |       | $                                                              | (75        | )                                                           | $          | (3,632                                      | )          | $                       | 12,727     |   | $ | 9,020 |   |
| Three months  activity       |       | 25                                                             |       | 16                                                          |       | (2,255                                      | )          | (2,214                  | )          |
| Balance,  September 30, 2005 |       | $                                                              | (50        | )                                                           | $          | (3,616                                      | )          | $                       | 10,472     |   | $ | 6,806 |   |

 

16

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**6.****                                     ****BankLoan Agreements**

 

OnFebruary 14, 2003, the Company executed an amended and restated revolvingcredit and security agreement with two banks which replaced a previous loanagreement. The amended and restated loan agreement increased the line of creditto $50 million through February 2007, continued the mortgage on the Company’sPlainview property for $2.4 million and is secured by the pledge of the stockof certain of the Company’s subsidiaries. The interest rate on revolving creditborrowings under this agreement is at various rates depending upon certainfinancial ratios, with the current rate substantially equivalent to LIBOR plus1% (4.9% at September 30, 2005). The Company paid a facility fee of $125,000and is required to pay a commitment fee of .25% per annum of the average unusedportion of the credit line. At September 30, 2005, the Company’s availableunused line of credit was approximately $39.6 million after consideration ofletters of credit. The mortgage is payable in monthly installments ofapproximately $26,000 through March 2008 and a balloon payment of $1.6 millionin April 2008. The Company has entered into interest rate swap agreements forthe outstanding amount under the mortgage agreement at approximately 7.6% inorder to reduce the interest rate risk associated with these borrowings. Theseinstruments have been designed and qualify as effective cash flow hedges. Thefair market value of the interest rate swap agreements was $80,000 as ofSeptember 30, 2005 in favor of the banks. If this mortgage was prepaid,although the Company has no intention of doing so, the $80,000 would be chargedto the statement of operations at that time.

 

The terms of the loanagreement require compliance with certain covenants including minimumconsolidated tangible net worth and pretax earnings, maintenance of certainfinancial ratios, limitations on indebtedness and prohibition of the payment ofcash dividends. The Company is currently in full compliance with all of thecovenants contained in the loan agreement, as amended.

 

**7.****                                     ****Inventories**

 

Inventories consist of thefollowing:

 
| ** **      | ** ** | **September 30, 2005** | ** ** | **June 30, 2005** | ** ** |
|-----------------|------------|------------------------|------------|-------------------|------------|
| ** **      | ** ** | **(In thousands)**     | ** ** |
| Raw materials   |       | $47,569                |       | $43,158           |       |
| Work in process |       | 52,394                 |       | 53,115            |       |
| Finished goods  |       | 22,458                 |       | 22,633            |       |
|            |       | $122,421               |       | $118,906          |       |

 

**8.****                                     ****ProductWarranty**

 

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 recorded and isincluded in cost of goods sold.

 

17

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Activity related to theCompany’s product warranty liability was as follows:

 
| ** **                         | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(In thousands)**                   | ** ** |
| Balance at beginning of period     |       | $                                    | 2,056      |   | $ | 1,702 |   |
| Provision for warranty obligations |       | 819                                  |       | 478 |   |
| Charges incurred                   |       | (547                                 | )          | (261 | ) |
| Acquired warranty obligations      |       | —                               |       | (195 | ) |
| Foreign currency impact            |       | (9                                   | )          | 2 |   |
|                               |       |                                 |       |   |   |
| Balance at end of period           |       | $                                    | 2,319      |   | $ | 1,726 |   |

 

**9.****                                     ****DefinedBenefit Pension Plans**

 

EffectiveJanuary 1, 1994, the Company established a Supplemental Executive RetirementPlan (the “SERP”) which provides retirement, death and disability benefits tocertain of its officers. On September 3, 2003, the Company acquired MCE,including its defined benefit pension plan (the “MCE Plan”). The MCE Plan hasbeen frozen since December 31, 1993.

 

**Componentsof Net Periodic Benefit Cost**

 
| ** **                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                        | ** ** | **(In thousands)**                   | ** ** |
| Service cost                                      |       | $                                    | 126        |   | $ | 134 |   |
| Interest cost                                     |       | 248                                  |       | 170 |   |
| Expected return on plan assets                    |       | (36                                  | )          | (31 | ) |
| Amortization of net transition (asset) obligation |       | 9                                    |       | 9 |   |
| Recognized actuarial (gain) loss                  |       | 113                                  |       | 50 |   |
|                                              |       |                                 |       |   |   |
| Net periodic benefit cost                         |       | $                                    | 460        |   | $ | 332 |   |

 

The Company previouslydisclosed in its financial statements for the year ended June 30, 2005, that itexpected to contribute $164,000 to its pension plan in the fiscal year endedJune 30, 2006. As of September 30, 2005, $100,000 of the contributions had beenmade.

 

**10.**                               **StockOptions and Warrants**

 

Underthe Company’s stock option plans, options may be granted to purchase shares ofthe Company’s Common Stock exercisable at prices generally equal to the fairmarket value on the date of grant. In December 1993, the Board of Directorsadopted the Outside Director Stock Option Plan (the “Directors’ Plan”) whichprovides for options to non-employee directors, which become exercisable inthree installments. The Directors’ Plan, as amended, covers 1.3 million sharesof the Company’s Common Stock. In November 1994, the shareholders approved theDirectors’ Plan and the 1994 Non-Qualified

 

18

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StockOption Plan (the “1994 Plan”). In November 1996, the shareholders approved the1996 Stock Option Plan (the “1996 Plan”). In April 1998, the Board of Directorsadopted the 1998 Stock Option Plan (the “1998 Plan”). In January 2000, theshareholders approved the 1999 Stock Option Plan (the “1999 Plan”). In March2000, the Board of Directors adopted the 2000 Stock Option Plan (the “2000 Plan”).In November 2000, the shareholders approved the Key Employee Stock Option Plan(the “Key Employee Plan”). In June 2002, the Board of Directors adopted the2002 Stock Option Plan (the “2002 Plan”). In November 2002, the shareholdersapproved the 2002 Outside Directors’ Stock Option Plan (the “2002 Directors’Plan”), which provides for options to non-employee directors which becomeexercisable in three installments. The 1994 Plan, the 1996 Plan, the 1998 Plan,the 1999 Plan, the 2000 Plan, the Key Employee Plan and the 2002 Plan providefor options which become exercisable in one or more installments. The 1994Plan, the 1996 Plan and the 1998 Plan each cover 3.8 million shares of theCompany’s Common Stock. The 1999 Plan covers 2.3 million shares, the 2000 Plancovers 6.2 million shares, the Key Employee Plan covers 4.0 million shares, the2002 Plan covers 1.5 million shares and the 2002 Directors’ Plan covers 525,000shares. In August 2005, the Board of Directors amended the 2002 Directors’Plan, subject to shareholder approval, to increase the number of shares coveredto 1.1 million shares. Options under all plans shall expire not later than tenyears from the date of grant. As of September 30, 2005, 2.7 million shares ofthe Company’s Common Stock were reserved and available to be granted pursuantto these plans, excluding the 600,000 shares subject to shareholder approval.

 

Stockbased compensation expense is attributable to the granting and the remainingrequisite service periods, of stock options. Compensation expense attributableto net stock based compensation in the three months ended September 30, 2005was $2.0 million ($1.3 million after tax), or $.02 for both basic and dilutedearnings per share. As of September 30, 2005, the total unrecognizedcompensation cost related to nonvested stock awards was $7.8 million and therelated weighted average period over which it is expected to be recognized isapproximately 2 years.

 

Priorto the Company’s adoption of SFAS No. 123(R), SFAS No. 123 required that theCompany provide pro forma information regarding net earnings and net earningsper common share as if compensation cost for the Company’s stock based awardshad 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 forma charge forcompensation cost related to stock based awards granted was recognized over theservice period. For stock options, the service period represents the period oftime between the date of grant and the date each option becomes exercisablewithout consideration of certain acceleration provisions (e.g., change ofcontrol.).

 

19

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Thefollowing table illustrates the effect on the net earnings per common share asif the fair value method had been applied to all outstanding awards for thethree months ended September 2004:

 

| ** **                                                                                                                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                                          | ** ** | **September 30, 2004** | ** ** |
| ** **                                                                                                                          | ** ** | **(In thousands)**     | ** ** |
| Net income, as reported                                                                                                             |       | $                      | 5,617      |   |
| Deduct:  Total stock based compensation expense determined  under fair value method for all awards, net of related tax effects |       | (3,286                 | )          |
|                                                                                                                                |       |                   |       |
| Pro forma net income                                                                                                                |       | $                      | 2,331      |   |
|                                                                                                                                |       |                   |       |
| Net income per share:                                                                                                               |       |                   |       |
| Basic, as  reported                                                                                                                 |       | $                      | 0.08       |   |
|                                                                                                                                |       |                   |       |
| Basic, pro forma                                                                                                                    |       | $                      | 0.03       |   |
|                                                                                                                                |       |                   |       |
| Diluted, as  reported                                                                                                               |       | $                      | 0.07       |   |
|                                                                                                                                |       |                   |       |
| Diluted, pro  forma                                                                                                                 |       | $                      | 0.03       |   |

 

Asummary of the Company’s stock option plans as of September 30, 2005 andchanges during the three month period then ended, is presented below:

 

 
| ** **                         | ** ** | **Shares**         | ** ** | **Weighted Average Exercise Price** | ** ** | **Aggregate Intrinsic Value (1)** | ** ** | **Weighted-Average Contractual Life Remaining in Years** | ** ** |
|------------------------------------|------------|--------------------|------------|-------------------------------------|------------|-----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                         | ** ** | **(In thousands)** | ** ** | ** **                          | ** ** | **(In thousands)**                | ** ** | ** **                                               | ** ** |
|                               |       |               |       |                                |       |                              |       |                                                     |       |
| Outstanding at  June 30, 2005      |       | 15,384             |       | $11.72                              |       |                              |       |                                                     |       |
| Granted at fair  value             |       | 50                 |       | 9.23                                |       |                              |       |                                                     |       |
| Exercised                          |       | (69                | )          | 4.15                                |       |                              |       |                                                     |       |
| Expired                            |       | —             |       | —                              |       |                              |       |                                                     |       |
| Forfeited                          |       | (80                | )          | 10.28                               |       |                              |       |                                                     |       |
|                               |       |               |       |                                |       |                              |       |                                                     |       |
| Outstanding at  September 30, 2005 |       | 15,285             |       | $11.75                              |       | $13,968                           |       | 6.0                                                      |       |
|                               |       |               |       |                                |       |                              |       |                                                     |       |
| Exercisable at  September 30, 2005 |       | 13,181             |       | $12.07                              |       | $13,341                           |       | 5.6                                                      |       |
|                               |       |               |       |                                |       |                              |       |                                                     |       |

 

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(1)        The intrinsic value of a stock option is the amount bywhich the current market value of the underlying stock exceeds the exerciseprice 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 in substantivelyequal tranches over a service period of up to 5 years.

 

The weighted average grantdate fair value of stock options granted for the three months ended September30, 2005 and 2004 was $7.29 and $5.39, respectively. The total intrinsic valueof stock options exercised during the three months ended September 30, 2005 and2004 was $366,000 and $992,000 respectively.

 

20

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

 
| ** **                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                       | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                             |       |                                 |       |   |   |
| Weighted average expected stock price volatility |       | 95                                   | %          | 82 | % |
| Weighted average expected option life            |       | 6.2 years                            |       | 3.0 years |   |
| Average risk free interest rate                  |       | 4.1                                  | %          | 2.9 | % |
| Average dividend yield                           |       | —                               |       | — |   |

 

Cash received from shareoption exercises for the three months ended September 30, 2005, and 2004 is $286,000and $796,000 respectively.

 

**11.****                              ****IncomeTaxes**

 

The Company recorded creditsof $139,000 and $366,000 to additional paid-in capital during the three monthsended September 30, 2005 and 2004, respectively, in connection with the actual taxbenefit related to compensation deductions on the exercise of stock options.

 

**12.****                              ****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 byour lending banks. Purchases will be made from time to time, depending uponmarket conditions at prices deemed appropriate by management. During the firstquarter of fiscal 2006, a total of 5,000 shares were purchased and retired. Asof September 30, 2005, 55,000 shares have been repurchased and retired sincethe inception of this program.

 

**13.****                              ****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. The Company has prepared andfiled a voluntary disclosure with the State Department in which the details ofthe exports and erroneous classifications are described. At this time, it isnot possible to determine whether any fines or other penalties will be assertedagainst the Company, or the materiality of any outcome.

 

We are involved in variousother legal matters. We believe the outcome of these other legal matters willnot have a material effect upon us.

 

21

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**14.****                              ****BusinessSegments**

 

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

 

**MicroelectronicSolutions (“AMS”)**

a) MicroelectronicComponents, Sub-assemblies and Modules

b) Integrated Circuits

c) Motion Control Systems

 

**TestSolutions (“ATS”)**

a) Instrument Products andTest Systems

 

The Company is amanufacturer of advanced technology systems and components for commercialindustry, government and defense contractors. Approximately 26% and 32% of theCompany’s sales for the three months ended September 30, 2005 and 2004,respectively, were to agencies of the United States government or to primedefense contractors or subcontractors of the United States government. No onecustomer constituted more than 10% of the Company’s sales during any of the periodspresented. Inter-segment sales were not material and have been eliminated fromthe tables below.

 

Mostof the Company’s operations are located in the United States, however, it alsohas operations in Europe and Asia. Each of Aeroflex International Limited,which we acquired in May 2002, RIWS, which we acquired in July 2003, and SPG,which we acquired in May 2005, have significant operations in the UnitedKingdom. Specifically, net sales from facilities located in the United Kingdomwere approximately $35 million for the three months ended September 30, 2005. Totalassets of the United Kingdom operations were $239 million as of September 30,2005.

 

Revenues, based on thecustomers’ locations, attributed to the United States and other regions are asfollows:

 
| ** **               | ** ** | **For the Three Months Ended September 30,** | ** ** |
|--------------------------|------------|----------------------------------------------|------------|
| ** **               | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
|                     |       | **(In  thousands)**                          |       |
| United States of America |       | $76,266                                      |       | $67,947 |   |
| Europe and Middle East   |       | 29,888                                       |       | 27,223 |   |
| Asia and Australia       |       | 18,279                                       |       | 12,862 |   |
| Rest of World            |       | 1,215                                        |       | 1,151 |   |
|                     |       | $125,648                                     |       | $109,183 |   |

 

22

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| ** **                                                                  | ** ** | **For the Three Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                  | ** ** | **2005**                                     | ** ** | **2004** | ** ** |
| ** **                                                                  | ** ** | **(In thousands)**                           | ** ** |
| ** **                                                                  | ** ** | ** **                                   | ** ** | **(Restated) (1)** | ** ** |
| Net sales:                                                                  |       |                                         |       |   |   |
| Microelectronic  solutions                                                  |       | $54,823                                      |       | $51,183 |   |
| Test solutions                                                              |       | 70,825                                       |       | 58,000 |   |
| Net sales                                                                   |       | $125,648                                     |       | $109,183 |   |
|                                                                        |       |                                         |       |   |   |
| Segment adjusted operating income (2):                                      |       |                                         |       |   |   |
| Microelectronic  solutions                                                  |       | $13,527                                      |       | $10,869 |   |
| Test solutions                                                              |       | 4,253                                        |       | 4,692 |   |
| General  corporate expense                                                  |       | (3,967                                       | )          | (3,540 | ) |
|                                                                        |       | 13,813                                       |       | 12,021 |   |
|                                                                        |       |                                         |       |   |   |
| Amortization of acquired intangibles                                        |       |                                         |       |   |   |
| – AMS                                                                  |       | (534                                         | )          | (554 | ) |
| – ATS                                                                  |       | (2,923                                       | )          | (1,506 | ) |
| Stock based compensation                                                    |       |                                         |       |   |   |
| – AMS                                                                  |       | (351                                         | )          | — |   |
| – ATS                                                                  |       | (434                                         | )          | — |   |
| – Corporate                                                            |       | (1,229                                       | )          | — |   |
| Current period  impact of acquisition related adjustment to inventory - ATS |       | (1,088                                       | )          | — |   |
| Operating income  (GAAP)                                                    |       | 7,254                                        |       | 9,961 |   |
| Interest expense                                                            |       | (160                                         | )          | (260 | ) |
| Other income  (expense), net                                                |       | 91                                           |       | 424 |   |
| Income from  continuing operations before income taxes                      |       | $7,185                                       |       | $10,125 |   |

 

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(1)          Restated for the transfer of the Motion ControlSystems business from ATS to AMS. Sales and operating income (loss) for theMotion Control Systems business in 2004 was $3.8 million and $(246,000),respectively.

(2)          Management evaluates the operating results of the twosegments based upon reporting pre-tax operating income, before costs related toamortization of acquired intangibles, stock based compensation and the impactof an acquisition related adjustment to inventory.

 

23

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**ITEM 2****—****       ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

We use our advanced design, engineering andmanufacturing capabilities to produce microelectronic and test solutions thatwe sell primarily into the broadband communications, aerospace and defensemarkets. We also design and manufacture motion control systems which are usedfor industrial and defense applications.

 

**Microelectronic Solutions**

 

We have been a designer and supplier ofmicroelectronics for more than 20 years. Our products include (i) custom andstandard integrated circuits, such as databuses, transceivers,microcontrollers, microprocessors and memories and (ii) components,sub-assemblies and modules for military and commercial communication systems. Wealso design, develop and produce motion control systems including stabilizationand tracking devices, magnetic motors and scanning devices.

 

**Test Solutions**

 

We design, develop and manufacture a broadline of test equipment which includes:

 

•                  Wireless TestEquipment

•                  FrequencySynthesizers

•                  Radio TestEquipment

•                  Synthetic TestSystems

•                  Avionics TestEquipment

•                  Other GeneralPurpose Test Equipment

 

Our operating strategy is based on thefollowing key objectives:

 

•                  to strengthenand expand our portfolio of proprietary technologies;

•                  to broaden theapplications and target markets for our existing products;

•                  to expand thescope of our content in our customers’ products;

•                  to increase ouroperating efficiencies;

•                  to maintain aconservative capital structure; and

•                  toopportunistically pursue strategic acquisitions.

 

In April 2005, we acquired JcAIR TestSystems, which manufactures customized avionics test solutions, both manual andautomated, for manufacturing, repair and ground support operations.

 

In May 2005, we acquired the SPG division ofUbiNetics Holdings Limited, which is a developer, manufacturer and integratorof wireless test and measurement solutions specific to commercial wirelessdevelopment organizations and service operators.

 

Our product development efforts primarilyinvolve engineering and design relating to:

 

•                  developing newproducts

•                  improvingexisting products

•                  adaptingexisting products to new applications

•                  developingprototype components to bid on specific programs

 

Some of our development efforts arereimbursed under contractual arrangements. Product development and similarcosts which are not reimbursed under contractual arrangements are expensed inthe period incurred.

 

24

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**Three Months ended September 30,2005 Compared to Three Months Ended September 30, 2004**

 

*Net Sales.*Net salesincreased 15% to $125.6 million for the three months ended September 30, 2005from $109.2 million for the three months ended September 30, 2004. Net sales inthe microelectronic solutions (“AMS”) segment increased 7% to $54.8 million forthe three months ended September 30, 2005 from $51.2 million for the threemonths ended September 30, 2004 primarily as a result of increased sales volumeof our microelectronic modules and components. Net sales in the test solutions(“ATS”) segment increased 22% to $70.8 million for the three months endedSeptember 30, 2005 from $58.0 million for the three months endedSeptember 30, 2004 as a result of increased sales from our fiscal 2005acquisitions of JcAIR and SPG and increased sales volume of communication testproducts offset, in part, by reduced sales of wireless test solutions.

 

*Gross Profit.*Cost of salesincludes materials, direct labor and overhead expenses such as engineeringlabor, fringe benefits, allocable occupancy costs, depreciation andmanufacturing supplies.

 
| **Three Months**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Ended**                              | ** ** | ** ** | ** ** | **% of**   | ** ** | ** ** | ** ** | **% of**   | ** ** | ** ** | ** ** | **% of**   | ** ** |
| **September 30,**                      | ** ** | **AMS**    | ** ** | **sales**  | ** ** | **ATS**    | ** ** | **sales**  | ** ** | **Total**  | ** ** | **sales**  | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2005                                   |       | $          | 28,001     |       | 51.1       | %          | $          | 30,925     |       | 43.7       | %          | $          | 58,926     |   | 46.9 | % |
| 2004                                   |       | 24,419     |       | 47.7       | %          | 26,913     |       | 46.4       | %          | 51,332     |       | 47.0       | %          |
|                                        |            |            |            |            |            |            |            |            |            |            |            |            |            |  |  |  |

 

Gross profit increased $3.6 million, or 15%,in the AMS segment primarily as a result of increased sales and margins in ourmicroelectronic modules and components businesses and increased margins in ourintegrated circuits business. Gross profit increased $4.0 million, or 15%, inthe ATS segment primarily as a result of increased sales contributed by ourfiscal 2005 acquisitions and increased sales of communication test productsoffset, in part, by reduced sales of wireless test solutions.

 

*Selling, General andAdministrative Costs.*Selling, general and administrative costsinclude office and management salaries, fringe benefits, commissions, insuranceand professional fees.

 
| **Three Months**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|---------------|------------|------------|------------|------------|------------|
| **Ended**                              | ** ** | ** ** | ** ** | **% of**   | ** ** | ** ** | ** ** | **% of**   | ** ** | ** **    | ** ** | ** ** | ** ** | **% of**   | ** ** |
| **September 30,**                      | ** ** | **AMS**    | ** ** | **sales**  | ** ** | **ATS**    | ** ** | **sales**  | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**  | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2005                                   |       | $          | 8,752      |       | 16.0       | %          | $          | 16,304     |       | 23.0          | %          | $          | 5,195      |       | $          | 30,251 |   | 24.1 | % |
| 2004                                   |       | 8,439      |       | 16.5       | %          | 12,788     |       | 22.0       | %          | 3,540         |       | 24,767     |       | 22.7       | %          |
|                                        |            |            |            |            |            |            |            |            |            |               |            |            |            |            |            |  |  |  |  |

 

Selling, general and administrative costs increasedby $313,000, or 4%, in the AMS segment primarily due to the recognition ofstock based compensation that was previously presented on a pro forma basis.          Selling, general and administrativecost increased by $3.5 million, or 28%, in the ATS segment primarily as aresult of our fiscal 2005 fourth quarter acquisitions of JcAIR and SPG andstock based compensation. Corporate selling, general and administrative expensesincreased by $1.7 million primarily due to stock based compensation.

 

25

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*Research and Development Costs.*Research anddevelopment costs include material, engineering labor and allocated overhead.

 
| **Three Months**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Ended**                              | ** ** | ** ** | ** ** | **% of**   | ** ** | ** ** | ** ** | **% of**   | ** ** | ** ** | ** ** | **% of**   | ** ** |
| **September 30,**                      | ** ** | **AMS**    | ** ** | **sales**  | ** ** | **ATS**    | ** ** | **sales**  | ** ** | **Total**  | ** ** | **sales**  | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2005                                   |       | $          | 6,074      |       | 11.1       | %          | $          | 11,890     |       | 16.8       | %          | $          | 17,964     |   | 14.3 | % |
| 2004                                   |       | 5,111      |       | 10.0       | %          | 9,433      |       | 16.3       | %          | 14,544     |       | 13.3       | %          |
|                                        |            |            |            |            |            |            |            |            |            |            |            |            |            |  |  |  |

 

Self funded research and development costs increased$963,000, or 19%, in the AMS segment primarily due to exploration of additionalopportunities in our integrated circuit business. Research and developmentincreased $2.5 million, or 26%, in the ATS segment mainly due to theacquisition of SPG in the quarter ended June 30, 2005.

 

*Amortization of AcquiredIntangibles.*Amortization increased $1,397,000 or 68% primarilydue to the acquisitions of JcAIR and SPG.

 

*Other Income (Expense).*Interest expense decreasedby $100,000 to $160,000 due to lower outstanding debt. Interest incomedecreased by $261,000 due to the decreased level of interest generating cashand cash equivalents as a result of the acquisition in the quarter ended June30, 2005.

 

*Provision for Income Taxes.*The income taxprovision was $2.7 million (an effective income tax rate of $37%) for the threemonths ended**September 30, 2005 and $3.7 million (aneffective income tax rate of 36.8%) for the three months ended September 30,2004. The effective income tax rate for the two periods differed from theamount computed by applying the U.S. Federal income tax rate to income beforeincome taxes primarily due to non-deductible expenses as well as foreign, stateand local income taxes.

 

*Income from ContinuingOperations.*The income from continuing operations for the threemonths ended September 30, 2005 was $4.5 million, or $.06 per diluted share,versus $6.4 million, or $.08 per diluted share, for the three months endedSeptember 30, 2004.

 

*Discontinued Operations.*Discontinuedoperations includes the results of operations of MIC, VMC and TriLink. InSeptember 2004, we sold the stock of MIC for $8.8 million and recorded a losson disposal of $1.3 million ($1.3 million, net of tax).

 

**Off-Balance Sheet Arrangements**

 

We are not a party to any off-balance sheetarrangements other than letters of credit totaling $10.4 million to guaranteeour performance under certain government contracts.

 

26

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**Liquidity and Capital Resources**

 

As of September 30, 2005, we had $169.1million in working capital. Our current ratio was 2.7 to 1 at September 30,2005. On February 14, 2003, we executed an amendment and restated revolvingcredit and security agreement with two banks which replaced a previous loanagreement. The amended and restated loan agreement increased the line of creditto $50 million through February 2007, continued the mortgage on our Plainviewproperty for $2.4 million and is secured by the pledge of the stock of certainof our subsidiaries. The interest rate on revolving credit borrowings underthis agreement is at various rates depending upon certain financial ratios,with the current rate substantially equivalent to LIBOR plus 1% (4.9% atSeptember 30, 2005). The mortgage is payable in monthly installments ofapproximately $26,000 through March 2008 and a balloon payment of $1.6 millionin April 2008. We have entered into interest rate swap agreements for theoutstanding amount under the mortgage agreement at approximately 7.6% in orderto reduce the interest rate risk associated with these borrowings.

 

The terms of the loan agreement requirecompliance with certain covenants including minimum consolidated tangible networth and pretax earnings, maintenance of certain financial ratios, limitationson indebtedness and prohibition of the payment of cash dividends. We arecurrently in full compliance with all of the covenants contained in our loanagreement, as amended to date. We expect to be in compliance with all covenantsfor the foreseeable future.

 

On April 19, 2005, we acquired JcAIR for $35million in cash.

 

On May 23, 2005, we acquired SPG for $84million in cash and a contingent payment of up to $4 million in cash dependingon SPG achieving certain performance goals for the year ending June 30, 2006.

 

For the three months ended September 30,2005, our operations provided cash from continuing operations of $7.6 million. Forthe three months ended September 30, 2005, our investing activities used cashof $3.5 million, primarily for capital expenditures. For the three months endedSeptember 30, 2005, our financing activities provided cash of $279,000.

 

We believe our remaining cash and cashequivalents coupled with internally generated funds and available lines ofcredit will be sufficient for our working capital requirements, capitalexpenditure needs and the servicing of our debt for the foreseeable future. Oneof our pension plans currently is unfunded, but is expected to be funded fromthe cash surrender value of life insurance policies that are being held in arabbi trust. We do not believe that the amount of the pension obligationsremaining after application of such policy proceeds will be material. Our cashand cash equivalents coupled with our available lines of credit, are availableto fund acquisitions and other potential large cash needs that may arise. AtSeptember 30, 2005, our available unused line of credit was $39.6 million afterconsideration of letters of credit.

 

The following table summarizes, as ofSeptember 30, 2005, our obligations and commitments to make future paymentsunder debt, operating lease and employment agreements:

 

| ** **           | ** ** | **Payments due by period** | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | ** **                 | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **           | ** ** | **Total**                  | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| ** **           | ** ** | **(In thousands)**         | ** ** |
|                 |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt       |       | $                          | 4,723      |   | $ | 635 |   | $ | 2,676 |   | $ | 667 |   | $ | 745 |   |
| Operating leases     |       | 32,230                     |       | 6,463 |   | 9,195 |   | 5,368 |   | 11,204 |   |
| Employment contracts |       | 6,674                      |       | 2,277 |   | 2,913 |   | 1,484 |   | — |   |
| Total                |       | $                          | 43,627     |   | $ | 9,375 |   | $ | 14,784 |   | $ | 7,519 |   | $ | 11,949 |   |

 

27

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The operating lease commitments shown in theabove table have not been reduced by future minimum sub-lease rentals of $15.1million.

 

In the normal course of business, weroutinely enter into binding and non-binding purchase obligations primarilycovering anticipated purchases of inventory and equipment. None of theseobligations are individually significant. We do not expect that thesecommitments, as of September 30, 2005, will have a material adverse affect onour liquidity.

 

**Accounting Policies InvolvingSignificant Estimates**

 

The preparation of financial statements andrelated disclosures in conformity with accounting principles generally acceptedin the United States of America requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe recognition of revenue and expenses during the period reported. Thefollowing accounting policies require us to make estimates and assumptionsbased on the circumstances, information available and our experience andjudgment. These estimates and assumptions are reviewed periodically and theeffects of revisions are reflected in the period that they are determined to benecessary. If actual results differ significantly from our estimates, ourfinancial statements could be materially impacted.

 

Revenue and Cost RecognitionUnder Long-Term Contracts

 

We recognize revenue when persuasive evidenceof an arrangement exists, delivery has occurred or services have been rendered,the selling price is fixed or determinable and collectibility of the resultingreceivable is reasonably assured. For arrangements other than certain long-termcontracts, revenue (including shipping and handling fees) is recognized whenproducts are shipped and title is passed to the customer. If title does notpass until the product reaches the customer’s delivery site, then recognitionof the revenue is deferred until that time. Revenues associated with certainlong-term contracts are recognized in accordance with Statement of Position No.81-1 “Accounting for Performance of Construction-Type and CertainProduction-Type Contracts” (“SOP 81-1”). Under SOP 81-1, we use thepercentage-of-completion method, whereby revenues and associated costs arerecognized as work on a contract progresses. We measure the extent of progresstoward completion generally based upon one of the following (based upon anassessment of which method most closely aligns to the underlying earningsprocess): (i) the units-of-delivery method, (ii) the cost-to-cost method, usingthe ratio of contract costs incurred as a percentage of total estimated costsat contract completion (based upon engineering and production estimates), or(iii) the achievement of contractual milestones. Provisions for anticipatedlosses or revisions in estimated profits on contracts-in-process are recordedin the period in which such anticipated losses or revisions become evident. Revenuefrom software support and maintenance contracts is recognized ratably over theterm of the contract in accordance with SOP-97-2, “Software RevenueRecognition.”

 

Certain of our sales are to distributorswhich have a right to return some portion of product within eighteen months ofsale. We recognize revenue on these sales at the time of shipment to thedistributor as these sales meet all of the criteria of Statement of FinancialAccounting Standards (“SFAS”) No. 48, “Revenue Recognition When Right of ReturnExists.” 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.

 

Inventories

 

Inventories are stated at the lower of cost(first-in, first-out) or market. Inventory levels are maintained in relation tothe expected sales volume. We periodically evaluate the net realizable value ofour inventory. Numerous analyses are applied including lower of cost or marketanalysis, forecasted sales requirements and forecasted warranty requirements. Aftertaking these and other factors into consideration, such as technologicalchanges, age and physical condition, appropriate adjustments are recorded tothe inventory balance. If actual conditions differ from our expectation, theninventory balances may be over or under valued, which could have a materialeffect on our results of operations and financial condition.

 

28

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Recoverability of Long-Livedand Intangible Assets

 

Property, plant and equipment are stated atcost less accumulated depreciation computed on a straight-line basis over theestimated useful lives of the related assets. Leasehold improvements areamortized over the life of the lease or the estimated life of the asset,whichever is shorter. Changes in circumstances such as technological advancesor changes to our business model can result in the actual useful livesdiffering from our estimates. To the extent the estimated useful lives areincorrect, the value of these assets may be over or under stated, which in turncould have a material effect on our results of operations and financialcondition.

 

Long-lived assets other than goodwill arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying value of any such asset may be impaired. We evaluate therecoverability of such assets by estimating future cash flows. If the sum ofthe undiscounted cash flows expected to result from the use of the assets andtheir eventual disposition is less than the carrying amount of the assets, wewill recognize an impairment loss to the extent of the excess of the carryingamount of the assets over the discounted cash flow.

 

SFAS No. 142 requires that we perform anassessment of whether there is an indication that goodwill is impaired on anannual basis unless events or circumstances warrant a more frequent assessment.The impairment assessment involves, among other things, an estimation of thefair value of each of our reporting units (as defined in SFAS No. 142). Suchestimates are inherently subjective, and subject to change in future periods.

 

If the impairment review of goodwill, intangibleassets and other long-lived assets differ significantly from actual results, itcould have a material effect on our results of operations and financialcondition.

 

Income Taxes

 

The carrying value of our net deferred taxassets assumes that we will be able to generate sufficient future taxableincome in certain tax jurisdictions. If this assumption changes in the future,we may be required to record additional valuation allowances against ourdeferred tax assets resulting in additional income tax expense in ourconsolidated statement of operations. We evaluate the realizability of thedeferred tax assets and assess the adequacy of the valuation allowancequarterly.

 

Stock Based Compensation

 

With the adoption of SFAS No. No. 123(R) onJuly 1, 2005, we are required to record the fair value of stock basedcompensation awards as an expense. In order to determine the fair value ofstock options on the date of grant, the Company applies the Black-Scholesoption-pricing model. Inherent in this model are assumptions related toexpected stock price volatility, option life, risk-free interest rate anddividend yield. While the risk-free interest rate and dividend yield are lesssubjective assumptions, typically based on factual data derived from publicsources, the expected stock price volatility and option life assumptionsrequire a greater level of judgment which makes them critical accountingestimates.

 

**Recently Issued AccountingStandards Not Yet Adopted**

 

 

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InMay 2005, the 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 and corrections oferrors made in fiscal years beginning after December 15, 2005. The adoption ofthis statement is not expected to have any effect on our consolidated financialstatements.

 

InApril 2005, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset RetirementObligations — An Interpretation of FASB Statement No. 143.” FIN 47 clarifiesthe terms of FASB Statement No. 143 and requires an entity to recognize aliability for a conditional asset retirement obligation if the entity hassufficient information to reasonably estimate its fair value. FIN 47 iseffective no later than the end of fiscal years ending after December 15, 2005.We are currently evaluating the impact of this standard on our consolidatedfinancial statements.

 

OnDecember 31, 2004, the FASB issued FASB Staff Position FAS 109-1, “Applicationof FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004,” (“FSP No. 109-1”), and FASB Staff Position No. FAS 109-2, “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004,” (“FSP No. 109-2”). These staffpositions provide accounting guidance on how companies should account for theeffects of the American Jobs Creation Act of 2004 (“AJCA”) that was signed intolaw 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. We are currently evaluating all available U.S. Treasuryguidance.

 

**RisksRelating to our Business**

 

*Generaleconomic conditions could adversely affect our revenues, gross margins andexpenses*.

 

Our revenues and gross margins will dependsignificantly on the overall demand for microelectronic products and testingsolutions, particularly in the product and service segments in which wecompete. Weaker demand for our products and services caused by economicweakness may result in decreased revenues, earnings levels or growth rates andproblems with the saleability of inventory and realizability of customerreceivables. In the past, we have observed effects of the global economicdownturn in many areas of our business. Delays or reductions in spending forour products could have a material adverse effect on our business, results ofoperations and financial condition.

 

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*Ouroperating results may fluctuate significantly on a quarterly basis.*

 

Our sales and other operating results havefluctuated significantly in the past, and we expect this trend will continue. Factorswhich affect our results include:

 

•                  the timing,cancellation or rescheduling of customer estimates, orders and shipments;

•                  the pricing andmix of products sold;

•                  new productintroductions;

•                  our ability toobtain components and subassemblies from contract manufacturers and suppliers; and

•                  variations inmanufacturing efficiencies.

 

Many of these factors are beyond our control.Our performance in any one fiscal quarter is not necessarily indicative of anyfinancial trends or future performance.

 

*In the event that any of ourcustomers encounter financial difficulties and fail to pay us, it couldadversely affect our results of operations and financial condition.*

 

We manufacture products to customerspecifications and purchase products in response to customer orders. Inaddition, we may commit significant amounts to maintain inventory inanticipation of customer orders. In the event that any customer, for whom wemaintain inventory, experiences financial difficulties, we may be unable tosell such inventory at its current profit margin, if at all. In such an event,our gross margins would decline. In addition, if the financial condition of anycustomer deteriorates, resulting in an impairment of that customer’s ability topay us amounts owed in respect of a significant amount of outstandingreceivables, our financial condition would be adversely affected.

 

*If we cannot continue to develop,manufacture and market innovative products and services rapidly that meetcustomer requirements for performance and reliability, we may lose market shareand our revenues may suffer*.

 

The process of developing new high technologyproducts and services is complex and uncertain, and failure to anticipatecustomers’ changing needs and emerging technological trends accurately and todevelop or obtain appropriate intellectual property could significantly harmour results of operations. We must make long-term investments and commitsignificant resources before knowing whether our predictions will eventuallyresult in products that the market will accept. We must accurately forecastvolumes, mix of products and configurations that meet customer requirements,and we may not succeed.

 

*Due to the international natureof our business, political or economic changes could harm our future revenues,costs and expenses and financial condition.*

 

Our future revenues, costs and expenses couldbe adversely affected by a variety of international factors, including:

 

•                  changes in acountry’s or region’s political or economic conditions;

•                  longer accountsreceivable cycles;

•                  tradeprotection measures;

•                  unexpectedchanges in regulatory requirements;

•                  differingtechnology standards and/or customer requirements; and

•                  import orexport 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 componentmanufacturing, along with key suppliers, is located outside of the UnitedStates, and also could be disrupted by some of the international factorsdescribed above.

 

*We are exposed to foreigncurrency exchange rate risks that could adversely affect our business, resultsof operations and financial condition.*

 

We are exposed to foreign currency exchangerate risks that are inherent in our sales commitments, anticipated sales, andassets and liabilities that are denominated in currencies other than the UnitedStates dollar. Failure to sufficiently hedge or otherwise manage foreigncurrency risks properly could adversely affect our business, results ofoperations and financial condition.

 

*As part of our business strategy,we may complete acquisitions or divest non-strategic businesses and productlines. These actions could adversely affect our business, results of operationsand financial condition.*

 

As part of our business strategy, we engagein discussions with third parties regarding, and enter into agreements relatingto, possible acquisitions, strategic alliances, ventures and divestitures inorder to manage our product and technology portfolios and further our strategicobjectives. In order to pursue this strategy successfully, we must identifysuitable acquisition, alliance or divesture candidates, complete thesetransactions, some of which may be large and complex, and integrate acquiredcompanies. Integration and other risks of acquisitions and strategic alliancescan be more pronounced for larger and more complicated transactions, or ifmultiple acquisitions are pursued simultaneously.

 

The integration of acquisitions may make thecompletion and integration of subsequent acquisitions more difficult. However,if we fail to identify and complete these transactions, we may be required toexpend resources to internally develop products and technology or may be at acompetitive disadvantage or may be adversely affected by negative marketperceptions, which may have a material effect on our revenues and selling,general and administrative expenses taken as a whole.

 

Acquisitions and strategic alliances mayrequire us to integrate with a different company culture, management team andbusiness infrastructure and otherwise manage integration risks. Even if anacquisition or alliance is successfully integrated, we may not receive theexpected benefits of the transaction. Managing acquisitions, alliances and divestituresrequires varying levels of management resources, which may divert management’sattention from the other business operations. Acquisitions, including abandonedacquisitions, also may result in significant costs and expenses and charges toearnings. As a result, any completed, pending or future transactions maycontribute to our financial results differing from the investment community’sexpectations in a given quarter.

 

*In order to be successful, wemust retain and motivate key employees, and failure to do so could seriouslyharm us.*

 

In order to be successful, we must retain andmotivate executives and other key employees, including those in managerial,technical, marketing and information technology support positions. Inparticular, our product generation efforts depend on hiring and retainingqualified engineers. Attracting and retaining skilled workers and qualifiedsales representatives is also critical to us. Experienced management andtechnical, marketing and support personnel in the microelectronics and testsolutions industries are in demand and competition for their talents isintense. Employee retention may be a particularly challenging issue followingour recent acquisitions since we also must continue to motivate employees andkeep them focused on our strategies and goals, which may be particularlydifficult due to the potential distractions related to integrating the acquiredoperations.

 

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*Terrorist acts or acts of war mayseriously harm our business, results of operations and financial condition.*

 

Terrorist acts or acts of war (whereverlocated around the world) may cause damage or disruption to us, our employees,facilities, partners, suppliers, distributors and resellers, and customers,which could significantly impact our revenues, expenses and financialcondition. The potential for future terrorist attacks, the national andinternational responses to terrorist attacks, and other acts of war orhostility have created many economic and political uncertainties, which couldadversely affect our business and results of operations in ways that cannotpresently be predicted. In addition, as a company with headquarters andsignificant operations located in the United States, we may be impacted byactions against the United States. We will be predominantly uninsured forlosses and interruptions caused by terrorist acts or acts of war.

 

*Ourstock price has historically fluctuated and may continue to fluctuate.*

 

Our stock price, like that of othertechnology companies, can be volatile. Some of the factors that can affect ourstock price are:

 

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

•                  quarterlyincreases or decreases in our revenue or earnings;

•                  changes inquarterly revenue or earnings estimates by the investment community; and

•                  speculation inthe press or investment community about our strategic position, financialcondition, results of operations, business or significant transactions.

 

General market conditions and domestic orinternational macroeconomic and geopolitical factors unrelated to ourperformance may also affect our stock price. In addition, following periods ofvolatility in a Registrant’s securities, securities class action litigationagainst a Registrant is sometimes instituted. This type of litigation couldresult in substantial costs and the diversion of management time and resources.

 

**Forward-LookingStatements**

 

All statements other than statements ofhistorical fact included in this Quarterly Report, including without limitationstatements under “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” regarding our financial position, business strategyand plans and objectives of our management for future operations, areforward-looking statements. When used in this Quarterly Report, words such as “anticipate,”“believe,” “estimate,” “expect,” “intend” and similar expressions, as theyrelate to us or our management, identify forward-looking statements. Suchforward-looking statements are based on the current beliefs of our management,as well as assumptions made by and information currently available to ourmanagement. Actual results could differ materially from those contemplated bythe forward-looking statements as a result of certain factors, including butnot limited to those set forth above. Such statements reflect our current viewswith respect to the future and are subject to these and other risks,uncertainties and assumptions relating to our financial condition, results ofoperation, growth strategy and liquidity. We do not undertake any obligation toupdate such forward-looking statements.

 

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**ITEM 3 —QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

We are exposed to market risk related tochanges in interest rates and to foreign currency exchange rates. Most of ourdebt is at fixed rates of interest or at a variable rate with an interest rateswap agreement which effectively converts the variable rate debt into fixedrate debt. Therefore, if market interest rates increase by 10% from levels atSeptember 30, 2005, the effect on our net income as well as the fair value ofour swap would be insignificant. Most of our invested cash and cash equivalentsare at variable rates of interest. If market interest rates decrease by 10percent from levels at September 30, 2005, the effect on our net income wouldbe insignificant. If foreign currency exchange rates (primarily the BritishPound and the Euro) change by 10% from levels at September 30, 2005, the effecton our other comprehensive income would be approximately $17.4 million. Foreigncurrency contracts are used to protect us from fluctuations in exchange rates. Weperiodically enter 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 September 30, 2005, we had $2.4 million ofnotional value foreign currency forward contracts maturing through December2005. Notional amounts do not quantify risk or represent assets or liabilities,but are used in the calculation of cash settlements under the contracts. Thefair value of these contracts at September 30, 2005 was $44,000 less than thenotional value.

 

**ITEM 4 —CONTROLS AND PROCEDURES**

 

Basedon their evaluation as of the end of the period covered by this Form 10-Q, ourmanagement, with the participation of our Chief Executive Officer and PrincipalAccounting and Principal Financial Officer, conducted an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures, as required by Exchange Act Rule 13a-15. Based on that evaluation,the Chief Executive Officer and Principal Accounting and Principal 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.

 

**Changesin Internal Controls**

 

There were no changes in our internalcontrols over financial reporting that occurred during the quarter endedSeptember 30, 2005 that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Limitations on the Effectivenessof Controls**

 

We believe that a control system, no matterhow well designed and operated, cannot provide absolute assurance that theobjectives of the control system are met, and no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within a company have been detected. Our disclosure controls andprocedures are designed to provide reasonable assurance of achieving theirobjectives and our Chief Executive Officer and Principal Financial andPrincipal Accounting Officer have concluded that such controls and proceduresare effective at the “reasonable assurance” level.

 

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**AEROFLEXINCORPORATED**

**ANDSUBSIDIARIES**

**PART II— OTHER INFORMATION**

 

Item 1.    Legal Proceedings

 

In fiscal 2005, we learnedthat we inadvertently may have violated certain International Traffic in ArmsRegulations (ITAR) by exporting certain products and services without licenses.These violations resulted from an error in classifying the products andservices as commercial rather than military. We have prepared and filed avoluntary disclosure with the State Department in which the details of theexports and erroneous classifications are described. At this time, it is notpossible to determine whether any fines or other penalties will be assertedagainst us or the materiality of any outcome.

 

We are involved in variousother legal matters. We believe the outcome of these other legal matters willnot have a material effect upon us.

 

Item2.             UnregisteredSales of Securities and Use of Proceeds

 
| **Issuer purchases of equity securities(1)** | ** ** | **Total Number of Shares Purchased as Part of Publicly** | ** ** | **Maximum Number of Shares that May Yet** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------|------------|
| **Period**                                   | ** ** | **Total Number of Shares Purchased(2)**                  | ** ** | **Average Price Paid Per Share**          | ** ** | **Announced Plans or Programs** | ** ** | **be Purchased under the Plans or Programs** | ** ** |
| ** **                                   | ** ** | ** **                                               | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| August 2005                                  |       | 5,000                                                    |       | $                                         | 8.90       |   | 55,000 |   | 2,945,000 |   |
|                                              |            |                                                          |            |                                           |            |  |  |  |  |  |

 

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(1)          For description of plans,see Note 12 to the Unaudited Condensed Consolidated Financial Statements.

 

(2)          All purchases were made inopen market transactions. Our 3.0 million share stock buyback program has beenin effect since May 23, 2005. There is no time limit on the repurchases to be madeunder the Plan.

 

Item3.    Defaults upon Senior Securities

 

None

 

Item4.    Submission of Matters to a Vote ofSecurity Holders

 

None

 

Item 5.    Other Information

 

None

 

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Item 6.    Exhibits

 
| Exhibits |
|----------|
|     |   |   |
| 31.1     |   | Certification  of Chief Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of  2002. |
|     |   |   |
| 31.2     |   | Certification  of Principal Accounting Officer and the Principal 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. |
|     |   |   |
| 32.1     |   | Certification  of Chief Executive Officer and of Principal Accounting Officer and the Principal |
|     |   | Financial  Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |

 

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SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 
|   |             |   |   | AEROFLEX  INCORPORATED |                               |
|--------|------------------|--------|--------|------------------------|------------------------------------|
|   |             |   |   | (REGISTRANT)           |                               |
|   |             |   |   |                   |                               |   |
|   |             |   |   |                   |                               |   |
|   |             |   |   |                   |                               |   |
|   | November 8, 2005 |   |   | By:                    | /s/Charles  Badlato                |   |
|   |             |   |   |                   | Charles  Badlato                   |   |
|   |             |   |   |                   | Vice  President - Treasurer        |   |
|   |             |   |   |                   | (Principal  Accounting Officer and |   |
|   |             |   |   |                   | Principal  Financial Officer)      |   |
|   |             |   |   |                   |                               |   |

 

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