**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

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**FORM 10-Q**

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

**THESECURITIES EXCHANGE ACT OF 1934**

Forthe quarter ended                                                      **December 31, 2006**

**Commission File Number 000-02324**

**AEROFLEX INCORPORATED**

(Exact name of Registrant as specified in its Charter)

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

**(516)694-6700**

(Registrant’s telephone number, including area code)

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

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

 

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

 

| Large accelerated filer | x | Accelerated  filer | o | Non-accelerated  filer | o |
|-------------------------|---|--------------------|---|------------------------|---|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of common stockas of the latest practicable date.
| February 5, 2007 |   | 73,640,702            |
|------------------|--------|-----------------------|
| *(Date)*         |   | *(Number  of Shares)* |

 

 

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**AEROFLEXINCORPORATED**

**AND SUBSIDIARIES**

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

 

2

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**Aeroflex Incorporated**

**and Subsidiaries**

** **

**Unaudited Condensed ConsolidatedBalance Sheets**

(Inthousands)

 
| ** **                                                                      | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| Assets                                                                          |       |                  |       |              |       |
|                                                                            |       |                  |       |              |       |
| Current assets:                                                                 |       |                  |       |              |       |
| Cash and cash  equivalents                                                      |       | $                     | 14,923     |              | $          | 10,387 |   |
| Marketable  securities                                                          |       | —                |       | 28,332            |       |
| Accounts  receivable, less allowance for doubtful accounts of $1,926 and $1,350 |       | 118,120               |       | 120,296           |       |
| Inventories                                                                     |       | 146,528               |       | 133,420           |       |
| Deferred income  taxes                                                          |       | 24,948                |       | 24,732            |       |
| Prepaid expenses  and other current assets                                      |       | 13,823                |       | 11,187            |       |
| Total current  assets                                                           |       | 318,342               |       | 328,354           |       |
|                                                                            |       |                  |       |              |       |
| Property, plant and  equipment, net                                             |       | 79,051                |       | 77,940            |       |
| Other assets                                                                    |       | 16,350                |       | 14,276            |       |
| Intangible assets with  definite lives, net                                     |       | 49,479                |       | 54,215            |       |
| Goodwill                                                                        |       | 177,594               |       | 163,237           |       |
|                                                                            |       |                  |       |              |       |
| Total assets                                                                    |       | $                     | 640,816    |              | $          | 638,022 |   |

 

See notes tounaudited condensed consolidated financial statements

3

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**Aeroflex Incorporated**

**and Subsidiaries**

** **

**Unaudited Condensed ConsolidatedBalance Sheets**

**(continued)**

(Inthousands, except per share data)

 
| ** **                                                                                                          | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                          | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| Liabilities and  Stockholders’ Equity                                                                          |       |                  |       |              |       |
|                                                                                                                |       |                  |       |              |       |
| Current  liabilities:                                                                                               |       |                  |       |              |       |
| Current portion of long-term debt                                                                                   |       | $                     | 607        |              | $          | 607 |   |
| Accounts payable                                                                                                    |       | 30,237                |       | 37,832            |       |
| Advance payments by customers                                                                                       |       | 22,190                |       | 21,128            |       |
| Income taxes payable                                                                                                |       | 3,144                 |       | 9,162             |       |
| Accrued payroll expenses                                                                                            |       | 16,893                |       | 17,440            |       |
| Accrued expenses and other current liabilities                                                                      |       | 38,007                |       | 33,046            |       |
| Total current liabilities                                                                                           |       | 111,078               |       | 119,215           |       |
|                                                                                                                |       |                  |       |              |       |
| Long-term debt                                                                                                      |       | 3,397                 |       | 3,558             |       |
| Deferred income  taxes                                                                                              |       | 2,644                 |       | 4,631             |       |
| Other long-term  liabilities                                                                                        |       | 23,656                |       | 22,948            |       |
| Total liabilities                                                                                                   |       | 140,775               |       | 150,352           |       |
|                                                                                                                |       |                  |       |              |       |
| Stockholders’  equity:                                                                                         |       |                  |       |              |       |
| Preferred stock, par value $.10 per share;  authorized 1,000 shares:                                                |       |                  |       |              |       |
| Series A Junior Participating Preferred Stock, par  value $.10 per share, authorized 110 shares ; none issued       |       | —                |       | —            |       |
| Common stock, par value $.10 per share; authorized  110,000 shares; issued and outstanding 73,628 and 75,270 shares |       | 7,363                 |       | 7,527             |       |
| Additional paid-in capital                                                                                          |       | 370,476               |       | 384,870           |       |
| Accumulated other comprehensive income                                                                              |       | 24,058                |       | 13,468            |       |
| Retained earnings                                                                                                   |       | 98,144                |       | 81,805            |       |
| Total stockholders’ equity                                                                                     |       | 500,041               |       | 487,670           |       |
|                                                                                                                |       |                  |       |              |       |
| Total  liabilities and stockholders’ equity                                                                    |       | $                     | 640,816    |              | $          | 638,022 |   |

 

Seenotes to unaudited condensed consolidated financial statements

 

4

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**Aeroflex Incorporated**

**and Subsidiaries**

**Unaudited Condensed Consolidated Statements of Earnings**

(Inthousands, except per share data)

 
| ** **                                             | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **December 31,**            | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                   |       |                             |       |   |   |
|                                                   |       |                             |       |   |   |
|                                                   |       |                             |       |   |   |
| Net sales                                              |       | $                                | 145,314    |   | $ | 135,156 |   |
| Cost of sales                                          |       | 76,769                           |       | 70,602 |   |
| Gross profit                                           |       | 68,545                           |       | 64,554 |   |
|                                                   |       |                             |       |   |   |
| Selling, general and  administrative costs             |       | 32,750                           |       | 30,556 |   |
| Research and  development costs                        |       | 18,444                           |       | 18,290 |   |
| Amortization of  acquired intangibles                  |       | 3,188                            |       | 3,433 |   |
|                                                   |       | 54,382                           |       | 52,279 |   |
| Operating income                                       |       | 14,163                           |       | 12,275 |   |
|                                                   |       |                             |       |   |   |
| Other income (expense)                                 |       |                             |       |   |   |
| Interest expense                                       |       | (144                             | )          | (147 | ) |
| Other income  (expense)                                |       | (96                              | )          | 661 |   |
| Total other  income (expense)                          |       | (240                             | )          | 514 |   |
|                                                   |       |                             |       |   |   |
| Income before income  taxes                            |       | 13,923                           |       | 12,789 |   |
| Provision for income  taxes                            |       | 4,743                            |       | 5,015 |   |
| Net income                                             |       | $                                | 9,180      |   | $ | 7,774 |   |
|                                                   |       |                             |       |   |   |
| Net income per common  share:                          |       |                             |       |   |   |
| Basic                                                  |       | $                                | 0.12       |   | $ | 0.10 |   |
| Diluted                                                |       | $                                | 0.12       |   | $ | 0.10 |   |
|                                                   |       |                             |       |   |   |
| Weighted average number  of common shares outstanding: |       |                             |       |   |   |
| Basic                                                  |       | 73,689                           |       | 74,875 |   |
| Diluted                                                |       | 75,441                           |       | 75,990 |   |

 

Seenotes to unaudited condensed consolidated financial statements

5

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**Aeroflex Incorporated**

**and Subsidiaries**

**Unaudited Condensed ConsolidatedStatements of Earnings**

(In thousands,except per share data)
| ** **                                             | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **December 31,**          | ** ** |
| ** **                                             | ** ** | ** **                     | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                                   |       |                           |       |   |   |
|                                                   |       |                           |       |   |   |
|                                                   |       |                           |       |   |   |
| Net sales                                              |       | $                              | 282,149    |   | $ | 260,804 |   |
| Cost of sales                                          |       | 149,850                        |       | 137,324 |   |
| Gross profit                                           |       | 132,299                        |       | 123,480 |   |
|                                                   |       |                           |       |   |   |
| Selling, general  and administrative costs             |       | 64,150                         |       | 60,808 |   |
| Research and  development costs                        |       | 36,192                         |       | 36,254 |   |
| Amortization of  acquired intangibles                  |       | 6,425                          |       | 6,889 |   |
|                                                   |       | 106,767                        |       | 103,951 |   |
| Operating income                                       |       | 25,532                         |       | 19,529 |   |
|                                                   |       |                           |       |   |   |
| Other income  (expense)                                |       |                           |       |   |   |
| Interest expense                                       |       | (295                           | )          | (307 | ) |
| Other income (expense)                                 |       | (127                           | )          | 752 |   |
| Total other income (expense)                           |       | (422                           | )          | 445 |   |
|                                                   |       |                           |       |   |   |
| Income before  income taxes                            |       | 25,110                         |       | 19,974 |   |
| Provision for  income taxes                            |       | 8,771                          |       | 7,672 |   |
| Net income                                             |       | $                              | 16,339     |   | $ | 12,302 |   |
|                                                   |       |                           |       |   |   |
| Net income per  common share:                          |       |                           |       |   |   |
|                                                   |       |                           |       |   |   |
| Basic                                                  |       | $                              | 0.22       |   | $ | 0.16 |   |
| Diluted                                                |       | $                              | 0.22       |   | $ | 0.16 |   |
|                                                   |       |                           |       |   |   |
|                                                   |       |                           |       |   |   |
| Weighted average  number of common shares outstanding: |       |                           |       |   |   |
| Basic                                                  |       | 74,212                         |       | 74,816 |   |
| Diluted                                                |       | 75,713                         |       | 75,845 |   |

 

See notes to unauditedcondensed consolidated financial statements.

6

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**Aeroflex Incorporated**

**and Subsidiaries**

**Unaudited Condensed ConsolidatedStatements of Cash Flows**

(Inthousands)

 
| ** **                                                                                   | ** ** | **Six months ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                   | ** ** | **December 31,**          | ** ** |
| ** **                                                                                   | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                       |       |                           |       |   |   |
| Net income                                                                                   |       | $                              | 16,339     |   | $ | 12,302 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                               |       | 15,207                         |       | 15,197 |   |
| Deferred income  taxes                                                                       |       | (2,933                         | )          | (3,837 | ) |
| Non - cash share  based compensation                                                         |       | 1,954                          |       | 3,458 |   |
| Excess tax  benefits from share based compensation arrangements                              |       | (231                           | )          | (401 | ) |
| Other, net                                                                                   |       | 624                            |       | 204 |   |
| Change in  operating assets and liabilities,                                                 |       |                           |       |   |   |
| Decrease  (increase) in accounts receivable                                                  |       | 2,445                          |       | (2,952 | ) |
| Decrease  (increase) in inventories                                                          |       | (10,848                        | )          | (7,805 | ) |
| Decrease (increase)  in prepaid expenses and other assets                                    |       | (4,344                         | )          | (1,639 | ) |
| Increase  (decrease) in accounts payable, accrued expenses and other liabilities             |       | (9,076                         | )          | 311 |   |
| Net cash  provided by operating activities                                                   |       | 9,137                          |       | 14,838 |   |
|                                                                                         |       |                           |       |   |   |
| Cash flows from  investing activities:                                                       |       |                           |       |   |   |
| Capital  expenditures                                                                        |       | (8,381                         | )          | (7,504 | ) |
| Purchase of  marketable securities                                                           |       | (268,667                       | )          | (74,555 | ) |
| Proceeds from  sale of marketable securities                                                 |       | 296,999                        |       | 67,552 |   |
| Contingent  payment for purchase of business                                                 |       | (9,246                         | )          | — |   |
| Other, net                                                                                   |       | 62                             |       | 96 |   |
| Net cash  provided by (used in) investing activities                                         |       | 10,767                         |       | (14,411 | ) |
|                                                                                         |       |                           |       |   |   |
| Cash flows from  financing activities:                                                       |       |                           |       |   |   |
| Purchase and  retirement of treasury stock                                                   |       | (17,233                        | )          | (153 | ) |
| Debt repayments                                                                              |       | (161                           | )          | (192 | ) |
| Excess tax  benefits from share based compensation arrangements                              |       | 231                            |       | 401 |   |
| Proceeds from  the exercise of stock options                                                 |       | 506                            |       | 1,805 |   |
| Amounts paid for  withholding taxes on stock option exercises                                |       | (353                           | )          | (145 | ) |
| Withholding  taxes collected for stock option exercises                                      |       | 353                            |       | 145 |   |
| Net cash  provided by (used in) financing activities                                         |       | (16,657                        | )          | 1,861 |   |
| Effect of  exchange rate changes on cash and cash equivalents                                |       | 1,289                          |       | 249 |   |
|                                                                                         |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       | 4,536                          |       | 2,537 |   |
| Cash and cash  equivalents at beginning of period                                            |       | 10,387                         |       | 12,974 |   |
| Cash and cash  equivalents at end of period                                                  |       | $                              | 14,923     |   | $ | 15,511 |   |

 

Seenotes to unaudited condensed consolidated financial statements

7

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**AEROFLEXINCORPORATED**

**AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

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

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

Results of operations for the three and sixmonth periods are not necessarily indicative of results of operations forfuture interim periods or for the full fiscal year ended June 30, 2007.

The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period.  Actual results could differ from thoseestimates.

**Revenue Recognition**

We recognize revenue when persuasive evidenceof an arrangement exists, the selling price is fixed or determinable, andcollectibility of the resulting receivable is reasonably assured.

For arrangements other than certain long-termcontracts, revenue (including shipping and handling fees) is recognized whenproducts are shipped and title has passed to the customer.  If title does not pass until the productreaches the customer’s delivery site, then recognition of the revenue isdeferred until that time.  Certain of oursales are to distributors which have a right to return some portion of productwithin eighteen months of sale.  Werecognize revenue on these sales at the time of shipment to the distributor asthe returns under these arrangements have been insignificant and can bereasonably estimated.  An estimate ofsuch returns is recorded at the time sales are recognized.

Long-term contracts are accounted for inaccordance with SOP 81-1 “Accounting for Performance of Construction-Type and CertainProduction-Type Contracts.”  We determineestimated contract profit rates and use the percentage-of-completion method torecognize revenues and associated costs as work progresses on certain long-termcontracts.  We measure the extent ofprogress toward completion based upon one of the following methods (based uponan assessment of which method most closely aligns to the underlying earningsprocess): (i) the units-of-delivery method, (ii) the cost-to-cost method, usingthe ratio of contract costs incurred as a percentage of total estimated costsat contract completion (based upon engineering and production estimates), or(iii) the achievement of contractual milestones.  Provisions for anticipated losses or revisionsin estimated profits on contracts-in-process are recorded in the period inwhich such anticipated losses or revisions become evident.

Revenue from sales of products where softwareis other than incidental to their performance, including related softwaresupport and maintenance contracts, is recognized in accordance with SOP-97-2, “SoftwareRevenue Recognition.”  Accordingly,revenue for software is recognized when the software is

8

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delivered, assuming all of the above criteriafor revenue recognition are met.  When acustomer purchases software together with post contract support, we allocate aportion of the fee to the post contract support for its fair value based on thecontractual renewal rate.  Post contractsupport fees are deferred in advanced payments by customers and recognized asrevenue ratably over the term of the related contract.

**Financial Instruments andDerivatives**

Foreign currency contracts are used toprotect us from fluctuations in exchange rates. We 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 December31, 2006, we had $4.6 million of notional value foreign currency forwardcontracts maturing through April 2007. 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 thesecontracts at December 31, 2006 was immaterial.

Our interest rate swap derivatives aredesignated as cash flow hedges.  As such,they are recorded on the balance sheet as assets or liabilities at their fairvalue, with changes in the fair value of such derivatives recorded as acomponent of other comprehensive income.

**Marketable Securities**

Marketable securities are classified asavailable-for-sale and are recorded at fair market value with unrealized gainsand losses, net of taxes, reported as a separate component of shareholders’equity.  Realized gains and losses anddeclines in market value judged to be other than temporary, of which there werenone for the three and six months ended December 31, 2006 and 2005, areincluded in other income.  Interest anddividends are also included in other income. Marketable securities consist solely of auction rate bonds whosecarrying amount equaled their fair value.

**Recently Issued AccountingStandards Not Yet Adopted**

In June 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN48”).  FIN 48 clarifies the accountingfor uncertainty in income taxes by prescribing a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  The interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods and disclosure.  FIN 48 becomeseffective for us in our fiscal year ending June 30, 2008.  We are in the process of evaluating theimpact, if any, FIN 48 will have on our consolidated financial statements.

In September 2006, the FASBissued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair ValueMeasurements” (“SFAS No. 157”) to clarify the definition of fair value,establish a framework for measuring fair value in GAAP and expand thedisclosures on fair value measurements. SFAS No. 157 defines fair value as the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date (an exit price). SFAS No. 157 alsostipulates that, as a market-based measurement, fair value measurement shouldbe determined based on the assumptions that market participants would use inpricing the asset or liability, and establishes a fair value hierarchy thatdistinguishes between (a) market participant assumptions developed based onmarket data obtained from sources independent of the reporting entity (observableinputs) and (b) the reporting entity’s own assumptions about market participantassumptions developed based on the best information available in thecircumstances (unobservable inputs). SFAS No. 157 applies to other accounting pronouncements that require orpermit fair value measurements and does not require any new fair valuemeasurements.  SFAS No. 157 becomeseffective for us in our fiscal year ending June 30, 2009.  We are currently evaluating the impact, ifany, of the provisions of SFAS No. 157 on our consolidated financialstatements.

9

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In September 2006, the FASBissued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension andOther Post Retirement Plans,” (“SFAS No. 158”) which requires the recognitionof a plan’s funded status as an asset or liability in the statement offinancial position.  It requires that theplan’s assets and its obligations that determine its funded status be measuredas of the end of the employer’s fiscal year. The requirement to recognize thefunded status and the disclosure requirements are effective as of the end ofour fiscal year ending June 30, 2007 and the requirement to measure the fundedstatus at the end of the fiscal year is effective as of June 30, 2009.  We are currently evaluating the impact of theprovisions of SFAS No. 158 on our consolidated financial statements.

In September 2006, the SECissued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB No. 108”) to provide guidance on the consideration of theeffects of prior year misstatements in quantifying current year misstatementsfor the purpose of determining whether the current year’s financial statementsare materially misstated.  Under SAB No.108, companies should evaluate a misstatement based on its impact on thecurrent year income statement, as well as the effect of the cumulativemisstatement on the current year’s ending balance sheet.  SAB No. 108 will become effective for us inour fiscal year ending June 30, 2007.  Weare currently evaluating the impact, if any, of the provisions of SAB No. 108on our consolidated financial statements.

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

On July 31, 2003, we acquired the RacalInstruments Wireless Solutions Group (“RIWS”) for cash of $38 million and adeferred payment of up to $16.5 million in either cash or Aeroflex commonstock, at our option, depending on RIWS achieving certain performance goals forthe year ending July 31, 2004. In October 2006, a final determination of thedeferred payment was made requiring us to pay $9.2 million, which we paid incash and charged to goodwill.  We did notinclude this contingent consideration in any previously issued balance sheet asthe payment of this consideration was not considered to be certain beyond areasonable doubt.

**Intangible Assets with DefiniteLives**

The components of amortizable intangibleassets are as follows:

|                               | ** ** | **December 31, 2006** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **(In thousands)**         | ** ** |
| ** **                    | ** ** | **Gross Carrying**         | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **                    | ** ** | **Amount**                      | ** ** | **Amortization** | ** ** | **Value** | ** ** |
|                          |       |                            |       |   |   |   |   |
| Existing  technology          |       | $                               | 86,785     |   | $ | (40,785 | ) | $ | 46,000 |   |
| Tradenames                    |       | 2,342                           |       | (2,126 | ) | 216 |   |
| Customer related  intangibles |       | 6,486                           |       | (3,223 | ) | 3,263 |   |
| Total                         |       | $                               | 95,613     |   | $ | (46,134 | ) | $ | 49,479 |   |

 

10

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The aggregate amortization expense foramortized intangible assets was $3.2 million and $3.4 million for the threemonths ended December 31, 2006 and 2005, respectively and $6.4 million and $6.9million for the six months ended December 31, 2006 and 2005, respectively.

The estimated aggregate amortization expensefor each of the twelve month periods ending December 31, is as follows:

|        | ** ** | **(In thousands)** | ** ** |
|--------|------------|-------------------------|------------|
|   |       |                    |       |
| 2007   |       | $                       | 13,640     |   |
| 2008   |       | 11,682                  |       |
| 2009   |       | 8,940                   |       |
| 2010   |       | 4,800                   |       |
| 2011   |       | 2,288                   |       |
|        |            |                         |            |  |

 

**Goodwill**

The carrying amount of goodwill is asfollows:

|                                    | ** ** | **Balance**                | ** ** | ** **        | ** ** | **Effect of** | ** ** | **Balance**                     | ** ** |
|------------------------------------|------------|----------------------------|------------|-------------------|------------|--------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **as of**             | ** ** | **Adjustment**    | ** ** | **Foreign**        | ** ** | **as of**                  | ** ** |
| ** **                         | ** ** | **July 1, 2006** | ** ** | **(Note a)** | ** ** | **Currency**       | ** ** | **December 31, 2006** | ** ** |
| ** **                         | ** ** | **(In thousands)**    | ** ** |
|                               |       |                       |       |              |       |               |       |                            |       |
| Microelectronic Solutions  segment |       | $                          | 46,688     |              | $          | —             |       | $                               | —     |   | $ | 46,688 |   |
| Test Solutions segment             |       | 116,549                    |       | 9,246             |       | 5,111              |       | 130,906                         |       |
| Total                              |       | $                          | 163,237    |              | $          | 9,246              |       | $                               | 5,111      |   | $ | 177,594 |   |

----

Note a — Thisadjustment to goodwill is for the payment of the final determination of thedeferred payment due on the RIWS acquisition. The payment was made in October 2006.

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

In fiscal 2006, we initiated steps toconsolidate our three Test Solutions businesses in the United Kingdom.  Pursuant to the plan, which is substantiallycomplete, our manufacturing operations were moved into one facility and wecreated a shared-services environment for all finance and administrativefunctions.  In connection with this plan,approximately 40 employees have been terminated and certain contract positionswere eliminated.  In fiscal 2006, werecorded charges of $3.2 million primarily for workforce reductions in alldepartments.  During the six months endedDecember 31, 2006, we recorded an additional charge of $100,000 for workforcereductions.  As of December 31, 2006,approximately $323,000 remains to be paid and is included in accruedliabilities.  The workforce restructuringcharges were allocated primarily to selling, general and administrative costs.

In the third quarter of fiscal 2007, we planto effectuate further restructuring activity in the Wireless division of ourTest Solutions businesses in the United Kingdom.  Pursuant to the plan, approximately 25 employeeswill be terminated and certain contract positions will be eliminated.  The plan is expected to cost approximately$1.4 million in severance costs.

11

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The following table sets forth the chargesand payments related to the restructuring reserve, which is included in accruedexpenses and other current liabilities in the accompanying balance sheet, forthe six months ended December 31, 2006:

|                       | ** ** | ** **                    | ** ** | ** **                                                      | ** ** | ** **   | ** ** | ** **   | ** ** | **Balance**           | ** ** |
|-----------------------|------------|-------------------------------|------------|-----------------------------------------------------------------|------------|--------------|------------|--------------|------------|-----------------------|------------|
| ** **            | ** ** | **Balance July 1,** | ** ** | ** **                                                      | ** ** | ** **   | ** ** | ** **   | ** ** | **December 31,** | ** ** |
| ** **            | ** ** | **2006**                      | ** ** | **Six Months Ended December 31, 2006** | ** ** | **2006**     | ** ** |
| ** **            | ** ** | ** **                    | ** ** | **(In thousands)**                                         | ** ** | ** **   | ** ** |
| ** **            | ** ** | ** **                    | ** ** | ** **                                                      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **            | ** ** |
| ** **            | ** ** | ** **                    | ** ** | **Net Addition**                                           | ** ** | ** **   | ** ** | ** **   | ** ** | ** **            | ** ** |
| ** **            | ** ** | ** **                    | ** ** | **to**                                                          | ** ** | ** **   | ** ** | **Foreign**  | ** ** | ** **            | ** ** |
| ** **            | ** ** | **Restructuring**             | ** ** | **Restructuring**                                               | ** ** | **Cash**     | ** ** | **Currency** | ** ** | **Restructuring**     | ** ** |
| ** **            | ** ** | **Reserve**                   | ** ** | **Reserve**                                                     | ** ** | **Payments** | ** ** | **Impact**   | ** ** | **Reserve**           | ** ** |
|                  |       |                          |       |                                                            |       |         |       |         |       |                  |       |
| Work force  reduction |       | $                             | 1,091      |                                                            | $          | 100          |       | $            | (930       | )                     | $          | 62 |   | $ | 323 |   |
|                  |       |                          |       |                                                            |       |         |       |         |       |                  |       |
| Other                 |       | 100                           |       | —                                                          |       | (100         | )          | —       |       | —                |       |
|                  |       |                          |       |                                                            |       |         |       |         |       |                  |       |
| Total                 |       | $                             | 1,191      |                                                            | $          | 100          |       | $            | (1,030     | )                     | $          | 62 |   | $ | 323 |   |

 

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

The consolidated statements of earningspresent basic and diluted earnings per share. Basic earnings per share is determined by dividing income available tocommon stockholders by the weighted average number of common shares outstandingfor the period.  Diluted earnings pershare considers the potential effect of dilution on basic earnings per shareassuming potentially dilutive securities that meet certain criteria, such asstock options, were outstanding since issuance. The treasury stock method is used to determine the dilutive effect ofpotentially dilutive securities.

The following table reconciles basic sharesoutstanding to diluted shares outstanding:

|                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **December 31,**            | ** ** | **December 31,**          | ** ** |
| ** **                             | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                             | ** ** | **(In thousands)**          | ** ** |
|                                   |       |                             |       |                           |       |   |   |   |   |
| Basic Shares Outstanding               |       | 73,689                           |       | 74,875                         |       | 74,212 |   | 74,816 |   |
| Add: Effect of  dilutive stock options |       | 1,752                            |       | 1,115                          |       | 1,501 |   | 1,029 |   |
|                                   |       |                             |       |                           |       |   |   |   |   |
| Diluted Shares  Outstanding            |       | 75,441                           |       | 75,990                         |       | 75,713 |   | 75,845 |   |

 

Options to purchase 7.2 million shares atexercise prices ranging between $8.55 and $34.41 per share were outstanding asof December 31, 2006 but were not included in the computation of diluted EPS astheir effect would have been anti-dilutive. Options to purchase 10.1 millionshares at exercise prices ranging between $8.16 and $34.41 per share wereoutstanding as of December 31, 2005 but were not included in the computation ofdiluted EPS as their effect would have been anti-dilutive.

12

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

The components of comprehensive income are asfollows:

|                                                                                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                              | ** ** | **December 31,**            | ** ** | **December 31,**          | ** ** |
| ** **                                                                                                                              | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                              | ** ** | **(In thousands)**          | ** ** |
| Net income                                                                                                                              |       | $                                | 9,180      |                           | $          | 7,774 |   | $ | 16,339 |   | $ | 12,302 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Minimum pension  liability adjustment, net of tax provision (benefit) of $0 and $0 in 2006 and  $0 and $(16) in 2005                    |       | —                           |       | —                         |       | — |   | 16 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Unrealized gain  (loss) on interest rate swap agreements, net of tax provision (benefit) of  $(1) and $3 in 2006 and $8 and $23 in 2005 |       | 4                                |       | 13                             |       | (2 | ) | 37 |   |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Foreign currency  translation adjustment                                                                                                |       | 8,405                            |       | (2,795                         | )          | 10,592 |   | (5,049 | ) |
|                                                                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Total comprehensive income                                                                                                              |       | $                                | 17,589     |                           | $          | 4,992 |   | $ | 26,929 |   | $ | 7,306 |   |

 

Accumulated other comprehensive income (loss)is as follows:

|                             | ** ** | ** **                 | ** ** | **Unrealized**             | ** ** | ** **      | ** ** | ** **                 | ** ** |
|-----------------------------|------------|----------------------------|------------|----------------------------|------------|-----------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Minimum**                | ** ** | **Gain (Loss)**       | ** ** | ** **      | ** ** | ** **                 | ** ** |
| ** **                  | ** ** | **Pension**                | ** ** | **on Interest**       | ** ** | **Foreign**     | ** ** | ** **                 | ** ** |
| ** **                  | ** ** | **Liability**              | ** ** | **Rate Swap**         | ** ** | **Currency**    | ** ** | ** **                 | ** ** |
| ** **                  | ** ** | **Adjustment**             | ** ** | **Agreements**             | ** ** | **Translation** | ** ** | **Total**                  | ** ** |
| ** **                  | ** ** | **(net of tax)** | ** ** | **(net of tax)** | ** ** | **Adjustment**  | ** ** | **(net of tax)** | ** ** |
| ** **                  | ** ** | **(In thousands)**    | ** ** |
|                        |       |                       |       |                       |       |            |       |                       |       |
| Balance, June  30, 2006     |       | $                          | (4,180     | )                          | $          | (12             | )          | $                          | 17,660     |   | $ | 13,468 |   |
| Six months  activity        |       | —                     |       | (2                         | )          | 10,592          |       | 10,590                     |       |
| Balance, December 31,  2006 |       | $                          | (4,180     | )                          | $          | (14             | )          | $                          | 28,252     |   | $ | 24,058 |   |

 

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

13

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

Inventories consist of the following:

|                 | ** ** | **December 31,**   | ** ** | **June 30,** | ** ** |
|-----------------|------------|-------------------------|------------|-------------------|------------|
| ** **      | ** ** | **2006**                | ** ** | **2006**          | ** ** |
| ** **      | ** ** | **(In thousands)** | ** ** |
|            |       |                    |       |              |       |
| Raw materials   |       | $                       | 70,212     |              | $          | 52,796 |   |
| Work in process |       | 53,924                  |       | 57,020            |       |
| Finished goods  |       | 22,392                  |       | 23,604            |       |
|            |       | $                       | 146,528    |              | $          | 133,420 |   |

 

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

We warrant our products against defects indesign, materials and workmanship, generally for one year from their date ofshipment.  A provision for estimatedfuture costs relating to these warranties is recorded when revenue isrecognized and is included in cost of sales. Quarterly we analyze our warrantyliability for reasonableness based on a 15-month history of warranty costsincurred, the nature of the products shipped subject to warranty andanticipated warranty trends.

Activity related to our product warrantyliability was as follows:

|                                     | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **December 31,**          | ** ** |
| ** **                          | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(In thousands)**        | ** ** |
|                                |       |                           |       |   |   |
| Balance at  beginning of period     |       | $                              | 2,583      |   | $ | 2,056 |   |
| Provision for  warranty obligations |       | 1,652                          |       | 1,780 |   |
| Cost of warranty  obligations       |       | (1,486                         | )          | (1,379 | ) |
| Foreign currency  impact            |       | 45                             |       | (19 | ) |
|                                |       |                           |       |   |   |
| Balance at end of  period           |       | $                              | 2,794      |   | $ | 2,438 |   |

 

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

On March 21, 2006, we executed a loanagreement with four banks for an unsecured multi-currency revolving creditfacility that provides for borrowings under a line of credit of up to $100 millionthrough March 2011.   Under certaincircumstances, upon our request, the commitments under the credit facility maybe increased by an additional $50 million to $150 million.  The interest rates on borrowings under thisagreement are at varying rates depending on certain financial ratios with thecurrent rate substantially equivalent to LIBOR plus .575% (5.9% at December 31,2006) on the revolving credit borrowings. We are required to pay an annual facility fee of .175% on the entirecredit line.

The terms of the loan agreement, as amendedon August 28, 2006, require compliance with certain financial covenantsincluding maintenance of various financial ratios, limitations on indebtednessand treasury stock repurchases, and prohibition of the payment of cashdividends and certain other payments.  Weare currently in full compliance with all of the covenants contained in theloan agreement.  At December 31, 2006there were no borrowings outstanding under the revolving credit facility andour available unused line of credit was approximately $89.0 million afterconsideration of $11.0 million of outstanding letters of credit.

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

Effective January 1, 1994,we established a Supplemental Executive Retirement Plan (the “SERP”) whichprovides retirement, death and disability benefits to certain of ourofficers.  A substantial portion of theobligations under the SERP are unfunded. On September 3, 2003, we acquired MCE, including its defined benefitpension plan, which has been frozen since December 31, 1993.

**Components of Net Periodic BenefitCost**

|                                                    | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **December 31,**          | ** ** |
| ** **                                         | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                         | ** ** | **(In thousands)**             | ** ** |
|                                               |       |                           |       |   |   |
| Service cost                                       |       | $                              | 93         |   | $ | 257 |   |
| Interest cost                                      |       | 539                            |       | 495 |   |
| Expected return  on plan assets                    |       | (81                            | )          | (73 | ) |
| Amortization of  net transition (asset) obligation |       | 19                             |       | 19 |   |
| Recognized  actuarial (gain) loss                  |       | 344                            |       | 225 |   |
| Net periodic benefit  cost                         |       | $                              | 914        |   | $ | 923 |   |

 

We previously disclosed inthe notes to our financial statements for the year ended June 30, 2006, that weexpected to contribute $1.5 million to the MCE pension and SERP plans in thefiscal year ended June 30, 2007.   As ofDecember 31, 2006, $426,000 of contributions have been made.

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

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

We have several stock optionplans that are described under the caption “Stock Options and Warrants” infootnote 9 of our June 30, 2006 consolidated financial statements.  As of December 31, 2006, 3.1 million sharesof the Company’s Common Stock were reserved and available to be grantedpursuant to these plans.

Compensation expenseattributable to share based compensation was $1.0 million ($670,000 after tax),or $0.01 for both basic and diluted earnings per share, for the three monthsended December 31, 2006 and $1.4 million ($860,000 after tax), or $.01 for bothbasic and diluted earnings per share, for the three months ended December 31,2005.   Compensation expense attributableto share based compensation was $2.0 million ($1.3 million after tax), or $0.02for both basic and diluted earnings per share, for the six months endedDecember 31, 2006 and $3.5 million ($2.1 million after tax), or $.03 for bothbasic and diluted earnings per share, for the six months ended December 31,2005.  As of December 31, 2006, the totalunrecognized compensation cost related to nonvested stock awards was $5.0million and the related weighted average period over which it is expected to berecognized is approximately 1.7 years.

15

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A summary of our stockoption plans as of December 31, 2006 and changes during the six month periodthen ended, is presented below:

|                                                | ** ** | ** **              | ** ** | **Weighted** | ** ** | ** **              | ** ** | **Weighted Average** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                     | ** ** | ** **              | ** ** | **Average**  | ** ** | **Aggregate**           | ** ** | **Contractual Life** | ** ** |
| ** **                                     | ** ** | ** **              | ** ** | **Exercise** | ** ** | **Intrinsic**           | ** ** | **Remaining in**     | ** ** |
| ** **                                     | ** ** | **Shares**              | ** ** | **Price**    | ** ** | **Value (1)**      | ** ** | **Years**                 | ** ** |
| ** **                                     | ** ** | **(In thousands)** | ** ** | ** **   | ** ** | **(In thousands)** | ** ** | ** **                | ** ** |
|                                           |       |                    |       |         |       |                    |       |                      |       |
| Outstanding at  July 1, 2006                   |       | 14,763                  |       | $            | 11.92      |                    |       |                      |       |   |
| Granted                                        |       | 10                      |       | 10.77        |       |                    |       |                      |       |
| Exercised                                      |       | (169                    | )          | 7.13         |       |                    |       |                      |       |
| Expired                                        |       | —                  |       | —       |       |                    |       |                      |       |
| Forfeited                                      |       | (135                    | )          | 10.94        |       |                    |       |                      |       |
|                                           |       |                    |       |         |       |                    |       |                      |       |
| Outstanding at  December 31, 2006              |       | 14,469                  |       | $            | 11.98      |                    | $          | 27,682                    |       | 4.9 |   |
|                                           |       |                    |       |         |       |                    |       |                      |       |
| Exercisable at  December 31, 2006              |       | 13,492                  |       | $            | 12.13      |                    | $          | 25,775                    |       | 4.6 |   |
|                                           |       |                    |       |         |       |                    |       |                      |       |
| Options expected to  vest at December 31, 2006 |       | 908                     |       | $            | 10.00      |                    | $          | 1,739                     |       | 8.4 |   |

----

(1)             Theintrinsic value of a stock option is the amount by which the market value ofthe underlying stock on December 31, 2006 exceeds the exercise price of theoption.

The weighted average grant datefair value of stock options granted for the three months ended December 31,2005 was $8.49.  There were no stockoptions granted in the three months ended December 31, 2006.  The weighted average grant date fair value ofstock options granted for the six months ended December 31, 2006 and 2005 was$7.95 and $8.30, respectively.

The fair value of eachoption grant (none in the three months ended December 31, 2006) was estimatedon the date of grant using the Black-Scholes option-pricing model with the followingweighted average assumptions:

|                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **December 31,**            | ** ** | **December 31,**          | ** ** |
| ** **                                        | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average  expected stock price volatility |       | N/A                              |       | 94                             | %          | 84 | % | 94 | % |
| Weighted average  expected option life            |       | N/A                              |       | 6.2 years                      |       | 6.0 years |   | 6.2 years |   |
| Average risk  free interest rate                  |       | N/A                              |       | 4.6                            | %          | 4.8 | % | 4.5 | % |
| Average dividend  yield                           |       | N/A                              |       | —                         |       | — |   | — |   |
| Discount for  post-vesting restrictions           |       | N/A                              |       | N/A                            |       | N/A |   | N/A |   |

 

The total intrinsic value ofstock options exercised for the three months ended December 31, 2006 and 2005was $831,000 and $707,000, respectively, on the exercise dates.   The total intrinsic value of stock optionsexercised for the six months ended December 31, 2006 and 2005 was $850,000 and$1.1 million, respectively, on the exercise dates.

 

16

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Cash received from stockoption exercises for the three months ended December 31, 2006 and 2005 was$442,000 and $1.5 million, respectively.  Cash received from stock option exercises for the six months endedDecember 31, 2006 and 2005 was $506,000 and $1.8 million, respectively.  The tax benefit received from stock optionexercises for the three months ended December 31, 2006 and 2005 was $299,000and $262,000, respectively.    The taxbenefit received from stock option exercises for the six months ended December31, 2006 and 2005 was $305,000 and $401,000, respectively.

**Restricted Stock**

In fiscal 2006, we granted10,000 shares of Restricted Stock of which 5,000 vested and none were forfeitedduring the six months ended December 31, 2006. At the grant date, this award had an estimated fair value ofapproximately $105,000 which is being recognized as compensation expense, on astraight line basis over the requisite service period of two years.

**11.   Stock Repurchase Program**

During fiscal 2005, ourBoard of Directors authorized a stock repurchase program of up to 3.0 millionshares of the Company’s Common Stock, subject to certain limitations imposed byour lending banks.  Purchases are madefrom time to time, depending upon market conditions at prices deemed appropriateby management.  For the six months endedDecember 31, 2006, approximately 1.8 million shares were repurchased for $17.2million and retired.  Since the inceptionof this program, approximately 1.8 million shares have been repurchased for$18.0 million and retired, including 85,000 shares repurchased in prior fiscalyears.

**12.   Contingencies**

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

**13.   Business Segments**

Our business segments andmajor products included in each segment, are as follows:

MicroelectronicSolutions (“AMS”)

·                  Microelectronic Components, Sub-assembliesand Modules

·                  Integrated Circuits

·                  MotionControl Systems

TestSolutions (“ATS”)

·                  InstrumentProducts and Test Systems

We are a manufacturer ofadvanced technology systems and components for commercial industry, governmentand defense contractors.  Approximately30% and 30% of our sales for the three months ended December 31, 2006 and 2005,and 29% and 28% for the six months ended December 31, 2006 and 2005,respectively, were to agencies of the United States government or to primedefense contractors or subcontractors of the United States government.  No one customer constituted more than 10% ofsales during any of the periods presented. Inter-segment sales were not material and have been eliminated from thetables below.

17

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Most of our operations arelocated in the United States; however, we also have operations in Europe andAsia.  Aeroflex International Limited,which was acquired in May 2002, RIWS, which was acquired in July 2003, and theSPG division of UbiNetics Holdings Limited, which was acquired in May 2005, allhave significant operations in the United Kingdom.  Specifically, net sales from facilitieslocated in the United Kingdom were approximately $80.3 million and $71.3million for the six months ended December 31, 2006 and 2005, respectively.  Total assets of the United Kingdom operationswere $233.4 million as of December 31, 2006.

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

|                           | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------------------------|------------|
| ** **                | ** ** | **December 31,**                              | ** ** |
| ** **                | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)**                            | ** ** |
| ** **                | ** ** | ** **                                         | ** ** | ** ** | ** ** |
| United States of  America |       | $                                                  | 89,560     |   | $ | 82,593 |   |
| Europe and  Middle East   |       | 38,411                                             |       | 31,080 |   |
| Asia and  Australia       |       | 16,163                                             |       | 20,216 |   |
| Other regions             |       | 1,180                                              |       | 1,267 |   |
|                      |       | $                                                  | 145,314    |   | $ | 135,156 |   |

 

|                           | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **December 31,**                            | ** ** |
| ** **                | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(In thousands)**                          | ** ** |
|                      |       |                                             |       |   |   |
| United States of  America |       | $                                                | 166,860    |   | $ | 158,859 |   |
| Europe and  Middle East   |       | 79,326                                           |       | 60,967 |   |
| Asia and  Australia       |       | 33,584                                           |       | 38,495 |   |
| Other regions             |       | 2,379                                            |       | 2,483 |   |
|                      |       | $                                                | 282,149    |   | $ | 260,804 |   |

 

18

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Selected financial data by segment is asfollows:

|                                                                                  | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **December 31,**                              | ** ** | **December 31,**                            | ** ** |
| ** **                                                                       | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | **(In thousands)**                            | ** ** | **(In thousands)**                          | ** ** |
| Net sales:                                                                       |       |                                               |       |                                             |       |   |   |   |   |
| Microelectronic solutions (“AMS”)                                      |       | $                                                  | 62,592     |                                             | $          | 58,869 |   | $ | 127,219 |   | $ | 113,692 |   |
| Test solutions (“ATS”)                                                 |       | 82,722                                             |       | 76,287                                           |       | 154,930 |   | 147,112 |   |
| Net sales                                                                        |       | $                                                  | 145,314    |                                             | $          | 135,156 |   | $ | 282,149 |   | $ | 260,804 |   |
|                                                                             |       |                                               |       |                                             |       |   |   |   |   |
| Segment adjusted  operating income (1):                                          |       |                                               |       |                                             |       |   |   |   |   |
| AMS                                                                              |       | $                                                  | 14,842     |                                             | $          | 15,395 |   | $ | 30,854 |   | $ | 28,924 |   |
| ATS                                                                              |       | 7,808                                              |       | 5,900                                            |       | 12,642 |   | 10,152 |   |
| General corporate expense                                                        |       | (4,285                                             | )          | (4,145                                           | )          | (9,485 | ) | (8,112 | ) |
| Adjusted operating income                                                        |       | 18,365                                             |       | 17,150                                           |       | 34,011 |   | 30,964 |   |
|                                                                             |       |                                               |       |                                             |       |   |   |   |   |
| Amortization of  acquired intangibles                                            |       |                                               |       |                                             |       |   |   |   |   |
| — AMS                                                                       |       | (440                                               | )          | (533                                             | )          | (927 | ) | (1,067 | ) |
| — ATS                                                                       |       | (2,748                                             | )          | (2,900                                           | )          | (5,498 | ) | (5,822 | ) |
| Share based  compensation                                                        |       |                                               |       |                                             |       |   |   |   |   |
| — AMS                                                                       |       | (277                                               | )          | (373                                             | )          | (526 | ) | (726 | ) |
| — ATS                                                                       |       | (259                                               | )          | (377                                             | )          | (502 | ) | (811 | ) |
| — Corporate                                                                 |       | (478                                               | )          | (692                                             | )          | (926 | ) | (1,921 | ) |
| Restructuring  charges - ATS (2)                                                 |       | —                                             |       | —                                           |       | (100 | ) | — |   |
| Current period  impact of acquisition related adjustment to inventory — ATS |       | —                                             |       | —                                           |       | — |   | (1,088 | ) |
| Operating income  (GAAP)                                                         |       | 14,163                                             |       | 12,275                                           |       | 25,532 |   | 19,529 |   |
| Interest expense                                                                 |       | (144                                               | )          | (147                                             | )          | (295 | ) | (307 | ) |
| Other income  (expense), net                                                     |       | (96                                                | )          | 661                                              |       | (127 | ) | 752 |   |
| Income before income  taxes                                                      |       | $                                                  | 13,923     |                                             | $          | 12,789 |   | $ | 25,110 |   | $ | 19,974 |   |

----

(1)            Management evaluatesthe operating results of the two segments based upon pre-tax operating income,before costs related to restructuring, amortization of acquired intangibles,share based compensation and the impact of any acquisition related adjustmentsto inventory.

(2)            The operating incomeof the ATS segment has been adjusted to exclude the restructuring charges forthe reorganization of its ATS segment, primarily its European operations. 

19

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**ITEM 2 —MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**Overview**

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

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

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

In fiscal 2006, we initiated steps to consolidate our three TestSolutions businesses in the United Kingdom. Pursuant to the plan, which is substantially complete, our manufacturingoperations were moved into one facility and we created a shared-servicesenvironment for all finance and administrative functions.  In connection with this plan, approximately40 employees have been terminated and certain contract positions wereeliminated.  In fiscal 2006 we recorded acharge of $3.2 million for workforce reductions in all departments.    During the first six months of fiscal 2007,we recorded an additional charge of $100,000 for workforce reductions.  As of December 31, 2006, approximately$323,000 remains to be paid and is included in accrued liabilities.  The workforce restructuring charges wereallocated primarily to selling, general and administrative costs.

In the third quarter of fiscal 2007, we plan to effectuate furtherrestructuring activity in the Wireless division of our Test Solutionsbusinesses in the United Kingdom. Pursuant to the plan, approximately 25 employees will be terminated andcertain contract positions will be eliminated. The plan is expected to cost approximately $1.4 million in severancecosts and generate annual savings of approximately $4.6 million.

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

*Net Sales. *Net sales increased 8% to $145.3 million forthe three months ended December 31, 2006 from $135.2 million for the threemonths ended December 31, 2005.  Netsales in the microelectronic solutions (“AMS”) segment increased 6% to $62.6 million for the threemonths ended December 31, 2006 from $58.9 million for the three months endedDecember 31, 2005 primarily as a result of increased volume of integratedcircuits, components and microelectronic modules.  Net sales in the test solutions (“ATS”)segment increased 8% to $82.7 million for the three months ended December 31,2006 from $76.3 million for the three months ended December 31, 2005 as aresult of an increase in volume in our wireless and radar test business.  The increased volume in our wireless businesswas partially due to new product introductions.

20

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*Gross Profit. *Gross profit equals net sales less cost of sales.* *Cost of sales includes materials,direct labor and overhead expenses such as engineering labor, fringe benefits,allocable occupancy costs, depreciation and manufacturing supplies.

 
| **Three Months**                                 | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **December 31,**                                 | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** |
| 2006                                                  |       | $          | 31,874     |          | 50.9       | %          | $          | 36,671        |       | 44.3       | %          | $             | 68,545     |   | 47.2 | % |
| 2005                                                  |       | 30,202     |       | 51.3          | %          | 34,352     |       | 45.0          | %          | 64,554     |       | 47.8          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

 

Gross profit increased $1.7 million, or 6%, in the AMS segment dueprimarily to components and microelectronic modules.  Margin percentages decreased 0.4% to 50.9%primarily due to a change in sales mix related to integrated circuits.

Gross profit increased $2.3 million, or 7%, in the ATS segmentprimarily as a result of an increase in volume in wireless and radio test products.  Margin percentages decreased 0.7% to 44.3%primarily due to sales mix.

*Selling, General and Administrative Costs. *Selling, general and administrative costs include office and managementsalaries, fringe benefits, commissions, insurance and professional fees.
| **Three Months**                                 | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** **    | ** ** | ** ** | ** ** | **% of** | ** ** |
| **December 31,**                                 | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** |
| 2006                                                  |       | $          | 10,467     |          | 16.7       | %          | $          | 17,520        |       | 21.2          | %          | $          | 4,763      |          | $          | 32,750 |   | 22.5 | % |
| 2005                                                  |       | 9,633      |       | 16.4          | %          | 16,086     |       | 21.1          | %          | 4,837         |       | 30,556     |       | 22.6          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |               |            |            |            |               |            |  |  |  |  |

 

Selling, general and administrative costs increased by $834,000, or 9%, in the AMS segment primarily dueto general increases in expenses related to the increase in sales.   Selling,general and administrative costs increased by $1.4 million, or 9%, inthe ATS segment primarily as a result of general increases in expenses relatedto the increase in sales combined with an unfavorable impact from foreigncurrency exchange rates.  Corporateselling, general and administrative expenses remained relatively unchanged.

*Research and Development Costs. *Research and development costs includematerial, engineering labor and allocated overhead.
| **Three Months**                                 | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **December 31,**                                 | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** |
| 2006                                                  |       | $          | 6,843      |          | 10.9       | %          | $          | 11,601        |       | 14.0       | %          | $             | 18,444     |   | 12.7 | % |
| 2005                                                  |       | 5,546      |       | 9.4           | %          | 12,744     |       | 16.7          | %          | 18,290     |       | 13.5          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

 

Self funded research and development costs increased $1.3 million, or23%, in the AMS segment primarily due to development costs for integratedcircuits and microelectronic modules. Research and development costs decreased $1.1 million, or 9%, in the ATSsegment mainly due to restructuring efforts in our wireless business combinedwith cost saving initiatives in radar, offset by increased development costs inradio test.

21

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*Amortization of AcquiredIntangibles.* Amortization decreased $245,000, or 7%.

*Other Income (Expense). *Interest expense was $144,000 in the current quarter and $147,000 inthe prior year’s comparable quarter. Other income (expense) of $(96,000) for the three months ended December31, 2006 consisted primarily of foreign exchange loss of $(367,000) offset byinterest income of $161,000.  Otherincome of $661,000 for the three months ended December 31, 2005 consisted primarilyof a favorable building lease termination gain of $459,000 and interest incomeof $249,000.  The decrease in interestincome was due to the lower balances in cash, cash equivalents and marketablesecurities due to $17.2 million of purchases of treasury stock and $9.2 millioncontingent acquisition payment in the current year.

*Provision for Income Taxes. *The income tax provision was $4.7 million (an effective income tax rateof 34.1%) for the three months ended**December 31,2006 and $5.0 million (an effective income tax rate of 39.2%) for the threemonths ended December 31, 2005.  Theeffective income tax rate for the two periods differed from the amount computedby applying the U.S. Federal income tax rate to income before income taxes dueto foreign, state and local income taxes, and, for the three months endedDecember 31, 2005, a state rate change and a tax audit adjustment, both ofwhich were fully reflected in that quarter. We anticipate the rate to be 35% for the balance of the year.   We paid $11.8 million for the three monthsended December 31, 2006 and $9.7 million for the three months ended December31, 2005 for income taxes.

*Net Income*.  Netincome for the three months ended December 31, 2006 was $9.2 million, or 6.3%of sales, versus $7.8 million, or 5.8% of sales, for the three months endedDecember 31, 2005.

**Six Months ended December 31,2006 Compared to Six Months Ended December 31, 2005**

*Net Sales. *Net sales increased 8% to $282.1 million for the six months endedDecember 31, 2006 from $260.8 million for the six months ended December 31,2005.  Net sales in the AMS segmentincreased 12% to $127.2 millionfor the six months ended December 31, 2006 from $113.7 million for the sixmonths ended December 31, 2005 as a result of an increase in volume ofcomponents, integrated circuits and microelectronic modules.   Net sales in the ATS segment increased 5% to$154.9 million for the six months ended December 31, 2006 from $147.1 millionfor the six months ended December 31, 2005 as a result of an increase in volumeof radar test and new product introductions in our wireless business.

*Gross Profit.*

| **Six Months**                                   | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **December 31,**                                 | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2006                                                  |       | $          | 63,690     |          | 50.1       | %          | $          | 68,609        |       | 44.3       | %          | $             | 132,299    |   | 46.9 | % |
| 2005                                                  |       | 58,203     |       | 51.2          | %          | 65,277     |       | 44.4          | %          | 123,480    |       | 47.3          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

 

AMS gross profit increased approximately $5.5million, or 9%, due to increased sales volumes of integrated circuits andcomponents.   Margin percentagesdecreased 1.1% to 50.1% largely due to a highly profitable satellite relatedshipment for microelectronic modules, which included a performance bonus, inlast year’s first quarter, and a change in sales mix related to integratedcircuits.

ATS gross profit increased $3.3 million, or5%, due to increases in sales volume. Margin percentages declined  0.1%to 44.3%.

22

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*Selling, General andAdministrative Costs.*

| **Six Months**                                   | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** **    | ** ** | ** ** | ** ** | **% of** | ** ** |
| **December 31,**                                 | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2006                                                  |       | $          | 20,239     |          | 15.9       | %          | $          | 33,500        |       | 21.6          | %          | $          | 10,411     |          | $          | 64,150 |   | 22.7 | % |
| 2005                                                  |       | 18,385     |       | 16.2          | %          | 32,390     |       | 22.0          | %          | 10,033        |       | 60,808     |       | 23.3          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |               |            |            |            |               |            |  |  |  |  |

 

Selling, general andadministrative costs increased by $1.9 million, or 10%, in the AMS segmentprimarily due to general increases in expenses related to the increase insales.  Selling, general andadministrative costs increased by $1.1 million, or 3%, in the ATS segment primarilyas a result of a general increase in sales, offset by cost reduction efforts inour wireless business.  Corporateselling, general and administrative expenses increased by $378,000, or 4%,primarily due to increased personnel and benefit costs offset by a reduction inshare based compensation.

*Research and DevelopmentCosts.*

| **Six Months**                                   | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**                                             | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **December 31,**                                 | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| **(In thousands, except percentages)** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| 2006                                                  |       | $          | 13,123     |          | 10.3       | %          | $          | 23,069        |       | 14.9       | %          | $             | 36,192     |   | 12.8 | % |
| 2005                                                  |       | 11,620     |       | 10.2          | %          | 24,634     |       | 16.7          | %          | 36,254     |       | 13.9          | %          |
|                                                       |            |            |            |               |            |            |            |               |            |            |            |               |            |  |  |  |

 

Self funded research and development costsincreased $1.5 million, or 13%, in the AMS segment primarily due to developmentcosts for microelectronic modules and integrated circuits.  Research and development decreased $1.6million, or 6%, in the ATS segment primarily due to restructuring efforts inour wireless business, combined with cost saving initiatives in radar, offsetby increased development costs in radio test.

*Amortization of AcquiredIntangibles.* Amortization decreased $464,000, or 7%.

*Other Income (Expense).*  Interest expense decreased to $295,000 for the six months ended December31, 2006 from $307,000 for the six months ended December 31, 2005.  Other expense of $(127,000) for the sixmonths ended December 31, 2006 consisted primarily of foreign currencytransaction losses of $(777,000) offset by interest income of $526,000.  Other income of $752,000 for the six monthsended December 31, 2005 consisted primarily of interest income of $337,000 anda favorable building lease termination gain of $459,000.   The increase in interest income was due tohigher levels of cash in the first three months of the current year and anincrease in interest rates.

*Provision for Income Taxes. *The income tax provision was $8.8 million (an effective income tax rateof 34.9%) for the six months ended* *December31, 2006 and $7.7 million (an effective income tax rate of 38.4%) for the sixmonths ended December 31, 2005.  Theeffective income tax rate for the two periods differed from the amount computedby applying the U.S. Federal income tax rate to income before income taxes dueto foreign, state and local income taxes, and for the six months ended December31, 2005, a state rate change and a tax audit adjustment, both of which werefully reflected in that period.  Weanticipate the rate to be 35% for the balance of the year.  We paid $17.4 million for the six monthsended December 31, 2006, and $11.6 million for the six months ended December31, 2005, for income taxes.

23

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*Net Income. *Net income for the six months ended December 31, 2006 was $16.3million, or 5.8% of sales, versus $12.3 million, or 4.7% of sales, for the sixmonths ended December 31, 2005.

**Off-Balance Sheet Arrangements**

We do not maintain any off-balance sheetarrangements, transactions, obligations or other relationships withunconsolidated entities that would be expected to have a material current orfuture effect upon our financial condition or results of operations.

**Liquidity and Capital Resources**

As of December 31, 2006, we had $207 millionin working capital and our current ratio was 2.9 to 1.  Our available unused line of credit under anunsecured multi-currency $100 million revolving credit facility that expires inMarch 2011 is approximately $89 million at December 31, 2006, afterconsideration of letters of credit. Under certain circumstances, at our request, the commitments under thecredit facility may be increased by an additional $50 million to $150million.   The interest rate on revolvingcredit borrowings under this agreement is at various rates depending uponcertain financial ratios, with the current rate substantially equivalent toLIBOR plus .575% (5.9% at December 31, 2006).

The terms of the loan agreement requirecompliance with certain covenants including maintenance of various financialratios, limitation on indebtedness and treasury stock repurchases, andprohibition of the payment of cash dividends. We are currently in full compliance with all of the covenants containedin our loan agreement, as amended to date. We expect to be in compliance with all covenants for the foreseeablefuture.

For the six months ended December 31, 2006,our operations provided cash of $9.1 million. Our investing activities providedcash of $10.8 million, primarily from the sale of marketable securities (net ofpurchases) of $28.3 million, partially offset by $8.4 million of capitalexpenditures and $9.2 million paid in a final determination of the Racalacquisition earnout.  Our financingactivities used cash of $16.7 million, primarily for the purchase andretirement of treasury stock.

We believe our cash, cash equivalents andmarketable securities coupled with internally generated funds and availableborrowings under lines of credit will be sufficient for our working capitalrequirements, capital expenditure needs and the servicing of our debt for theforeseeable future.  One of our pensionplans currently is unfunded, but is expected to be funded from the cashsurrender value of life insurance policies that are being held in a rabbitrust.  We do not believe that the amountof the pension obligations remaining after application of such policy proceedswill be material to our annual cash flows. Our cash, cash equivalents and marketable securities, coupled with ouravailable borrowings under lines of credit, are available to fund acquisitionsand other potential large cash needs that may arise.

24

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The following tablesummarizes, as of December 31, 2006, our obligations and commitments to makefuture payments under debt, operating leases 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                       |       | $                                         | 4,004      |   | $ | 607 |   | $ | 2,312 |   | $ | 700 |   | $ | 385 |   |
| Operating leases                     |       | 38,200                                    |       | 8,787 |   | 11,148 |   | 6,092 |   | 12,173 |   |
| Employment and  consulting contracts |       | 6,565                                     |       | 2,886 |   | 3,679 |   | — |   | — |   |
| Total                                |       | $                                         | 48,769     |   | $ | 12,280 |   | $ | 17,139 |   | $ | 6,792 |   | $ | 12,558 |   |

 

The operating lease commitments shown in theabove table have not been reduced by future minimum sub-lease rentals of $5.1million.

In the normal course of business, weroutinely enter into binding and non-binding purchase obligations primarilycovering anticipated purchases of inventory and equipment.  None of these obligations are individuallysignificant.  We do not expect that thesecommitments will have a material adverse affect on our 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.  The following accounting policies require usto make estimates and assumptions based on the circumstances, informationavailable and our experience and judgment. These estimates and assumptions are reviewed periodically and theeffects of revisions are reflected in the period that they are determined to benecessary.  If actual results differsignificantly from our estimates, our financial statements could be materiallyimpacted.

Revenue and Cost Recognition

We recognize revenue when persuasive evidenceof an arrangement exists, the selling price is fixed or determinable and collectibilityof the resulting receivable is reasonably assured.

For arrangements other than certain long-termcontracts, revenue (including shipping and handling fees) is recognized whenproducts are shipped and title has passed to the customer.  If title does not pass until the productreaches the customer’s delivery site, then recognition of the revenue isdeferred until that time.  Certain of oursales are to distributors which have a right to return some portion of productwithin eighteen months of sale.  Werecognize revenue on these sales at the time of shipment to the distributor asthe returns under these arrangements have been insignificant and can bereasonably estimated.  An estimate ofsuch returns is recorded at the time sales are recognized.

25

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

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

Inventories

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

PurchaseAccounting and Recoverability of Long-Lived and Intangible Assets

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

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

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

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

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

Although we did not experience impairment of goodwill and otherlong-lived assets during fiscal 2006 and through December 31, 2006, in responseto recent operating results in certain businesses within our test solutionssegment (which has goodwill of approximately $130.9 million at December 31,2006), we may conduct additional impairment reviews prior to June 30, 2007.

Restructuring Charges

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

Income Taxes

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

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

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Share-BasedCompensation

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

**Issued But Not Adopted Accounting Pronouncements**

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

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

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

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

**Forward-Looking Statements**

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

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

We are exposed to market risk related to changes in interest rates andto foreign currency exchange rates.  Mostof our debt is at fixed rates of interest or at a variable rate with aninterest rate swap agreement which effectively converts the variable rate debtinto fixed rate debt.  Therefore, ifmarket interest rates increase by 10% from levels at December 31, 2006, theeffect on our net income as well as the fair value of our swap would beinsignificant.  Most of our investedcash, cash equivalents and marketable securities are at variable rates ofinterest.  If market interest ratesdecrease by 10 percent from levels at December 31, 2006, the effect on our netincome would be insignificant.  Ifforeign currency exchange rates (primarily the British Pound and the Euro)change by 10% from levels at December 31, 2006, the effect on our othercomprehensive income would be approximately $18.2 million.  Foreign currency contracts are used toprotect us from short-term fluctuations in exchange rates principally relatedto outstanding trade receivables.  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 December31, 2006, we had $4.6 million of notional value foreign currency forwardcontracts maturing through April 2007. Notional amounts do not quantify risk or represent assets orliabilities, but are used in the calculation of cash settlements under thecontracts.  The fair value of thesecontracts at December 31, 2006 was immaterial.

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

Based on their evaluation as of the end of theperiod covered by this Form 10-Q, our management, with the participation of ourChief Executive Officer and Chief Financial Officer, conducted an evaluation ofthe effectiveness of the design and operation of our disclosure controls andprocedures, as required by Exchange Act Rule 13a-15.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures were effective as of December 31, 2006, to ensure thatinformation to be disclosed by us in the reports that we file or submit underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified by the SEC’s rules and forms.

**Changes in Internal Controls**

There were no changes in our internal controls over financial reportingthat occurred during the quarter ended December 31, 2006 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

**Limitationson the Effectiveness of Controls**

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

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**AEROFLEXINCORPORATED**

**ANDSUBSIDIARIES**

**PART II — OTHER INFORMATION**
| Item 1.  | Legal Proceedings                                                                                                                                                             |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                          |
|     | We are involved in various routine legal matters. We  believe the outcome of these matters will not have a material adverse effect  on our consolidated financial statements. |
|     |                                                                                                                                                                          |
| Item 1A. | Risk Factors                                                                                                                                                                  |
|     |                                                                                                                                                                          |
|     | There have been no material changes in our risk  factors from the risk factors disclosed in the Form10-K for the year ended  June 30, 2006.                                   |
|     |                                                                                                                                                                          |
| Item 2.  | Unregistered Sales of  Equity Securities and Use of Proceeds                                                                                                                  |

 
| ** **                                                                      | ** ** | ** **                                 | ** ** | ** **                   | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|
| ** **                                                                      | ** ** | ** **                                 | ** ** | ** **                   | ** ** | **Total Number of** | ** ** | **Maximum Number** | ** ** |
| ** **                                                                      | ** ** | ** **                                 | ** ** | ** **                   | ** ** | **Shares Purchased** | ** ** | **of Shares that** | ** ** |
| **Issuer Purchases of Equity Securities (1) (2)** | ** ** | **to date as Part of** | ** ** | **May Yet be**     | ** ** |
| ** **                                                                      | ** ** | **Total Number of**              | ** ** | ** **                   | ** ** | **Publicly** | ** ** | **Purchased under** | ** ** |
| ** **                                                                      | ** ** | **Shares**                                 | ** ** | **Average Price**       | ** ** | **Announced Plans** | ** ** | **the Plans or** | ** ** |
| **Period**                                                                      | ** ** | **Purchased**                              | ** ** | **Paid Per Share** | ** ** | **or Programs** | ** ** | **Programs** | ** ** |
|                                                                            |       |                                       |       |                         |       |   |   |   |   |
| October 2006                                                                    |       | —                                     |       | $                            | —     |   | 1,838,838 |   | 1,161,162 |   |
| November 2006                                                                   |       | —                                     |       | $                            | —     |   | 1,838,838 |   | 1,161,162 |   |
| December 2006                                                                   |       | —                                     |       | $                            | —     |   | 1,838,838 |   | 1,161,162 |   |

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|          | (1)    For description of our stock repurchase  program, see Note 11 to the Unaudited Condensed Consolidated Financial  Statements.                                                                                                    |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                  |
|     | (2)    All purchases are made in open market  transactions.  Our 3.0 million share  stock buyback program has been in effect since May 23, 2005.  There is no time limit on the repurchases  to be made under the plan. |
|     |                                                                                                                                                                                                                                                  |
| Item 3.  | Defaults  upon Senior Securities                                                                                                                                                                                                                      |
|     |                                                                                                                                                                                                                                                  |
|     | None                                                                                                                                                                                                                                                  |
|     |                                                                                                                                                                                                                                                  |
| Item  4. | Submission of Matters to a  Vote of Security Holders                                                                                                                                                                                                  |
|     |                                                                                                                                                                                                                                                  |
|     | Item 4.                                                                                                                                                                                                                                               | Submission of Matters to a  Vote of Security Holders |
|     |                                                                                                                                                                                                                                                  |   |
|     | (a)                                                                                                                                                                                                                                                   | The Registrant held its  Annual Meeting of Stockholders on November 9, 2006. |
|     |                                                                                                                                                                                                                                                  |   |
|     | (b)                                                                                                                                                                                                                                                   | Not applicable. |
|     |                                                                                                                                                                                                                                                  |   |   |

 

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|        |   |
|--------|--------|
|   | (c)    | (1) | Three directors were  elected at the Annual Meeting to serve until the Annual Meeting of  Stockholders in 2009.  The names of  these directors and votes cast in favor of their election and shares withheld  are as follows: |
|   |   |   |   |

 

| Name               | ** ** | **Votes For** | ** ** | **Votes Withheld** |
|--------------------|------------|---------------|------------|--------------------|
|               |       |          |       |               |
| Harvey R. Blau     |       | 65,409,255    |       | 3,564,924          |
|               |       |          |       |               |
| Michael A.  Nelson |       | 65,368,450    |       | 3,605,729          |
|               |       |          |       |               |
| Joseph E. Pompeo   |       | 65,336,576    |       | 3,637,603          |

 
| Item  5. | Other Information |
|----------|-------------------|
|     |              |
|     | None              |
|     |              |
| Item  6. | Exhibits          |
|     |              |
|     | Exhibits          |
|     |              |   |
|     | 10.1              | First Amendment to the  Aeroflex Incorporated Deferred Compensation Plan (Incorporated by reference  to Exhibit 10.1 to the Current Report on Form 8-K (Date of Report: November 21,  2006) filed with the Commission on November 22, 2006). |
|     |              |   |
|     | 10.2              | Amendment No. 6 to the  Employment Agreement by and between Aeroflex Incorporated and Harvey R. Blau  (Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K  (Date of Report: November 21, 2006) filed with the Commission on  November 22, 2006). |
|     |              |   |
|     | 10.3              | Amendment No. 6 to the  Employment Agreement by and between Aeroflex Incorporated and Leonard Borow  (Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K  (Date of Report: November 21, 2006) filed with the Commission on  November 22, 2006). |
|     |              |   |
|     | 10.4              | Amendment No. 1 to Employment  Agreement by and between Aeroflex Incorporated and John Adamovich, Jr.  (Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K  (Date of Report: November 21, 2006) filed with the Commission on  November 22, 2006). |
|     |              |   |
|     | 10.5              | Employment Agreement,  dated December 5, 2006, between Aeroflex Incorporated and John E. Buyko  (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K  (Date of Report: December 5, 2006) filed with the Commission on December 7,  2006). |
|     |              |   |
|     | 31.1              | Certification of Chief  Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002. |
|     |              |   |
|     | 31.2              | Certification of Chief  Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|     |              |   |
|     | 31.3              | Certification of Chief  Operating Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|     |              |   |
|     | 31.4              | Certification of Principal  Accounting Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|     |              |   |
|     | 32.1              | Certification of Chief  Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|     |              |   |
|     | 32.2              | Certification of Chief  Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
|     |              |   |   |
|          |                   |  |  |  |

 

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SIGNATURES

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

 

 
|                  |   | AEROFLEX  INCORPORATED |                     |
|------------------|--------|------------------------|--------------------------|
|             |   | (REGISTRANT)           |                     |
|             |   |                   |                     |
|             |   |                   |                     |
|             |   |                   |                     |
|             |   |                   |                     |
| February 7, 2007 |   | By:                    | /s/ John  Adamovich, Jr. |   |
|             |   |                   | John Adamovich,  Jr.     |   |
|             |   |                   | Sr. Vice President  and  |   |
|             |   |                   | Chief Financial  Officer |   |

 

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EXHIBIT INDEX

10.1                           First Amendment to the Aeroflex IncorporatedDeferred Compensation Plan (Incorporated by reference to Exhibit 10.1 to theCurrent Report on Form 8-K (Date of Report: November 21, 2006) filed with theCommission on November 22, 2006).

10.2                           Amendment No. 6 to the Employment Agreementby and between Aeroflex Incorporated and Harvey R. Blau (Incorporated byreference to Exhibit 10.2 to the Current Report on Form 8-K (Date of Report:November 21, 2006) filed with the Commission on November 22, 2006).

10.3                           Amendment No. 6 to the Employment Agreementby and between Aeroflex Incorporated and Leonard Borow (Incorporated byreference to Exhibit 10.3 to the Current Report on Form 8-K (Date of Report:November 21, 2006) filed with the Commission on November 22, 2006).

10.4                           Amendment No. 1 to Employment Agreement byand between Aeroflex Incorporated and John Adamovich, Jr. (Incorporated byreference to Exhibit 10.4 to the Current Report on Form 8-K (Date of Report:November 21, 2006) filed with the Commission on November 22, 2006).

10.5                           Employment Agreement, dated December 5, 2006,between Aeroflex Incorporated and John E. Buyko (Incorporated by reference toExhibit 10.1 to the Current Report on Form 8-K (Date of Report: December 5,2006) filed with the Commission on December 7, 2006).

31.1              Certification of ChiefExecutive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002.

31.2              Certification of ChiefFinancial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.3              Certification of ChiefOperating Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.4              Certification of PrincipalAccounting Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1              Certification of ChiefExecutive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2              Certification of ChiefFinancial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

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