UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549










FORM
10-Q







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


THE
SECURITIES EXCHANGE ACT OF 1934





For
      the quarterly period ended
              December
      31, 2008Commission
      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.
      Employerof
      incorporation or organization)
                
                Identification
      No.)35
      South Service RoadP.O.
      Box 6022Plainview,
      N.Y.
                
                11803-0622(Address
      of principal executive offices)
                
                (Zip
      Code)


(516)
694-6700


(Registrant’s
telephone number, including area code)










Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes
                    o
                    
                    No
                    x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act.  (Check one):
 
 Large
      accelerated filer
                        o
                        
                        Accelerated filer
                        o
  Non-accelerated
      filer
                      x
                      
                      Smaller reporting company
                      o
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 
 Yes
                                        o
                                        
                                        No
                                        x


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


February
      17, 2009
              1,000(Date)
              (Number
      of Shares)








AEROFLEX
INCORPORATED


AND
SUBSIDIARIES





INDEX





PAGEPART
      I:             FINANCIAL
      INFORMATIONItem
      1 -
                                    UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETSDecember
      31, 2008 and June 30, 2008
                                    2UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSThree
      Months Ended December 31, 2008 and 2007Six
      Months Ended December 31, 2008 andPeriods
      from July 1, 2007 to August 14, 2007and
      August 15, 2007 to December 31, 2007
                                    3 -
      4UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSix
      Months Ended December 31, 2008 andPeriods
      from July 1, 2007 to August 14, 2007and
      August 15, 2007 to December 31, 2007
                                    5NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    6 - 36Item
      2 -
                                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIALCONDITION
      AND RESULTS OF OPERATIONSThree
      and Six Months Ended December 31, 2008 and 2007
                                    37– 53Item
      3 -
                                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                    53Item
      4T -
                                    CONTROLS
      AND PROCEDURES
                                    53PART
      II:             OTHER
      INFORMATIONItem
      1 -
                                    LEGAL
      PROCEEDINGS
                                    54Item
      1A-
                                    RISK
      FACTORS
                                    55Item
      2 -
                                    UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                                    55Item
      3 -
                                    DEFAULTS
      UPON SENIOR SECURITIES
                                    55Item
      4 -
                                    SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                    55Item
      5 -
                                    OTHER
      INFORMATION
                                    55Item
      6 -
                                    EXHIBITS
                                    56SIGNATURES
                                    57EXHIBIT
      INDEX
                                    58CERTIFICATIONS
                                    59 -63


- 1
-




Aeroflex
Incorporated
 and
Subsidiaries
 Unaudited
Condensed Consolidated Balance Sheets
 (In
thousands, except share and per share data )
 
 December 31,
                              
                              
                              June 30,2008
                              
                              
                              2008Successor Entity
                              
                              
                              Successor EntityAssetsCurrent
      assets:Cash
      and cash equivalents
                              
                              $
                              73,664
                              
                              
                              $
                              54,149Accounts
      receivable, less allowance for doubtful accounts of $2,219 and
      $2,683
                              
                              
                              122,798
                              
                              
                              
                              147,983Inventories
                              
                              
                              127,772
                              
                              
                              
                              134,891Deferred
      income taxes
                              
                              
                              32,937
                              
                              
                              
                              27,039Prepaid
      expenses and other current assets
                              
                              
                              12,216
                              
                              
                              
                              12,184Total
      current assets
                              
                              
                              369,387
                              
                              
                              
                              376,246Property,
      plant and equipment, net
                              
                              
                              97,544
                              
                              
                              
                              104,649Non-current
      marketable securities
                              
                              
                              17,750
                              
                              
                              
                              19,960Deferred
      financing costs, net
                              
                              
                              28,127
                              
                              
                              
                              30,185Other
      assets
                              
                              
                              15,511
                              
                              
                              
                              18,560Intangible
      assets with definite lives, net
                              
                              
                              299,752
                              
                              
                              
                              344,866Intangible
      assets with indefinite lives
                              
                              
                              114,728
                              
                              
                              
                              123,378Goodwill
                              
                              
                              448,765
                              
                              
                              
                              461,155Total
      assets
                              
                              $
                              1,391,564
                              
                              
                              $
                              1,478,999Liabilities and Stockholder's
      EquityCurrent
      liabilities:Current
      portion of long-term debt
                              
                              $
                              4,070
                              
                              
                              $
                              5,574Accounts
      payable
                              
                              
                              34,705
                              
                              
                              
                              39,382Advance
      payments by customers and deferred revenue
                              
                              
                              28,148
                              
                              
                              
                              27,144Income
      taxes payable
                              
                              
                              8,009
                              
                              
                              
                              1,936Accrued
      payroll expenses
                              
                              
                              18,111
                              
                              
                              
                              24,525Accrued
      expenses and other current liabilities
                              
                              
                              58,159
                              
                              
                              
                              56,830Total
      current liabilities
                              
                              
                              151,202
                              
                              
                              
                              155,391Long-term
      debt
                              
                              
                              878,501
                              
                              
                              
                              873,237Deferred
      income taxes
                              
                              
                              135,340
                              
                              
                              
                              159,457Defined
      benefit plan obligations
                              
                              
                              6,099
                              
                              
                              
                              6,263Other
      long-term liabilities
                              
                              
                              24,738
                              
                              
                              
                              8,003Total
      liabilities
                              
                              
                              1,195,880
                              
                              
                              
                              1,202,351Stockholder's
      equity:Common
      stock, par value $.10 per share; authorized 1,000 shares; issued and
      outstanding 1,000 shares
                              
                              
                              -
                              
                              
                              
                              -Additional
      paid-in capital
                              
                              
                              382,765
                              
                              
                              
                              381,666Accumulated
      other comprehensive income (loss)
                              
                              
                              (70,652
                              )
                              
                              
                              407Accumulated
      deficit
                              
                              
                              (116,429
                              )
                              
                              
                              (105,425
                              )Total
      stockholder's equity
                              
                              
                              195,684
                              
                              
                              
                              276,648Total
      liabilities and stockholder's equity
                              
                              $
                              1,391,564
                              
                              
                              $
                              1,478,999
 
 See notes
to unaudited condensed consolidated financial statements.
  - 2
-
  Aeroflex
Incorporated and Subsidiaries
 Unaudited
Condensed Consolidated Statements of Operations
 (In
thousands)
 
 Three Months Ended December 31,2008
                              
                              
                              2007Successor Entity
                              
                              
                              Successor EntityNet
      sales
                              
                              $
                              156,815
                              
                              
                              $
                              160,757Cost
      of sales
                              
                              
                              83,656
                              
                              
                              
                              106,124Gross
      profit
                              
                              
                              73,159
                              
                              
                              
                              54,633Selling,
      general and administrative costs
                              
                              
                              34,174
                              
                              
                              
                              32,972Research
      and development costs
                              
                              
                              17,075
                              
                              
                              
                              19,922Amortization
      of acquired intangibles
                              
                              
                              14,622
                              
                              
                              
                              20,939Company
      sale transaction expenses
                              
                              
                              -
                              
                              
                              
                              1,31465,871
                              
                              
                              
                              75,147Operating
      income (loss)
                              
                              
                              7,288
                              
                              
                              
                              (20,514
                              )Other
      income (expense)Interest
      expense
                              
                              
                              (21,250
                              )
                              
                              
                              (21,977
                              )Other
      income (expense), net
                              
                              
                              9,327
                              
                              
                              
                              2,176Total
      other income (expense)
                              
                              
                              (11,923
                              )
                              
                              
                              (19,801
                              )Income
      (loss) from continuing operations before income taxes
                              
                              
                              (4,635
                              )
                              
                              
                              (40,315
                              )Provision
      (benefit) for income taxes
                              
                              
                              (528
                              )
                              
                              
                              (11,247
                              )Income (loss) from continuing
      operations
                              
                              
                              (4,107
                              )
                              
                              
                              (29,068
                              )Income
      (loss) from discontinued operations, net of tax
                              
                              
                              -
                              
                              
                              
                              (527
                              )Net
      income (loss)
                              
                              $
                              (4,107
                              )
                              
                              $
                              (29,595
                              )
 
 See notes
to unaudited condensed consolidated financial statements.
  - 3
-
 
 Aeroflex
Incorporated and Subsidiaries
 Unaudited
Condensed Consolidated Statements of Operations
 (In
thousands)
 
 Six Months Ended
                              
                              
                              August 15, 2007
                              
                              
                              July 1, 2007December 31, 2008
                              
                              
                              to December 31, 2007
                              
                              
                              to August 14, 2007Successor Entity
                              
                              
                              Successor Entity
                              
                              
                              Predecessor EntityNet
      sales
                              
                              $
                              297,660
                              
                              
                              $
                              262,772
                              
                              
                              $
                              38,221Cost
      of sales
                              
                              
                              157,142
                              
                              
                              
                              170,884
                              
                              
                              
                              22,861Gross
      profit
                              
                              
                              140,518
                              
                              
                              
                              91,888
                              
                              
                              
                              15,360Selling,
      general and administrative costs
                              
                              
                              65,658
                              
                              
                              
                              51,956
                              
                              
                              
                              19,031Research
      and development costs
                              
                              
                              34,104
                              
                              
                              
                              30,402
                              
                              
                              
                              12,178Amortization
      of acquired intangibles
                              
                              
                              32,590
                              
                              
                              
                              31,409
                              
                              
                              
                              1,692Acquired
      in-process research and development costs
                              
                              
                              -
                              
                              
                              
                              24,340
                              
                              
                              
                              -Company
      sale transaction expenses
                              
                              
                              -
                              
                              
                              
                              31,609
                              
                              
                              
                              3,717132,352
                              
                              
                              
                              169,716
                              
                              
                              
                              36,618Operating
      income (loss)
                              
                              
                              8,166
                              
                              
                              
                              (77,828
                              )
                              
                              
                              (21,258
                              )Other
      income (expense)Interest
      expense
                              
                              
                              (42,465
                              )
                              
                              
                              (33,113
                              )
                              
                              
                              (275
                              )Other
      income (expense), net
                              
                              
                              12,413
                              
                              
                              
                              1,921
                              
                              
                              
                              294Total
      other income (expense)
                              
                              
                              (30,052
                              )
                              
                              
                              (31,192
                              )
                              
                              
                              19Income
      (loss) from continuing operations before income taxes
                              
                              
                              (21,886
                              )
                              
                              
                              (109,020
                              )
                              
                              
                              (21,239
                              )Provision
      (benefit) for income taxes
                              
                              
                              (10,882
                              )
                              
                              
                              (30,416
                              )
                              
                              
                              (6,831
                              )Income (loss) from continuing
      operations
                              
                              
                              (11,004
                              )
                              
                              
                              (78,604
                              )
                              
                              
                              (14,408
                              )Income
      (loss) from discontinued operations, net of tax
                              
                              
                              -
                              
                              
                              
                              (1,489
                              )
                              
                              
                              (2,508
                              )Net
      income (loss)
                              
                              $
                              (11,004
                              )
                              
                              $
                              (80,093
                              )
                              
                              $
                              (16,916
                              )
 
 See notes
to unaudited condensed consolidated financial statements.
  - 4
-
 
 Aeroflex
Incorporated
 and
Subsidiaries
 Unaudited
Condensed Consolidated Statements of Cash Flows
 (In
thousands)
 
 Six Months Ended
                            
                            
                            August 15, 2007
                            
                            
                            July 1, 2007December 31,
                            
                            
                            to December 31,
                            
                            
                            to August 14,2008
                            
                            
                            2007
                            
                            
                            2007Successor Entity
                            
                            
                            Successor Entity
                            
                            
                            Predecessor EntityCash
      flows from operating activities:Net
      income (loss)
                            
                            $
                            (11,004
                            )
                            
                            $
                            (80,093
                            )
                            
                            $
                            (16,916
                            )Loss
      from discontinued operations, net of tax
                            
                            
                            -
                            
                            
                            
                            1,489
                            
                            
                            
                            2,508Income
      (loss) from continuing operations
                            
                            
                            (11,004
                            )
                            
                            
                            (78,604
                            )
                            
                            
                            (14,408
                            )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                            
                            
                            43,651
                            
                            
                            
                            39,889
                            
                            
                            
                            3,662Acquired
      in-process research and development costs
                            
                            
                            -
                            
                            
                            
                            24,340
                            
                            
                            
                            -Acquisition
      related adjustment to cost of sales
                            
                            
                            -
                            
                            
                            
                            33,317
                            
                            
                            
                            -Acquisition
      related adjustment to sales
                            
                            
                            176
                            
                            
                            
                            1,659
                            
                            
                            
                            -Deferred
      income taxes
                            
                            
                            (18,808
                            )
                            
                            
                            (3,262
                            )
                            
                            
                            5,284Non
      - cash share based compensation
                            
                            
                            977
                            
                            
                            
                            2,146
                            
                            
                            
                            214Amortization
      of deferred financing costs
                            
                            
                            2,399
                            
                            
                            
                            1,236
                            
                            
                            
                            217Paid
      in kind interest
                            
                            
                            7,889
                            
                            
                            
                            3,956
                            
                            
                            
                            -Excess
      tax benefits from share based
      compensation arrangements
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (12,542
                            )Other,
      net
                            
                            
                            (80
                            )
                            
                            
                            434
                            
                            
                            
                            (24
                            )Change
      in operating assets and liabilities, net of effects from purchases of
      businesses:Decrease
      (increase) in accounts receivable
                            
                            
                            12,687
                            
                            
                            
                            (34,164
                            )
                            
                            
                            47,889Decrease
      (increase) in inventories
                            
                            
                            (4,698
                            )
                            
                            
                            11,982
                            
                            
                            
                            (12,885
                            )Decrease
      (increase) in prepaid expenses and other assets
                            
                            
                            1,224
                            
                            
                            
                            30,741
                            
                            
                            
                            (26,899
                            )Increase
      (decrease) in accounts payable, accrued expenses and other
      liabilities
                            
                            
                            7,247
                            
                            
                            
                            (68,007
                            )
                            
                            
                            21,246Net
      cash provided by (used in) continuing operations
                            
                            
                            41,660
                            
                            
                            
                            (34,337
                            )
                            
                            
                            11,754Net
      cash provided by (used in) discontinued operations
                            
                            
                            -
                            
                            
                            
                            (2,029
                            )
                            
                            
                            (461
                            )Net
      cash provided by (used in) operating activities
                            
                            
                            41,660
                            
                            
                            
                            (36,366
                            )
                            
                            
                            11,293Cash
      flows from investing activities:Acquisition
      of Predecessor Entity, net of cash acquired
                            
                            
                            -
                            
                            
                            
                            (1,118,293
                            )
                            
                            
                            -Payments
      for purchase of business, net of cash acquired
                            
                            
                            -
                            
                            
                            
                            1,522
                            
                            
                            
                            -Capital
      expenditures
                            
                            
                            (8,353
                            )
                            
                            
                            (5,211
                            )
                            
                            
                            (1,088
                            )Proceeds
      from the sale of property, plant and equipment
                            
                            
                            866
                            
                            
                            
                            24
                            
                            
                            
                            -Purchase
      of marketable securities
                            
                            
                            -
                            
                            
                            
                            (547,178
                            )
                            
                            
                            (53,828
                            )Proceeds
      from sale of marketable securities
                            
                            
                            -
                            
                            
                            
                            512,558
                            
                            
                            
                            63,328Other
                            
                            
                            (12
                            )
                            
                            
                            -
                            
                            
                            
                            -Net
      cash provided by (used in) investing activities by continuing
      operations
                            
                            
                            (7,499
                            )
                            
                            
                            (1,156,578
                            )
                            
                            
                            8,412Net
      cash provided by (used in) discontinued operations
                            
                            
                            -
                            
                            
                            
                            (12
                            )
                            
                            
                            (6
                            )Net
      cash provided by (used in) investing activities
                            
                            
                            (7,499
                            )
                            
                            
                            (1,156,590
                            )
                            
                            
                            8,406Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                            
                            
                            -
                            
                            
                            
                            378,350
                            
                            
                            
                            -Borrowings
      under debt agreements
                            
                            
                            -
                            
                            
                            
                            870,000
                            
                            
                            
                            -Debt
      repayments
                            
                            
                            (4,129
                            )
                            
                            
                            (3,134
                            )
                            
                            
                            (29
                            )Debt
      financing costs
                            
                            
                            (340
                            )
                            
                            
                            (27,315
                            )
                            
                            
                            (477
                            )Excess
      tax benefits from share based compensation arrangements
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            12,542Proceeds
      from the exercise of stock options and warrants
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            583Amounts
      paid for withholding taxes on stock option exercises
                            
                            
                            -
                            
                            
                            
                            (14,142
                            )
                            
                            
                            (56
                            )Withholding
      taxes collected for stock option exercises
                            
                            
                            -
                            
                            
                            
                            14,142
                            
                            
                            
                            56Net
      cash provided by (used in) financing activities
                            
                            
                            (4,469
                            )
                            
                            
                            1,217,901
                            
                            
                            
                            12,619Effect
      of exchange rate changes on cash and cash equivalents
                            
                            
                            (10,177
                            )
                            
                            
                            317
                            
                            
                            
                            178Net
      increase in cash and cash equivalents
                            
                            
                            19,515
                            
                            
                            
                            25,262
                            
                            
                            
                            32,496Cash
      and cash equivalents at beginning of period
                            
                            
                            54,149
                            
                            
                            
                            -
                            
                            
                            
                            13,000Cash
      and cash equivalents at end of period
                            
                            $
                            73,664
                            
                            
                            $
                            25,262
                            
                            
                            $
                            45,496
 
 See notes
to unaudited condensed consolidated financial statements.
  - 5
-




AEROFLEX
INCORPORATED AND SUBSIDIARIES


NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.           Basis
of Presentation





The
condensed consolidated financial statements of Aeroflex Incorporated and
Subsidiaries (the “Company”, “we”, or “our’’) presented herein are
unaudited.  In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly our
financial position, results of operations and cash flows as of and for all
periods presented have been made.  Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) have been
omitted.  These condensed consolidated financial statements should be
read in conjunction with the Company’s June 30, 2008 audited financial
statements and notes thereto.





Results
of operations for the three and six months ended December 31, 2008 are not
necessarily indicative of results of operations for future interim periods or
for the full fiscal year ending June 30, 2009.





The
Company and its Sale


We
design, engineer and manufacture microelectronics and test solution and
measurement equipment that are sold primarily to the broadband communications,
aerospace and defense markets. Our fiscal year ends on June 30.





On August
15, 2007, the Company was acquired by affiliates of or funds managed by The
Veritas Capital Fund Ill, L.P. (“Veritas”), Golden Gate Private Equity, Inc.
(“Golden Gate”) and GS Direct, L.L.C. (“GS Direct”) and certain members of
management (“the Merger”) (see Note 3).





Presentation
and Use of Estimates





Our
financial statements are prepared in conformity with U.S. GAAP. We consolidate
our subsidiaries, all of which, except for Test Evolution Corporation (see Note
4), are wholly owned. All significant intercompany balances and transactions
have been eliminated.





The
condensed consolidated financial statements presented as of December 31, 2008
and June 30, 2008, and for the three months ended December 31, 2008 and 2007,
the six months ended December 31, 2008 and the period from August 15, 2007 to
December 31, 2007 represent the Company subsequent to the Merger (the
“Successor” or “Successor Entity”), whereas the condensed consolidated financial
statements for the period from July 1, 2007 to August 14, 2007 represent the
Company prior to the Merger (the “Predecessor” or “Predecessor Entity”). The
purchase method of accounting was applied effective August 15, 2007 in
connection with the Merger. Therefore, our condensed consolidated financial
statements for periods before August 15, 2007 are presented on a different basis
than those for the periods after August 14, 2007 and, as such, are not
comparable.





The
preparation of financial statements and related disclosures in conformity with
U.S. GAAP requires that management of the Company make a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the more significant estimates included in our
consolidated financial statements are revenue and cost recognition under
long-term contracts; the valuation of accounts receivable, inventories,
investments and deferred tax assets; the depreciable lives of fixed assets and
useful lives of amortizable intangible assets; the valuation of assets
acquired and liabilities assumed in business combinations; the recoverability of
long-lived amortizable intangible assets and goodwill, as well as net assets of
discontinued operations; share-based
compensation; restructuring charges; asset retirement obligations and certain
accrued expenses and contingencies.


- 6
-


We are
subject to uncertainties such as the impact of future events, economic,
environmental and political factors, and changes in the business climate;
therefore, actual results may differ from those estimates. When no estimate in a
given range is deemed to be better than any other when estimating contingent
liabilities, the low end of the range is accrued. The accounting estimates used
in the preparation of our consolidated financial statements will change as new
events occur, as more experience is acquired, as additional information is
obtained and as our operating environment changes. Changes in estimates are made
when circumstances warrant them. Such changes and refinements in estimation
methodologies are reflected in reported results of operations. If material, the
effects of changes in estimates are disclosed in the notes to the consolidated
financial statements.





Cash
and Cash Equivalents


All
highly liquid investments having maturities of three months or less at the date
of acquisition are considered to be cash equivalents.





Marketable
Securities


Marketable
securities are classified as available-for-sale and are recorded at fair value
with unrealized gains and losses reported as a separate component of
stockholder’s equity. Realized gains and losses and declines in market value
judged to be other than temporary, of which there were none, are included in
other income (expense). Interest income is also included in other
income.





At
December 31, 2008, our marketable securities consisted primarily of $17.8
million of auction rate securities, which is net of a $2.2 million valuation
allowance. Auction rate securities represent long-term (generally maturities of
ten years to thirty-five years from the date of issuance) variable rate bonds
tied to short-term interest rates that are reset through an auction process,
which occurs every seven to thirty-five days, and are classified as available
for sale securities. All but one (with the one security having a carrying value
of $1.7 million and a AA rating) of our auction rate securities retain a
triple-A rating by at least one nationally recognized statistical rating
organization. In addition, certain of our auction rate securities are backed by
student loans whose principal and interest are federally guaranteed by the
Family Federal Education Loan Program. Through December 31, 2008, we have
collected all interest payments on all our auction rate securities when due, and
since early February 2008 (when auctions began to fail) have redeemed $26.5
million of auction rate securities at par.





At
December 31, 2008, the par value of our auction rate securities was $20.0
million; however we have concluded that the fair value of our auction rate
securities as of that date was $17.8 million.  Since many auctions are
failing and given that there is currently no active secondary market for our
investment in auction rate securities, the determination of fair value was based
on the following factors:





·
            continuing
      illiquidity;


·
            lack
      of action by the issuers to establish different forms of financing to
      replace or redeem these securities;
and


·
            the
      credit quality of the underlying
securities.





If fair
values were to continue to be below cost for a prolonged period of time, we
would consider various factors in determining whether to recognize an other than
temporary impairment charge, including the length of time and the extent to
which the fair value has been below the cost basis, the current financial
condition of the issuer and our intent and ability to hold the investment for a
period of time sufficient to allow for any anticipated recovery in market
value.


- 7
-


Auction
rate securities are classified as non-current assets in the accompanying
December 31, 2008 and June 30, 2008 consolidated balance sheets.





Inventories


Inventories,
including amounts related to long-term contracts accounted for under
percentage-of-completion accounting, are stated at the lower of cost (first-in,
first-out) or market.





Financial
Instruments and Derivatives


Foreign
currency contracts are used in certain circumstances to protect us from
fluctuations in exchange rates. We enter into foreign currency contracts, which
are not designated as hedges. Thus the change in fair value is included in
income as it occurs, within other income (expense). As of December 31, 2008, we
had $8.1 million of notional value foreign currency forward contracts maturing
through March 2009. Notional amounts do not quantify risk or represent assets or
liabilities of the Company, but are used in the calculation of cash settlements
under the contracts. The fair value of these contracts was a $792,000 liability
at December 31, 2008 and a $13,000 asset at June 30, 2008.





Our
interest rate swap derivatives are designated as cash flow hedges. As such, they
are recorded on the balance sheet as assets or liabilities at their fair value,
with changes in the fair value of such derivatives, net of taxes, recorded as a
component of other comprehensive income. The fair value of the interest rate
swap derivatives as of December 31, 2008 was a liability of $18.2 million ($11.5
million, net of taxes) and as of June 30, 2008 was an asset of $2.2 million
($1.4 million, net of taxes).





Revenue
Recognition


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





For
arrangements other than certain long-term contracts, revenue (including shipping
and handling fees) is recognized when products are shipped and title has passed
to the customer. If title does not pass until the product reaches the customer’s
delivery site, recognition of the revenue is deferred until that time. Certain
of our sales are to distributors which have a right to return some portion of
product within up to eighteen months of sale. We recognize revenue on these
sales at the time of shipment to the distributor as the returns under these
arrangements have been insignificant and can be reasonably estimated. A
provision for such estimated returns is recorded at the time sales are
recognized.





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





Revenue
from sales of products where software is other than incidental to their
performance, including related software support and maintenance contracts is
recognized in accordance with SOP 97-2, “Software Revenue Recognition.”
Accordingly, revenue for software is recognized when the software is delivered,
if all of the above criteria for revenue recognition are met.


- 8
-


When a
customer purchases software together with post contract support, we allocate a
portion of the fee to the post contract support for its fair value based on the
contractual renewal rate or the amount the support is sold for on a standalone
basis. Post contract support fees are deferred in Advance Payments by Customers
and Deferred Revenue, and recognized as revenue ratably over the term of the
related contract.





Acquisition
Accounting


We use
the purchase method to account for business combinations, whereby the total cost
of an acquisition is allocated to the tangible and intangible assets acquired
and liabilities assumed based upon their respective fair values at the date of
acquisition. The allocation of the purchase price is dependent upon certain
valuations and other studies, which contain estimates and
assumptions.





Long-Lived
Assets


We test
goodwill annually for impairment and whenever events or circumstances indicate
impairment might have occurred. We evaluate the recoverability of goodwill using
a two-step impairment test approach at the reporting unit level. In the first
step, which is used to identify potential impairments, the overall fair value
for the reporting unit is compared to its carrying amount including goodwill. If
the fair value of a reporting unit is less than the carrying amount, a second
step is performed which compares the implied fair value of the reporting unit’s
goodwill to the carrying amount of the goodwill. The implied fair value for the
goodwill is determined based on the difference between the fair value of the
reporting unit and the fair value of its net identifiable assets. If the implied
fair value of the goodwill is less than its carrying amount, the difference is
recognized as an impairment.





Our
amortizable intangible assets, which are comprised primarily of developed
technology and customer related intangibles, are subject to amortization over
periods ranging up to 11 years, on a straight-line basis. Property, plant and
equipment are stated at cost. Depreciation of plant and equipment is provided
over the estimated useful lives of the respective assets, principally on a
straight-line basis. Leasehold improvements are amortized over the life of the
lease, including anticipated renewals, or the estimated life of the asset,
whichever is shorter.





We
periodically review our depreciable and amortizable long-lived assets for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected undiscounted cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value.





Research
and Development Costs


We charge
all research and development costs to expense as incurred, except those of our
software products for which costs incurred between the date of product
technological feasibility and the date that the software is available for
general release are capitalized. We use a working model of the software or a
detailed program design to assess technological feasibility. There were no
software development costs capitalized for the three months ended December 31,
2008 and 2007 and the periods from August 15, 2007 to December 31, 2007 and July
1, 2007 to August 14, 2007. Approximately $209,000 of software development costs
were capitalized during the six months ended December 31,
2008.  Capitalized software development costs are amortized to cost of
sales based on the higher of a) the percentage of revenue for units delivered to
total anticipated revenue for the related product or b) on a straight-line
basis.  Capitalized software development costs of $445,000 and $1.2
million were included in Other Assets at December 31, 2008 and June 30, 2008,
respectively.


- 9
-


Income
Taxes


We
recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.





Foreign
Currency Translations


The
financial statements of our foreign subsidiaries are measured in their local
currency and then translated into U.S. dollars using the current rate method.
Under the current rate method, assets and liabilities are translated using the
exchange rate at the balance sheet date. Revenues and expenses are translated at
average exchange rates prevailing throughout the year.





Gains and
losses resulting from the translation of financial statements of foreign
subsidiaries are accumulated in other comprehensive income (loss) and presented
as part of stockholder’s equity. Realized and unrealized foreign currency
exchange gains (losses) from the settlement of foreign currency transactions are
reflected in other income (expense) and amounted to $8.8 million and $1.4
million for the three months ended December 31, 2008 and 2007, respectively, and
$11.2 million, $1.0 million and $193,000 for the six months ended December 31,
2008 and the periods from August 15, 2007 to December 31, 2007 and July 1, 2007
to August 14, 2007, respectively.





Comprehensive
Income


Comprehensive
income consists of net income (loss) and equity adjustments relating to foreign
currency translation, changes in fair value of certain derivatives and
non-current marketable securities and adjustments to the minimum pension
liability.





Recently
Adopted Accounting Pronouncements


In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value
Measurements,” to clarify the definition of fair value, establish a framework
for measuring fair value and expand the disclosures on fair value
measurements.  SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit
price).  SFAS 157 also stipulates that, as a market-based measurement, fair
value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes between (a) market participant
assumptions developed based on market data obtained from sources independent of
the reporting entity (observable inputs) and (b) the reporting entity’s own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs).




In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS
157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13.”  This
FSP amends SFAS 157 to exclude certain leasing transactions accounted for under
previously existing accounting guidance.  However, this scope exception
does not apply to assets acquired and liabilities assumed in a business
combination, regardless of whether those assets and liabilities are related to
leases.




In
February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date for
FASB Statement No. 157.”  This FSP permits the delayed application of
SFAS 157 for nonfinancial assets and nonfinancial liabilities, as defined in
this FSP, except for those that are recognized or disclosed at fair value in the
financial statements at least annually, until the beginning of our fiscal
2010.  As of July 1, 2008, we adopted SFAS 157 (see Note 8), with the
exception of its application to nonfinancial assets and nonfinancial
liabilities, which we will defer in accordance with FSP No. FAS 157-2.  We
are currently evaluating the impact on our consolidated financial statements of
adopting SFAS 157 at the beginning of fiscal 2010 for such nonfinancial assets
and nonfinancial liabilities.


- 10
-


In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. 
The FSP was effective upon issuance, including prior periods for which financial
statements were not issued.  Revisions resulting from a change in the
valuation technique or its application will be accounted for as a change in
accounting estimate following the guidance in SFAS 154, “Accounting Changes and
Error Corrections.”  However, the disclosure provisions in SFAS 154 for a
change in accounting estimate are not required for revisions resulting from a
change in valuation technique or its application.  We adopted SFAS 157
and FSP FAS 157-3 beginning in our fiscal 2009 first quarter (see Note
8).  As of December 31, 2008, we have a $2.2 million valuation
allowance against the value of our auction rate securities.





In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” to permit all entities to choose to
elect, at specified election dates, to measure eligible financial instruments at
fair value.  An entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting date, and recognize upfront costs and fees related to those items in
earnings as incurred and not deferred.  SFAS 159 became effective for us as
of July 1, 2008.  As we did not elect the fair value option for our
financial instruments (other than those already measured at fair value in
accordance with SFAS No. 157), the adoption of this standard did not have
an impact on our consolidated financial statements.





Recently
Issued Accounting Pronouncements Not Yet Adopted


In
December 2007, the FASB issued SFAS 141(R), “Business Combinations.” SFAS 141(R)
replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. The Statement also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS 141(R) is effective for us for
acquisitions consummated on or after July 1, 2009.





In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51.” SFAS 160 establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160
also establishes reporting requirements that provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS 160 is effective for fiscal years
beginning after December 15, 2008. We are currently evaluating the impact, if
any, the provisions of SFAS 160 will have on our consolidated financial
statements.





In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133.”  SFAS 161
requires qualitative disclosures about a company’s objectives and strategies for
using derivative instruments, quantitative disclosures of the fair values and
gains and losses of these derivative instruments in a tabular format, as well as
more information about liquidity by requiring disclosure of a derivative
contract’s credit-risk-related contingent features.  SFAS 161 also
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. We are currently
evaluating the disclosure requirements of SFAS 161. As this is a disclosure-only
standard, there will be no impact on our consolidated financial statements as a
result of its adoption. SFAS 161 becomes effective for our March 2009 interim
consolidated financial statements.


- 11
-


In April
2008, the FASB issued FSPFAS No. 142-3,
“Determination of the Useful Life of Intangible Assets.”  This FSP
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS 142, “Goodwill and Other Intangible Assets.” This FSP also adds
certain disclosures to those already prescribed in SFAS 142.  FSP
142-3 becomes effective for the annual and interim periods within the year,
beginning in our fiscal 2010. The guidance for determining useful lives must be
applied prospectively to intangible assets acquired after the effective date.
The disclosure requirements must be applied prospectively to all intangible
assets recognized as of the effective date.





In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.”  This FSP provides that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class
method.  This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
years.  Upon adoption, a company is required to retrospectively adjust
its earnings per share data (including any amounts related to interim periods,
summaries of earnings and selected financial data) to conform with the
provisions in this FSP.  Early application of this FSP is
prohibited.  We have not issued any share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents.




In
November 2008, the FASB ratified the consensus reached on EITF Issue
No. 08-6, “Accounting for Equity Method Investment
Considerations.”  EITF No. 08-6 addresses questions about the
potential effect of SFAS No. 141(R) and SFAS No. 160 on
equity-method accounting.  The primary issues include how the initial
carrying value of an equity method investment should be determined, how to
account for any subsequent purchases and sales of additional ownership
interests, and whether the investor must separately assess its underlying share
of the investee’s indefinite-lived intangible assets for impairment.  The
effective date of EITF No. 08-6 coincides with that of SFAS
No. 141(R) and SFAS No. 160 and is to be applied on a prospective
basis beginning in the Company’s fiscal 2010.  Early adoption is not
permitted for entities that previously adopted an alternate accounting
policy.





2. Discontinued
Operations





As a
result of continued operating losses, in June 2007 our then board of directors
approved a formal plan to divest our radar business (“Radar”) and to seek a
strategic buyer. This business had previously been included in the Test
Solutions segment.  As a result of this decision, the operating
results of Radar, net of taxes, had been classified in the consolidated
statements of operations as discontinued operations for all periods presented.
We recorded a loss on disposal of $3.7 million ($2.4 million, net of tax) in the
predecessor period July 1, 2007 to August 14, 2007, to reflect the net assets of
Radar at their net realizable value based on the May 15, 2008 sale of the
business for $750,000. The sale agreement provided for additional contingent
consideration, which is not included in the calculation of the loss on disposal
as realization is not probable.


- 12
-


Net sales
and income (loss) from discontinued operations (including impairment charges),
which were solely related to Radar, were as follows:





Three Months
                              
                              
                              August 15, 2007
                              
                              
                              July 1, 2007Ended
                              
                              
                              to
                              
                              
                              toDecember 31,
                              
                              
                              December 31,
                              
                              
                              August 14,2007
                              
                              
                              2007
                              
                              
                              2007(In
      thousands)Net
      sales
                              
                              $
                              372
                              
                              
                              $
                              578
                              
                              
                              $
                              120Income
      (loss) from discontinuedoperations
      before income taxes
                              
                              $
                              (647
                              )
                              
                              $
                              (1,831
                              )
                              
                              $
                              (3,861
                              )Income
      tax (benefit)
                              
                              
                              (120
                              )
                              
                              
                              (342
                              )
                              
                              
                              (1,353
                              )Income
      (loss) from discontinuedoperations
                              
                              $
                              (527
                              )
                              
                              $
                              (1,489
                              )
                              
                              $
                              (2,508
                              )





In March
2005, we sold the net assets of our shock and vibration control device
manufacturing business (“VMC”).  Under the terms of the sale
agreements, we retained certain liabilities relating to adverse environmental
conditions that existed at the premises occupied by VMC as of the date of
sale.  We recorded a liability for the estimated remediation costs
related to adverse environmental conditions that existed at the VMC premises
when it was sold.  The accrued environmental liability at December 31,
2008 is $1.1 million, of which $322,000 is expected to be paid within one
year.





3.         Company
Sale Transaction





The
Merger on August 15, 2007 was funded by a $378.4 million equity investment by
Veritas, Golden Gate, GS Direct and certain members of our management and the
majority of the proceeds from term loans aggregating $525 million and two
exchangeable unsecured credit facilities totaling $345 million.  An
advisory agreement with the non-management equity investors or their designated
affiliates requires us to pay advisory services fees of $2.3 million for fiscal
2009.  Refer to Note 3 to our June 30, 2008 annual financial
statements for complete details of our Merger and the Terminated
Merger.





In
connection with the Merger and Terminated Merger, for the periods from August
15, 2007 to December 31, 2007 and July 1,2007 to August 14, 2007, we
incurred Company sale transaction and related expenses that we expensed as
incurred of $31.6 million and $3.7 million, respectively, consisting primarily
of merger-related severance and other change of control related payments, a
merger termination fee and the related lawsuit settlement charge and legal and
other professional fees (“Company Sale Transaction expenses”).





The
Merger constituted a change in control of the Company. In accordance with GAAP,
the Company recorded its assets and liabilities at fair value as of the date of
the Merger, whereby the purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Independent third-party appraisers were engaged to assist
management and perform valuations of certain of the tangible and intangible
assets acquired.


- 13
-


We
allocated the purchase price, including the acquisition costs of approximately
$22.9 million, based on the estimated fair value of the assets acquired and
liabilities assumed as follows:





(In thousands)Current
      assets (excluding cash of $45.5 million)
                  
                  $
                  335,252Property,
      plant and equipment
                  
                  
                  111,804Other
      assets
                  
                  
                  16,537Developed
      technology
                  
                  
                  195,500Customer
      related intangible assets
                  
                  
                  211,582Other
      acquired intangible assets
                  
                  
                  6,290Intangible
      assets with indefinite lives (tradenames)
                  
                  
                  122,870Goodwill
                  
                  
                  452,756In-process
      research and development
                  
                  
                  24,340Total
      assets acquired
                  
                  
                  1,476,931Current
      liabilities
                  
                  
                  (137,751
                  )Long-term
      liabilities
                  
                  
                  (220,887
                  )Total
      liabilities assumed
                  
                  
                  (358,638
                  )Net
      assets acquired
                  
                  $
                  1,118,293





At the
acquisition date, the acquired in-process research and development (IPR&D)
was not considered to have reached technological feasibility and had no
alternative future uses. Therefore, the fair value of the IPR&D of $24.3
million was expensed at the time of the acquisition in operating costs. The
allocation to in-process research and development represents the estimated fair
value of such incomplete research and development, at the acquisition date,
based on future cash flows.  As of the acquisition date, cash flows
from these projects were expected to commence in fiscal year 2009. In
determining the fair values of IPR&D, risk adjusted discount rates that
ranged from 17% to 25% were applied to the projects’ cash flows, which have
taken into account the respective projects’ completion percentage.





The
unaudited pro forma results of operations presented below for the period from
July 1, 2007 to August 14, 2007 are presented as though the Merger had occurred
on July 1, 2006, after giving effect to purchase accounting adjustments relating
to depreciation and amortization of the revalued assets, interest expense
associated with the new credit facilities and other acquisition-related
adjustments in connection with the Merger. The pro forma results of operations
are not necessarily indicative of the combined results that would have occurred
had the Merger been consummated at July 1, 2006, nor are they necessarily
indicative of future operating results.





Period fromJuly 1, 2007 toAugust 14, 2007Predecessor(In thousands)Net
      sales
                        
                        $
                        38,178Net
      income (loss)
                        
                        $
                        (27,554
                        )





In
connection with the consummation of the Merger, we entered into amended
employment agreements with all participants, excluding one retired participant,
in our unfunded Supplemental Executive Retirement Plan (“the “SERP”) that
provided for specified payments, plus, for certain participants, 6% interest per
annum from August 15, 2007, in full satisfaction of the benefits payable under
the SERP.  In accordance with the terms of those agreements, we made a
payment of $16.6 million in December 2008 and a final payment of $3.2 million in
January 2009, which was included in accrued expenses at December 31,
2008.  The actuarially determined liability to the one remaining
retired participant in the SERP, who will receive monthly payments through at
least December 15, 2015, was $6.7 million at December 31, 2008, of which
$628,000 and $6.1 million is included in accrued expenses and defined benefit
plan obligations, respectively.


- 14
-




4.       Acquisition
of Businesses and Intangible Assets





Test
Evolution Corporation





On
October 1, 2007, we purchased 40% of the outstanding stock of Test Evolution
Corporation (“TEC”) for $4.0 million ($2.0 million at closing and $2.0 million
paid in October 2008). TEC, located in Massachusetts, develops and manufactures
digital, analog and RF semiconductor automated test equipment. We have
determined that we have control of this company and have consolidated TEC’s
assets and liabilities and results of operations, all of which were
insignificant, into our financial statements commencing October 1, 2007. The
non-controlling interest of 60% in each of the equity and operations of TEC are
not material to our consolidated financial statements and have been included in
other long-term liabilities and other income (expense),
respectively.  TEC is included in our Test Solutions
segment.





Gaisler
Research AB





On June
30, 2008, we acquired the stock of Gaisler Research AB (“Gaisler”) for $12.7
million cash (net of $2.7 million cash acquired), plus up to another $15 million
over the next three years provided specified EBITDA targets are
achieved.  Located in Sweden, Gaisler provides integrated circuit
software products and services to European space system suppliers, plus other
U.S., Japanese and Russian space agencies. Gaisler is included in our
Microelectronic Solutions segment.





We
preliminarily allocated the purchase price, including acquisition costs of
approximately $379,000, based on the estimated fair value of the assets acquired
and liabilities assumed as follows:





(In thousands)Current
      assets (excluding cash of $2.7 million)
                    
                    $
                    987Property,
      plant and equipment
                    
                    
                    62Developed
      technology
                    
                    
                    2,920Customer
      related intangibles
                    
                    
                    1,650Tradenames
                    
                    
                    508Goodwill
                    
                    
                    8,424In-process
      research and development
                    
                    
                    635Total
      assets acquired
                    
                    
                    15,186Current
      liabilities
                    
                    
                    (1,096
                    )Deferred
      taxes
                    
                    
                    (1,423
                    )Total
      liabilities assumed
                    
                    
                    (2,519
                    )Net
      assets acquired
                    
                    $
                    12,667





As of
December 31, 2008, we were in the process of completing our assessment of the
fair value of certain assets and liabilities as of the date of acquisition which
is expected to be finalized upon the receipt and completion of additional
information and analysis during fiscal 2009.





The
customer related intangibles and developed technology are being amortized on a
straight-line basis over a range of 1 to 7 years.





On a pro
forma basis, had the Gaisler acquisition taken place as of the beginning of
fiscal 2008, our results of operations would not have been materially
affected.


- 15
-


Intangible
Assets with Definite Lives


The
components of amortizable intangible assets are as follows:





December 31, 2008
                
                
                June 30, 2008(In
      thousands)Gross
                
                
                
                
                
                GrossCarrying
                
                
                Accumulated
                
                
                Carrying
                
                
                AccumulatedAmount
                
                
                Amortization
                
                
                Amount
                
                
                AmortizationDeveloped
      technology
                
                $
                188,760
                
                
                $
                44,288
                
                
                $
                198,420
                
                
                $
                29,631Customer
      related intangibles
                
                
                207,266
                
                
                
                56,685
                
                
                
                213,232
                
                
                
                42,433Non-compete
      arrangements
                
                
                6,290
                
                
                
                1,591
                
                
                
                6,290
                
                
                
                1,012Total
                
                $
                402,316
                
                
                $
                102,564
                
                
                $
                417,942
                
                
                $
                73,076





The
aggregate amortization expense for amortizable intangible assets was $14.6
million and $20.9 million for the three months ended December 31, 2008 and 2007,
respectively and $32.6 million, $31.4 million and $1.7 million for the six
months ended December 31, 2008 and the periods August 15, 2007 to December 31,
2007 and July 1, 2007 to August 14, 2007, respectively.





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




(In thousands)2009
                  
                  $
                  57,4712010
                  
                  
                  56,6762011
                  
                  
                  56,4682012
                  
                  
                  54,0602013
                  
                  
                  40,805





Goodwill





The
carrying amount of goodwill is as follows:





AMS
                  
                  
                  ATS
                  
                  
                  Total(In thousands)Balance
      at June 30, 2007 (predecessor entity)
                  
                  $
                  51,321
                  
                  
                  $
                  130,641
                  
                  
                  $
                  181,962Goodwill
      adjustment recorded in purchase accounting from allocation of purchase
      price (1)
                  
                  
                  243,456
                  
                  
                  
                  27,373
                  
                  
                  
                  270,829Balance
      at August 15, 2007 (successor entity)
                  
                  
                  294,777
                  
                  
                  
                  158,014
                  
                  
                  
                  452,791Acquisition
      of Test Evolution Corporation
                  
                  
                  -
                  
                  
                  
                  1,868
                  
                  
                  
                  1,868Acquisition
      of Gaisler
                  
                  
                  8,261
                  
                  
                  
                  -
                  
                  
                  
                  8,261Impact
      of foreign currency translation
                  
                  
                  (268
                  )
                  
                  
                  (1,497
                  )
                  
                  
                  (1,765
                  )Balance
      at June 30, 2008 (successor entity)
                  
                  
                  302,770
                  
                  
                  
                  158,385
                  
                  
                  
                  461,155Final
      adjustment to goodwill recorded in purchase accounting
                  
                  
                  494
                  
                  
                  
                  (529
                  )
                  
                  
                  (35
                  )Adjustment
      to goodwill for acquisition of Gaisler
                  
                  
                  163
                  
                  
                  
                  -
                  
                  
                  
                  163Impact
      of foreign currency translation
                  
                  
                  (2,141
                  )
                  
                  
                  (10,377
                  )
                  
                  
                  (12,518
                  )Balance
      at December 31, 2008 (successor entity)
                  
                  $
                  301,286
                  
                  
                  $
                  147,479
                  
                  
                  $
                  448,765





(1)
            The
      predecessor entity goodwill has been written off in purchase accounting
      for the Merger.


- 16
-





5. 
     Restructuring Charges





In fiscal
2008, we initiated actions to restructure our U.K. business units by further
consolidating our manufacturing, research and development and selling, general
and administrative activities. In addition, we initiated a restructuring in our
Whippany, New Jersey, component manufacturing facility to address a slowdown in
sales of its integrated products line.  These actions resulted in the
termination of approximately 151 employees, which resulted in restructuring
costs, principally severance, for the periods from August 15, 2007 to December
31, 2007 and July 1, 2007 to August 14, 2007 of $1.0 million ($379,000 in cost
of sales, $233,000 in selling, general and administrative costs and $433,000 in
research and development costs) and $3.8 million ($1.6 million in selling,
general and administrative costs and $2.2 million in research and development
costs), respectively. Substantially all of the workforce reduction costs were
paid prior to June 30, 2008.  In May 2008, we incurred other
restructuring charges including $2.6 million of accrued contractual commitments
under operating leases for two facilities in the U.K. that we exited, which will
be paid through December 2010. In addition, approximately $485,000 of fixed
asset impairment charges were recorded in selling, general and administrative
costs in the fourth quarter of fiscal 2008 for the write-off of leasehold
improvements in the abandoned facilities.





For the
six months ended December 31, 2008, in connection with continued restructuring
activities, primarily to reduce certain manufacturing operations, we incurred
$2.2 million of severance costs for an additional 55 employees terminated in our
U.K. business unit ($1.6 million in cost of sales, $356,000 in selling, general
and administrative costs and $225,000 in research and development
costs).





The
following table sets forth the charges and payments related to the restructuring
liability for the periods indicated:





Balance
                
                
                
                
                
                
                
                
                
                
                
                BalanceJune 30,
                
                
                
                
                
                
                
                
                
                
                
                December 31,2008
                
                
                Six Months Ended December 31, 2008
                
                
                2008Effect ofRestructuring
                
                
                
                
                
                
                
                
                foreign
                
                
                RestructuringLiability
                
                
                Net Additions
                
                
                Cash Payments
                
                
                currency
                
                
                Liability(In thousands)Work
      force reduction
                
                $
                12
                
                
                $
                2,210
                
                
                $
                (2,022
                )
                
                $
                -
                
                
                $
                200Other
                
                
                3,242
                
                
                
                -
                
                
                
                (478
                )
                
                
                (809
                )
                
                
                1,955Total
                
                $
                3,254
                
                
                $
                2,210
                
                
                $
                (2,500
                )
                
                $
                (809
                )
                
                $
                2,155





6.       Inventories





Inventories
consist of the following:





December 31,
                  
                  
                  June 30,2008
                  
                  
                  2008(In
      thousands)Raw
      materials
                  
                  $
                  59,342
                  
                  
                  $
                  64,533Work
      in process
                  
                  
                  45,179
                  
                  
                  
                  41,056Finished
      goods
                  
                  
                  23,251
                  
                  
                  
                  29,302$
                  127,772
                  
                  
                  $
                  134,891




- 17
-


7.       Product
Warranty




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





Activity
related to our product warranty liability, which is reflected in accrued
expenses and other current liabilities in the accompanying consolidated balance
sheets, was as follows:





Six Months
                  
                  
                  August 15, 2007
                  
                  
                  July 1, 2007Ended
                  
                  
                  to
                  
                  
                  toDecember 31,
                  
                  
                  December 31,
                  
                  
                  August 14,2008
                  
                  
                  2007
                  
                  
                  2007(In thousands)Balance
      at beginning of period
                  
                  $
                  2,944
                  
                  
                  $
                  3,002
                  
                  
                  $
                  2,929Provision
      for warranty obligations
                  
                  
                  1,256
                  
                  
                  
                  1,320
                  
                  
                  
                  469Cost
      of warranty obligations
                  
                  
                  (1,446
                  )
                  
                  
                  (1,306
                  )
                  
                  
                  (394
                  )Foreign
      currency impact
                  
                  
                  (244
                  )
                  
                  
                  4
                  
                  
                  
                  (2
                  )Balance
      at end of period
                  
                  $
                  2,510
                  
                  
                  $
                  3,020
                  
                  
                  $
                  3,002





8.     Fair
Value Measurements





We
adopted the provisions of SFAS 157 for financial assets and liabilities as of
July 1, 2008 and, as of December 31, 2008, have recorded a $2.2 million
valuation allowance against the cost of our auction rate
securities.  SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability, in the principal or
most advantageous market for the asset or liability, in an orderly transaction
between market participants at the measurement date.  SFAS 157 also
establishes a fair value hierarchy which requires the entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value.





SFAS 157
describes three levels of inputs that may be used to measure fair
value:





Level
      1:
              Inputs
      based on quoted market prices for identical assets or liabilities in
      active  markets at the measurement date.Level
      2:
              Observable
      inputs other than quoted prices included in Level 1, such as
      quoted  prices for similar assets and liabilities in active
      markets; quoted prices for  identical or similar assets and
      liabilities in markets that are not active; or other  inputs
      that are observable or can be corroborated by observable market
      data.Level
      3:
              Inputs
      reflect management’s best estimate of what market participants
      would  use in pricing the asset or liability at the measurement
      date.  The inputs are  unobservable in the market and
      significant to the instruments
valuation.




- 18
-


The
following table presents for each hierarchy level, financial assets and
liabilities measured at fair value on a recurring basis as of December 31,
2008:





Quoted Prices inActive Markets
                  
                  
                  Significant Other
                  
                  
                  Significantfor Identical
                  
                  
                  Observable
                  
                  
                  UnobservableAssets
                  
                  
                  Inputs
                  
                  
                  Inputs(Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)
                  
                  
                  Total(In thousands)Assets:Non-current
      marketable securities
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  17,750
                  
                  
                  $
                  17,750Liabilities:Foreign
      currency forward contracts
                  
                  $
                  -
                  
                  
                  $
                  792
                  
                  
                  $
                  -
                  
                  
                  $
                  792Interest
      rate swap contracts
                  
                  
                  -
                  
                  
                  
                  18,197
                  
                  
                  
                  -
                  
                  
                  
                  18,197Total
      Liabilities
                  
                  $
                  -
                  
                  
                  $
                  18,989
                  
                  
                  $
                  -
                  
                  
                  $
                  18,989





The
following table presents the changes in the carrying value of the Company’s
assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) as defined in SFAS No. 157 for the six months
ended December 31, 2008:





Fair Value MeasurementsUsing SignificantUnobservable Inputs(Level 3)AuctionRateSecurities(In thousands)Balance
      at June 30, 2008
                    
                    $
                    -Transfers
      to Level 3
                    
                    
                    19,953Total
      unrealized losses in accumulated other comprehensive income
      (loss)
                    
                    
                    (2,203
                    )Balance
      at December 31, 2008
                    
                    $
                    17,750





Non-Current Marketable
Securities – Non-current marketable securities primarily consist of
auction rate securities that currently have no active market from which we could
obtain pricing.  Since we adopted SFAS 157 on July 1, 2008, auction
rate securities have been classified as Level 3 as their valuation requires
substantial judgment and estimation of factors that are not currently observable
in the market due to the lack of trading in the securities.  Since
February 2008, when auctions for these securities began to fail, we have
redeemed $26.5million of auction rate
securities at par. To date, we have collected all interest payments on all our
auction rate securities when due. Furthermore, we have the intent and are able
to hold these securities until the credit markets recover, or until maturity, if
necessary.   However, based on a discounted cash flow analysis,
which considered, among other items, the collateral underlying the securities,
the credit worthiness of the issuer, the timing of future cash flows and
liquidity risks, we have recorded a $2.2 million valuation allowance against the
auction rate securities.





Foreign Currency Forward
Contracts – The fair value of our foreign currency forward contracts were
valued using a pricing model with all significant inputs based on observable
market data such as measurement date spot and forward rates.


- 19
-


Interest Rate Swap Contracts –
The fair value of our outstanding interest rate swap contracts were based on
valuations received from the counterparties and corroborated by measurement date
equivalent swap rates.





9.       Long
Term Debt and Credit Agreements





On August
7, 2008, our 11.75% exchangeable senior unsecured loan in the amount of $225
million with an ultimate maturity on February 15, 2015 was refinanced with an
unsecured senior note with the same interest rate and maturity
date.  We may prepay the senior notes commencing August 15, 2011 at
105.875% of the principal amount prepaid, which decreases to 102.938% on August
15, 2012 and to 100% on or after August 15, 2013.  In addition, we may
redeem up to 35% of the original aggregate principal balance of the senior
notes, at any time prior to August 15, 2010, with the net proceeds of certain
equity offerings at 111.75% of the principal amount redeemed.  On
January 21, 2009, the SEC declared effective the Company’s exchange offer
registration statement under which the unregistered unsecured senior notes may
be exchanged for publicly registered 11.75% unsecured senior notes due February
15, 2015 with substantially identical terms as the exchanged notes.





As of
December 31, 2008, we are in compliance with all of the covenants contained in
our loan agreements.





In
connection with our credit facilities, we capitalized deferred financing costs
of $340,000, $27.3 million and $477,000 for the six months ended December 31,
2008 and the periods August 15, 2007 to December 31, 2007 and July 1, 2007 to
August 14, 2007, respectively, primarily consisting of facility, legal and
advisory fees.  We are amortizing these costs over the terms of the
related facilities.  For the three months ended December 31, 2008 and
2007 we amortized $1.2 million and $969,000, respectively, to interest
expense.  For the six months ended December 31, 2008 and the periods
August 15, 2007 to December 31, 2007 and July 1, 2007 to August 14, 2007, we
amortized $2.4 million, $1.2 million and $217,000, respectively, to interest
expense.





Interest
paid was $21.1 million for the six months ended December 31, 2008, $19.0 million
for the period August 15, 2007 to December 31, 2007, and $57,000 for the period
July 1, 2007 to August 14, 2007.





The fair
value of our debt instruments are summarized as follows:





December 31, 2008Carrying
                  
                  
                  EstimatedAmount
                  
                  
                  Fair Value(In
      thousands)Senior
      secured B-1 term loan
                  
                  $
                  393,857
                  
                  
                  $
                  248,130Senior
      secured B-2 term loan
                  
                  
                  123,080
                  
                  
                  
                  81,233Exchangeable
      senior unsecured loan
                  
                  
                  225,000
                  
                  
                  
                  157,500Senior
      subordinated unsecured term loan
                  
                  
                  139,229
                  
                  
                  
                  90,499Other
                  
                  
                  1,405
                  
                  
                  
                  1,405Total
      debt
                  
                  $
                  882,571
                  
                  
                  $
                  578,767





The
carrying value of debt of $878.8 million as of June 30, 2008 had a fair value of
$804.2 million.





The
estimated fair values of each of our debt instruments are based on quoted market
prices for the same or similar issues. Fair value estimates related to our debt
instruments are made at a specific point in time based on relevant market
information.  These estimates are subjective in nature and involve
uncertainties and matters of significant judgments and therefore cannot be
determined with precision.  Changes in assumptions could significantly
affect the estimates.


- 20
-


10. 
   Stockholder’s Equity





Share
Based Compensation




Stock
Options





All of
our Predecessor Entity stock option plans were terminated on August 15, 2007.
The Merger agreement provided that all stock options were cancelled and
converted into the right to receive a cash payment equal to the number of shares
of our common stock underlying the options multiplied by that amount, if any, by
which $14.50 exceeded the exercise price, without interest and less any
withholding taxes.  On August 15, 2007 we paid $43.9 million to option
holders to cancel all options outstanding in connection with the
Merger.





Member
Interests





On August
15, 2007 certain members of our management were granted Class B member interests
in a limited liability company (parent LLC) that is the ultimate parent of the
Company, and which owns all of the common stock of the Parent. The parent LLC is
a holding company with no operations or employees of its own. The parent LLC has
two classes of membership interests, Class A and Class B. Our non-management
equity investors, or their affiliates, and Company employees that made equity
investments to partially fund the Merger are Class A members and Class B members
consist of Company employees. Pursuant to the terms of the limited liability
company operating agreement governing the parent LLC, the holders of Class B
member interests are entitled to receive a percentage of all distributions, if
any, made by the parent LLC after (x) the holders of the Class A members in the
parent LLC have received a return of their invested capital, plus a 12% per
annum internal rate of return (compounded annually) on their invested capital
and (y) certain members of our management that received Class A interests for
their capital contributions have received a special distribution in the
aggregate amount of $3.2 million, together with a 12% per annum internal rate of
return (compounded annually). The Class B member interests are non-transferable
and vest ratably over five years, with any unvested interests reverting to the
holders of Class A interests in the event they are forfeited or
repurchased.





Compensation
expense attributable to share based compensation was $489,000 ($308,000 after
tax) for both the three months ended December 31, 2008 and 2007, $977,000
($616,000 after tax) for the six months ended December 31, 2008, $2.1 million
($1.4 million after tax) for the period August 15, 2007 to December 31, 2007 and
$214,000 ($135,000 after tax) for the period July 1, 2007 to August 14,
2007.


- 21
-


A summary
of the changes to outstanding stock options from July 1, 2007 to August 15, 2007
is presented below:





WeightedAverageExerciseShares
                  
                  
                  Price(In thousands)Outstanding
      at June 30, 2007
                  
                  
                  13,003
                  
                  
                  $
                  12.37Granted
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (27
                  )
                  
                  
                  19.30Expired
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (51
                  )
                  
                  
                  11.39Cancelled
                  
                  
                  (3,825
                  )
                  
                  
                  18.74Paid
      out on Merger
                  
                  
                  (9,100
                  )
                  
                  
                  9.68Outstanding
      at August 15, 2007
                  
                  
                  -





Cash
received from stock option exercises was $583,000 for the period July 1, 2007 to
August 14, 2007.  The tax benefit received from stock option exercises
was $16.1 million for the period August 15, 2007 to December 31, 2007 and
$41,000 for the period July 1, 2007 to August 14, 2007.





11.     Comprehensive
Income




The
components of comprehensive income (loss) are as follows:





Three Months
                    
                    
                    Three Months
                    
                    
                    Six Months
                    
                    
                    August 15, 2007
                    
                    
                    July 1, 2007Ended
                    
                    
                    Ended
                    
                    
                    Ended
                    
                    
                    to
                    
                    
                    toDecember 31,
                    
                    
                    December 31,
                    
                    
                    December 31,
                    
                    
                    December 31,
                    
                    
                    August 14,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2007(In thousands)Net
      income (loss)
                    
                    $
                    (4,107
                    )
                    
                    $
                    (29,595
                    )
                    
                    $
                    (11,004
                    )
                    
                    $
                    (80,093
                    )
                    
                    $
                    (16,916
                    )Unrealized
      gain (loss) on interest rate swap agreements, net of tax provision
      (benefit) of ($6.5 million), ($1.4 million), ($7.6 million), ($1.4
      million) and $0
                    
                    
                    (11,045
                    )
                    
                    
                    (2,460
                    )
                    
                    
                    (12,875
                    )
                    
                    
                    (2,460
                    )
                    
                    
                    -Valuation
      allowance against non-current marketable
      securities
                    
                    
                    (1,448
                    )
                    
                    
                    -
                    
                    
                    
                    (2,203
                    )
                    
                    
                    -
                    
                    
                    
                    -Foreign
      currency translation adjustment
                    
                    
                    (34,199
                    )
                    
                    
                    (4,924
                    )
                    
                    
                    (55,981
                    )
                    
                    
                    (608
                    )
                    
                    
                    (497
                    )Total
      comprehensive income (loss)
                    
                    $
                    (50,799
                    )
                    
                    $
                    (36,979
                    )
                    
                    $
                    (82,063
                    )
                    
                    $
                    (83,161
                    )
                    
                    $
                    (17,413
                    )




- 22
-


Accumulated
other comprehensive income (loss) is as follows:





UnrealizedGain (Loss)
                
                
                Valuation
                
                
                Minimumon Interest
                
                
                Allowance Against
                
                
                Pension
                
                
                ForeignRate Swap
                
                
                Non-Current
                
                
                Liability
                
                
                CurrencyAgreements
                
                
                Marketable
                
                
                Adjustment
                
                
                Translation
                
                
                Total(net of tax)
                
                
                Securities
                
                
                (net of tax)
                
                
                Adjustment
                
                
                (net of tax)(In thousands)Balance,
      June 30, 2008
                
                $
                1,411
                
                
                $
                -
                
                
                $
                (6
                )
                
                $
                (998
                )
                
                $
                407Six
      months' activity
                
                
                (12,875
                )
                
                
                (2,203
                )
                
                
                -
                
                
                
                (55,981
                )
                
                
                (71,059
                )Balance,
      December 31, 2008
                
                $
                (11,464
                )
                
                $
                (2,203
                )
                
                $
                (6
                )
                
                $
                (56,979
                )
                
                $
                (70,652
                )





The
foreign currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.  The
valuation allowance for non-current marketable securities is not adjusted for
income taxes as it would create a capital loss carryforward upon realization for
which we would record a valuation allowance against the related deferred tax
asset.





12.     Legal
Matters





During
the quarter ended March 31, 2007, we became aware that certain RadHard
bidirectional multipurpose transceivers sold by us since 1999 may have been
subject to the licensing jurisdiction of the U.S. Department of State in
accordance with the International Traffic in Arms Regulations (“ITAR”).
Accordingly, we filed a Voluntary Disclosure with the Directorate of Defense
Trade Controls, Department of State, describing the details of the possible
inadvertent misclassification. Simultaneously, we filed a Commodity Jurisdiction
request providing detailed information and data supporting our contention that
the product is not subject to ITAR and requesting a determination that such
product is not ITAR controlled. By letter dated November 15, 2007, we were
informed that the U.S. Department of State had determined in response to our
Commodity Jurisdiction request, that the product is subject to the licensing
jurisdiction of the U.S. Department of State in accordance with ITAR. We
requested reconsideration of this determination. On February 7, 2008, we filed
an addendum to the above referenced Voluntary Disclosure advising the
Directorate of Defense Trade Controls that other products sold by us similar in
nature to the transceiver described above may also be subject to the ITAR. The
Directorate of Defense Trade Controls agreed to extend our time to file such
addendum to the Voluntary Disclosure until a decision was rendered with respect
to our request for reconsideration of the determination in connection with the
above-referenced Commodity Jurisdiction request. On August 5, 2008, we received
a letter from the Office of Defense Trade Controls Compliance (“DTCC”)
requesting that we provide documentation and/or information relating to our
compliance initiatives after November 15, 2007 as well as the results of any
product reviews conducted by us, and indicating that a civil penalty against us
could be warranted in connection with this matter following the review of such
materials. We have provided all of the materials and documentation requested by
the DTCC.  Our request for reconsideration was denied by the
Directorate of Defense Trade Controls on August 19, 2008 which determined that
the product is subject to the licensing jurisdiction of the Department of State
in accordance with ITAR. Accordingly, on September 18, 2008, we filed an
addendum to our Voluntary Disclosure identifying other products that may have
been subject to the licensing jurisdiction of the U.S. Department of State in
accordance with the ITAR but were inadvertently misclassified.  At
this time it is not possible to determine whether any fines or other penalties
will be asserted against us, or the materiality of any outcome.


- 23
-


During
May 2008, we became further aware that a certain product sold by our KDI
subsidiary may have inadvertently been misclassified as not ITAR controlled. On
August 5, 2008, we filed a Voluntary Disclosure with the Directorate of Defense
Trade Controls, Department of State, describing the inadvertent
misclassification of this product.  At this time it isnot
possible to determine whether any fines or other penalties will be asserted
against us with respect to the foregoing matters, or the materiality of any
outcome.





During
November 2008, we became aware that our Hauppauge facility had shipped two ITAR
controlled products to a foreign customer, but inadvertently had noted on the
requisite paperwork that only one ITAR controlled product was included in the
shipment.  We intend to file a voluntary disclosure with the
Directorate of Defense Trade Controls, U.S. Department of State, informing them
of this mistake.  At this time it is not possible to determine whether
any fines or other penalties will be asserted against us, or the materiality of
any outcome.




During
January 2009, we became aware that a certain product sold by our Powell
subsidiary, for which an ITAR marketing license had been properly issued by the
U.S. Department of State, mistakenly was taken out of the country by an employee
without first obtaining the required U.S. Customs signature upon
departure.   We intend to file a voluntary disclosure shortly
advising the U.S. Department of State of this mistake. At this time it is not
possible to determine whether any fines or other penalties will be asserted
against us, or the materiality of any outcome.





An
amended class action complaint was filed against us and the Predecessor Entity’s
board of directors on June 20, 2007 in the Supreme Court of the State of New
York, Nassau County. The complaint alleges that the board breached its fiduciary
duties to our stockholders (i) by issuing a preliminary proxy statement on June
5, 2007 that was issued in connection with seeking stockholder approval of the
Merger and (ii) in approving certain amendments, that were allegedly beyond the
scope of our corporate powers, to our SERP and the employment agreements of
defendants Harvey R. Blau, our then Chairman and Chief Executive Officer, and
Leonard Borow, our then President and Chief Operating Officer and currently, the
Successor Entity’s President and Chief Executive Officer. We are currently in
settlement discussions with the plaintiffs and have accrued an insignificant
liability for the settlement.





We are
also involved in various other claims and legal actions that arise in the
ordinary course of business. We do not believe that the ultimate resolution of
any of these actions will have a material adverse effect on our financial
position, results of operations, liquidity or capital resources.





13.     Business
Segments





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





Microelectronic
Solutions (“AMS”)





·
            Microelectronic
      Components, Sub-assemblies and
Modules


·
            Integrated
      Circuits


·
            Motion
      Control Systems





Test
Solutions (“ATS”)





·
            Instrument
      Products and Test Systems





We are a
manufacturer of advanced technology systems and components for commercial
industry, government and defense contractors. Approximately 36% of our sales for
the six months ended December 31, 2008, 29% of our sales for the period August
15, 2007 to December 31, 2007 and 21% for the period July 1, 2007 to August 14,
2007 were to agencies of the United States government or to prime defense
contractors or subcontractors of the United States government. No one customer
constituted more than 10% of sales during any of the periods presented.
Inter-segment sales were not material and have been eliminated from the tables
below.


- 24
-





The
majority of our operations are located in the United States; however, we also
have operations in Europe and Asia, with our most significant international
operations in the U.K.  Net sales from facilities located in the U.K.
were approximately $33.4 million and $49.1 million for the three months ended
December 31, 2008 and 2007, respectively, and $67.8 million, $76.8 million and
$11.7 million for the six months ended December 31, 2008 and the periods August
15, 2007 to December 31, 2007 and July 1, 2007 to August 14, 2007, respectively.
Total assets of the U.K.     operations were $178.3
million and $237.5 million as of December 31, 2008 and June 30, 2008,
respectively.





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





Three Months
                
                
                Three Months
                
                
                Six Months
                
                
                August 15, 2007
                
                
                July 1, 2007Ended
                
                
                Ended
                
                
                Ended
                
                
                to
                
                
                toDecember 31,
                
                
                December 31,
                
                
                December 31,
                
                
                December 31,
                
                
                August 14,2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2007(Successor)
                
                
                (Successor)
                
                
                (Successor)
                
                
                (Successor)
                
                
                (Predecessor)(In thousands)United
      States of America
                
                $
                97,042
                
                
                $
                90,745
                
                
                $
                172,057
                
                
                $
                146,972
                
                
                $
                21,183Europe
      and Middle East
                
                
                22,777
                
                
                
                37,499
                
                
                
                59,898
                
                
                
                61,286
                
                
                
                10,357Asia
      and Australia
                
                
                34,176
                
                
                
                30,463
                
                
                
                61,062
                
                
                
                51,085
                
                
                
                6,242Other
      regions
                
                
                2,820
                
                
                
                2,050
                
                
                
                4,643
                
                
                
                3,429
                
                
                
                439$
                156,815
                
                
                $
                160,757
                
                
                $
                297,660
                
                
                $
                262,772
                
                
                $
                38,221




- 25
-


Selected
financial data by segment is as follows:





August 15,Three Months
                  
                  
                  Three Months
                  
                  
                  Six Months
                  
                  
                  2007Ended
                  
                  
                  Ended
                  
                  
                  Ended
                  
                  
                  through
                  
                  
                  July 1, 2007December 31,
                  
                  
                  December 31,
                  
                  
                  December 31,
                  
                  
                  December 31,
                  
                  
                  to August 14,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2007(Successor)
                  
                  
                  (Successor)
                  
                  
                  (Successor)
                  
                  
                  (Successor)
                  
                  
                  (Predecessor)(In thousands)Net
      sales:Microelectronic
      solutions ("AMS")
                  
                  $
                  70,752
                  
                  
                  $
                  71,503
                  
                  
                  $
                  138,332
                  
                  
                  $
                  119,899
                  
                  
                  $
                  19,017Test
      solutions ("ATS")
                  
                  
                  86,063
                  
                  
                  
                  89,254
                  
                  
                  
                  159,328
                  
                  
                  
                  142,873
                  
                  
                  
                  19,204Net
      sales
                  
                  $
                  156,815
                  
                  
                  $
                  160,757
                  
                  
                  $
                  297,660
                  
                  
                  $
                  262,772
                  
                  
                  $
                  38,221Segment
      adjusted operating income:-
      AMS
                  
                  $
                  15,371
                  
                  
                  $
                  16,987
                  
                  
                  $
                  29,984
                  
                  
                  $
                  32,220
                  
                  
                  $
                  24-
      ATS
                  
                  
                  15,974
                  
                  
                  
                  12,789
                  
                  
                  
                  25,604
                  
                  
                  
                  23,357
                  
                  
                  
                  (7,582
                  )-
      General corporate expense
                  
                  
                  (3,870
                  )
                  
                  
                  (2,929
                  )
                  
                  
                  (6,567
                  )
                  
                  
                  (3,409
                  )
                  
                  
                  (2,347
                  )Adjusted
      operating income (loss)
                  
                  
                  27,475
                  
                  
                  
                  26,847
                  
                  
                  
                  49,021
                  
                  
                  
                  52,168
                  
                  
                  
                  (9,905
                  )Amortization
      of acquired intangibles-
      AMS
                  
                  
                  (8,462
                  )
                  
                  
                  (12,585
                  )
                  
                  
                  (19,139
                  )
                  
                  
                  (18,843
                  )
                  
                  
                  (279
                  )-
      ATS
                  
                  
                  (6,160
                  )
                  
                  
                  (8,354
                  )
                  
                  
                  (13,451
                  )
                  
                  
                  (12,566
                  )
                  
                  
                  (1,413
                  )Share
      based compensation-
      AMS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (83
                  )-
      ATS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  95-
      Corporate
                  
                  
                  (489
                  )
                  
                  
                  (489
                  )
                  
                  
                  (977
                  )
                  
                  
                  (2,146
                  )
                  
                  
                  (226
                  )Restructuring
      charges-
      ATS
                  
                  
                  (1,808
                  )
                  
                  
                  (1,015
                  )
                  
                  
                  (2,210
                  )
                  
                  
                  (1,045
                  )
                  
                  
                  (3,778
                  )One-time
      lease termination costs-
      ATS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (576
                  )Merger
      related expenses - Corporate
                  
                  
                  (2,172
                  )
                  
                  
                  (533
                  )
                  
                  
                  (2,806
                  )
                  
                  
                  (2,715
                  )
                  
                  
                  (1,319
                  )Acquired
      in-process R&D costs-
      AMS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (15,700
                  )
                  
                  
                  --
      ATS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (8,640
                  )
                  
                  
                  -Current
      period impact of acquisitionrelated
      adjustments:Inventory
      - AMS
                  
                  
                  -
                  
                  
                  
                  (12,501
                  )
                  
                  
                  -
                  
                  
                  
                  (19,661
                  )
                  
                  
                  (57
                  )Inventory
      - ATS
                  
                  
                  -
                  
                  
                  
                  (8,416
                  )
                  
                  
                  -
                  
                  
                  
                  (13,656
                  )
                  
                  
                  -Depreciation
      - AMS
                  
                  
                  (286
                  )
                  
                  
                  (293
                  )
                  
                  
                  (572
                  )
                  
                  
                  (439
                  )
                  
                  
                  -Depreciation
      - ATS
                  
                  
                  (676
                  )
                  
                  
                  (823
                  )
                  
                  
                  (1,414
                  )
                  
                  
                  (1,235
                  )
                  
                  
                  -Depreciation
      - Corporate
                  
                  
                  (55
                  )
                  
                  
                  (55
                  )
                  
                  
                  (110
                  )
                  
                  
                  (82
                  )
                  
                  
                  -Deferred
      revenue - ATS
                  
                  
                  (79
                  )
                  
                  
                  (983
                  )
                  
                  
                  (176
                  )
                  
                  
                  (1,659
                  )
                  
                  
                  -Company
      sale transaction expenses
                  
                  
                  -
                  
                  
                  
                  (1,314
                  )
                  
                  
                  -
                  
                  
                  
                  (31,609
                  )
                  
                  
                  (3,717
                  )Operating
      income (loss) (GAAP)
                  
                  
                  7,288
                  
                  
                  
                  (20,514
                  )
                  
                  
                  8,166
                  
                  
                  
                  (77,828
                  )
                  
                  
                  (21,258
                  )Interest
      expense
                  
                  
                  (21,250
                  )
                  
                  
                  (21,977
                  )
                  
                  
                  (42,465
                  )
                  
                  
                  (33,113
                  )
                  
                  
                  (275
                  )Other
      income (expense), net
                  
                  
                  9,327
                  
                  
                  
                  2,176
                  
                  
                  
                  12,413
                  
                  
                  
                  1,921
                  
                  
                  
                  294Income
      (loss) from continuing operations before income taxes
                  
                  $
                  (4,635
                  )
                  
                  $
                  (40,315
                  )
                  
                  $
                  (21,886
                  )
                  
                  $
                  (109,020
                  )
                  
                  $
                  (21,239
                  )





Management
evaluates the operating results of the two segments based upon pre-tax operating
income, before costs related to restructuring, lease termination charges,
amortization of acquired intangibles, share-based compensation, acquired
in-process research and development costs, Company Sale Transaction expenses,
merger related expenses and the impact of any acquisition related
adjustments.


- 26
-





14.   
 Guarantor/Non-Guarantor Financial Information





The
following supplemental condensed consolidating financial information sets forth,
on an unconsolidated basis, the balance sheets and the statements of operations,
and cash flows for Aeroflex Incorporated (the “Parent Company”), the Guarantor
Subsidiaries and, on a combined basis, the Non-Guarantor
Subsidiaries.  The supplemental condensed consolidating financial
information reflects, for all fiscal periods presented, the investments of the
Parent Company in the Guarantor Subsidiaries as well as the investments of the
Parent Company and the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries,
in all cases, using the equity method.  The Parent Company’s purchase
price allocation adjustments, including applicable intangible assets, arising
from business acquisitions have been pushed down to the applicable subsidiary
columns (see Notes 3 and 4).





Condensed
Consolidating Statement of Operations


For
the Three Months Ended December 31, 2008


(In
thousands)





Subsidiary
                  
                  
                  SubsidiaryParent
                  
                  
                  Guarantors
                  
                  
                  Non-Guarantors
                  
                  
                  Eliminations
                  
                  
                  ConsolidatedNet
      sales
                  
                  $
                  -
                  
                  
                  $
                  112,157
                  
                  
                  $
                  45,852
                  
                  
                  $
                  (1,194
                  )
                  
                  $
                  156,815Cost
      of sales
                  
                  
                  -
                  
                  
                  
                  58,298
                  
                  
                  
                  26,554
                  
                  
                  
                  (1,196
                  )
                  
                  
                  83,656Gross
      profit
                  
                  
                  -
                  
                  
                  
                  53,859
                  
                  
                  
                  19,298
                  
                  
                  
                  2
                  
                  
                  
                  73,159Selling,
      general and administrative costs
                  
                  
                  6,586
                  
                  
                  
                  18,345
                  
                  
                  
                  9,243
                  
                  
                  
                  -
                  
                  
                  
                  34,174Research
      and development costs
                  
                  
                  -
                  
                  
                  
                  11,275
                  
                  
                  
                  5,800
                  
                  
                  
                  -
                  
                  
                  
                  17,075Amortization
      of acquired intangibles
                  
                  
                  -
                  
                  
                  
                  12,563
                  
                  
                  
                  2,059
                  
                  
                  
                  -
                  
                  
                  
                  14,622Operating
      income (loss)
                  
                  
                  (6,586
                  )
                  
                  
                  11,676
                  
                  
                  
                  2,196
                  
                  
                  
                  2
                  
                  
                  
                  7,288Other
      income (expense):Interest
      expense
                  
                  
                  (21,227
                  )
                  
                  
                  (23
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (21,250
                  )Other
      income (expense), net
                  
                  
                  (725
                  )
                  
                  
                  123
                  
                  
                  
                  9,929
                  
                  
                  
                  -
                  
                  
                  
                  9,327Intercompany
      charges
                  
                  
                  14,726
                  
                  
                  
                  (14,653
                  )
                  
                  
                  (73
                  )
                  
                  
                  -
                  
                  
                  
                  -Income
      (loss) from continuing operations before income taxes
                  
                  
                  (13,812
                  )
                  
                  
                  (2,877
                  )
                  
                  
                  12,052
                  
                  
                  
                  2
                  
                  
                  
                  (4,635
                  )Provision
      (benefit) for income taxes
                  
                  
                  (4,387
                  )
                  
                  
                  (218
                  )
                  
                  
                  1,507
                  
                  
                  
                  2,570
                  
                  
                  
                  (528
                  )Income
      (loss) from continuing operations
                  
                  
                  (9,425
                  )
                  
                  
                  (2,659
                  )
                  
                  
                  10,545
                  
                  
                  
                  (2,568
                  )
                  
                  
                  (4,107
                  )Loss
      from discontinued operations, net of tax
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Equity
      income (loss) of subsidiaries
                  
                  
                  5,318
                  
                  
                  
                  10,663
                  
                  
                  
                  -
                  
                  
                  
                  (15,981
                  )
                  
                  
                  -Net
      income (loss)
                  
                  $
                  (4,107
                  )
                  
                  $
                  8,004
                  
                  
                  $
                  10,545
                  
                  
                  $
                  (18,549
                  )
                  
                  $
                  (4,107
                  )




- 27
-





Condensed
Consolidating Statement of Operations


For
the Three Months Ended December 31, 2007


(In
thousands)





Subsidiary
                    
                    
                    SubsidiaryParent
                    
                    
                    Guarantors
                    
                    
                    Non-Guarantors
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedNet
      sales
                    
                    $
                    -
                    
                    
                    $
                    110,287
                    
                    
                    $
                    50,799
                    
                    
                    $
                    (329
                    )
                    
                    $
                    160,757Cost
      of sales
                    
                    
                    -
                    
                    
                    
                    74,611
                    
                    
                    
                    31,748
                    
                    
                    
                    (235
                    )
                    
                    
                    106,124Gross
      profit
                    
                    
                    -
                    
                    
                    
                    35,676
                    
                    
                    
                    19,051
                    
                    
                    
                    (94
                    )
                    
                    
                    54,633Selling,
      general and administrative costs
                    
                    
                    4,006
                    
                    
                    
                    17,758
                    
                    
                    
                    11,208
                    
                    
                    
                    -
                    
                    
                    
                    32,972Research
      and development costs
                    
                    
                    -
                    
                    
                    
                    11,254
                    
                    
                    
                    8,668
                    
                    
                    
                    -
                    
                    
                    
                    19,922Amortization
      of acquired intangibles
                    
                    
                    -
                    
                    
                    
                    18,197
                    
                    
                    
                    2,742
                    
                    
                    
                    -
                    
                    
                    
                    20,939Company
      sale transaction expenses
                    
                    
                    1,314
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,314Operating
      income (loss)
                    
                    
                    (5,320
                    )
                    
                    
                    (11,533
                    )
                    
                    
                    (3,567
                    )
                    
                    
                    (94
                    )
                    
                    
                    (20,514
                    )Other
      income (expense):Interest
      expense
                    
                    
                    (21,949
                    )
                    
                    
                    (27
                    )
                    
                    
                    (1
                    )
                    
                    
                    -
                    
                    
                    
                    (21,977
                    )Other
      income (expense), net
                    
                    
                    419
                    
                    
                    
                    59
                    
                    
                    
                    1,698
                    
                    
                    
                    -
                    
                    
                    
                    2,176Intercompany
      charges
                    
                    
                    11,276
                    
                    
                    
                    (10,448
                    )
                    
                    
                    (828
                    )
                    
                    
                    -
                    
                    
                    
                    -Income
      (loss) from continuing operations before income taxes
                    
                    
                    (15,574
                    )
                    
                    
                    (21,949
                    )
                    
                    
                    (2,698
                    )
                    
                    
                    (94
                    )
                    
                    
                    (40,315
                    )Provision
      (benefit) for income taxes
                    
                    
                    (4,638
                    )
                    
                    
                    (6,536
                    )
                    
                    
                    667
                    
                    
                    
                    (740
                    )
                    
                    
                    (11,247
                    )Income
      (loss) from continuing operations
                    
                    
                    (10,936
                    )
                    
                    
                    (15,413
                    )
                    
                    
                    (3,365
                    )
                    
                    
                    646
                    
                    
                    
                    (29,068
                    )Loss
      from discontinued operations, net of tax
                    
                    
                    -
                    
                    
                    
                    (527
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (527
                    )Equity
      income (loss) of subsidiaries
                    
                    
                    (18,659
                    )
                    
                    
                    (3,249
                    )
                    
                    
                    -
                    
                    
                    
                    21,908
                    
                    
                    
                    -Net
      income (loss)
                    
                    $
                    (29,595
                    )
                    
                    $
                    (19,189
                    )
                    
                    $
                    (3,365
                    )
                    
                    $
                    22,554
                    
                    
                    $
                    (29,595
                    )




- 28
-





Condensed
Consolidating Statement of Operations


For
the Six Months Ended December 31, 2008


(In
thousands)





Subsidiary
                      
                      
                      SubsidiaryParent
                      
                      
                      Guarantors
                      
                      
                      Non-Guarantors
                      
                      
                      Eliminations
                      
                      
                      ConsolidatedNet
      sales
                      
                      $
                      -
                      
                      
                      $
                      207,798
                      
                      
                      $
                      92,659
                      
                      
                      $
                      (2,797
                      )
                      
                      $
                      297,660Cost
      of sales
                      
                      
                      -
                      
                      
                      
                      108,752
                      
                      
                      
                      51,240
                      
                      
                      
                      (2,850
                      )
                      
                      
                      157,142Gross
      profit
                      
                      
                      -
                      
                      
                      
                      99,046
                      
                      
                      
                      41,419
                      
                      
                      
                      53
                      
                      
                      
                      140,518Selling,
      general and administrative costs
                      
                      
                      10,459
                      
                      
                      
                      36,330
                      
                      
                      
                      18,869
                      
                      
                      
                      -
                      
                      
                      
                      65,658Research
      and development costs
                      
                      
                      -
                      
                      
                      
                      22,442
                      
                      
                      
                      11,662
                      
                      
                      
                      -
                      
                      
                      
                      34,104Amortization
      of acquired intangibles
                      
                      
                      -
                      
                      
                      
                      27,876
                      
                      
                      
                      4,714
                      
                      
                      
                      -
                      
                      
                      
                      32,590Operating
      income (loss)
                      
                      
                      (10,459
                      )
                      
                      
                      12,398
                      
                      
                      
                      6,174
                      
                      
                      
                      53
                      
                      
                      
                      8,166Other
      income (expense):Interest
      expense
                      
                      
                      (42,410
                      )
                      
                      
                      (45
                      )
                      
                      
                      (10
                      )
                      
                      
                      -
                      
                      
                      
                      (42,465
                      )Other
      income (expense), net
                      
                      
                      (662
                      )
                      
                      
                      365
                      
                      
                      
                      12,710
                      
                      
                      
                      -
                      
                      
                      
                      12,413Intercompany
      charges
                      
                      
                      36,912
                      
                      
                      
                      (36,226
                      )
                      
                      
                      (686
                      )
                      
                      
                      -
                      
                      
                      
                      -Income
      (loss) from continuing operations before income taxes
                      
                      
                      (16,619
                      )
                      
                      
                      (23,508
                      )
                      
                      
                      18,188
                      
                      
                      
                      53
                      
                      
                      
                      (21,886
                      )Provision
      (benefit) for income taxes
                      
                      
                      (5,434
                      )
                      
                      
                      (8,061
                      )
                      
                      
                      2,703
                      
                      
                      
                      (90
                      )
                      
                      
                      (10,882
                      )Income
      (loss) from continuing operations
                      
                      
                      (11,185
                      )
                      
                      
                      (15,447
                      )
                      
                      
                      15,485
                      
                      
                      
                      143
                      
                      
                      
                      (11,004
                      )Equity
      income of subsidiaries
                      
                      
                      181
                      
                      
                      
                      15,891
                      
                      
                      
                      -
                      
                      
                      
                      (16,072
                      )
                      
                      
                      -Net
      income (loss)
                      
                      $
                      (11,004
                      )
                      
                      $
                      444
                      
                      
                      $
                      15,485
                      
                      
                      $
                      (15,929
                      )
                      
                      $
                      (11,004
                      )




- 29
-





Condensed
Consolidating Statement of Operations


For
the Period from August 15, 2007 to December 31, 2007


(In
thousands)





Subsidiary
                      
                      
                      SubsidiaryParent
                      
                      
                      Guarantors
                      
                      
                      Non-Guarantors
                      
                      
                      Eliminations
                      
                      
                      ConsolidatedNet
      sales
                      
                      $
                      -
                      
                      
                      $
                      182,745
                      
                      
                      $
                      81,814
                      
                      
                      $
                      (1,787
                      )
                      
                      $
                      262,772Cost
      of sales
                      
                      
                      -
                      
                      
                      
                      120,899
                      
                      
                      
                      51,825
                      
                      
                      
                      (1,840
                      )
                      
                      
                      170,884Gross
      profit
                      
                      
                      -
                      
                      
                      
                      61,846
                      
                      
                      
                      29,989
                      
                      
                      
                      53
                      
                      
                      
                      91,888Selling,
      general and administrative costs
                      
                      
                      8,353
                      
                      
                      
                      27,252
                      
                      
                      
                      16,351
                      
                      
                      
                      -
                      
                      
                      
                      51,956Research
      and development costs
                      
                      
                      -
                      
                      
                      
                      17,597
                      
                      
                      
                      12,805
                      
                      
                      
                      -
                      
                      
                      
                      30,402Amortization
      of acquired intangibles
                      
                      
                      -
                      
                      
                      
                      27,295
                      
                      
                      
                      4,114
                      
                      
                      
                      -
                      
                      
                      
                      31,409Acquired
      in-process R&D costs
                      
                      
                      -
                      
                      
                      
                      21,820
                      
                      
                      
                      2,520
                      
                      
                      
                      -
                      
                      
                      
                      24,340Company
      sale transaction expenses
                      
                      
                      31,609
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      31,609Operating
      income (loss)
                      
                      
                      (39,962
                      )
                      
                      
                      (32,118
                      )
                      
                      
                      (5,801
                      )
                      
                      
                      53
                      
                      
                      
                      (77,828
                      )Other
      income (expense):Interest
      expense
                      
                      
                      (33,073
                      )
                      
                      
                      (41
                      )
                      
                      
                      1
                      
                      
                      
                      -
                      
                      
                      
                      (33,113
                      )Other
      income (expense), net
                      
                      
                      744
                      
                      
                      
                      37
                      
                      
                      
                      1,140
                      
                      
                      
                      -
                      
                      
                      
                      1,921Intercompany
      charges
                      
                      
                      17,200
                      
                      
                      
                      (15,933
                      )
                      
                      
                      (1,267
                      )
                      
                      
                      -
                      
                      
                      
                      -Income
      (loss) from continuing operations before income taxes
                      
                      
                      (55,091
                      )
                      
                      
                      (48,055
                      )
                      
                      
                      (5,927
                      )
                      
                      
                      53
                      
                      
                      
                      (109,020
                      )Provision
      (benefit) for income taxes
                      
                      
                      (16,405
                      )
                      
                      
                      (14,310
                      )
                      
                      
                      1,465
                      
                      
                      
                      (1,166
                      )
                      
                      
                      (30,416
                      )Income
      (loss) from continuing operations
                      
                      
                      (38,686
                      )
                      
                      
                      (33,745
                      )
                      
                      
                      (7,392
                      )
                      
                      
                      1,219
                      
                      
                      
                      (78,604
                      )Loss
      from discontinued operations, net of tax
                      
                      
                      -
                      
                      
                      
                      (1,489
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,489
                      )Equity
      in income (loss) of subsidiaries
                      
                      
                      (41,407
                      )
                      
                      
                      (7,284
                      )
                      
                      
                      -
                      
                      
                      
                      48,691
                      
                      
                      
                      -Net
      income (loss)
                      
                      $
                      (80,093
                      )
                      
                      $
                      (42,518
                      )
                      
                      $
                      (7,392
                      )
                      
                      $
                      49,910
                      
                      
                      $
                      (80,093
                      )




- 30
-





Condensed
Consolidating Statement of Operations


For
the Period from July 1, 2007 to August 14, 2007


(In
thousands)





Subsidiary
                
                
                SubsidiaryParent
                
                
                Guarantors
                
                
                Non-Guarantors
                
                
                Eliminations
                
                
                ConsolidatedNet
      sales
                
                $
                -
                
                
                $
                25,858
                
                
                $
                12,809
                
                
                $
                (446
                )
                
                $
                38,221Cost
      of sales
                
                
                -
                
                
                
                15,066
                
                
                
                8,074
                
                
                
                (279
                )
                
                
                22,861Gross
      profit
                
                
                -
                
                
                
                10,792
                
                
                
                4,735
                
                
                
                (167
                )
                
                
                15,360Selling,
      general and administrative costs
                
                
                3,892
                
                
                
                7,571
                
                
                
                7,568
                
                
                
                -
                
                
                
                19,031Research
      and development costs
                
                
                -
                
                
                
                5,526
                
                
                
                6,652
                
                
                
                -
                
                
                
                12,178Amortization
      of acquired intangibles
                
                
                -
                
                
                
                601
                
                
                
                1,091
                
                
                
                -
                
                
                
                1,692Company
      sale transaction expenses
                
                
                3,717
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,717Operating
      income (loss)
                
                
                (7,609
                )
                
                
                (2,906
                )
                
                
                (10,576
                )
                
                
                (167
                )
                
                
                (21,258
                )Other
      income (expense):Interest
      expense
                
                
                (261
                )
                
                
                (14
                )
                
                
                -
                
                
                
                -
                
                
                
                (275
                )Other
      income (expense), net
                
                
                157
                
                
                
                27
                
                
                
                110
                
                
                
                -
                
                
                
                294Intercompany
      charges
                
                
                5,544
                
                
                
                (5,109
                )
                
                
                (435
                )
                
                
                -
                
                
                
                -Income
      (loss) from continuing operations before income taxes
                
                
                (2,169
                )
                
                
                (8,002
                )
                
                
                (10,901
                )
                
                
                (167
                )
                
                
                (21,239
                )Provision
      (benefit) for income taxes
                
                
                (853
                )
                
                
                (3,145
                )
                
                
                (2,833
                )
                
                
                -
                
                
                
                (6,831
                )Income
      (loss) from continuing operations
                
                
                (1,316
                )
                
                
                (4,857
                )
                
                
                (8,068
                )
                
                
                (167
                )
                
                
                (14,408
                )Loss
      from discontinued operations, net of tax
                
                
                -
                
                
                
                (2,508
                )
                
                
                -
                
                
                
                -
                
                
                
                (2,508
                )Equity
      in income (loss) of subsidiaries
                
                
                (15,600
                )
                
                
                (7,814
                )
                
                
                -
                
                
                
                23,414
                
                
                
                -Net
      income (loss)
                
                $
                (16,916
                )
                
                $
                (15,179
                )
                
                $
                (8,068
                )
                
                $
                23,247
                
                
                $
                (16,916
                )


- 31
-





Condensed
Consolidating Balance Sheet


As
of December 31, 2008


(In
thousands)





Subsidiary
                    
                    
                    SubsidiaryParent
                    
                    
                    Guarantors
                    
                    
                    Non-Guarantors
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedAssetsCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    47,270
                    
                    
                    $
                    (365
                    )
                    
                    $
                    26,759
                    
                    
                    $
                    -
                    
                    
                    $
                    73,664Accounts
      receivable, net
                    
                    
                    -
                    
                    
                    
                    74,875
                    
                    
                    
                    47,923
                    
                    
                    
                    -
                    
                    
                    
                    122,798Inventories
                    
                    
                    -
                    
                    
                    
                    94,837
                    
                    
                    
                    33,385
                    
                    
                    
                    (450
                    )
                    
                    
                    127,772Deferred
      income taxes
                    
                    
                    5,003
                    
                    
                    
                    23,560
                    
                    
                    
                    4,374
                    
                    
                    
                    -
                    
                    
                    
                    32,937Prepaid
      expenses and other current assets
                    
                    
                    3,060
                    
                    
                    
                    4,440
                    
                    
                    
                    4,716
                    
                    
                    
                    -
                    
                    
                    
                    12,216Total
      current assets
                    
                    
                    55,333
                    
                    
                    
                    197,347
                    
                    
                    
                    117,157
                    
                    
                    
                    (450
                    )
                    
                    
                    369,387Property,
      plant and equipment, net
                    
                    
                    13,063
                    
                    
                    
                    64,100
                    
                    
                    
                    20,381
                    
                    
                    
                    -
                    
                    
                    
                    97,544Non-current
      marketable securities
                    
                    
                    17,750
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    17,750Deferred
      financing costs
                    
                    
                    28,127
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    28,127Other
      assets
                    
                    
                    12,494
                    
                    
                    
                    2,340
                    
                    
                    
                    677
                    
                    
                    
                    -
                    
                    
                    
                    15,511Intangible
      assets with definite lives, net
                    
                    
                    -
                    
                    
                    
                    264,141
                    
                    
                    
                    35,611
                    
                    
                    
                    -
                    
                    
                    
                    299,752Intangible
      assets with indefinite lives
                    
                    
                    -
                    
                    
                    
                    90,229
                    
                    
                    
                    24,499
                    
                    
                    
                    -
                    
                    
                    
                    114,728Goodwill
                    
                    
                    (10
                    )
                    
                    
                    411,646
                    
                    
                    
                    37,129
                    
                    
                    
                    -
                    
                    
                    
                    448,765Total
      assets
                    
                    $
                    126,757
                    
                    
                    $
                    1,029,803
                    
                    
                    $
                    235,454
                    
                    
                    $
                    (450
                    )
                    
                    $
                    1,391,564Liabilities and Stockholder's
      EquityCurrent
      liabilities:Current
      portion of long-term debt
                    
                    $
                    3,750
                    
                    
                    $
                    320
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,070Accounts
      payable
                    
                    
                    281
                    
                    
                    
                    18,935
                    
                    
                    
                    15,489
                    
                    
                    
                    -
                    
                    
                    
                    34,705Deferred
      revenue, including advance payments
                    
                    
                    -
                    
                    
                    
                    15,129
                    
                    
                    
                    13,019
                    
                    
                    
                    -
                    
                    
                    
                    28,148Income
      taxes payable
                    
                    
                    -
                    
                    
                    
                    2,716
                    
                    
                    
                    5,293
                    
                    
                    
                    -
                    
                    
                    
                    8,009Accrued
      payroll expense
                    
                    
                    920
                    
                    
                    
                    15,056
                    
                    
                    
                    2,135
                    
                    
                    
                    -
                    
                    
                    
                    18,111Accrued
      expenses and other current liabilities
                    
                    
                    34,366
                    
                    
                    
                    11,745
                    
                    
                    
                    12,048
                    
                    
                    
                    -
                    
                    
                    
                    58,159Total
      current liabilities
                    
                    
                    39,317
                    
                    
                    
                    63,901
                    
                    
                    
                    47,984
                    
                    
                    
                    -
                    
                    
                    
                    151,202Long-term
      debt
                    
                    
                    877,416
                    
                    
                    
                    1,085
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    878,501Deferred
      income taxes
                    
                    
                    (17,932
                    )
                    
                    
                    139,389
                    
                    
                    
                    13,972
                    
                    
                    
                    (89
                    )
                    
                    
                    135,340Defined
      benefit plan obligations
                    
                    
                    6,099
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,099Other
      long-term liabilities
                    
                    
                    19,311
                    
                    
                    
                    449
                    
                    
                    
                    4,978
                    
                    
                    
                    -
                    
                    
                    
                    24,738Intercompany
      investment
                    
                    
                    (252,829
                    )
                    
                    
                    4,876
                    
                    
                    
                    247,953
                    
                    
                    
                    -
                    
                    
                    
                    -Intercompany
      receivable/payable
                    
                    
                    (862,819
                    )
                    
                    
                    895,652
                    
                    
                    
                    (32,349
                    )
                    
                    
                    (484
                    )
                    
                    
                    -Total
      liabilities
                    
                    
                    (191,437
                    )
                    
                    
                    1,105,352
                    
                    
                    
                    282,538
                    
                    
                    
                    (573
                    )
                    
                    
                    1,195,880Stockholder's
      equity
                    
                    
                    318,194
                    
                    
                    
                    (75,549
                    )
                    
                    
                    (47,084
                    )
                    
                    
                    123
                    
                    
                    
                    195,684Total
      liabilities and stockholder's equity
                    
                    $
                    126,757
                    
                    
                    $
                    1,029,803
                    
                    
                    $
                    235,454
                    
                    
                    $
                    (450
                    )
                    
                    $
                    1,391,564


- 32
-





Condensed
Consolidating Balance Sheet


As
of June 30, 2008


(In
thousands)





Subsidiary
                    
                    
                    SubsidiaryParent
                    
                    
                    Guarantors
                    
                    
                    Non-Guarantors
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedAssetsCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    39,285
                    
                    
                    $
                    (2,379
                    )
                    
                    $
                    17,243
                    
                    
                    $
                    -
                    
                    
                    $
                    54,149Accounts
      receivable, net
                    
                    
                    -
                    
                    
                    
                    90,343
                    
                    
                    
                    57,640
                    
                    
                    
                    -
                    
                    
                    
                    147,983Inventories
                    
                    
                    -
                    
                    
                    
                    91,856
                    
                    
                    
                    43,537
                    
                    
                    
                    (502
                    )
                    
                    
                    134,891Deferred
      income taxes
                    
                    
                    (2,352
                    )
                    
                    
                    23,539
                    
                    
                    
                    5,852
                    
                    
                    
                    -
                    
                    
                    
                    27,039Prepaid
      expenses and other current assets
                    
                    
                    2,464
                    
                    
                    
                    2,616
                    
                    
                    
                    7,104
                    
                    
                    
                    -
                    
                    
                    
                    12,184Total
      current assets
                    
                    
                    39,397
                    
                    
                    
                    205,975
                    
                    
                    
                    131,376
                    
                    
                    
                    (502
                    )
                    
                    
                    376,246Property,
      plant and equipment, net
                    
                    
                    13,406
                    
                    
                    
                    63,964
                    
                    
                    
                    27,279
                    
                    
                    
                    -
                    
                    
                    
                    104,649Non-current
      marketable securities
                    
                    
                    19,960
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    19,960Deferred
      financing costs
                    
                    
                    30,185
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    30,185Other
      assets
                    
                    
                    16,480
                    
                    
                    
                    2,474
                    
                    
                    
                    (394
                    )
                    
                    
                    -
                    
                    
                    
                    18,560Intangible
      assets with definite lives, net
                    
                    
                    -
                    
                    
                    
                    297,408
                    
                    
                    
                    47,458
                    
                    
                    
                    -
                    
                    
                    
                    344,866Intangible
      assets with indefinite lives
                    
                    
                    -
                    
                    
                    
                    90,229
                    
                    
                    
                    33,149
                    
                    
                    
                    -
                    
                    
                    
                    123,378Goodwill
                    
                    
                    -
                    
                    
                    
                    435,570
                    
                    
                    
                    25,101
                    
                    
                    
                    484
                    
                    
                    
                    461,155Total
      assets
                    
                    $
                    119,428
                    
                    
                    $
                    1,095,620
                    
                    
                    $
                    263,969
                    
                    
                    $
                    (18
                    )
                    
                    $
                    1,478,999Liabilities and Stockholder's
      EquityCurrent
      liabilities:Current
      portion of long-term debt
                    
                    $
                    5,250
                    
                    
                    $
                    324
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    5,574Accounts
      payable
                    
                    
                    554
                    
                    
                    
                    19,882
                    
                    
                    
                    18,946
                    
                    
                    
                    -
                    
                    
                    
                    39,382Deferred
      revenue, including advance payments
                    
                    
                    -
                    
                    
                    
                    8,621
                    
                    
                    
                    18,523
                    
                    
                    
                    -
                    
                    
                    
                    27,144Income
      taxes payable
                    
                    
                    409
                    
                    
                    
                    -
                    
                    
                    
                    1,527
                    
                    
                    
                    -
                    
                    
                    
                    1,936Accrued
      payroll expense
                    
                    
                    2,106
                    
                    
                    
                    18,200
                    
                    
                    
                    4,219
                    
                    
                    
                    -
                    
                    
                    
                    24,525Accrued
      expenses and other current liabilities
                    
                    
                    31,205
                    
                    
                    
                    12,272
                    
                    
                    
                    13,353
                    
                    
                    
                    -
                    
                    
                    
                    56,830Total
      current liabilities
                    
                    
                    39,524
                    
                    
                    
                    59,299
                    
                    
                    
                    56,568
                    
                    
                    
                    -
                    
                    
                    
                    155,391Long-term
      debt
                    
                    
                    872,152
                    
                    
                    
                    1,085
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    873,237Deferred
      income taxes
                    
                    
                    (12,254
                    )
                    
                    
                    150,400
                    
                    
                    
                    21,311
                    
                    
                    
                    -
                    
                    
                    
                    159,457Defined
      benefit plan obligations
                    
                    
                    6,263
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,263Other
      long-term liabilities
                    
                    
                    1,368
                    
                    
                    
                    487
                    
                    
                    
                    6,148
                    
                    
                    
                    -
                    
                    
                    
                    8,003Intercompany
      investment
                    
                    
                    (248,051
                    )
                    
                    
                    2,944
                    
                    
                    
                    245,107
                    
                    
                    
                    -
                    
                    
                    
                    -Intercompany
      receivable/payable
                    
                    
                    (895,004
                    )
                    
                    
                    953,623
                    
                    
                    
                    (58,619
                    )
                    
                    
                    -
                    
                    
                    
                    -Total
      liabilities
                    
                    
                    (236,002
                    )
                    
                    
                    1,167,838
                    
                    
                    
                    270,515
                    
                    
                    
                    -
                    
                    
                    
                    1,202,351Stockholder's
      equity
                    
                    
                    355,430
                    
                    
                    
                    (72,218
                    )
                    
                    
                    (6,546
                    )
                    
                    
                    (18
                    )
                    
                    
                    276,648Total
      liabilities and stockholder's equity
                    
                    $
                    119,428
                    
                    
                    $
                    1,095,620
                    
                    
                    $
                    263,969
                    
                    
                    $
                    (18
                    )
                    
                    $
                    1,478,999


- 33
-





Condensed
Consolidating Statement of Cash Flows


For
the Six Months Ended December 31, 2008


(In
thousands)





Non-Guarantor
                
                
                Guarantor
                
                
                ConsolidatingParent
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Adjustments
                
                
                ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                
                $
                (11,004
                )
                
                $
                444
                
                
                $
                15,485
                
                
                $
                (15,929
                )
                
                $
                (11,004
                )Changes
      in operating assets and liabilities and non-cash items, included in net
      earnings (loss)
                
                
                23,477
                
                
                
                5,928
                
                
                
                7,330
                
                
                
                15,929
                
                
                
                52,664Net
      cash provided by (used in) operating activities
                
                
                12,473
                
                
                
                6,372
                
                
                
                22,815
                
                
                
                -
                
                
                
                41,660Cash
      flows from investing activities:Capital
      expenditures
                
                
                (11
                )
                
                
                (5,041
                )
                
                
                (3,301
                )
                
                
                -
                
                
                
                (8,353
                )Proceeds
      from the sale of property, plant and equipment
                
                
                -
                
                
                
                687
                
                
                
                179
                
                
                
                -
                
                
                
                866Other,
      net
                
                
                (12
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (12
                )Net
      cash provided by (used in) investing activities
                
                
                (23
                )
                
                
                (4,354
                )
                
                
                (3,122
                )
                
                
                -
                
                
                
                (7,499
                )Cash
      flows from financing activities:Debt
      repayments
                
                
                (4,125
                )
                
                
                (4
                )
                
                
                -
                
                
                
                -
                
                
                
                (4,129
                )Debt
      financing costs
                
                
                (340
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (340
                )Net
      cash provided by (used in) financing activities
                
                
                (4,465
                )
                
                
                (4
                )
                
                
                -
                
                
                
                -
                
                
                
                (4,469
                )Effect
      of exchange rate changes on cash and cash equivalents
                
                
                -
                
                
                
                -
                
                
                
                (10,177
                )
                
                
                -
                
                
                
                (10,177
                )Net
      increase in cash and cash equivalents
                
                
                7,985
                
                
                
                2,014
                
                
                
                9,516
                
                
                
                -
                
                
                
                19,515Cash
      and cash equivalents at beginning of period
                
                
                39,285
                
                
                
                (2,379
                )
                
                
                17,243
                
                
                
                -
                
                
                
                54,149Cash
      and cash equivalents at end of period
                
                $
                47,270
                
                
                $
                (365
                )
                
                $
                26,759
                
                
                $
                -
                
                
                $
                73,664


- 34
-





Condensed
Consolidating Statement of Cash Flows


For
the Period from August 15, 2007 to December 31, 2007


(In
thousands)





Non-Guarantor
                
                
                Guarantor
                
                
                ConsolidatingParent
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Adjustments
                
                
                ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                
                $
                (80,093
                )
                
                $
                (42,518
                )
                
                $
                (7,392
                )
                
                $
                49,910
                
                
                $
                (80,093
                )Loss
      from discontinued operations, net of tax
                
                
                -
                
                
                
                1,489
                
                
                
                -
                
                
                
                -
                
                
                
                1,489Income
      (loss) from continuing operations
                
                
                (80,093
                )
                
                
                (41,029
                )
                
                
                (7,392
                )
                
                
                49,910
                
                
                
                (78,604
                )Changes
      in operating assets and liabilities and non cash items, included in net
      income (loss)
                
                
                42,282
                
                
                
                59,349
                
                
                
                (7,454
                )
                
                
                (49,910
                )
                
                
                44,267Net
      cash provided by (used in) continuing operations
                
                
                (37,811
                )
                
                
                18,320
                
                
                
                (14,846
                )
                
                
                -
                
                
                
                (34,337
                )Net
      cash provided by (used in) discontinued operations
                
                
                -
                
                
                
                (2,029
                )
                
                
                -
                
                
                
                -
                
                
                
                (2,029
                )Net
      cash provided by (used in) operating activities
                
                
                (37,811
                )
                
                
                16,291
                
                
                
                (14,846
                )
                
                
                -
                
                
                
                (36,366
                )Cash
      flows from investing activities:Acquisition
      of predecessor entity, net of cash acquired
                
                
                (1,128,915
                )
                
                
                (2,593
                )
                
                
                13,215
                
                
                
                -
                
                
                
                (1,118,293
                )Payment
      for purchase of businesses, net of cash acquired
                
                
                1,522
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,522Capital
      expenditures
                
                
                (97
                )
                
                
                (4,110
                )
                
                
                (1,004
                )
                
                
                -
                
                
                
                (5,211
                )Proceeds
      from the sale of property, plant and equipment
                
                
                -
                
                
                
                9
                
                
                
                15
                
                
                
                -
                
                
                
                24Purchase
      of marketable securities
                
                
                (547,178
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (547,178
                )Proceeds
      from sale of marketable securities
                
                
                512,558
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                512,558Net
      cash provided by (used in) investing activities of continuing
      operations
                
                
                (1,162,110
                )
                
                
                (6,694
                )
                
                
                12,226
                
                
                
                -
                
                
                
                (1,156,578
                )Net
      cash provided by (used in) discontinued operations
                
                
                -
                
                
                
                (12
                )
                
                
                -
                
                
                
                -
                
                
                
                (12
                )Net
      cash provided by (used in) investing activities
                
                
                (1,162,110
                )
                
                
                (6,706
                )
                
                
                12,226
                
                
                
                -
                
                
                
                (1,156,590
                )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                
                
                378,350
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                378,350Borrowings
      under debt agreements
                
                
                870,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                870,000Debt
      repayments
                
                
                (3,122
                )
                
                
                (12
                )
                
                
                -
                
                
                
                -
                
                
                
                (3,134
                )Debt
      financing costs
                
                
                (27,315
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (27,315
                )Amounts
      paid for withholding taxes on stock option exercises
                
                
                (14,142
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (14,142
                )Witholding
      taxes collected for stock option exercises
                
                
                14,142
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                14,142Net
      cash provided by (used in) financing activities of continuing
      operations
                
                
                1,217,913
                
                
                
                (12
                )
                
                
                -
                
                
                
                -
                
                
                
                1,217,901Effect
      of exchange rate changes on cash and cash equivalents
                
                
                -
                
                
                
                -
                
                
                
                317
                
                
                
                -
                
                
                
                317Net
      increase in cash and cash equivalents
                
                
                17,992
                
                
                
                9,573
                
                
                
                (2,303
                )
                
                
                -
                
                
                
                25,262Cash
      and cash equivalents at beginning of period
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Cash
      and cash equivalents at end of period
                
                $
                17,992
                
                
                $
                9,573
                
                
                $
                (2,303
                )
                
                $
                -
                
                
                $
                25,262


- 35
-





Condensed
Consolidating Statement of Cash Flows


For
the Period from July 1, 2007 to August 14, 2007


(In
thousands)





Non-Guarantor
                
                
                Guarantor
                
                
                ConsolidatingParent
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Adjustments
                
                
                ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                
                $
                (16,916
                )
                
                $
                (15,179
                )
                
                $
                (8,068
                )
                
                $
                23,247
                
                
                $
                (16,916
                )Loss
      from discontinued operations, net of tax
                
                
                -
                
                
                
                2,508
                
                
                
                -
                
                
                
                -
                
                
                
                2,508Income
      (loss) from continuing operations
                
                
                (16,916
                )
                
                
                (12,671
                )
                
                
                (8,068
                )
                
                
                23,247
                
                
                
                (14,408
                )Changes
      in operating assets and liabilities and non cash items, included in net
      income (loss)
                
                
                23,110
                
                
                
                12,708
                
                
                
                13,591
                
                
                
                (23,247
                )
                
                
                26,162Net
      cash provided by (used in) continuing operations
                
                
                6,194
                
                
                
                37
                
                
                
                5,523
                
                
                
                -
                
                
                
                11,754Net
      cash provided by (used in) discontinued operations
                
                
                -
                
                
                
                (461
                )
                
                
                -
                
                
                
                -
                
                
                
                (461
                )Net
      cash provided by (used in) operating activities
                
                
                6,194
                
                
                
                (424
                )
                
                
                5,523
                
                
                
                -
                
                
                
                11,293Cash
      flows from investing activities:Capital
      expenditures
                
                
                (249
                )
                
                
                (587
                )
                
                
                (252
                )
                
                
                -
                
                
                
                (1,088
                )Purchase
      of marketable securities
                
                
                (53,828
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (53,828
                )Proceeds
      from sale of marketable securities
                
                
                63,328
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                63,328Net
      cash provided by (used in) investing activities of continuing
      operations
                
                
                9,251
                
                
                
                (587
                )
                
                
                (252
                )
                
                
                -
                
                
                
                8,412Net
      cash provided by (used in) discontinued operations
                
                
                -
                
                
                
                (6
                )
                
                
                -
                
                
                
                -
                
                
                
                (6
                )Net
      cash provided by (used in) investing activities
                
                
                9,251
                
                
                
                (593
                )
                
                
                (252
                )
                
                
                -
                
                
                
                8,406Cash
      flows from financing activities:Debt
      repayments
                
                
                (26
                )
                
                
                (3
                )
                
                
                -
                
                
                
                -
                
                
                
                (29
                )Debt
      financing costs
                
                
                (477
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (477
                )Excess
      tax benefits from share based compensation arrangements
                
                
                12,542
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,542Proceeds
      from the exercise of stock options and warrants
                
                
                583
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                583Amounts
      paid for withholding taxes on stock option exercises
                
                
                (56
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (56
                )Withholding
      taxes collected for stock option exercises
                
                
                56
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                56Net
      cash provided by (used in) financing activities of continuing
      operations
                
                
                12,622
                
                
                
                (3
                )
                
                
                -
                
                
                
                -
                
                
                
                12,619Effect
      of exchange rate changes on cash and cash equivalents
                
                
                -
                
                
                
                -
                
                
                
                178
                
                
                
                -
                
                
                
                178Net
      increase (decrease) in cash and cash equivalents
                
                
                28,067
                
                
                
                (1,020
                )
                
                
                5,449
                
                
                
                -
                
                
                
                32,496Cash
      and cash equivalents at beginning of period
                
                
                6,807
                
                
                
                (1,573
                )
                
                
                7,766
                
                
                
                -
                
                
                
                13,000Cash
      and cash equivalents at end of period
                
                $
                34,874
                
                
                $
                (2,593
                )
                
                $
                13,215
                
                
                $
                -
                
                
                $
                45,496


- 36
-





ITEM
      2-
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Overview





We are a
leading provider of highly specialized microelectronics and test and measurement
equipment, primarily tothe global aerospace
and defense and broadband communications markets. We also design application
specific integrated circuits (“ASICs”) for CT scan equipment for the medical
industry. Founded in 1937, we have developed a substantial intellectual property
portfolio that includes more than 150 patents, extensive know-how, years of
collaborative research and development with our customers and a demonstrated
history in space, validating the high quality performance of our products. We
believe that the combination of our leading market positions, complementary
portfolio of products, years of experience and engineering capabilities provides
us with a competitive advantage and enables us to deliver high performance, high
value products to our customers.





The
Acquisition





On August
15, 2007, AX Acquisition and its parent consummated a merger with Aeroflex
Incorporated. At the effective time of the merger, AX Acquisition was merged
with and into Aeroflex Incorporated. Aeroflex Incorporated was the surviving
corporation in the merger and became a wholly-owned subsidiary of the
parent.





The
acquisition was funded by:





·
            equity
      investments in the parent of approximately $378.4 million by affiliates
      of, or funds managed by, The Veritas Capital Fund III, L.P., Golden Gate
      Private Equity, Inc. and GS Direct, L.L.C. (the “Sponsors”) and certain
      members of our management;





·
            borrowings
      under a senior secured credit facility, consisting of $525.0 million under
      our term loan facility;





·
            borrowings
      under an exchangeable senior unsecured credit facility, consisting of a
      $225.0 million term loan facility;
and





·
            borrowings
      under an exchangeable senior subordinated unsecured credit facility,
      consisting of a $120.0 million term loan
  facility.





On
September 21, 2007, we entered into a $120.0 million senior subordinated
unsecured credit facility to refinance the $120.0 million exchangeable senior
subordinated unsecured credit facility.  On August 7, 2008, we entered
into a $225.0 million senior unsecured credit facility to refinance the $225.0
million exchangeable senior unsecured credit facility.





Results
of Operations





Refer to
Notes 1 and 3 to our consolidated financial statements for details concerning
the Company’s August 15, 2007 acquisition by affiliates of or funds managed by
the Sponsors and certain members of our management and the basis upon which such
consolidated financial statements are presented. For comparative purposes in
this Management’s Discussion and Analysis of Financial Condition and Results of
Operations, we combined the Predecessor period from July 1, 2007 to August 14,
2007 with the Successor period from August 15, 2007 to December 31, 2007 to form
the six months ended December 31, 2007. This combination is not a GAAP
presentation. However, we believe this presentation is useful to the reader as a
comparison to the Successor period for the six months ended December 31,
2008.


- 37
-





The
following table sets forth our historical results of operations as a percentage
of net sales for the periods indicated below:





Non-GAAPcombinedPredecessorSuccessor
                      
                      
                      Successor
                      
                      
                      Successor
                      
                      
                      and Successor
                      
                      
                      Successor
                      
                      
                      PredecessorPeriod
                      
                      
                      PeriodThree
                      
                      
                      Three
                      
                      
                      Six
                      
                      
                      Six
                      
                      
                      August 15,
                      
                      
                      July 1,Months
                      
                      
                      Months
                      
                      
                      Months
                      
                      
                      Months
                      
                      
                      2007
                      
                      
                      2007Ended
                      
                      
                      Ended
                      
                      
                      Ended
                      
                      
                      Ended
                      
                      
                      through
                      
                      
                      throughDecember 31,
                      
                      
                      December 31,
                      
                      
                      December 31,
                      
                      
                      December 31,
                      
                      
                      December 31,
                      
                      
                      August 14,2008
                      
                      
                      2007
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2007
                      
                      
                      2007Net
      sales
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %Costs
      of sales
                      
                      
                      53.3
                      
                      
                      
                      66.0
                      
                      
                      
                      52.8
                      
                      
                      
                      64.4
                      
                      
                      
                      65.0
                      
                      
                      
                      59.8Gross
      profit
                      
                      
                      46.7
                      
                      
                      
                      34.0
                      
                      
                      
                      47.2
                      
                      
                      
                      35.6
                      
                      
                      
                      35.0
                      
                      
                      
                      40.2Operating
      expenses:Selling,
      general and administrative costs
                      
                      
                      21.8
                      
                      
                      
                      20.5
                      
                      
                      
                      22.0
                      
                      
                      
                      23.6
                      
                      
                      
                      19.8
                      
                      
                      
                      49.8Research
      and development costs
                      
                      
                      10.9
                      
                      
                      
                      12.4
                      
                      
                      
                      11.5
                      
                      
                      
                      14.1
                      
                      
                      
                      11.6
                      
                      
                      
                      31.9Amortization
      of acquired intangibles
                      
                      
                      9.3
                      
                      
                      
                      13.1
                      
                      
                      
                      11.0
                      
                      
                      
                      11.0
                      
                      
                      
                      11.9
                      
                      
                      
                      4.4Acquired
      in-process research and development costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      8.1
                      
                      
                      
                      9.3
                      
                      
                      
                      -Company
      sale transaction expenses
                      
                      
                      -
                      
                      
                      
                      0.8
                      
                      
                      
                      -
                      
                      
                      
                      11.7
                      
                      
                      
                      12.0
                      
                      
                      
                      9.7Total
      operating expenses
                      
                      
                      42.0
                      
                      
                      
                      46.8
                      
                      
                      
                      44.5
                      
                      
                      
                      68.5
                      
                      
                      
                      64.6
                      
                      
                      
                      95.8Operating
      income (loss)
                      
                      
                      4.7
                      
                      
                      
                      (12.8
                      )
                      
                      
                      2.7
                      
                      
                      
                      (32.9
                      )
                      
                      
                      (29.6
                      )
                      
                      
                      (55.6
                      )Interest
      expense
                      
                      
                      (13.6
                      )
                      
                      
                      (13.7
                      )
                      
                      
                      (14.3
                      )
                      
                      
                      (11.1
                      )
                      
                      
                      (12.6
                      )
                      
                      
                      -Other
      income (expense), net
                      
                      
                      6.0
                      
                      
                      
                      1.4
                      
                      
                      
                      4.2
                      
                      
                      
                      0.7
                      
                      
                      
                      0.7
                      
                      
                      
                      -Income
      (loss) from continuing operations before income taxes
                      
                      
                      (2.9
                      )
                      
                      
                      (25.1
                      )
                      
                      
                      (7.4
                      )
                      
                      
                      (43.3
                      )
                      
                      
                      (41.5
                      )
                      
                      
                      (55.6
                      )Provision
      (benefit) for income taxes
                      
                      
                      (0.3
                      )
                      
                      
                      (7.0
                      )
                      
                      
                      (3.7
                      )
                      
                      
                      (12.4
                      )
                      
                      
                      (11.6
                      )
                      
                      
                      (17.9
                      )Income
      (loss) from continuing operations
                      
                      
                      (2.6
                      )
                      
                      
                      (18.1
                      )
                      
                      
                      (3.7
                      )
                      
                      
                      (30.9
                      )
                      
                      
                      (29.9
                      )
                      
                      
                      (37.7
                      )Discontinued
      operations
                      
                      
                      -
                      
                      
                      
                      (0.3
                      )
                      
                      
                      -
                      
                      
                      
                      (1.3
                      )
                      
                      
                      (0.6
                      )
                      
                      
                      (6.6
                      )Net
      income (loss)
                      
                      
                      (2.6
                      )%
                      
                      
                      (18.4
                      )%
                      
                      
                      (3.7
                      )%
                      
                      
                      (32.2
                      )%
                      
                      
                      (30.5
                      )%
                      
                      
                      (44.3
                      )%





Management
evaluates the operating results of the Company’s two segments based upon pre-tax
operating income, before costs related to restructuring, lease termination
charges, amortization of acquired intangibles, share-based compensation,
acquired in-process research and development costs, Company Sale Transaction
expenses, merger related expenses and the impact of any acquisition related
adjustments.


- 38
-





The
following table sets forth our net sales and adjusted operating income by
business segment and reconciles adjusted operating income (loss) from continuing
operations before income taxes for the periods indicated:





Non-GAAPCombinedPredecessorSuccessor
                
                
                Successor
                
                
                Successor
                
                
                and
      Successor
                
                
                Successor
                
                
                PredecessorThree Months
                
                
                Three
      Months
                
                
                Six
      Months
                
                
                Six
      Months
                
                
                August 15, 2007Ended
                
                
                Ended
                
                
                Ended
                
                
                Ended
                
                
                through
                
                
                July
      1, 2007December 31,
                
                
                December
      31,
                
                
                December
      31,
                
                
                December
      31,
                
                
                December
      31,
                
                
                to
      August 14,2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2007
                
                
                2007(In thousands)Net
      sales:Microelectronic
      solutions ("AMS")
                
                $
                70,752
                
                
                $
                71,503
                
                
                $
                138,332
                
                
                $
                138,916
                
                
                $
                119,899
                
                
                $
                19,017Test
      solutions ("ATS")
                
                
                86,063
                
                
                
                89,254
                
                
                
                159,328
                
                
                
                162,077
                
                
                
                142,873
                
                
                
                19,204Net
      sales
                
                $
                156,815
                
                
                $
                160,757
                
                
                $
                297,660
                
                
                $
                300,993
                
                
                $
                262,772
                
                
                $
                38,221Segment
      adjusted operating income:-
      AMS
                
                $
                15,371
                
                
                $
                16,987
                
                
                $
                29,984
                
                
                $
                32,244
                
                
                $
                32,220
                
                
                $
                24-
      ATS
                
                
                15,974
                
                
                
                12,789
                
                
                
                25,604
                
                
                
                15,775
                
                
                
                23,357
                
                
                
                (7,582
                )-
      General corporate expense
                
                
                (3,870
                )
                
                
                (2,929
                )
                
                
                (6,567
                )
                
                
                (5,756
                )
                
                
                (3,409
                )
                
                
                (2,347
                )Adjusted
      operating income (loss)
                
                
                27,475
                
                
                
                26,847
                
                
                
                49,021
                
                
                
                42,263
                
                
                
                52,168
                
                
                
                (9,905
                )Amortization
      of acquired intangibles-
      AMS
                
                
                (8,462
                )
                
                
                (12,585
                )
                
                
                (19,139
                )
                
                
                (19,122
                )
                
                
                (18,843
                )
                
                
                (279
                )-
      ATS
                
                
                (6,160
                )
                
                
                (8,354
                )
                
                
                (13,451
                )
                
                
                (13,979
                )
                
                
                (12,566
                )
                
                
                (1,413
                )Share
      based compensation-
      AMS
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (83
                )
                
                
                -
                
                
                
                (83
                )-
      ATS
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                95
                
                
                
                -
                
                
                
                95-
      Corporate
                
                
                (489
                )
                
                
                (489
                )
                
                
                (977
                )
                
                
                (2,372
                )
                
                
                (2,146
                )
                
                
                (226
                )Restructuring
      charges-
      ATS
                
                
                (1,808
                )
                
                
                (1,015
                )
                
                
                (2,210
                )
                
                
                (4,823
                )
                
                
                (1,045
                )
                
                
                (3,778
                )One-time
      lease termination costs-
      ATS
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (576
                )
                
                
                -
                
                
                
                (576
                )Merger
      related expenses - Corporate
                
                
                (2,172
                )
                
                
                (533
                )
                
                
                (2,806
                )
                
                
                (4,034
                )
                
                
                (2,715
                )
                
                
                (1,319
                )Acquired
      in-process R&D costs-
      AMS
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (15,700
                )
                
                
                (15,700
                )
                
                
                --
      ATS
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (8,640
                )
                
                
                (8,640
                )
                
                
                -Current
      period impact of acquisition related adjustments:Inventory
      - AMS
                
                
                -
                
                
                
                (12,501
                )
                
                
                -
                
                
                
                (19,718
                )
                
                
                (19,661
                )
                
                
                (57
                )Inventory
      - ATS
                
                
                -
                
                
                
                (8,416
                )
                
                
                -
                
                
                
                (13,656
                )
                
                
                (13,656
                )
                
                
                -Depreciation
      - AMS
                
                
                (286
                )
                
                
                (293
                )
                
                
                (572
                )
                
                
                (439
                )
                
                
                (439
                )
                
                
                -Depreciation
      - ATS
                
                
                (676
                )
                
                
                (823
                )
                
                
                (1,414
                )
                
                
                (1,235
                )
                
                
                (1,235
                )
                
                
                -Depreciation
      - Corporate
                
                
                (55
                )
                
                
                (55
                )
                
                
                (110
                )
                
                
                (82
                )
                
                
                (82
                )
                
                
                -Deferred
      revenue - ATS
                
                
                (79
                )
                
                
                (983
                )
                
                
                (176
                )
                
                
                (1,659
                )
                
                
                (1,659
                )
                
                
                -Company
      sale transaction expenses
                
                
                -
                
                
                
                (1,314
                )
                
                
                -
                
                
                
                (35,326
                )
                
                
                (31,609
                )
                
                
                (3,717
                )Operating
      income (loss) (GAAP)
                
                
                7,288
                
                
                
                (20,514
                )
                
                
                8,166
                
                
                
                (99,086
                )
                
                
                (77,828
                )
                
                
                (21,258
                )Interest
      expense
                
                
                (21,250
                )
                
                
                (21,977
                )
                
                
                (42,465
                )
                
                
                (33,388
                )
                
                
                (33,113
                )
                
                
                (275
                )Other
      income (expense), net
                
                
                9,327
                
                
                
                2,176
                
                
                
                12,413
                
                
                
                2,215
                
                
                
                1,921
                
                
                
                294Income
      (loss) from continuing operations before income taxes
                
                $
                (4,635
                )
                
                $
                (40,315
                )
                
                $
                (21,886
                )
                
                $
                (130,259
                )
                
                $
                (109,020
                )
                
                $
                (21,239
                )


- 39
-





Three
Months Ended December 31, 2008 Compared to Three Months Ended December 31,
2007





Net Sales.Net
sales decreased 2% to $156.8 million for the three months ended December 31,
2008 from $160.8 million for the three months ended December 31,
2007.





Net sales
in the microelectronic solutions (“AMS”) segment decreased 1% to $70.8 million
for the three months ended December 31, 2008 from $71.5 million for the three
months ended December 31, 2007 primarily due to a reduction in sales of
microelectronic modules and components largely due to a general slowdown in the
market combined with price erosion due to competition in Asia.  This
reduction is partially offset by an increase in sales volume of integrated
circuits and motion control products combined with additional sales from our
acquisition of Gaisler in June 2008 ($922,000).  Net sales in the test
solutions (“ATS”)segment decreased 4% to
$86.1 million in 2008 from $89.3 million in 2007, due primarily to foreign
currency exchange rates, and reductions in sales of radio test sets, offset by
increases in sales of wireless products.  The change in foreign
currency exchange rates has negatively impacted U.K. sales by approximately $10
million.   Further, the period ended December 31, 2008 was
impacted by a purchase accounting adjustment to deferred revenue which reduced
sales by $79,000; while the period ended December 31, 2007, was impacted by a
purchase accounting adjustment to deferred revenue which reduced sales by
$983,000.





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





On a
consolidated basis, gross margin was 46.7% for the three months ended December
31, 2008 and 34.0% for the three months ended December 31, 2007.  For
the three months ended December 31, 2007, gross margin was adversely affected by
purchase accounting adjustments aggregating $22.4 million which (i) increased
cost of sales in the 2007 period for the increase in the recorded value of the
Company’s Sale Transaction date inventories by $20.9 million to eliminate
manufacturing profits inherent in the inventories at that date; (ii) increased
depreciation expense by $542,000 due to acquisition date fair value adjustments
and (iii) reduced sales for the quarter by $983,000 related to eliminating
selling profits inherent in certain deferred revenues.  In 2008, gross
margin was adversely affected by (i) increased depreciation expense of $492,000
related to acquisition date fair value adjustments and (ii) eliminating selling
profits inherent in certain deferred revenues which reduced sales for the
quarter by $79,000.  Ignoring the purchase accounting adjustments,
gross margin was 47.0% for the period ended December 31, 2008 and 47.7% for the
period ended December 31, 2007.





Three Months
                  
                  Gross ProfitEndedDecember 31,
                  
                  
                  
                  
                  % of
                  
                  
                  
                  
                  
                  % of
                  
                  
                  
                  
                  
                  % of(In thousands)
                  
                  AMS
                  
                  
                  sales
                  
                  
                  ATS
                  
                  
                  sales
                  
                  
                  Total
                  
                  
                  sales2008
                  
                  $
                  33,076
                  
                  
                  
                  46.7
                  %
                  
                  $
                  40,083
                  
                  
                  
                  46.6
                  %
                  
                  $
                  73,159
                  
                  
                  
                  46.7
                  %2007
                  
                  $
                  22,244
                  
                  
                  
                  31.1
                  %
                  
                  $
                  32,389
                  
                  
                  
                  36.3
                  %
                  
                  $
                  54,633
                  
                  
                  
                  34.0
                  %





Gross
margins in the AMS segment were 46.7% in 2008 and 31.1% in
2007.  Gross profit in 2008 was negatively impacted by purchase
accounting adjustments of $199,000 versus $12.7 million in 2007. Ignoring the
purchase accounting adjustments, gross margins were 47.0% in 2008 and 48.9% in
2007.  The decrease in gross margins is attributable to lower sales of
microelectronic modules and components partially offset by an increase in sales
of integrated circuit products.





Gross
margins in the ATS segment were 46.6% in 2008 and 36.3% in 2007. Gross profit in
2008 was negatively impacted by purchase accounting adjustments of $372,000
versus $9.7 million in 2007. Ignoring the purchase accounting adjustments, gross
margins were 47.0% in 2008 and 46.7% in 2007.


- 40
-





Selling, General and Administrative
Costs.  Selling, general and administrative (“SG&A”) costs
include sales, office and management salaries, fringe benefits, commissions,
insurance and professional fees, as well as, merger related
expenses.  On a consolidated basis SG&A costs increased 130 basis
points as a percentage of sales from the quarter ended December 31, 2007 to the
quarter ended December 31, 2008.  Excluding merger related expenses
($2.2 million in 2008 and $533,000 in 2007), stock compensation costs ($489,000
in 2008 and $489,000 in 2007), acquisition related depreciation expense
($293,000 in 2008 and $364,000 in 2007) and restructuring costs ($324,000 in
2008 and $203,000 in 2007) SG&A was $30.9 million in 2008 and $31.4 million
in 2007 and increased 20 basis points as a percentage of sales.





Three Months
                
                Selling, General and Administrative CostsEndedDecember 31,
                
                
                
                
                % of
                
                
                
                
                
                % of
                
                
                
                
                
                
                
                
                % of(In thousands)
                
                AMS
                
                
                sales
                
                
                ATS
                
                
                sales
                
                
                Corporate
                
                
                Total
                
                
                sales2008
                
                $
                10,723
                
                
                
                15.2
                %
                
                $
                16,865
                
                
                
                19.6
                %
                
                $
                6,586
                
                
                $
                34,174
                
                
                
                21.8
                %2007
                
                $
                10,512
                
                
                
                14.7
                %
                
                $
                18,454
                
                
                
                20.7
                %
                
                $
                4,006
                
                
                $
                32,972
                
                
                
                20.5
                %





Selling,
general and administrative costs increased $211,000, or 2%, in the AMS
segment.  Selling, general and administrative costs decreased $1.6
million, or 9%, in the ATS segment largely due to general cost savings and the
benefits of restructuring activities, as well as, a favorable impact from a
change in foreign currency exchange rates.





Corporate
general and administrative expenses increased $2.6 million primarily due to
additional merger related expenses ($1.6 million) and other professional
fees.





Selling,
general and administrative expenses increased 50 basis points, as a percentage
of sales, for AMS and decreased 110 basis points for ATS. Corporate general and
administrative expenses increased 170 basis points as a percentage of
consolidated sales.  Excluding merger related expenses, Corporate
SG&A expenses increased 65 basis points.





Research and Development
Costs. Research and development costs include materials, engineering
labor and allocated overhead. On a consolidated basis, research and development
expenses decreased 150 basis points as a percentage of sales.





Three Months
                  
                  Research and Development CostsEndedDecember 31,
                  
                  
                  
                  
                  % of
                  
                  
                  
                  
                  
                  % of
                  
                  
                  
                  
                  
                  % of(In thousands)
                  
                  AMS
                  
                  
                  sales
                  
                  
                  ATS
                  
                  
                  sales
                  
                  
                  Total
                  
                  
                  sales2008
                  
                  $
                  7,268
                  
                  
                  
                  10.3
                  %
                  
                  $
                  9,807
                  
                  
                  
                  11.4
                  %
                  
                  $
                  17,075
                  
                  
                  
                  10.9
                  %2007
                  
                  $
                  7,538
                  
                  
                  
                  10.5
                  %
                  
                  $
                  12,384
                  
                  
                  
                  13.9
                  %
                  
                  $
                  19,922
                  
                  
                  
                  12.4
                  %





AMS
segment self-funded research and development costs decreased $270,000, or 4%,
primarily due to a reduction in microelectronic module projects.  As a
percentage of sales, research and development costs decreased 20 basis
points.





ATS
segment self-funded research and development costs decreased $2.6 million, or
21%, primarily due to the closing of our Burnham facility combined with
reductions related to the completion of certain projects in the wireless
business.   Restructuring charges included in R&D were
$161,000 in 2008 and $433,000 in 2007.


- 41
-





Restructuring
costs.The ATS segment incurred restructuring costs of $1.8
million in the three months ended December 31, 2008 ($1.3 million in cost of
sales, $324,000 in S,G&A and $161,000 in R&D) related to further
consolidation and reorganization efforts in our U.K. operations.  In
comparison, in the three months ended December 31, 2007 the ATS segment incurred
total restructuring costs of $1.0 million ($379,000 in cost of sales, $203,000
in S,G&A and $433,000 in R&D), which costs also relate to consolidation
and reorganization efforts in our U.K. operations.





Amortization of Acquired
Intangibles.Amortization of acquired intangibles decreased
$6.3 million in 2008 due to the impact of the change in foreign currency
exchange rates, combined with the completion of amortization of acquired
backlog. The AMS segment decreased $4.1 million and the ATS segment decreased
$2.2 million.





Company Sale Transaction
Expenses.In the three months ended December 31, 2007, we
incurred Company Sale Transaction expenses of $1.3 million, consisting primarily
of professional fees.  There were no comparable costs in the current
quarter.





Other Income
(Expense).Interest expense was $21.3 million in the three
months ended December 31, 2008 and $22.0 million in the three months ended
December 31, 2007.  Other income (expense) of $9.3 million for the
three months ended December 31, 2008 consisted primarily of $8.8 million of
foreign currency gains and $506,000 of interest income and other miscellaneous
income, net. Other income (expense) of $2.2 million for the three months ended
December 31, 2007 consisted primarily of $1.4 million of foreign currency gains,
$533,000 of interest income and $258,000 of other miscellaneous
expense.





Provision for Income
Taxes.The income tax benefit was $528,000 for the three
months ended December 31, 2008, an effective income tax rate of
11.4%.  We had an income tax benefit of $11.2 million, an effective
income tax rate of 27.9% for the three months ended December 31, 2007. The
effective income tax rate for the two periods differed from the amount computed
by applying the U.S. Federal income tax rate to income before income taxes
primarily due to foreign, state and local income taxes.  We paid
income taxes of $372,000 in the three months ended December 31, 2008 and $3.1
million in the three months ended December 31, 2007.





Income (loss) from Continuing
Operations.  The loss from continuing operations was $4.1
million for the three months ended December 31, 2008 and $29.1 million for the
three months ended December 31, 2007.  The improvement of $25.0
million was largely related to an increase in gross margin of $18.5 million
(primarily due to a reduction in the effect of purchase accounting adjustments),
an increase in foreign currency transaction gains of $7.4 million, a reduction
in intangible asset amortization of $6.3 million, decreased R&D expense of
$2.8 million and reduced Company sale transaction expenses of $1.3
million.  The improvement is offset by a reduced tax benefit of $10.7
million.


- 42
-





Six
Months Ended December 31, 2008 Compared to Six Months Ended December 31,
2007





Net Sales.Net
sales decreased 1% to $297.7 million for the six months ended December 31, 2008
from $301.0 million for the six months ended December 31, 2007.





Net sales
in the microelectronic solutions (“AMS”) segment decreased slightly to $138.3
million for the six months ended December 31, 2008 from $138.9 million for the
six months ended December 31, 2007 primarily due to a reduction in sales volume
of microelectronic modules and components, offset by increases in motion control
products and integrated circuits combined with additional sales from our
acquisition of Gaisler in June 2008 ($2.3 million).  Net sales in the
test solutions (“ATS”)segment decreased 2% to
$159.3 million in 2008 from $162.1 million in 2007.  The change in
foreign currency exchange rates has negatively impacted U.K. sales by
approximately $10 million.  Excluding the impact of foreign currency
exchange rates, sales for the six months ended December 31, 2008 increased
approximately $7 million as compared to the six months ended December 31, 2007
primarily due to an increase in sales of wireless products, partially offset by
reductions in sales volume of synthetic test products.  The period
ended December 31, 2008 was impacted by a purchase accounting adjustment to
deferred revenue which reduced sales by $176,000; while the period ended
December 31, 2007 was impacted by a purchase accounting adjustment to deferred
revenue which reduced sales by $1.7 million.





Gross Profit.On a
consolidated basis, gross margin was 47.2% for the six months ended December 31,
2008 and 35.6% for the six months ended December 31, 2007.  In 2007,
gross margin was adversely affected by purchase accounting adjustments
aggregating $35.8 million which (i) increased cost of sales in the 2007 period
for the increase in the recorded value of the Company’s Sale Transaction date
inventories by $33.4 million to eliminate manufacturing profits inherent in the
inventories at that date; (ii) increased depreciation expense by $813,000 due to
acquisition date fair value adjustments and (iii) reduced sales for the six
months by $1.7 million related to eliminating selling profits inherent in
certain deferred revenues.  In 2008, gross margin was adversely
affected by (i) increased depreciation expense of $1.0 million related to
acquisition date fair value adjustments and (ii) eliminating selling profits
inherent in certain deferred revenues which reduced sales for the six months by
$176,000.  Ignoring the purchase accounting adjustments, gross margin
was 47.6% for the period ended December 31, 2008 and 47.3% for the period ended
December 31, 2007.





Six Months
                    
                    Gross ProfitEndedDecember 31,
                    
                    
                    
                    
                    % of
                    
                    
                    
                    
                    
                    % of
                    
                    
                    
                    
                    
                    % of(In thousands)
                    
                    AMS
                    
                    
                    sales
                    
                    
                    ATS
                    
                    
                    sales
                    
                    
                    Total
                    
                    
                    sales2008
                    
                    $
                    65,096
                    
                    
                    
                    47.1
                    %
                    
                    $
                    75,422
                    
                    
                    
                    47.3
                    %
                    
                    $
                    140,518
                    
                    
                    
                    47.2
                    %2007
                    
                    $
                    48,060
                    
                    
                    
                    34.6
                    %
                    
                    $
                    59,188
                    
                    
                    
                    36.5
                    %
                    
                    $
                    107,248
                    
                    
                    
                    35.6
                    %





Gross margins in the AMS segment were
47.1% in 2008 and 34.6% in 2007.  Gross profit in 2008 was negatively
impacted by purchase accounting adjustments of $398,000 versus $20.0 million in
2007. Ignoring the purchase accounting adjustments, gross margins were 47.3% in
2008 and 49.0% in 2007.  The decrease in gross margins is principally
attributable to lower sales volumes of microelectronic modules and components,
partially offset by an increase in sales volume of integrated
circuits.





Gross
margins in the ATS segment were 47.3% in 2008 and 36.5% in 2007. Gross profit in
2008 was negatively impacted by purchase accounting adjustments of $786,000
versus $15.8 million in 2007. Ignoring the purchase accounting adjustments,
gross margins were 47.8% in 2008 and 45.8% in 2007.  Gross margins
increased principally due to increased sales and margins in our wireless
products and increased margins in our synthetic test products due to product
mix.


- 43
-





Selling, General and Administrative
Costs.  On a consolidated basis SG&A costs decreased 160
basis points as a percentage of sales from the six months ended December 31,
2007 to the six months ended December 31, 2008. Excluding merger related
expenses ($2.8 million in 2008 and $4.0 million in 2007), stock compensation
costs ($977,000 in 2008 and $2.3 million in 2007), acquisition related
depreciation expense ($608,000 in 2008 and $546,000 in 2007), restructuring
costs ($356,000 in 2008 and $1.8 million in 2007) and a one-time lease
termination cost ($575,000 in 2007), SG&A was $60.9 million in 2008 and
$61.7 million in 2007, representing a reduction of 3 basis points as a
percentage of sales.





Six Months
                  
                  Selling, General and Administrative CostsEndedDecember 31,
                  
                  
                  
                  
                  % of
                  
                  
                  
                  
                  
                  % of
                  
                  
                  
                  
                  
                  
                  
                  
                  % of(In thousands)
                  
                  AMS
                  
                  
                  sales
                  
                  
                  ATS
                  
                  
                  sales
                  
                  
                  Corporate
                  
                  
                  Total
                  
                  
                  sales2008
                  
                  $
                  21,085
                  
                  
                  
                  15.2
                  %
                  
                  $
                  34,114
                  
                  
                  
                  21.4
                  %
                  
                  $
                  10,459
                  
                  
                  $
                  65,658
                  
                  
                  
                  22.0
                  %2007
                  
                  $
                  20,893
                  
                  
                  
                  15.0
                  %
                  
                  $
                  37,849
                  
                  
                  
                  23.4
                  %
                  
                  $
                  12,245
                  
                  
                  $
                  70,987
                  
                  
                  
                  23.6
                  %





Selling,
general and administrative costs increased $192,000, or 1%, in the AMS
segment.  Selling, general and administrative costs decreased $3.7
million, or 10%, in the ATS segment largely due to a $1.5 million reduction in
restructuring costs and one time lease termination fees ($575,000) incurred in
2007.





Corporate
general and administrative expenses decreased $1.8 million due to reductions in
merger related expenses ($1.2 million) and stock-based compensation ($1.4
million) which are partially offset by increases in professional
fees.





Selling,
general and administrative expenses increased 20 basis points, as a percentage
of sales, for AMS and decreased 200 basis points for ATS. Excluding
restructuring costs ($356,000 in 2008 and $1.8 million in 2007), a one-time
lease termination cost ($575,000 in 2007), stock compensation adjustment
($89,000 favorable impact in 2007), acquisition related depreciation expense
($479,000 in 2008 and $446,000 in 2007), the decrease for ATS was 80 basis
points. Corporate general and administrative expenses decreased 55 basis points
as a percentage of consolidated sales and excluding the merger related expenses,
acquisition related depreciation and stock compensation costs, there was an
increase of 30 basis points.





Research and Development
Costs. On a consolidated basis, research and development expenses
decreased 260 basis points as a percentage of sales.





Six Months
                  
                  Research and Development CostsEndedDecember 31,
                  
                  
                  
                  
                  % of
                  
                  
                  
                  
                  
                  % of
                  
                  
                  
                  
                  
                  % of(In thousands)
                  
                  AMS
                  
                  
                  sales
                  
                  
                  ATS
                  
                  
                  sales
                  
                  
                  Total
                  
                  
                  sales2008
                  
                  $
                  14,599
                  
                  
                  
                  10.6
                  %
                  
                  $
                  19,505
                  
                  
                  
                  12.2
                  %
                  
                  $
                  34,104
                  
                  
                  
                  11.5
                  %2007
                  
                  $
                  15,164
                  
                  
                  
                  10.9
                  %
                  
                  $
                  27,416
                  
                  
                  
                  16.9
                  %
                  
                  $
                  42,580
                  
                  
                  
                  14.1
                  %





AMS
segment self-funded research and development costs decreased $565,000, or 4%,
primarily due to a reduction of microelectronic module projects.  As a
percentage of sales, research and development costs decreased 30 basis
points.





ATS
segment self-funded research and development costs decreased $7.9 million, or
29%, primarily due to a reduction of $2.4 million in restructuring costs in our
wireless business, the closing of our Burnham facility and reductions related to
the completion of certain product development projects.


- 44
-





Acquired In-Process Research and
Development Costs.  During the six months ended December 31,
2007 and in connection with the Company Sale Transaction, we recorded and
immediately expensed $24.3 million of acquired in-process research and
development (“IPR&D”) costs ($15.7 million in the AMS segment and $8.6
million in the ATS segment).  There were no comparable costs in the
current period.





Restructuring
costs.The ATS segment incurred restructuring costs of $2.2
million in the six months ended December 31, 2008 ($1.6 million in cost of
sales, $356,000 in S,G&A and $225,000 in R&D) related to further
consolidation and reorganization efforts in our U.K. operations.  In
comparison, in the six months ended December 31, 2007 the ATS segment incurred
total restructuring costs of $4.8 million, ($379,000 in cost of sales, $1.8
million in S,G&A and $2.6 million in R&D), which costs also relate to
consolidation and reorganization efforts in our U.K. operations.





Amortization of Acquired
Intangibles.Amortization of acquired intangibles decreased
$511,000 in 2008 due to the impact of the change in foreign currency exchange
rates, combined with the completion of amortization of acquired
backlog.  The amortization for the AMS segment remained relatively
unchanged and the ATS segment decreased $528,000.





Company Sale Transaction
Expenses.In the six months ended December 31, 2007, we
incurred Company Sale Transaction expenses of $35.3 million, consisting
primarily of merger related change of control, severance and other compensation
payments, a break-up fee and its related lawsuit settlement charge and legal and
other professional fees.  There were no comparable costs in the
current period.





Other Income
(Expense).Interest expense was $42.5 million in the six
months ended December 31, 2008 and $33.4 million in the six months ended
December 31, 2007. The increase is due to the addition of $870 million of debt
to finance the purchase of the Company on August 15, 2007.  Other
income (expense) of $12.4 million for the six months ended December 31, 2008
consisted primarily of $11.2 million of foreign currency gains and $1.2 million
of interest income and other miscellaneous income, net. Other income (expense)
of $2.2 million for the six months ended December 31, 2007 consisted primarily
of $1.2 million of foreign currency gains and $1.0 million of interest income
and other miscellaneous income (expense), net.





Provision for Income
Taxes.The income tax benefit was $10.9 million for the
six months ended December 31, 2008, an effective income tax rate of
49.7%.  We had an income tax benefit of $37.2 million, an effective
income tax rate of 28.6% for the six months ended December 31, 2007. The
effective income tax rate for the two periods differed from the amount computed
by applying the U.S. Federal income tax rate to income before income taxes
primarily due to foreign, state and local income taxes and, for 2007, the tax
benefit was decreased for the impact of certain Company sale transaction
expenses that were not deductible for tax purposes, as well as nondeductible
IPR&D.  We paid income taxes of $2.4 million in the six months
ended December 31, 2008 and $3.7 million in the six months ended December 31,
2007.





Income (loss) from Continuing
Operations.  The loss from continuing operations was $11.0
million for the six months ended December 31, 2008 and $93.0 million for the six
months ended December 31, 2007.  The improvement of $82.0 million was
largely related to an increase in gross profit, primarily due to a reduction in
the effect of purchase accounting adjustments, combined with other expenses
incurred in FY07 that were not repeated such as acquired IPR&D of $24.3
million and sale transaction expenses of $35.3 million partially offset by the
related tax effects.





Liquidity
and Capital Resources





As of
December 31, 2008, we had $73.7 million of cash and cash equivalents, $218.2
million in working capital and our current ratio was 2.4 to 1.  As of
June 30, 2008, we had $54.1 million of cash and cash equivalents, $220.9 million
in working capital and our current ratio was 2.4 to 1.


- 45
-





At
December 31, 2008, our marketable securities consisted primarily of $17.8
million of auction rate securities, net of a $2.2 million valuation allowance,
discussed below. Auction rate securities represent long-term (generally
maturities of ten years to thirty-five years from the date of issuance) variable
rate bonds tied to short-term interest rates that are reset through an auction
process, which occurs every seven to thirty-five days, and are classified as
available for sale securities. All but one (with the one security having a
carrying value of $1.7 million and a AA rating) of our auction rate securities
retain a triple-A rating by at least one nationally recognized statistical
rating organization. In addition, certain of our auction rate securities are
backed by student loans whose principal and interest are federally guaranteed by
the Family Federal Education Loan Program.  We have redeemed $26.5
million of auction rate securities at par since February 8, 2008.





Given the
high credit quality of our auction rate securities and our intent and ability to
hold these securities until liquidity returns to the market or maturity, if
necessary, we believe we will recover the full principal amount of $20.0
million, in the future. However, at December 31, 2008, we concluded that the
fair value of our auction rate securities was $17.8 million. Since many auctions
are failing and given that there is currently no active secondary market for our
investment in auction rate securities, the determination of fair value was based
on the following:





·
            continuing
      illiquidity;


·
            lack
      of action by the issuers to establish different forms of financing to
      replace or redeem these securities;
and


·
            the
      credit quality of the underlying
securities.





Should
credit market disruptions continue or increase in magnitude, we may be required
to record a further impairment on our investments or consider that an ultimate
liquidity event may take longer than currently anticipated.





Auction
rate securities are classified as non-current assets in the accompanying
December 31, 2008 and June 30, 2008 consolidated balance sheets.





Our
principal liquidity requirements are to service our debt and interest and meet
our working capital and capital expenditure needs. As of December 31, 2008, we
had $882.6 million of debt outstanding (of which $878.5 million was long-term),
including approximately $517.0 million under our senior secured credit facility,
$225.0 million unsecured debt under our unsecured senior credit facility and
$139.2 million under our senior subordinated unsecured credit facility,
including paid-in-kind interest. Additionally, at December 31, 2008 we were able
to borrow an additional $50.0 million under the revolving portion of our senior
secured credit facility.





The
following is a summary of required principal repayments of long-term debt for
the next five years and thereafter as of December 31, 2008:





Twelve months ended
                      December 31,
                    
                    (In thousands)2009
                    
                    $
                    4,0702010
                    
                    
                    5,5902011
                    
                    
                    5,6102012
                    
                    
                    5,6352013
                    
                    
                    5,250Thereafter
                    
                    
                    856,416Total
                    
                    $
                    882,571


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-


We expect
that cash generated from operating activities and availability under the
revolving portion of the senior secured credit facility will be our principal
sources of liquidity. Our ability to make payments on and to refinance our
indebtedness and to fund working capital needs and planned capital expenditures
will depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive and other factors
that are beyond our control. Based on our current level of operations, we
believe our cash flow from operations and available borrowings under our senior
secured credit facility will be adequate to meet our liquidity needs for at
least the next twelve months. We cannot assure you, however, that our business
will generate sufficient cash flow from operations, or those future borrowings
will be available to us under our senior secured credit facility in an amount
sufficient to enable us to repay our indebtedness or to fund other liquidity
needs. We may need to refinance all or a portion of our indebtedness on or
before the maturity thereof. We cannot assure you that we will be able to
refinance any of our indebtedness on commercially reasonable terms or at
all.





Cash
Flows





For the
six months ended December 31, 2008, our cash flow provided by continuing
operations was $41.7 million.  Our investing activities from
continuing operations used cash of $7.5 million, primarily for $8.4 million of
capital expenditures. Our financing activities used cash of $4.5 million,
primarily to repay indebtedness ($4.1 million).





For the
six months ended December 31, 2007, our cash flow used in continuing operations
was $22.6 million.  Our investing activities from continuing
operations used cash of $1.2 billion, primarily for payments of $1.1 billion to
predecessor shareholders and option holders, net of cash acquired, $6.3 million
of capital expenditures and the purchase (net of sales) of marketable securities
of $25.1 million. Our financing activities provided cash of $1.2 billion,
primarily from borrowings under our credit facilities of $870.0 million on
August 15, 2007 and proceeds from the issuance of common stock of $378.4
million, also on August 15, 2007.





Capital
Expenditures





Capital
expenditures were $8.4 million and $6.3 for the six months ended December 31,
2008 and 2007, respectively.  Our capital expenditures primarily
consist of equipment replacements.





Contractual
Obligations





The
following table summarizes our obligations and commitments to make future
payments under debt, and other obligations as of December 31, 2008:





Payments Due By Period (1)(In millions)Less Than
                    
                    
                    
                    
                    
                    
                    
                    
                    AfterTotal
                    
                    
                    1 Year
                    
                    
                    1 - 3 Years
                    
                    
                    4 - 5 Years
                    
                    
                    5 YearsSenior
      secured credit facility
                    
                    $
                    517.0
                    
                    
                    $
                    3.8
                    
                    
                    $
                    10.5
                    
                    
                    $
                    10.5
                    
                    
                    $
                    492.2Senior
      subordinated unsecured credit facility
                    
                    
                    225.0
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    225.0Subordinated
      unsecured credit facility
                    
                    
                    139.2
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    139.2Other
      long-term debt
                    
                    
                    1.4
                    
                    
                    
                    0.3
                    
                    
                    
                    0.7
                    
                    
                    
                    0.4
                    
                    
                    
                    -Operating
      leases (2)
                    
                    
                    19.5
                    
                    
                    
                    6.0
                    
                    
                    
                    8.2
                    
                    
                    
                    3.3
                    
                    
                    
                    2.0Employment
      agreements
                    
                    
                    7.9
                    
                    
                    
                    3.1
                    
                    
                    
                    4.0
                    
                    
                    
                    0.8
                    
                    
                    
                    -Advisory
      fee (3)
                    
                    
                    11.0
                    
                    
                    
                    2.2
                    
                    
                    
                    4.4
                    
                    
                    
                    4.4
                    
                    
                    
                    -Total
                    
                    $
                    921.0
                    
                    
                    $
                    15.4
                    
                    
                    $
                    27.8
                    
                    
                    $
                    19.4
                    
                    
                    $
                    858.4





(1)
              Amounts
      do not include interest
payments.


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-


(2)
            The
      Company does not expect any future minimum sub-lease rentals associated
      with operating lease commitments shown in the above
  table.





(3)
              The
      annual advisory fee is payable to our Sponsors throughout the term of an
      advisory agreement, which has an initial term expiring on December 31,
      2013 and is automatically renewable for additional one year terms
      thereafter unless terminated. For purposes of this table we have assumed
      that such agreement terminates December 31, 2013. The annual fee will be
      the greater of $2.2 million or 1.8% of adjusted EBITDA for the prior
      fiscal year, as defined in the
agreement.





In the
normal course of business, we routinely enter into binding and non-binding
purchase obligations primarily covering anticipated purchases of inventory and
equipment. None of these obligations are individually significant. We do not
expect that these commitments, as of December 31, 2008, will have a material
adverse affect on our liquidity.





Off-Balance
Sheet Arrangements





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





Seasonality





Historically
our net sales and earnings increase sequentially from quarter to quarter within
a fiscal year, but the first quarter is typically less than the previous year’s
fourth quarter.





Accounting
Policies Involving Significant Estimates





The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the revenues and expenses during the period
reported. The following accounting policies require us to make estimates and
assumptions based on the circumstances, information available and our experience
and judgment. These estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period that they are determined to be
necessary. If actual results differ significantly from our estimates, our
financial statements could be materially impacted.





Revenues and Cost
Recognition.We recognize revenue when persuasive evidence of
an arrangement exists, the selling price is fixed or determinable, and
collectibility of the resulting receivable is reasonably assured.





For
arrangements other than certain long-term contracts, revenue (including shipping
and handling fees) is recognized when products are shipped and title has passed
to the customer. If title does not pass until the product reaches the customer’s
delivery site, recognition of the revenue is deferred until that time. Certain
of our sales are to distributors which have a right to return some portion of
product within up to eighteen months of sale. We recognize revenue on these
sales at the time of shipment to the distributor as the returns under these
arrangements have been insignificant and can be reasonably estimated. A
provision for such estimated returns is recorded at the time sales are
recognized.





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


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-


Revenue
from sales of products where software is other than incidental to their
performance, including related software support and maintenance contracts is
recognized in accordance with SOP-97-2, “Software Revenue Recognition.”
Accordingly, revenue for software is recognized when the software is delivered,
provided the requisite 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 fair value based on the
contractual renewal rate or the amount the support is sold for on a standalone
basis. Post contract support fees are deferred in Advance Payments by Customers
and Deferred Revenue and recognized as revenue ratably over the term of the
related contract.





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





Purchase Accounting and
Recoverability of Long-Lived and IntangibleAssets.  Determining the fair value of certain assets and
liabilities acquired in a business combination is judgmental in nature and often
involves the use of significant estimates and assumptions. There are various
methods used to estimate the value of tangible and intangible assets acquired,
such as discounted cash flow and market multiple approaches. Some of the more
significant estimates and assumptions inherent in the two approaches include:
projected future cash flows (including timing); discount rate reflecting the
risk inherent in the future cash flows; perpetual growth rate; determination of
appropriate market comparables; and the determination of whether a premium or a
discount should be applied to comparables. There are also judgments made to
determine the expected useful lives assigned to each class of assets and
liabilities acquired. Goodwill is measured as the excess of the cost of
acquisition over the sum of the amounts assigned to identifiable assets acquired
less liabilities assumed. We perform an assessment of whether there is an
indication that goodwill is impaired on an annual basis unless events or
circumstances warrant a more frequent assessment. The impairment assessment
involves, among other things, an estimation of the fair value of each of our
reporting units. We engage an independent valuation expert using both a market
value approach, when applicable and an income based approach to assist us in
estimating those fair values. Such estimates are inherently subjective, and
subject to change in future periods.





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





Property,
plant and equipment are stated at cost less accumulated depreciation computed on
a straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the life of the lease or the estimated
life of the asset, whichever is shorter. Changes in circumstances such as
technological advances or changes to our business model can result in the actual
useful lives differing from our estimates. To the extent the estimated useful
lives are incorrect, the value of these assets may be over or under stated,
which in turn could have a material effect on our results of operations and
financial condition.


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-


Long-lived
assets other than goodwill are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of any such asset may
be impaired. We evaluate the recoverability of such assets by estimating future
cash flows. If the sum of the undiscounted cash flows expected to result from
the use of the assets and their eventual disposition is less than the carrying
amount of the assets, we will recognize an impairment loss to the extent of the
excess of the carrying amount of the assets over the discounted cash
flows.





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





Restructuring
Charges.When we incur a liability related to a restructuring
charge, we estimate 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 from
actual expenses, there could be significant additional expenses or reversals of
previously recorded charges in the future.





Income
Taxes.Significant judgment is required in determining our
worldwide income tax provision. In the ordinary course of a global business,
there are many transactions and calculations where the ultimate tax outcome is
uncertain. Some of these uncertainties arise as a consequence of revenue sharing
and cost reimbursement arrangements among related entities, the process of
identifying items of revenues and expense that qualify for preferential tax
treatment and segregation of foreign and domestic income and expense to avoid
double taxation. No assurance can be given that the final tax outcome of these
matters will not be different than that which is reflected in our historical
income tax provisions and accruals. Such differences could have a material
effect on our income tax provision and net earnings in the period in which such
determination is made.





We record
a valuation allowance to reduce our deferred tax assets to the amount of future
tax benefit that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, there is no
assurance that sufficient taxable income will be generated in future years or
that tax strategies will continue to be prudent. Accordingly, the valuation
allowance might need to be increased to cover additional deferred tax assets
that may not be realizable. Any increase in the valuation allowance could have a
material adverse impact on our income tax provision and net earnings in the
period in which such determination is made.





Share-Based
Compensation.We are required to record the fair value of
share based compensation awards as an expense. In order to determine the fair
value of stock options on the date of grant, the Company utilizes the
Black-Scholes option-pricing model. Inherent in this model 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 shares using daily price observations over a period consistent with the
expected life. We used the safe harbor guidance in Staff Accounting Bulletin
(“SAB”) 107 to estimate the expected life of options granted during fiscal 2007
and 2006. The risk-free rate is based on the U.S. Treasury yield curve in effect
at the time of grant for periods similar to the expected life. While the
risk-free interest rate and dividend yield are less subjective assumptions,
typically based on factual data derived from public sources, the expected stock
price volatility and option life assumptions require a greater level of judgment
which makes them critical accounting estimates.


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Recently
Adopted Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value
Measurements,” to clarify the definition of fair value, establish a
framework for measuring fair value and expand the disclosures on fair value
measurements.  SFAS 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (an exit
price).  SFAS 157 also stipulates that, as a market-based measurement,
fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability, and establishes a fair
value hierarchy that distinguishes between (a) market participant
assumptions developed based on market data obtained from sources independent of
the reporting entity (observable inputs) and (b) the reporting entity’s own
assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs).




In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS
157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13.”  This
FSP amends SFAS 157 to exclude certain leasing transactions accounted for
under previously existing accounting guidance.  However, this scope
exception does not apply to assets acquired and liabilities assumed in a
business combination, regardless of whether those assets and liabilities are
related to leases.




In
February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date for
FASB Statement No. 157.”  This FSP permits the delayed application of
SFAS 157 for nonfinancial assets and nonfinancial liabilities, as defined
in this FSP, except for those that are recognized or disclosed at fair value in
the financial statements at least annually, until the beginning of our fiscal
2010.  As of July 1, 2008, we adopted SFAS 157 (see Note 8), with
the exception of its application to nonfinancial assets and nonfinancial
liabilities, which we will defer in accordance with FSP No. FAS 157-2.  We
are currently evaluating the impact on our consolidated financial statements
of adopting SFAS 157 at the beginning of fiscal 2010 for such
nonfinancial assets and nonfinancial liabilities.




In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active,” which
clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active.  The FSP was effective upon issuance, including prior periods for
which financial statements were not issued.  Revisions resulting from
a change in the valuation technique or its application will be accounted for as
a change in accounting estimate following the guidance in SFAS 154,
“Accounting Changes and Error Corrections.”  However, the disclosure
provisions in SFAS 154 for a change in accounting estimate are not required for
revisions resulting from a change in valuation technique or its
application.  We adopted SFAS 157 and FSP FAS 157-3 beginning in our
fiscal 2009 first quarter (see Note 8).  As of December 31, 2008, we
have a $2.2 million valuation allowance against the value of our auction rate
securities.





In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for
Financial Assets and Financial Liabilities,” to permit all entities to choose to
elect, at specified election dates, to measure eligible financial instruments at
fair value.  An entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each subsequent
reporting date, and recognize upfront costs and fees related to those items in
earnings as incurred and not deferred.  SFAS 159 became effective for
us as of July 1, 2008.  As we did not elect the fair value option for
our financial instruments (other than those already measured at fair value in
accordance with SFAS No. 157), the adoption of this standard did not have
an impact on our consolidated financial statements.


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Recently
Issued Accounting Pronouncements Not Yet Adopted





In
December 2007, the FASB issued SFAS 141(R), “Business Combinations.” SFAS 141(R)
replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
acquiree and the goodwill acquired. The Statement also establishes disclosure
requirements which will enable users to evaluate the nature and financial
effects of the business combination. SFAS 141(R) is effective for us for
acquisitions consummated on or after July 1, 2009.





In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51.” SFAS 160 establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160
also establishes reporting requirements that provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS 160 is effective for fiscal years
beginning after December 15, 2008. We are currently evaluating the impact, if
any, the provisions of SFAS 160 will have on our consolidated financial
statements.





In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities—an amendment of FASB Statement No. 133.”  SFAS 161
requires qualitative disclosures about a company’s objectives and strategies for
using derivative instruments, quantitative disclosures of the fair values and
gains and losses of these derivative instruments in a tabular format, as well as
more information about liquidity by requiring disclosure of a derivative
contract’s credit-risk-related contingent features.  SFAS 161 also
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. We are currently
evaluating the disclosure requirements of SFAS 161. As this is a disclosure-only
standard, there will be no impact on our consolidated financial statements as a
result of its adoption. SFAS 161 becomes effective for our March 2009 interim
consolidated financial statements.





In April
2008, the FASB issued FSPFAS No. 142-3,
“Determination of the Useful Life of Intangible Assets.”  This FSP
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS 142, “Goodwill and Other Intangible Assets.” This FSP also adds
certain disclosures to those already prescribed in SFAS 142.  FSP
142-3 becomes effective for the annual and interim periods within the year,
beginning in our fiscal 2010. The guidance for determining useful lives must be
applied prospectively to intangible assets acquired after the effective date.
The disclosure requirements must be applied prospectively to all intangible
assets recognized as of the effective date.





In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.”  This FSP provides that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class
method.  This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
years.  Upon adoption, a company is required to retrospectively adjust
its earnings per share data (including any amounts related to interim periods,
summaries of earnings and selected financial data) to conform with the
provisions in this FSP.  Early application of this FSP is
prohibited.  We have not issued any share-based payment awards that
contain nonforfeitable rights to dividends or dividend
equivalents.


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In
November 2008, the FASB ratified the consensus reached on EITF Issue
No. 08-6, “Accounting for Equity Method Investment Considerations.” 
EITF No. 08-6 addresses questions about the potential effect of SFAS
No. 141(R) and SFAS No. 160 on equity-method accounting. 
The primary issues include how the initial carrying value of an equity method
investment should be determined, how to account for any subsequent purchases and
sales of additional ownership interests, and whether the investor must
separately assess its underlying share of the investee’s indefinite-lived
intangible assets for impairment.  The effective date of EITF No. 08-6
coincides with that of SFAS No. 141(R) and SFAS No. 160 and is to
be applied on a prospective basis beginning in the Company’s fiscal 2010. 
Early adoption is not permitted for entities that previously adopted an
alternate accounting policy.





Forward-Looking
Statements





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





ITEM 3 – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





Interest Rate
Risk.We are subject to interest rate risk in connection with
borrowings under our senior secured credit facility.  Although we
currently have interest rate swap agreements hedging portions of this debt,
these will expire before the borrowings are fully repaid. As of December 31,
2008, we have $517.0 million outstanding under the term-loan portion of our
senior secured credit facility, some of which is subject to variable interest
rates. Each change of 0.125% in interest rates would result in a $52,000 change
in our annual interest expense on the un-hedged portion of the term-loan
borrowings and a $63,000 change in our annual interest expense on the revolving
loan borrowings, assuming the entire $50.0 million was
outstanding.  Any debt we incur in the future may also bear interest
at floating rates.





Foreign Currency
Risk.Foreign currency contracts are used in certain
circumstances to protect us from fluctuations in exchange rates. We enter into
foreign currency contracts, which are not designated as hedges. Thus the change
in fair value is included in income as it occurs, within other income (expense).
As of December 31, 2008, we had $8.1 million of notional value foreign currency
forward contracts maturing through March 2009. Notional amounts do not quantify
risk or represent assets or liabilities of the Company, but are used in the
calculation of cash settlements under the contracts. The fair value of these
contracts was a $792,000 liability at December 31, 2008 and a $13,000 asset at
June 30, 2008.  If foreign currency exchange rates (primarily the
British pound and the Euro) change by 10% from the levels at December 31, 2008,
the effect on our comprehensive income would be approximately $22.2
million.





Inflation
Risk.Inflation has not had a material impact on our results
of operations or financial condition during the preceding three
years.





ITEM 4T – CONTROLS AND
PROCEDURES





Our
disclosure controls and procedures under the Securities Exchange Act of 1934, as
amended, are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. The Principal Executive Officer and the Principal Financial Officer,
with the assistance from other members of management, have reviewed the
effectiveness of our disclosure controls and procedures as of December 31, 2008
and, based on their evaluation, have concluded that the disclosure controls and
procedures were effective as of such date.


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There
have been no changes in our internal controls over financial reporting that
occurred during the quarter ended December 31, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.





PART
II – OTHER INFORMATION





Item 1.  Legal
Proceedings





During
the quarter ended March 31, 2007, we became aware that certain RadHard
bidirectional multipurpose transceivers sold by us since 1999 may have been
subject to the licensing jurisdiction of the U.S. Department of State in
accordance with the International Traffic in Arms Regulations (“ITAR”).
Accordingly, we filed a Voluntary Disclosure with the Directorate of Defense
Trade Controls, Department of State, describing the details of the possible
inadvertent misclassification. Simultaneously, we filed a Commodity Jurisdiction
request providing detailed information and data supporting our contention that
the product is not subject to ITAR and requesting a determination that such
product is not ITAR controlled. By letter dated November 15, 2007, we were
informed that the U.S. Department of State had determined in response to our
Commodity Jurisdiction request, that the product is subject to the licensing
jurisdiction of the U.S. Department of State in accordance with ITAR. We
requested reconsideration of this determination. On February 7, 2008, we filed
an addendum to the above referenced Voluntary Disclosure advising the
Directorate of Defense Trade Controls that other products sold by us similar in
nature to the transceiver described above may also be subject to the ITAR. The
Directorate of Defense Trade Controls agreed to extend our time to file such
addendum to the Voluntary Disclosure until a decision was rendered with respect
to our request for reconsideration of the determination in connection with the
above-referenced Commodity Jurisdiction request. On August 5, 2008, we received
a letter from the Office of Defense Trade Controls Compliance (“DTCC”)
requesting that we provide documentation and/or information relating to our
compliance initiatives after November 15, 2007 as well as the results of any
product reviews conducted by us, and indicating that a civil penalty against us
could be warranted in connection with this matter following the review of such
materials. We have provided all of the materials and documentation requested by
the DTCC.  Our request for reconsideration was denied by the
Directorate of Defense Trade Controls on August 19, 2008 which determined that
the product is subject to the licensing jurisdiction of the Department of State
in accordance with ITAR. Accordingly, on September 18, 2008, we filed an
addendum to our Voluntary Disclosure identifying other products that may have
been subject to the licensing jurisdiction of the U.S. Department of State in
accordance with the ITAR but were inadvertently misclassified.  At
this time it is not possible to determine whether any fines or other penalties
will be asserted against us, or the materiality of any outcome.





During
May 2008, we became further aware that a certain product sold by our KDI
subsidiary may have inadvertently been misclassified as not ITAR controlled. On
August 5, 2008, we filed a Voluntary Disclosure with the Directorate of Defense
Trade Controls, Department of State, describing the inadvertent
misclassification of this product.  At this time it isnot
possible to determine whether any fines or other penalties will be asserted
against us with respect to the foregoing matters, or the materiality of any
outcome.





During
November 2008, we became aware that our Hauppauge facility had shipped two ITAR
controlled products to a foreign customer, but inadvertently had noted on the
requisite paperwork that only one ITAR controlled product was included in the
shipment.  We intend to file a voluntary disclosure with the
Directorate of Defense Trade Controls, U.S. Department of State, informing them
of this mistake.  At this time it is not possible to determine whether
any fines or other penalties will be asserted against us, or the materiality of
any outcome.


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During
January 2009, we became aware that a certain product sold by our Powell
subsidiary, for which an ITAR marketing license had been properly issued by the
U.S. Department of State, mistakenly was taken out of the country by an employee
without first obtaining the required U.S. Customs signature upon
departure.   We intend to file a voluntary disclosure shortly
advising the U.S. Department of State of this mistake. At this time it is not
possible to determine whether any fines or other penalties will be asserted
against us, or the materiality of any outcome.





An
amended class action complaint was filed against us and the Predecessor Entity’s
board of directors on June 20, 2007 in the Supreme Court of the State of New
York, Nassau County. The complaint alleges that the board breached its fiduciary
duties to our stockholders (i) by issuing a preliminary proxy statement on June
5, 2007 that was issued in connection with seeking stockholder approval of the
Merger and (ii) in approving certain amendments, that were allegedly beyond the
scope of our corporate powers, to our SERP and the employment agreements of
defendants Harvey R. Blau, our then Chairman and Chief Executive Officer, and
Leonard Borow, our then President and Chief Operating Officer and currently, the
Successor Entity’s President and Chief Executive Officer. We are currently in
settlement discussions with the plaintiffs and have accrued an insignificant
liability for the settlement.





We are
also involved in various other claims and legal actions that arise in the
ordinary course of business. We do not believe that the ultimate resolution of
any of these actions will have a material adverse effect on our financial
position, results of operations, liquidity or capital
resources.





Item 1A.
            Risk
      Factors





There
have been no material changes in our risk factors from the risk factors
disclosed in the Registration Statement on Form S-1 filed on February 2, 2009,
and which became effective on February 11, 2009.





Item 2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds





None





Item 3.
            Defaults
      upon Senior Securities





None





Item 4.
            Submission
      of Matters to a Vote of Security
Holders





None





Item 5.
            Other
      Information





None


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Item 6. 
Exhibits




Exhibit No.
                        
                        Exhibit Description10.1
                        
                        Amendment
      No.3 to Employment Agreement between Aeroflex Incorporated and Carl
      Caruso, effective December 24, 2008 (incorporated by reference to
      Exhibit 10.27 to Amendment No. 1 to the Registration Statement on Form S-4
      filed with the Securities and Exchange Commission on January 16,
      2009).10.2
                        
                        Amendment
      No. 1 to Employment Agreement between Aeroflex Incorporated  and
      Leonard Borow, effective December 31, 2008 (incorporated
      by  reference to Exhibit 10.28 to Amendment No. 1 to the
      Registration Statement on Form S-4 filed with the Securities and Exchange
      Commission on January 16, 2009).10.3
                        
                        Amendment
      No. 1 to Employment Agreement between Aeroflex Incorporated and John
      Buyko, effective December 31, 2008 (incorporated by  reference
      to Exhibit 10.29 to Amendment No. 1 to the Registration Statement on Form
      S-4 filed with the Securities and Exchange Commission on January 16,
      2009).10.4
                        
                        Amendment
      No. 3 to Employment Agreement between Aeroflex Incorporated and John
      Adamovich, Jr., effective December 31, 2008 (incorporated
      by  reference to Exhibit 10.30 to Amendment No. 1 to the
      Registration Statement on Form S-4 filed with the Securities and Exchange
      Commission on January 16, 2009).10.5
                        
                        Amendment
      No. 2 to Employment Agreement between Aeroflex Incorporated and Charles
      Badlato, effective December 31, 2008 (incorporated by  reference
      to Exhibit 10.31 to Amendment No. 1 to the Registration Statement on Form
      S-4 filed with the Securities and Exchange Commission on January 16,
      2009).10.6
                        
                        Amendment
      No. 4 to Employment Agreement between Aeroflex Incorporated and Carl
      Caruso, effective December 31, 2008 (incorporated by  reference
      to Exhibit 10.32 to Amendment No. 1 to the Registration Statement on Form
      S-4 filed with the Securities and Exchange Commission on January 16,
      2009).31.1
                        
                        Certification
      pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2
                        
                        Certification
      pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act 2002.31.3
                        
                        Certification
      pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32.1
                        
                        Certification
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2
                        
                        Certification
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002.




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SIGNATURES





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





AEROFLEX
      INCORPORATED(REGISTRANT)February
      17, 2009
                  
                  /s/
      John Adamovich, Jr.John
      Adamovich, Jr.Sr.
      Vice President andChief
      Financial Officer




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EXHIBIT
INDEX





Exhibit No.
                  
                  Exhibit Description10.1
                  
                  Amendment
      No.3 to Employment Agreement between Aeroflex Incorporated and Carl
      Caruso, effective December 24, 2008 (incorporated by reference to
      Exhibit 10.27 to Amendment No. 1 to the Registration Statement on Form S-4
      filed with the Securities and Exchange Commission on January 16,
      2009).10.2
                  
                  Amendment
      No. 1 to Employment Agreement between Aeroflex Incorporated  and
      Leonard Borow, effective December 31, 2008 (incorporated
      by  reference to Exhibit 10.28 to Amendment No. 1 to the
      Registration Statement on Form S-4 filed with the Securities and Exchange
      Commission on January 16, 2009).10.3
                  
                  Amendment
      No. 1 to Employment Agreement between Aeroflex Incorporated and John
      Buyko, effective December 31, 2008 (incorporated by  reference
      to Exhibit 10.29 to Amendment No. 1 to the Registration Statement on Form
      S-4 filed with the Securities and Exchange Commission on January 16,
      2009).10.4
                  
                  Amendment
      No. 3 to Employment Agreement between Aeroflex Incorporated and John
      Adamovich, Jr., effective December 31, 2008 (incorporated
      by  reference to Exhibit 10.30 to Amendment No. 1 to the
      Registration Statement on Form S-4 filed with the Securities and Exchange
      Commission on January 16, 2009).10.5
                  
                  Amendment
      No. 2 to Employment Agreement between Aeroflex Incorporated and Charles
      Badlato, effective December 31, 2008 (incorporated by  reference
      to Exhibit 10.31 to Amendment No. 1 to the Registration Statement on Form
      S-4 filed with the Securities and Exchange Commission on January 16,
      2009).10.6
                  
                  Amendment
      No. 4 to Employment Agreement between Aeroflex Incorporated and Carl
      Caruso, effective December 31, 2008 (incorporated by  reference
      to Exhibit 10.32 to Amendment No. 1 to the Registration Statement on Form
      S-4 filed with the Securities and Exchange Commission on January 16,
      2009).31.1
                  
                  Certification
      pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2
                  
                  Certification
      pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act 2002.31.3
                  
                  Certification
      pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32.1
                  
                  Certification
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2
                  
                  Certification
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002.




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