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, 2010





Commission
      File
                
                Registrant;
      State of Incorporation;
                
                IRS
      EmployerNumber
                
                Address
      and Telephone Number
                
                Identification
      No.001-34974
                
                Aeroflex
      Holding Corp.
                
                01-0899019Delaware35
      South Service RoadP.O.
      Box 6022Plainview,
      NY 11803-0622(516)
      694-6700033-88878
                
                Aeroflex
      Incorporated
                
                11-1974412Delaware35
      South Service RoadP.O.
      Box 6022Plainview,
      NY 11803-0622(516)
      694-6700





Indicate
by check mark whether the registrants (1) have 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 registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days.




Aeroflex
      Holding Corp.
                    Yes
       ̈
                    No
      xAeroflex
      Incorporated
                    Yes
      x
                    No
       ̈




Indicate
by check mark whether the registrants have submitted electronically and posted
on their corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Aeroflex
      Holding Corp.
                Yes
       ̈
                No
       ̈Aeroflex
      Incorporated
                Yes
       ̈
                No
       ̈
  Indicate
by check mark whether each registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated
                
                Accelerated
                
                Non-accelerated
                
                Smaller reportingfiler
                
                filer
                
                filer
                
                companyAeroflex
      Holding Corp.
                 ̈
                
                 ̈
                
                x
                
                 ̈Aeroflex
      Incorporated
                 ̈
                
                 ̈
                
                x
                
                 ̈





Indicate
by check mark whether the registrants are shell companies (as defined in Rule
12b-2 of the Exchange Act).





Aeroflex
      Holding Corp.
                Yes
       ̈
                No
      xAeroflex
      Incorporated
                Yes
       ̈
                No
      x
  Number of
shares of common stock outstanding as of February 9, 2011:





Aeroflex Holding Corp. -
              84,789,180
      sharesAeroflex
      Incorporated -
              1,000
      shares





Aeroflex
Incorporated meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.












OVERVIEW





This
quarterly report on Form 10-Q for the period ended December 31, 2010 is a
combined quarterly report being separately filed by two registrants: Aeroflex
Holding Corp. (“Aeroflex Holding”) and Aeroflex Incorporated (“Aeroflex”), a
direct wholly-owned subsidiary of Aeroflex Holding. Unless the context provides
otherwise, references to “we,” “our,” “the Company,” or “us” refer collectively
to Aeroflex Holding and its subsidiary, Aeroflex, including Aeroflex’s
consolidated subsidiaries.





Filing a
combined report which contains full financial information of both Aeroflex
Holding and its wholly owned subsidiary Aeroflex is both economical and
efficient, as Aeroflex Holding is a holding company which does not conduct
business operations on its own - all business operations are conducted by
Aeroflex and its consolidated subsidiaries. All assets, liabilities, income,
expenses and cash flows presented for all periods represent those of Aeroflex
and its subsidiaries, except for activity related to Aeroflex Holding’s equity
and earnings per share. Aeroflex Holding’s only asset is its investment in
Aeroflex. As such, other than any discussions of liquidity and capital resources
(including indebtedness and cash flows), equity and earnings per share, controls
and procedures, unregistered sales of equity securities, use of proceeds and any
material differences between Aeroflex Holding and Aeroflex which would require
separate disclosures, all information presented in this quarterly report will be
combined and pertain to both Aeroflex Holding and Aeroflex.





In this
Form 10-Q, unless the context requires otherwise, references to (i) the term
“Sponsors” refers collectively to affiliates of or funds managed by The Veritas
Capital Fund III, L.P., Golden Gate Private Equity, Inc., and GS Direct, LLC,
which indirectly control Aeroflex Holding, and (ii) “fiscal year” refers to the
twelve months ended June 30 of the applicable year. For example, “fiscal 2010”
refers to the twelve months ended June 30, 2010.





Aeroflex
Holding’s board of directors authorized an increase of Aeroflex Holding’s
authorized shares of common stock to 300,000,000 and a
65,000,000 for 1 common stock split, both of which became effective on
November 18, 2010. Aeroflex Holding’s stockholders’ equity has been
retroactively adjusted to give effect to the stock split for all periods
presented by reclassifying the par value of the additional shares issued in
connection with the split from additional paid-in capital to common stock. In
addition, all share numbers and per share amounts in Aeroflex Holding’s
consolidated financial statements have been retroactively adjusted to give
effect to the stock split.





On
November 19, 2010, Aeroflex Holding consummated an initial public offering
(“IPO”) of common stock in which it sold 19,789,180 shares of common stock, par
value of $.01 per share, at a price of $13.50 per share. Aeroflex Holding
received net proceeds of $244.1 million from the IPO, after deducting
underwriting discounts and offering expenses, including a $2.5 million
transaction fee which was paid to affiliates of the Sponsors under the advisory
agreement with them for services directly attributable to the equity offering
(“Transaction Fee”). Aeroflex Holding used the net proceeds of the IPO to
make a capital contribution to Aeroflex. In connection with the IPO,
Aeroflex:





·
            Repurchased
      an aggregate of $186.6 million of its senior unsecured notes and senior
      subordinated unsecured term loans and paid the related
      expenses;





·
            Paid a
      $16.9 million termination fee to affiliates of the Sponsors to
      terminate the advisory agreement with them, which, including the related
      write-off of prepaid advisory fees, resulted in an $18.1 million expense
      (“Termination Fee”); and




·
            Enteredinto anamendment of the creditagreement with the
      lenders ofitssenior secured
      credit facility, forwhich a $3.3 million
      feewas paid to the
      lenders.







AEROFLEX
HOLDING CORP.


AND
SUBSIDIARIES





INDEX





PAGEPART
      I:    FINANCIAL
      INFORMATIONItem
      1
                                                    FINANCIAL
      STATEMENTS OF AEROFLEX HOLDING CORP. AND SUBSIDIARIESUnaudited
      Condensed Consolidated Balance SheetsDecember
      31, 2010 and June 30, 2010
                                                    2Unaudited
      Condensed Consolidated Statements Of OperationsThree
      Months Ended December 31, 2010 and 2009
                                                    3Six
      Months Ended December 31, 2010 and 2009
                                                    4Unaudited
      Condensed Consolidated Statements Of Stockholders’ Equity and
      ComprehensiveIncome
      (Loss)Six
      Months Ended December 31, 2010
                                                    5Unaudited
      Condensed Consolidated Statements Of Cash FlowsSix
      Months Ended December 31, 2010 and 2009
                                                    6FINANCIAL
      STATEMENTS OF AEROFLEX INCORPORATED AND SUBSIDIARIESUnaudited
      Condensed Consolidated Balance SheetsDecember
      31, 2010 and June 30, 2010
                                                    7Unaudited
      Condensed Consolidated Statements Of OperationsThree
      Months Ended December 31, 2010 and 2009
                                                    8Six
      Months Ended December 31, 2010 and 2009
                                                    9Unaudited
      Condensed Consolidated Statements Of Stockholder’s Equity and
      ComprehensiveIncome
      (Loss)Six
      Months Ended December 31, 2010
                                                    10Unaudited
      Condensed Consolidated Statements Of Cash FlowsSix
      Months Ended December 31, 2010 and 2009
                                                    11COMBINED
      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS
                                                    12
      – 34Item
      2
                                                    MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
      OF OPERATIONSThree
      and Six Months Ended December 31, 2010 and 2009
                                                    35
      – 50Item
      3
                                                    QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                    50Item
      4
                                                    CONTROLS
      AND PROCEDURES
                                                    50PART
      II:     OTHER
      INFORMATIONItem
      1
                                                    LEGAL
      PROCEEDINGS
                                                    51Item
      1A
                                                    RISK
      FACTORS
                                                    51









Item
      2
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              51Item
      3
              DEFAULTS
      UPON SENIOR SECURITIES
              51Item
      4
              [REMOVED
      AND RESERVED]
              51Item
      5
              OTHER
      INFORMATION
              51Item
      6
              EXHIBITS
              52SIGNATURE
              53EXHIBIT
      INDEX
              54CERTIFICATIONS




- 1
-





Aeroflex
Holding Corp. and Subsidiaries


Unaudited
Condensed Consolidated Balance Sheets


(In
thousands, except share and per share data )





December 31,
                                
                                
                                June 30,2010
                                
                                
                                2010AssetsCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                70,643
                                
                                
                                $
                                100,663Marketable
      securities
                                
                                
                                8,357
                                
                                
                                
                                -Accounts
      receivable, less allowance for doubtfulaccounts
      of $2,101 and $1,821
                                
                                
                                131,222
                                
                                
                                
                                141,595Inventories
                                
                                
                                153,880
                                
                                
                                
                                126,568Deferred
      income taxes
                                
                                
                                26,030
                                
                                
                                
                                28,018Prepaid
      expenses and other current assets
                                
                                
                                11,252
                                
                                
                                
                                10,983Total
      current assets
                                
                                
                                401,384
                                
                                
                                
                                407,827Property,
      plant and equipment, net
                                
                                
                                99,889
                                
                                
                                
                                101,662Non-current
      marketable securities, net
                                
                                
                                -
                                
                                
                                
                                9,769Deferred
      financing costs, net
                                
                                
                                17,435
                                
                                
                                
                                20,983Other
      assets
                                
                                
                                23,204
                                
                                
                                
                                21,818Intangible
      assets with definite lives, net
                                
                                
                                214,085
                                
                                
                                
                                238,313Intangible
      assets with indefinite lives
                                
                                
                                113,844
                                
                                
                                
                                109,894Goodwill
                                
                                
                                458,034
                                
                                
                                
                                445,874Total
      assets
                                
                                $
                                1,327,875
                                
                                
                                $
                                1,356,140Liabilities and Stockholders'
      EquityCurrent
      liabilities:Current
      portion of long-term debt
                                
                                $
                                360
                                
                                
                                $
                                21,817Accounts
      payable
                                
                                
                                36,967
                                
                                
                                
                                28,803Advance
      payments by customers and deferred revenue
                                
                                
                                23,185
                                
                                
                                
                                30,741Income
      taxes payable
                                
                                
                                1,654
                                
                                
                                
                                4,615Accrued
      payroll expenses
                                
                                
                                19,098
                                
                                
                                
                                23,082Accrued
      expenses and other current liabilities
                                
                                
                                52,944
                                
                                
                                
                                58,817Total
      current liabilities
                                
                                
                                134,208
                                
                                
                                
                                167,875Long-term
      debt
                                
                                
                                695,908
                                
                                
                                
                                880,030Deferred
      income taxes
                                
                                
                                88,066
                                
                                
                                
                                138,849Defined
      benefit plan obligations
                                
                                
                                5,605
                                
                                
                                
                                5,763Other
      long-term liabilities
                                
                                
                                12,983
                                
                                
                                
                                12,639Total
      liabilities
                                
                                
                                936,770
                                
                                
                                
                                1,205,156Stockholders'
      equity:Preferred
      stock $.01 par value; 50,000,000 shares authorized,no
      shares issued and outstanding
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, par value $.01 per share; 300,000,000 sharesauthorized;
      84,789,180 and 65,000,000 shares issued and outstanding
                                
                                
                                848
                                
                                
                                
                                650Additional
      paid-in capital
                                
                                
                                642,961
                                
                                
                                
                                398,291Accumulated
      other comprehensive income (loss)
                                
                                
                                (41,102
                                )
                                
                                
                                (53,575
                                )Accumulated
      deficit
                                
                                
                                (211,602
                                )
                                
                                
                                (194,382
                                )Total
      stockholders' equity
                                
                                
                                391,105
                                
                                
                                
                                150,984Total
      liabilities and stockholders' equity
                                
                                $
                                1,327,875
                                
                                
                                $
                                1,356,140





See
combined notes to unaudited condensed consolidated financial
statements.


- 2
-





Aeroflex
Holding Corp. and Subsidiaries


Unaudited
Condensed Consolidated Statements of Operations


(In
thousands, except per share data)





Three Months Ended December 31,2010
                
                
                2009Net
      sales
                
                $
                181,579
                
                
                $
                166,739Cost
      of sales
                
                
                86,739
                
                
                
                80,081Gross
      profit
                
                
                94,840
                
                
                
                86,658Selling,
      general and administrative costs
                
                
                38,266
                
                
                
                31,573Research
      and development costs
                
                
                21,656
                
                
                
                17,261Amortization
      of acquired intangibles
                
                
                15,843
                
                
                
                15,514Termination
      of Sponsor Advisory Agreement
                
                
                18,133
                
                
                
                -Restructuring
      charges
                
                
                6,293
                
                
                
                64100,191
                
                
                
                64,412Operating
      income (loss)
                
                
                (5,351
                )
                
                
                22,246Other
      income (expense):Interest
      expense
                
                
                (20,713
                )
                
                
                (21,418
                )Loss
      on extinguishment of debt
                
                
                (25,178
                )
                
                
                -Gain
      from a bargain purchase of a business
                
                
                173
                
                
                
                -Other
      income (expense), net
                
                
                (378
                )
                
                
                422Total
      other income (expense)
                
                
                (46,096
                )
                
                
                (20,996
                )Income
      (loss) before income taxes
                
                
                (51,447
                )
                
                
                1,250Provision
      (benefit) for income taxes
                
                
                (40,044
                )
                
                
                11,864Net
      income (loss)
                
                $
                (11,403
                )
                
                $
                (10,614
                )Net
      income (loss) per common share - Basic
                
                $
                (0.15
                )
                
                $
                (0.16
                )Weighted
      average number of common shares outstanding - Basic
                
                
                74,034
                
                
                
                65,000





See
combined notes to unaudited condensed consolidated financial
statements.


- 3
-





Aeroflex
Holding Corp. and Subsidiaries


Unaudited
Condensed Consolidated Statements of Operations


(In
thousands, except per share data)





Six Months Ended December 31,2010
                            
                            
                            2009Net
      sales
                            
                            $
                            337,510
                            
                            
                            $
                            296,855Cost
      of sales
                            
                            
                            162,844
                            
                            
                            
                            145,124Gross
      profit
                            
                            
                            174,666
                            
                            
                            
                            151,731Selling,
      general and administrative costs
                            
                            
                            74,969
                            
                            
                            
                            61,703Research
      and development costs
                            
                            
                            43,814
                            
                            
                            
                            34,442Amortization
      of acquired intangibles
                            
                            
                            31,806
                            
                            
                            
                            31,119Termination
      of Sponsor Advisory Agreement
                            
                            
                            18,133
                            
                            
                            
                            -Restructuring
      charges
                            
                            
                            8,092
                            
                            
                            
                            251Loss
      on liquidation of foreign subsidiary
                            
                            
                            -
                            
                            
                            
                            7,696176,814
                            
                            
                            
                            135,211Operating
      income (loss)
                            
                            
                            (2,148
                            )
                            
                            
                            16,520Other
      income (expense):Interest
      expense
                            
                            
                            (41,951
                            )
                            
                            
                            (42,457
                            )Loss
      on extinguishment of debt
                            
                            
                            (25,178
                            )
                            
                            
                            -Gain
      from a bargain purchase of a business
                            
                            
                            173
                            
                            
                            
                            -Other
      income (expense), net
                            
                            
                            (407
                            )
                            
                            
                            479Total
      other income (expense)
                            
                            
                            (67,363
                            )
                            
                            
                            (41,978
                            )Income
      (loss) before income taxes
                            
                            
                            (69,511
                            )
                            
                            
                            (25,458
                            )Provision
      (benefit) for income taxes
                            
                            
                            (52,291
                            )
                            
                            
                            5,699Net
      income (loss)
                            
                            $
                            (17,220
                            )
                            
                            $
                            (31,157
                            )Net
      income (loss) per common share - Basic
                            
                            $
                            (0.25
                            )
                            
                            $
                            (0.48
                            )Weighted
      average number of common shares outstanding - Basic
                            
                            
                            69,517
                            
                            
                            
                            65,000





See
combined notes to unaudited condensed consolidated financial
statements.


- 4
-


Aeroflex
Holding Corp. and Subsidiaries


Unaudited
Condensed Consolidated Statement of Stockholders' Equity


and
Comprehensive Income (Loss)


(In
thousands)





Additional
                    
                    
                    OtherCommon Stock
                    
                    
                    Paid-in
                    
                    
                    Comprehensive
                    
                    
                    Accumulated
                    
                    
                    ComprehensiveTotal
                    
                    
                    Shares
                    
                    
                    Par Value
                    
                    
                    Capital
                    
                    
                    Income(Loss)
                    
                    
                    Deficit
                    
                    
                    Income (Loss)Balance,
      June 30, 2010
                    
                    $
                    150,984
                    
                    
                    
                    65,000
                    
                    
                    $
                    650
                    
                    
                    $
                    398,291
                    
                    
                    $
                    (53,575
                    )
                    
                    $
                    (194,382
                    )Proceeds
      from issuance of common stock
                    
                    
                    244,097
                    
                    
                    
                    19,789
                    
                    
                    
                    198
                    
                    
                    
                    243,899
                    
                    
                    
                    -
                    
                    
                    
                    -Share-based
      compensation
                    
                    
                    1,026
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,026
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      changes
                    
                    
                    (255
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (255
                    )
                    
                    
                    -
                    
                    
                    
                    -Other
      comprehensive income (loss)
                    
                    
                    12,473
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,473
                    
                    
                    
                    -
                    
                    
                    $
                    12,473Net
      income (loss)
                    
                    
                    (17,220
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (17,220
                    )
                    
                    
                    (17,220
                    )Balance,
      December 31, 2010
                    
                    $
                    391,105
                    
                    
                    
                    84,789
                    
                    
                    $
                    848
                    
                    
                    $
                    642,961
                    
                    
                    $
                    (41,102
                    )
                    
                    $
                    (211,602
                    )
                    
                    $
                    (4,747
                    )





See
combined notes to unaudited condensed consolidated financial
statements.


- 5
-





Aeroflex
Holding Corp. and Subsidiaries


Unaudited
Condensed Consolidated Statements of Cash Flows


(In
thousands)





Six Months Ended December 31,2010
                        
                        
                        2009Cash
      flows from operating activities:Net
      income (loss)
                        
                        $
                        (17,220
                        )
                        
                        $
                        (31,157
                        )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                        
                        
                        41,534
                        
                        
                        
                        41,774Gain
      from a bargain purchase of a business
                        
                        
                        (173
                        )
                        
                        
                        -Acquisition
      related adjustment to cost of sales
                        
                        
                        998
                        
                        
                        
                        246Loss
      on liquidation of foreign subsidiary
                        
                        
                        -
                        
                        
                        
                        7,696Loss
      on extinguishment of debt
                        
                        
                        25,178
                        
                        
                        
                        -Deferred
      income taxes
                        
                        
                        (55,926
                        )
                        
                        
                        2,437Share-based
      compensation
                        
                        
                        1,026
                        
                        
                        
                        1,045Non
      - cash restructuring charges
                        
                        
                        4,860
                        
                        
                        
                        -Amortization
      of deferred financing costs
                        
                        
                        2,839
                        
                        
                        
                        2,386Paid
      in kind interest
                        
                        
                        2,434
                        
                        
                        
                        8,857Other,
      net
                        
                        
                        1,194
                        
                        
                        
                        400Change
      in operating assets and liabilities, net of effects from purchases of
      businesses:Decrease
      (increase) in accounts receivable
                        
                        
                        13,629
                        
                        
                        
                        12,136Decrease
      (increase) in inventories
                        
                        
                        (24,214
                        )
                        
                        
                        (358
                        )Decrease
      (increase) in prepaid expenses and other assets
                        
                        
                        (1,088
                        )
                        
                        
                        (4,319
                        )Increase
      (decrease) in accounts payable, accrued expenses and other
      liabilities
                        
                        
                        (6,128
                        )
                        
                        
                        (19,030
                        )Net
      cash provided by (used in) operating activities
                        
                        
                        (11,057
                        )
                        
                        
                        22,113Cash
      flows from investing activities:Payments
      for purchase of businesses, net of cash acquired
                        
                        
                        (23,591
                        )
                        
                        
                        -Capital
      expenditures
                        
                        
                        (11,213
                        )
                        
                        
                        (8,401
                        )Proceeds
      from sale of marketable securities
                        
                        
                        2,000
                        
                        
                        
                        1,000Proceeds
      from the sale of property, plant and equipment
                        
                        
                        741
                        
                        
                        
                        845Other,
      net
                        
                        
                        -
                        
                        
                        
                        (11
                        )Net
      cash provided by (used in) investing activities
                        
                        
                        (32,063
                        )
                        
                        
                        (6,567
                        )Cash
      flows from financing activities:Net
      proceeds from issuance of common stock
                        
                        
                        244,097
                        
                        
                        
                        -Repurchase
      of senior unsecured notes and senior subordinated unsecured term loans,
      including premiums and fees
                        
                        
                        (207,690
                        )
                        
                        
                        -Debt
      repayments
                        
                        
                        (21,458
                        )
                        
                        
                        (4,012
                        )Debt
      financing costs
                        
                        
                        (3,332
                        )
                        
                        
                        -Net
      cash provided by (used in) financing activities
                        
                        
                        11,617
                        
                        
                        
                        (4,012
                        )Effect
      of exchange rate changes on cash and cash equivalents
                        
                        
                        1,483
                        
                        
                        
                        (483
                        )Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        (30,020
                        )
                        
                        
                        11,051Cash
      and cash equivalents at beginning of period
                        
                        
                        100,663
                        
                        
                        
                        57,748Cash
      and cash equivalents at end of period
                        
                        $
                        70,643
                        
                        
                        $
                        68,799





See
combined notes to unaudited condensed consolidated financial
statements.


- 6
-





Aeroflex
Incorporated and Subsidiaries


Unaudited
Condensed Consolidated Balance Sheets


(In
thousands, except share and per share data )





December 31,
                    
                    
                    June 30,2010
                    
                    
                    2010AssetsCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    70,643
                    
                    
                    $
                    100,663Marketable
      securities
                    
                    
                    8,357
                    
                    
                    
                    -Accounts
      receivable, less allowance for doubtful accounts of $2,101 and
      $1,821
                    
                    
                    131,222
                    
                    
                    
                    141,595Inventories
                    
                    
                    153,880
                    
                    
                    
                    126,568Deferred
      income taxes
                    
                    
                    26,030
                    
                    
                    
                    28,018Prepaid
      expenses and other current assets
                    
                    
                    11,252
                    
                    
                    
                    10,983Total
      current assets
                    
                    
                    401,384
                    
                    
                    
                    407,827Property,
      plant and equipment, net
                    
                    
                    99,889
                    
                    
                    
                    101,662Non-current
      marketable securities, net
                    
                    
                    -
                    
                    
                    
                    9,769Deferred
      financing costs, net
                    
                    
                    17,435
                    
                    
                    
                    20,983Other
      assets
                    
                    
                    23,204
                    
                    
                    
                    21,818Intangible
      assets with definite lives, net
                    
                    
                    214,085
                    
                    
                    
                    238,313Intangible
      assets with indefinite lives
                    
                    
                    113,844
                    
                    
                    
                    109,894Goodwill
                    
                    
                    458,034
                    
                    
                    
                    445,874Total
      assets
                    
                    $
                    1,327,875
                    
                    
                    $
                    1,356,140Liabilities and Stockholder's
      EquityCurrent
      liabilities:Current
      portion of long-term debt
                    
                    $
                    360
                    
                    
                    $
                    21,817Accounts
      payable
                    
                    
                    36,967
                    
                    
                    
                    28,803Advance
      payments by customers and deferred revenue
                    
                    
                    23,185
                    
                    
                    
                    30,741Income
      taxes payable
                    
                    
                    1,654
                    
                    
                    
                    4,615Accrued
      payroll expenses
                    
                    
                    19,098
                    
                    
                    
                    23,082Accrued
      expenses and other current liabilities
                    
                    
                    52,944
                    
                    
                    
                    58,817Total
      current liabilities
                    
                    
                    134,208
                    
                    
                    
                    167,875Long-term
      debt
                    
                    
                    695,908
                    
                    
                    
                    880,030Deferred
      income taxes
                    
                    
                    88,066
                    
                    
                    
                    138,849Defined
      benefit plan obligations
                    
                    
                    5,605
                    
                    
                    
                    5,763Other
      long-term liabilities
                    
                    
                    12,983
                    
                    
                    
                    12,639Total
      liabilities
                    
                    
                    936,770
                    
                    
                    
                    1,205,156Stockholder's
      equity:Common
      stock, par value $.10 per share; 1,000 shares authorized, issued and
      outstanding
                    
                    
                    -
                    
                    
                    
                    -Additional
      paid-in capital
                    
                    
                    643,809
                    
                    
                    
                    398,941Accumulated
      other comprehensive income (loss)
                    
                    
                    (41,102
                    )
                    
                    
                    (53,575
                    )Accumulated
      deficit
                    
                    
                    (211,602
                    )
                    
                    
                    (194,382
                    )Total
      stockholder's equity
                    
                    
                    391,105
                    
                    
                    
                    150,984Total
      liabilities and stockholder's equity
                    
                    $
                    1,327,875
                    
                    
                    $
                    1,356,140





See
combined notes to unaudited condensed consolidated financial
statements.


- 7
-





Aeroflex
Incorporated and Subsidiaries


Unaudited
Condensed Consolidated Statements of Operations


(In
thousands)





Three Months Ended December 31,2010
                
                
                2009Net
      sales
                
                $
                181,579
                
                
                $
                166,739Cost
      of sales
                
                
                86,739
                
                
                
                80,081Gross
      profit
                
                
                94,840
                
                
                
                86,658Selling,
      general and administrative costs
                
                
                38,266
                
                
                
                31,573Research
      and development costs
                
                
                21,656
                
                
                
                17,261Amortization
      of acquired intangibles
                
                
                15,843
                
                
                
                15,514Termination
      of Sponsor Advisory Agreement
                
                
                18,133
                
                
                
                -Restructuring
      charges
                
                
                6,293
                
                
                
                64100,191
                
                
                
                64,412Operating
      income (loss)
                
                
                (5,351
                )
                
                
                22,246Other
      income (expense):Interest
      expense
                
                
                (20,713
                )
                
                
                (21,418
                )Loss
      on extinguishment of debt
                
                
                (25,178
                )
                
                
                -Gain
      from a bargain purchase of a business
                
                
                173
                
                
                
                -Other
      income (expense), net
                
                
                (378
                )
                
                
                422Total
      other income (expense)
                
                
                (46,096
                )
                
                
                (20,996
                )Income
      (loss) before income taxes
                
                
                (51,447
                )
                
                
                1,250Provision
      (benefit) for income taxes
                
                
                (40,044
                )
                
                
                11,864Net
      income (loss)
                
                $
                (11,403
                )
                
                $
                (10,614
                )





See
combined notes to unaudited condensed consolidated financial
statements.


- 8
-





Aeroflex
Incorporated and Subsidiaries


Unaudited
Condensed Consolidated Statements of Operations


(In
thousands)





Six Months Ended December 31,2010
                        
                        
                        2009Net
      sales
                        
                        $
                        337,510
                        
                        
                        $
                        296,855Cost
      of sales
                        
                        
                        162,844
                        
                        
                        
                        145,124Gross
      profit
                        
                        
                        174,666
                        
                        
                        
                        151,731Selling,
      general and administrative costs
                        
                        
                        74,969
                        
                        
                        
                        61,703Research
      and development costs
                        
                        
                        43,814
                        
                        
                        
                        34,442Amortization
      of acquired intangibles
                        
                        
                        31,806
                        
                        
                        
                        31,119Termination
      of Sponsor Advisory Agreement
                        
                        
                        18,133
                        
                        
                        
                        -Restructuring
      charges
                        
                        
                        8,092
                        
                        
                        
                        251Loss
      on liquidation of foreign subsidiary
                        
                        
                        -
                        
                        
                        
                        7,696176,814
                        
                        
                        
                        135,211Operating
      income (loss)
                        
                        
                        (2,148
                        )
                        
                        
                        16,520Other
      income (expense):Interest
      expense
                        
                        
                        (41,951
                        )
                        
                        
                        (42,457
                        )Loss
      on extinguishment of debt
                        
                        
                        (25,178
                        )
                        
                        
                        -Gain
      from a bargain purchase of a business
                        
                        
                        173
                        
                        
                        
                        -Other
      income (expense), net
                        
                        
                        (407
                        )
                        
                        
                        479Total
      other income (expense)
                        
                        
                        (67,363
                        )
                        
                        
                        (41,978
                        )Income
      (loss) before income taxes
                        
                        
                        (69,511
                        )
                        
                        
                        (25,458
                        )Provision
      (benefit) for income taxes
                        
                        
                        (52,291
                        )
                        
                        
                        5,699Net
      income (loss)
                        
                        $
                        (17,220
                        )
                        
                        $
                        (31,157
                        )





See notes
to unaudited condensed consolidated financial statements.


- 9
-





Aeroflex
Incorporated and Subsidiaries


Unaudited
Condensed Consolidated Statement of Stockholder's Equity


and
Comprehensive Income (Loss)


(In
thousands)





Additional
                  
                  
                  OtherCommon Stock
                  
                  
                  Paid-in
                  
                  
                  Comprehensive
                  
                  
                  Accumulated
                  
                  
                  ComprehensiveTotal
                  
                  
                  Shares
                  
                  
                  Par Value
                  
                  
                  Capital
                  
                  
                  Income(Loss)
                  
                  
                  Deficit
                  
                  
                  Income (Loss)Balance,
      June 30, 2010
                  
                  $
                  150,984
                  
                  
                  
                  1
                  
                  
                  $
                  -
                  
                  
                  $
                  398,941
                  
                  
                  $
                  (53,575
                  )
                  
                  $
                  (194,382
                  )Proceeds
      from capital contribution from Aeroflex Holding
                  
                  
                  244,097
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  244,097
                  
                  
                  
                  -
                  
                  
                  
                  -Share-based
      compensation
                  
                  
                  1,026
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,026
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      changes
                  
                  
                  (255
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (255
                  )
                  
                  
                  -
                  
                  
                  
                  -Other
      comprehensive income (loss)
                  
                  
                  12,473
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,473
                  
                  
                  
                  -
                  
                  
                  $
                  12,473Net
      income (loss)
                  
                  
                  (17,220
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (17,220
                  )
                  
                  
                  (17,220
                  )Balance,
      December 31, 2010
                  
                  $
                  391,105
                  
                  
                  
                  1
                  
                  
                  $
                  -
                  
                  
                  $
                  643,809
                  
                  
                  $
                  (41,102
                  )
                  
                  $
                  (211,602
                  )
                  
                  $
                  (4,747
                  )





See
combined notes to unaudited condensed consolidated financial
statements.


- 10
-





Aeroflex
Incorporated and Subsidiaries


Unaudited
Condensed Consolidated Statements of Cash Flows


(In
thousands)





Six Months Ended December 31,2010
                  
                  
                  2009Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  (17,220
                  )
                  
                  $
                  (31,157
                  )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                  
                  
                  41,534
                  
                  
                  
                  41,774Gain
      from a bargain purchase of a business
                  
                  
                  (173
                  )
                  
                  
                  -Acquisition
      related adjustment to cost of sales
                  
                  
                  998
                  
                  
                  
                  246Loss
      on liquidation of foreign subsidiary
                  
                  
                  -
                  
                  
                  
                  7,696Loss
      on extinguishment of debt
                  
                  
                  25,178
                  
                  
                  
                  -Deferred
      income taxes
                  
                  
                  (55,926
                  )
                  
                  
                  2,437Share-based
      compensation
                  
                  
                  1,026
                  
                  
                  
                  1,045Non
      - cash restructuring charges
                  
                  
                  4,860
                  
                  
                  
                  -Amortization
      of deferred financing costs
                  
                  
                  2,839
                  
                  
                  
                  2,386Paid
      in kind interest
                  
                  
                  2,434
                  
                  
                  
                  8,857Other,
      net
                  
                  
                  1,194
                  
                  
                  
                  400Change
      in operating assets and liabilities, net of effects from purchases of
      businesses:Decrease
      (increase) in accounts receivable
                  
                  
                  13,629
                  
                  
                  
                  12,136Decrease
      (increase) in inventories
                  
                  
                  (24,214
                  )
                  
                  
                  (358
                  )Decrease
      (increase) in prepaid expenses and other assets
                  
                  
                  (1,088
                  )
                  
                  
                  (4,319
                  )Increase
      (decrease) in accounts payable, accrued expenses and other
      liabilities
                  
                  
                  (6,128
                  )
                  
                  
                  (19,030
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  (11,057
                  )
                  
                  
                  22,113Cash
      flows from investing activities:Payments
      for purchase of businesses, net of cash acquired
                  
                  
                  (23,591
                  )
                  
                  
                  -Capital
      expenditures
                  
                  
                  (11,213
                  )
                  
                  
                  (8,401
                  )Proceeds
      from sale of marketable securities
                  
                  
                  2,000
                  
                  
                  
                  1,000Proceeds
      from the sale of property, plant and equipment
                  
                  
                  741
                  
                  
                  
                  845Other,
      net
                  
                  
                  -
                  
                  
                  
                  (11
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  (32,063
                  )
                  
                  
                  (6,567
                  )Cash
      flows from financing activities:Capital
      contribution from Aeroflex Holding
                  
                  
                  244,097
                  
                  
                  
                  -Repurchase
      of senior unsecured notes and senior subordinated unsecured term loans,
      including premiums and fees
                  
                  
                  (207,690
                  )
                  
                  
                  -Debt
      repayments
                  
                  
                  (21,458
                  )
                  
                  
                  (4,012
                  )Debt
      financing costs
                  
                  
                  (3,332
                  )
                  
                  
                  -Net
      cash provided by (used in) financing activities
                  
                  
                  11,617
                  
                  
                  
                  (4,012
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  1,483
                  
                  
                  
                  (483
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  (30,020
                  )
                  
                  
                  11,051Cash
      and cash equivalents at beginning of period
                  
                  
                  100,663
                  
                  
                  
                  57,748Cash
      and cash equivalents at end of period
                  
                  $
                  70,643
                  
                  
                  $
                  68,799





See
combined notes to unaudited condensed consolidated financial
statements.


- 11
-




COMBINED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.
            Basis
      of Presentation





Stock
Split, Initial Public Offering and Use of Proceeds





This
quarterly report for the period ended December 31, 2010 is a combined quarterly
report being separately filed by two registrants: Aeroflex Holding Corp.
(“Aeroflex Holding”) and Aeroflex Incorporated (“Aeroflex”), a direct
wholly-owned subsidiary of Aeroflex Holding.  Unless the context
provides otherwise, references to “we,” “our,” “the Company,” or “us” refer
collectively to Aeroflex Holding and its subsidiary, Aeroflex, including
Aeroflex’s consolidated subsidiaries.





Filing a
combined report which contains full financial information of both Aeroflex
Holding and its wholly owned subsidiary Aeroflex is both economical and
efficient, as Aeroflex Holding is a holding company which does not conduct
business operations on its own - all business operations are conducted by
Aeroflex and its consolidated subsidiaries. All assets, liabilities, income,
expenses and cash flows presented for all periods represent those of Aeroflex
and its subsidiaries, except for activity related to Aeroflex Holding’s equity
and earnings per share. Aeroflex Holding’s only asset is its investment in
Aeroflex.  As such, other than any discussions of liquidity and
capital resources (including indebtedness and cash flows), equity and earnings
per share, controls and procedures, unregistered sales of equity securities, use
of proceeds and any material differences between Aeroflex Holding and Aeroflex
which would require separate disclosures, all information presented in this
quarterly report will be combined and pertain to both Aeroflex Holding and
Aeroflex.





Unless
the context requires otherwise, references to (i) the term “Sponsors” refers
collectively to affiliates of or funds managed by The Veritas Capital Fund III,
L.P., Golden Gate Private Equity, Inc., and GS Direct, LLC, which indirectly
control Aeroflex Holding, and (ii) “fiscal year” refers to the twelve months
ended June 30 of the applicable year.  For example, “fiscal 2010”
refers to the twelve months ended June 30, 2010.





Aeroflex
Holding’s board of directors authorized an increase of Aeroflex Holding’s
authorized shares of common stock to 300,000,000 and a
65,000,000 for 1 common stock split, both of which became effective on
November 18, 2010. Aeroflex Holding’s stockholders’ equity has been
retroactively adjusted to give effect to the stock split for all periods
presented by reclassifying the par value of the additional shares issued in
connection with the split from additional paid-in capital to common stock. In
addition, all share numbers and per share amounts in Aeroflex Holding’s
consolidated financial statements have been retroactively adjusted to give
effect to the stock split.





On
November 19, 2010, Aeroflex Holding consummated an initial public offering
(“IPO”) of common stock in which it sold 19,789,180 shares of common stock, par
value of $.01 per share, at a price of $13.50 per share. Aeroflex Holding
received net proceeds of $244.1 million from the IPO, after deducting
underwriting discounts and offering expenses, including a $2.5 million
transaction fee which was paid to affiliates of the Sponsors under the advisory
agreement with them for services directly attributable to the equity offering
(“Transaction Fee”).  Aeroflex Holding used the net proceeds of the
IPO to make a capital contribution to Aeroflex.  In connection with
the IPO, Aeroflex:





·
            Repurchased
      an aggregate of $186.6 million of its senior unsecured notes and senior
      subordinated unsecured term loans and paid the related
      expenses;





·
            Paid
      a $16.9 million termination fee to affiliates of the Sponsors to terminate
      the advisory agreement with them, which, including the related write-off
      of prepaid advisory fees, resulted in an $18.1 million expense
      (“Termination Fee”); and


- 12
-




·
            Entered
      into an amendment of the credit agreement with the lenders of its senior
      secured credit facility, for which a $3.3 million fee was paid to the
      lenders.





Basis
of Accounting





The
accompanying unaudited condensed consolidated financial information of Aeroflex
Holding and Aeroflex have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”) and the rules and
regulations of the United States Securities and Exchange Commission (“SEC”), and
reflects all adjustments, consisting only of normal recurring adjustments, which
in management’s opinion are necessary to state fairly the Company’s financial
position as of December 31, 2010, the results of operations for the three and
six month periods ended December 31, 2010 and 2009 and the cash flows for the
six month periods ended December 31, 2010 and 2009. The June 30, 2010 balance
sheet information has been derived from audited financial statements, but does
not include all information or disclosures required by U.S. GAAP.





The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, as well as the reported amounts of
sales and expenses during the reporting period. Actual results may differ
from those estimates, and such differences may be material to the financial
statements.





These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements included in Aeroflex Holding’s
amended registration statement on Form S-1 filed with the SEC on November 9,
2010 (“Aeroflex Holding’s Registration Statement”) and in Aeroflex’s annual
report on Form 10-K for the fiscal year ended June 30, 2010 (”Aeroflex’s Fiscal
2010 Form 10-K”).





The
accompanying condensed consolidated financial statements of Aeroflex Holding are
essentially identical to the accompanying condensed consolidated financial
statements of Aeroflex, with the following significant exceptions: 
Aeroflex Holding has 84,789,180 shares of common stock outstanding at a par
value of $.01 per share, of which 65,000,000 shares are held by one shareholder
(as a result of the 65,000,000 for 1 stock split on November 18, 2010) and
19,789,180 shares are held by public shareholders by virtue of the IPO on
November 19, 2010, which resulted in net proceeds of $244.1 million after
deducting underwriting discounts and offering expenses. Aeroflex has 1,000
shares of common stock outstanding at a par value of $.10 per share, all of
which are held by Aeroflex Holding, and Aeroflex received a capital contribution
of $244.1 million from Aeroflex Holding from the net proceeds of the IPO. The
combined notes to the condensed consolidated financial statements are
essentially identical for Aeroflex Holding and Aeroflex, except as
noted.





Results
of operations for interim periods are not necessarily indicative of results to
be expected for the full fiscal year or any future periods.




- 13
-




Reclassifications





Certain
reclassifications have been made to the fiscal 2010 consolidated financial
statements to conform to the fiscal 2011 presentation.





2.
            Accounting
      Pronouncements





Recently
Adopted Accounting Pronouncements




On July
1, 2010, we adopted the authoritative guidance issued by the Financial
Accounting Standards Board (“FASB”) on the consolidation of variable interest
entities. The new guidance requires revised evaluations of whether entities
represent variable interest entities, ongoing assessments of control over such
entities, and additional disclosures for variable interests. The adoption of
this new guidance did not have an impact on our consolidated financial
statements.




Recently
Issued Accounting Pronouncements Not Yet Adopted





In
January 2010, the FASB issued authoritative guidance to amend the disclosure
requirements related to recurring and nonrecurring fair value
measurements.  The guidance requires a roll forward of activities on
purchases, sales, issuance, and settlements on a gross basis of the assets and
liabilities measured using significant unobservable inputs (Level 3 fair value
measurements). We believe the adoption on July 1, 2011 of the gross presentation
of the Level 3 roll forward will not have an impact on our consolidated
financial statements.





3.
            Acquisition
      of Businesses and Intangible Assets





Test
Evolution Corporation




On
October 1, 2007, we purchased 40% of the outstanding stock of Test
Evolution Corporation, or TEC, for $4.0 million. TEC, located in
Massachusetts, develops and manufactures digital, analog and RF semiconductor
automated test equipment. We 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. On August 5, 2010, we invested another $2.0 million
in TEC. At December 31, 2010, as a result of this and other capital
transactions, our ownership interest is approximately 51%. The amounts
attributable to the non-controlling interest in TEC’s equity and results of
operations 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.





Radiation
Assured Devices




On
June 30, 2010, we acquired 100% of the stock of Radiation Assured
Devices, Inc., or  RAD, for $14.0 million in cash, plus contingent
payments equal to 50% of the acquired company’s EBITDA (as defined in the
agreement) for the five year period of fiscal 2011 to fiscal 2015, provided
certain thresholds are met.  The fair value of the contingent consideration
as of December 31, 2010 was $7.9 million, of which $1.4 million was reflected in
accrued expenses and other current liabilities and $6.5 million was reflected in
other long-term liabilities. The fair value of the contingent consideration as
of June 30, 2010 was $7.1 million and was reflected in other long-term
liabilities and considered in the allocation of the purchase price.  The
$784,000 increase in the fair value of the contingent consideration was recorded
in selling, general and administrative costs for the three and six months ended
December 31, 2010. RAD, located in Colorado Springs, Colorado, uses commercial
and specialty technologies to provide state of the art radiation engineering and
qualification services, as well as to produce radiation hardened products for
commercial and military spaceborne electronics.  RAD is included in our
Microelectronic Solutions segment.


- 14
-




Advanced
Control Components




On
August 31, 2010, we acquired 100% of the stock of Advanced Control
Components, Inc., or ACC, for $19.2 million in cash, which was net of a
preliminary working capital adjustment made at closing.  The purchase price
is subject to a further working capital adjustment, based on the amount by which
the final adjusted net working capital at the date of closing is lower than the
target set forth in the purchase agreement.  We currently estimate an
additional $764,000 deficiency in adjusted net working capital, reducing the
purchase price to $18.4 million. ACC, located in Eatontown, New Jersey, designs,
manufacturers and markets a wide range of radio frequency, or RF, and microwave
products for the military, civilian radar, scientific and communications
markets. ACC is included in our Microelectronic Solutions
segment.





We
allocated the purchase price based on the estimated fair value of the assets
acquired and liabilities assumed as follows:





(In thousands)Current
      assets (excluding cash of $15)
                    
                    $
                    4,844Property,
      plant and equipment
                    
                    
                    1,156Other
      assets
                    
                    
                    60Customer
      related intangibles
                    
                    
                    5,680Non-compete
      arrangements
                    
                    
                    30Tradenames
                    
                    
                    3,010Goodwill
                    
                    
                    10,072Total
      assets acquired
                    
                    
                    24,852Current
      liabilities
                    
                    
                    (2,855
                    )Deferred
      taxes
                    
                    
                    (3,576
                    )Total
      liabilities assumed
                    
                    
                    (6,431
                    )Net
      assets acquired
                    
                    $
                    18,421





The
customer related intangibles and non-compete arrangements are being amortized on
a straight-line basis over a range of 1 to 9 years.  The tradenames
have an indefinite life.  The goodwill is not deductible for tax
purposes.




On a pro
forma basis, had the ACC acquisition taken place as of the beginning of the
periods presented, our results of operations for those periods would not have
been materially affected.





Cash
Paid for the Purchase of Businesses





For the
six months ended December 31, 2010, we had net cash outlays of $23.6 million for
the purchase of businesses, net of cash acquired.  This was primarily
comprised of $18.4 million for the purchase of ACC and $5.6 million of
contingent consideration payments related to fiscal 2010 ($4.6 million for
Gaisler Research AB, acquired on June 30, 2008 and $1.0 million for Airflyte
Electronics Company, acquired on June 26, 2009), partially offset by refunds for
working capital adjustments for prior year acquisitions.




- 15
-




Intangible
Assets with Definite Lives





The
components of amortizable intangible assets were as follows:




December 31, 2010
              
              
              June 30, 2010(In
      thousands)Gross
              
              
              
              
              
              GrossCarrying
              
              
              Accumulated
              
              
              Carrying
              
              
              AccumulatedAmount
              
              
              Amortization
              
              
              Amount
              
              
              AmortizationDeveloped
      technology
              
              $
              199,309
              
              
              $
              112,592
              
              
              $
              197,422
              
              
              $
              94,672Customer
      related intangibles
              
              
              228,551
              
              
              
              108,386
              
              
              
              222,026
              
              
              
              94,656Non-compete
      arrangements
              
              
              10,318
              
              
              
              5,421
              
              
              
              10,087
              
              
              
              4,420Tradenames
              
              
              3,315
              
              
              
              1,009
              
              
              
              3,184
              
              
              
              658Total
              
              $
              441,493
              
              
              $
              227,408
              
              
              $
              432,719
              
              
              $
              194,406




4.
            Restructuring
      Charges





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




Balance
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                BalanceJune 30,
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                December 31,2010
                                
                                
                                Six Months Ended December 31, 2010
                                
                                
                                2010Effect ofRestructuring
                                
                                
                                
                                
                                
                                
                                
                                
                                foreign
                                
                                
                                RestructuringLiability
                                
                                
                                Net Additions
                                
                                
                                Cash Payments
                                
                                
                                currency
                                
                                
                                Liability(In
      thousands)Work
      force reduction
                                
                                $
                                172
                                
                                
                                $
                                2,651
                                
                                
                                $
                                (1,212
                                )
                                
                                $
                                16
                                
                                
                                $
                                1,627Closure
      of  facilities
                                
                                
                                632
                                
                                
                                
                                581
                                
                                
                                
                                (684
                                )
                                
                                
                                28
                                
                                
                                
                                557Total
                                
                                $
                                804
                                
                                
                                $
                                3,232
                                
                                
                                $
                                (1,896
                                )
                                
                                $
                                44
                                
                                
                                $
                                2,184




For the
six months ended December 31, 2010, we recorded an $8.1 million charge in
connection with continued restructuring activities of certain manufacturing
operations related to consolidation and reorganization efforts in our
United Kingdom (“U.K.”) operations and in connection with one of our domestic
components facilities located in Whippany, New Jersey. We are consolidating part
of our components operations by relocating a portion of our Whippany, New Jersey
facility’s production to our Ann Arbor, Michigan facility and a portion to our
Eatontown, New Jersey facility.  In connection with this
consolidation, we recorded a $4.9 million impairment charge based on the fair
value of the Whippany, New Jersey facility we intend to sell.





5.
            Net
      Income (Loss) Per Common Share





The
consolidated statements of operations for Aeroflex Holding present only basic
net income (loss) per common share, as it does not have any potentially dilutive
securities. Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding for
the period.





Earning
per share information is not presented for Aeroflex because, as a wholly-owned
subsidiary of Aeroflex Holding, such information is not relevant.




- 16
-


6.
            Inventories





Inventories
consisted of the following:





December 31,
                    
                    
                    June 30,2010
                    
                    
                    2010(In thousands)Raw
      materials
                    
                    $
                    82,212
                    
                    
                    $
                    61,278Work
      in process
                    
                    
                    48,782
                    
                    
                    
                    44,022Finished
      goods
                    
                    
                    22,886
                    
                    
                    
                    21,268$
                    153,880
                    
                    
                    $
                    126,568





7.
            Derivative
      Financial Instruments





We
address certain financial exposures through a controlled program of risk
management that includes the use of derivative financial instruments. We enter
into interest rate swap derivatives to manage the effects of interest rate
movements on portions of our debt. We also enter into foreign currency forward
contracts, not designated as hedging instruments, to protect us from
fluctuations in exchange rates.





The fair
values of our derivative financial instruments included in the consolidated
balance sheets as of December 31, 2010 and June 30, 2010 are presented as
follows:





Asset (Liability) DerivativesDecember 31, 2010
                            
                            June 30, 2010Balance Sheet
                            
                            
                            
                            Balance Sheet(In thousands)
                            
                            Location
                            
                            Fair Value(1)
                            
                            Location
                            
                            Fair Value(1)Derivatives
      designated as hedging instruments:Interest
      rate swap contracts
                            
                            Accrued
      expenses and other current liabilities
                            
                            $
                            (1,033
                            )
                            Accrued
      expenses and other current liabilities
                            
                            $
                            (6,613
                            )Derivatives
      not designated as hedging instruments:Foreign
      currency forward contracts
                            
                            Prepaid
      expenses and other current assets
                            
                            
                            18
                            
                            Accrued
      expenses and other current liabilities
                            
                            
                            (293
                            )Total
      derivatives, net
                            
                            
                            
                            $
                            (1,015
                            )
                            
                            
                            $
                            (6,906
                            )





(1)  See
Note 8 for further information about how the fair values of derivative assets
and liabilities are determined.




- 17
-




The gains
and losses related to our derivative financial instruments designated as hedging
instruments for the three and six months ended December 31, 2010 and 2009 were
as follows:





Amount of Gain or (Loss)Recognized on Derivatives inDerivatives in Cash Flow
                            
                            Other Comprehensive IncomeHedging Relationships
                            
                            (Effective Portion)(1)Three Months Ended
                            
                            
                            Six Months EndedDecember 31,
                            
                            
                            December 31,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009(In
      thousands)Interest
      rate swap contracts
                            
                            $
                            (37
                            )
                            
                            $
                            (1,191
                            )
                            
                            $
                            (612
                            )
                            
                            $
                            (4,271
                            )





Location of Gain or (Loss)
                      
                      Amount of Gain or (Loss)Reclassified from Accumulated
                      
                      Reclassified fromOther Comprehensive Income
                      
                      Accumulated Other Comprehensive Incomeinto Income (Effective Portion)
                      
                      into Income (Effective Portion)(1)Three Months Ended
                      
                      
                      Six Months EndedDecember 31,
                      
                      
                      December 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009(In
      thousands)Interest
      expense
                      
                      $
                      (2,751
                      )
                      
                      $
                      (3,781
                      )
                      
                      $
                      (6,192
                      )
                      
                      $
                      (7,182
                      )





(1)See
Note 11 for additional information on changes to accumulated other comprehensive
income (loss).





The
amounts of the gains and losses related to our derivative financial instruments
not designated as hedging instruments for the three and six months ended
December 31, 2010 and 2009 were as follows:





Derivatives Not
                                    
                                    Location of Gain or (Loss)
                                    
                                    Amount of Gain or (Loss)Designated as
                                    
                                    Recognized in Earnings on
                                    
                                    Recognized in Earnings onHedging Instruments
                                    
                                    Derivative
                                    
                                    DerivativeThree Months Ended
                                    
                                    
                                    Six Months EndedDecember 31,
                                    
                                    
                                    December 31,2010
                                    
                                    
                                    2009
                                    
                                    
                                    2010
                                    
                                    
                                    2009(In
      thousands)Foreign
      currency forward contracts
                                    
                                    Other
      income (expense)
                                    
                                    $
                                    351
                                    
                                    
                                    $
                                    (87
                                    )
                                    
                                    $
                                    311
                                    
                                    
                                    $
                                    231





Interest
Rate Swap Cash-Flow Hedges





We enter
into interest rate swap contracts with counterparties that are rated investment
grade to manage the effects of interest rate movements on portions of our debt.
Such contracts effectively fix the borrowing rates on floating rate debt to
limit the exposure against the risk of rising rates.  We do not enter
into interest rate swap contracts for speculative purposes. Our interest rate
swap contracts outstanding as of December 31, 2010, all of which were entered
into in fiscal 2008 for an aggregate notional amount of $300.0 million, mature
in February 2011.


- 18
-




Foreign
Currency Contract Derivatives





Foreign
currency contracts are used to protect us from fluctuations in exchange rates.
We enter into foreign currency contracts, which are not designated as hedges.
The change in fair value is included in other income (expense) as it occurs. As
of December 31, 2010, we had $31.7 million of notional value foreign currency
forward contracts maturing through January 31, 2011. 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.





8.
            Fair
      Value Measurements





We
account for certain assets and liabilities at fair value.  The
hierarchy below lists three levels of fair value based on the extent to which
inputs used in measuring the fair value are observable in the
market.  We categorize each of our fair value measurements in one of
these three levels based on the lowest level input that is significant to the
fair value measurement in its entirety.  These levels
are:





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.




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




Quoted Prices inActive Markets
              
              
              Significant Other
              
              
              Significantfor Identical
              
              
              Observable
              
              
              UnobservableAssets
              
              
              Inputs
              
              
              InputsAs of December 31, 2010
              
              (Level 1)
              
              
              (Level 2)
              
              
              (Level 3)
              
              
              Total(In
      thousands)Assets:Current
      marketable securities
              
              $
              -
              
              
              $
              8,357
              
              
              $
              -
              
              
              $
              8,357Foreign
      currency forward contracts
              
              
              -
              
              
              
              18
              
              
              
              -
              
              
              
              18Total
      Assets
              
              $
              -
              
              
              $
              8,375
              
              
              $
              -
              
              
              $
              8,375Liabilities:Interest
      rate swap contracts
              
              $
              -
              
              
              $
              1,033
              
              
              $
              -
              
              
              $
              1,033


Quoted Prices inActive Markets
              
              
              Significant Other
              
              
              Significantfor Identical
              
              
              Observable
              
              
              UnobservableAssets
              
              
              Inputs
              
              
              InputsAs of June 30, 2010
              
              (Level 1)
              
              
              (Level 2)
              
              
              (Level 3)
              
              
              Total(In
      thousands)Assets:Non-current
      marketable securities
              
              $
              -
              
              
              $
              -
              
              
              $
              9,769
              
              
              $
              9,769Liabilities:Foreign
      currency forward contracts
              
              $
              -
              
              
              $
              293
              
              
              $
              -
              
              
              $
              293Interest
      rate swap contracts
              
              
              -
              
              
              
              6,613
              
              
              
              -
              
              
              
              6,613Total
      Liabilities
              
              $
              -
              
              
              $
              6,906
              
              
              $
              -
              
              
              $
              6,906




- 19
-




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) for the six months ended December 31,
2010:




Fair Value MeasurementsUsing SignificantUnobservable Inputs(Level 3)AuctionRateSecurities(In thousands)Balance
      at June 30, 2010
                  
                  $
                  9,769Sold
      at par
                  
                  
                  (2,000
                  )Transfer
      to Level 2
                  
                  
                  (9,045
                  )Transfer
      of unrealized loss from accumulated other comprehensive
      income (loss) to realized loss recorded in other
    expense
                  
                  
                  688Unrealized
      gain (loss) in accumulated other comprehensive income
    (loss)
                  
                  
                  588Balance
      at December 31, 2010
                  
                  $
                  -





Marketable Securities – In
December 2010, $2.0 million of our auction rate securities were sold at
par.  In January 2011, the remaining $9.0 million of our auction rate
securities were sold at an average of 92.4% of par. The resulting $688,000
realized loss, which approximated the other than temporary impairment at
December 31, 2010, was recorded in the statement of operations for the three and
six months ended December 31, 2010.  As of December 31, 2010, our
auction rate securities are classified as current marketable securities, since,
as of the balance sheet date, we had firm offers for their sale and we had the
intent to sell them. We have classified auction rate securities as Level 2, as
their valuation is based on the actual selling price.





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





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





All
indebtedness has been incurred by Aeroflex; such indebtedness is reflected on
the balance sheets of Aeroflex Holding by virtue of the principles of
consolidation.





All of
the net proceeds of Aeroflex Holding’s IPO were used to make a capital
contribution to Aeroflex to enable it to, among other things, tender for a
portion of its senior unsecured notes and offer to repurchase a portion of its
senior subordinated unsecured term loans.  In December 2010, Aeroflex
repurchased approximately $32.2 million of its senior unsecured notes and $154.4
million of its senior subordinated unsecured term loans. This resulted in a
$25.2 million loss on extinguishment of debt, which is comprised of the
following:





·
            an
      11% premium paid on the debt repurchased, which amounted to $20.5
      million;





·
            the
      write-off of the related deferred financing costs of $4.0 million;
      and


- 20
-




·
            professional
      fees of $614,000.





On
November 4, 2010, Aeroflex entered into an amendment of the credit agreement
with the lenders of its senior secured credit facility, for which it paid a $3.3
million fee to the lenders which was recorded as deferred financing costs and
$579,000 of other costs that were expensed as incurred, which allowed Aeroflex
to, among other things:





·
            increase
      the amount of cash it can spend for acquisitions of businesses from $20
      million per year and a $100 million aggregate amount, to $200 million in
      the aggregate (with no annual limit), from the effective date of the
      amendment to the credit facility maturity date, August 15,
      2014;





·
            pay certain fees to affiliates of
      our Sponsors upon the completion of the Aeroflex Holding
      IPO.  These fees were paid on November 24, 2010, and consisted
      of the $2.5 million Transaction Feefor services directly
      attributable to the equity offering, which was recorded as a
      reduction of additional paid-in capital, and the $16.9 million Termination
      Fee. The Termination Fee, when combined with the related write-off of
      prepaid advisory fees, amounted to an $18.1 million expense which was
      recorded in a separate line on the statement of operations entitled
      Termination of Sponsor Advisory Agreement;
  and





·
            base its interest rate margin
      above LIBOR on a grid, with reference to its current credit rating. This
      increased the interest rate margin by 75 basis points for all tranches of
      debt within the secured credit
facility.





The fair
values of Aeroflex’s debt instruments are summarized as follows:




December 31, 2010Carrying
                  
                  
                  EstimatedAmount
                  
                  
                  Fair Value(In
      thousands)Senior
      secured credit facility B-1 term loan
                  
                  $
                  372,651
                  
                  
                  $
                  370,788Senior
      secured B-2 term loan
                  
                  
                  116,454
                  
                  
                  
                  114,707Senior
      unsecured notes
                  
                  
                  192,845
                  
                  
                  
                  209,237Senior
      subordinated unsecured term loan
                  
                  
                  13,573
                  
                  
                  
                  15,270Other
                  
                  
                  745
                  
                  
                  
                  745Total
      debt
                  
                  $
                  696,268
                  
                  
                  $
                  710,747





As of
June 30, 2010, Aeroflex’s total debt had a carrying value of $901.8 million and
a fair value of $877.7 million.





The
estimated fair values of each of Aeroflex’s debt instruments are based on quoted
market prices for the same or similar issues. Fair value estimates related to
Aeroflex’s 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 these estimates.





As of
December 31, 2010, Aeroflex is in compliance with all of the covenants contained
in the loan agreements.





Interest
paid was $36.9 million and $30.6 million for the six months ended December 31,
2010 and 2009, respectively. Accrued interest of $12.9 million and $13.9 million
was included in accrued expenses and other current liabilities at December 31,
2010 and June 30, 2010, respectively.


- 21
-





10.
            Loss
      on Liquidation of Foreign
Subsidiary




In
connection with the 2003 acquisition of one of our wireless businesses in the
U.K., we set up a foreign partnership to finance the acquisition.  We
invested $19.5 million in the partnership and the partnership advanced those
funds to our foreign holding company in the form of a loan, the proceeds of
which was used for the acquisition.




During
the six months ended December 31, 2009, the loan was fully repaid to the
partnership, with interest, and we received a return of capital and
dividends.  The partnership has been substantially
liquidated.




As a
result of changes in foreign currency rates, there was a cumulative translation
adjustment of $7.7 million remaining after substantially all of the assets have
been returned to us and substantially all of the liabilities have been
satisfied.  In accordance with U.S. GAAP, this remaining cumulative
translation adjustment has been expensed in the period during which the
substantial liquidation of the partnership occurred and presented as a non-cash
loss on liquidation of foreign subsidiary in our Condensed Consolidated
Statement of Operations for the six months ended December 31,
2009.  This loss was not deductible for income tax
purposes.




11.
            Comprehensive
      Income





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




Three Months Ended
            
            
            Six Months EndedDecember 31,
            
            
            December 31,2010
            
            
            2009
            
            
            2010
            
            
            2009(In thousands)Net
      income (loss)
            
            $
            (11,403
            )
            
            $
            (10,614
            )
            
            $
            (17,220
            )
            
            $
            (31,157
            )Increase
      (decrease) in fair value of interest rate swap contracts, net of tax
      provision (benefit) of $1,053, $961, $2,166 and $1,086
            
            
            1,661
            
            
            
            1,629
            
            
            
            3,414
            
            
            
            1,825Valuation
      allowance against non-current marketable securities
            
            
            1,239
            
            
            
            (47
            )
            
            
            1,276
            
            
            
            222Foreign
      currency translation adjustment, net of tax of $(55), $617, $625 and
      $617
            
            
            (2,239
            )
            
            
            129
            
            
            
            7,783
            
            
            
            6,013Total
      comprehensive income (loss)
            
            $
            (10,742
            )
            
            $
            (8,903
            )
            
            $
            (4,747
            )
            
            $
            (23,097
            )


Accumulated
other comprehensive income (loss) was as follows:





UnrealizedGain (Loss)
                  
                  
                  Valuation
                  
                  
                  Minimum
                  
                  
                  Foreignon Interest
                  
                  
                  Allowance Against
                  
                  
                  Pension
                  
                  
                  CurrencyRate Swap
                  
                  
                  Non-Current
                  
                  
                  Liability
                  
                  
                  TranslationContracts
                  
                  
                  Marketable
                  
                  
                  Adjustment
                  
                  
                  Adjustment
                  
                  
                  Total(net of tax)
                  
                  
                  Securities
                  
                  
                  (net of tax)
                  
                  
                  (net of tax)
                  
                  
                  (net of tax)(In thousands)Balance,
      June 30, 2010
                  
                  $
                  (4,046
                  )
                  
                  $
                  (1,276
                  )
                  
                  $
                  (773
                  )
                  
                  $
                  (47,480
                  )
                  
                  $
                  (53,575
                  )Six
      months' activity
                  
                  
                  3,414
                  
                  
                  
                  1,276
                  
                  
                  
                  -
                  
                  
                  
                  7,783
                  
                  
                  
                  12,473Balance,
      December 31, 2010
                  
                  $
                  (632
                  )
                  
                  $
                  -
                  
                  
                  $
                  (773
                  )
                  
                  $
                  (39,697
                  )
                  
                  $
                  (41,102
                  )


- 22
-




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.





Although
as of December 31, 2010 deferred U.S. income taxes have been provided on certain
undistributed foreign earnings of a U.K. limited partnership subsidiary, we have
not recorded a deferred U.S. income tax on the foreign currency translation
adjustment since only an insignificant amount relates to that
subsidiary.





12.
            Legal
      Matters




In March
2005, we sold the net assets of our shock and vibration control device
manufacturing business, which we refer to as 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, 2010 was $1.5 million, of
which $322,000 was expected to be paid within one year.





We have
identified instances of noncompliance with the International Traffic in Arms
Regulations (“ITAR”) in certain of our past business activities as well as in
the pre-acquisition business activities of certain recently acquired companies.
These include the inadvertent misclassification and/or export of products
without the required license and the disclosure of controlled technology to
certain foreign national employees. These matters were formally disclosed to the
U.S. Department of State from time to time during the period from 2007 through
2010.





For
example, in fiscal 2007, when 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 ITAR,
we filed a Voluntary Disclosure with the  Department of State
describing the details of the possible inadvertent misclassification and
identifying certain unauthorized exports from the United States to end-users in
a number of countries, including China and Russia. Once our request for
reclassification was denied and a determination was made that the product was
subject to the licensing jurisdiction of the Department of State in accordance
with ITAR, 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 ITAR
but were inadvertently misclassified and exported without a
license.





At this
time it is not possible to determine whether any fines or other penalties will
be asserted against us or the materiality of the outcome of any of these
matters.




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 business,
results of operations, financial position, liquidity or capital
resources.





13.
            Business
      Segments





We are a
global provider of radio frequency, or RF, and microwave integrated circuits,
components and systems used in the design, development and maintenance of
technically demanding, high-performance wireless communication systems. Our
solutions include highly specialized microelectronic components and test and
measurement equipment used by companies in the space, avionics, defense,
commercial wireless communications, medical and other markets. Approximately 30%
and 32% of our sales for the three months ended December 31, 2010 and 2009 and
31% and 34% for the six months ended December 31, 2010 and 2009 were to agencies
of the United States government or to prime defense contractors or
subcontractors of the United States government. No 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.


- 23
-





The
majority of our operations are located in the United States. We also have
operations in Europe and Asia, with our most significant operations in the
U.K.  Net sales from facilities located in the U.K. were approximately
$42.8 million and $42.0 million for the three months ended December 31, 2010 and
2009 and $80.5 million and $71.1 million for the six months ended December 31,
2010 and 2009.  Total assets of the U.K. operations were $169.1
million as of December 31, 2010 and $159.9 million as of June 30,
2010.





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




Three Months Ended
                    
                    
                    Six Months EndedDecember 31,
                    
                    
                    December 31,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(In thousands)United
      States of America
                    
                    $
                    101,311
                    
                    
                    $
                    92,204
                    
                    
                    $
                    189,831
                    
                    
                    $
                    172,389Europe
      and Middle East
                    
                    
                    34,356
                    
                    
                    
                    34,242
                    
                    
                    
                    64,658
                    
                    
                    
                    62,709Asia
      and Australia
                    
                    
                    40,004
                    
                    
                    
                    36,590
                    
                    
                    
                    73,115
                    
                    
                    
                    56,105Other
      regions
                    
                    
                    5,908
                    
                    
                    
                    3,703
                    
                    
                    
                    9,906
                    
                    
                    
                    5,652$
                    181,579
                    
                    
                    $
                    166,739
                    
                    
                    $
                    337,510
                    
                    
                    $
                    296,855


- 24
-





Selected
financial data by segment is as follows:





Three Months Ended
                  
                  
                  Six Months EndedDecember 31,
                  
                  
                  December 31,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009(In thousands)Net
      salesMicroelectronic
      solutions ("AMS")
                  
                  $
                  89,225
                  
                  
                  $
                  79,160
                  
                  
                  $
                  166,530
                  
                  
                  $
                  146,521Test
      solutions ("ATS")
                  
                  
                  92,354
                  
                  
                  
                  87,579
                  
                  
                  
                  170,980
                  
                  
                  
                  150,334Net
      sales
                  
                  $
                  181,579
                  
                  
                  $
                  166,739
                  
                  
                  $
                  337,510
                  
                  
                  $
                  296,855Segment
      adjusted operating income-
      AMS
                  
                  $
                  22,942
                  
                  
                  $
                  21,887
                  
                  
                  $
                  41,829
                  
                  
                  $
                  36,911-
      ATS
                  
                  
                  17,171
                  
                  
                  
                  20,186
                  
                  
                  
                  24,028
                  
                  
                  
                  28,151-
      General corporate expense
                  
                  
                  (2,849
                  )
                  
                  
                  (2,258
                  )
                  
                  
                  (5,263
                  )
                  
                  
                  (5,189
                  )Adjusted
      operating income
                  
                  
                  37,264
                  
                  
                  
                  39,815
                  
                  
                  
                  60,594
                  
                  
                  
                  59,873Amortization
      of acquired intangibles-
      AMS
                  
                  
                  (9,196
                  )
                  
                  
                  (8,743
                  )
                  
                  
                  (18,456
                  )
                  
                  
                  (17,579
                  )-
      ATS
                  
                  
                  (6,647
                  )
                  
                  
                  (6,771
                  )
                  
                  
                  (13,350
                  )
                  
                  
                  (13,540
                  )Share-based
      compensation-
      Corporate
                  
                  
                  (513
                  )
                  
                  
                  (556
                  )
                  
                  
                  (1,026
                  )
                  
                  
                  (1,045
                  )Restructuring
      charges-
      AMS
                  
                  
                  (5,555
                  )
                  
                  
                  -
                  
                  
                  
                  (6,131
                  )
                  
                  
                  --
      ATS
                  
                  
                  (738
                  )
                  
                  
                  (64
                  )
                  
                  
                  (1,961
                  )
                  
                  
                  (251
                  )Business
      acquisition costs-
      Corporate
                  
                  
                  (92
                  )
                  
                  
                  -
                  
                  
                  
                  (282
                  )
                  
                  
                  -Increase
      in fair value of acquisition contingent consideration
      liability-
      Corporate
                  
                  
                  (784
                  )
                  
                  
                  -
                  
                  
                  
                  (784
                  )
                  
                  
                  -Merger
      related expenses - Corporate
                  
                  
                  (507
                  )
                  
                  
                  (771
                  )
                  
                  
                  (1,222
                  )
                  
                  
                  (1,464
                  )Termination
      of Sponsor Advisory Agreement - Corporate
                  
                  
                  (18,133
                  )
                  
                  
                  -
                  
                  
                  
                  (18,133
                  )
                  
                  
                  -Loss
      on liquidation of foreign subsidiary - ATS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (7,696
                  )Current
      period impact of acquisition related adjustments:Inventory
      - AMS
                  
                  
                  (368
                  )
                  
                  
                  -
                  
                  
                  
                  (551
                  )
                  
                  
                  (246
                  )Inventory
      - ATS
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (447
                  )
                  
                  
                  -Depreciation
      - AMS
                  
                  
                  (25
                  )
                  
                  
                  (265
                  )
                  
                  
                  (142
                  )
                  
                  
                  (540
                  )Depreciation
      - ATS
                  
                  
                  21
                  
                  
                  
                  (311
                  )
                  
                  
                  (99
                  )
                  
                  
                  (817
                  )Depreciation
      - Corporate
                  
                  
                  (55
                  )
                  
                  
                  (55
                  )
                  
                  
                  (110
                  )
                  
                  
                  (110
                  )Deferred
      revenue - ATS
                  
                  
                  (23
                  )
                  
                  
                  (33
                  )
                  
                  
                  (48
                  )
                  
                  
                  (65
                  )Operating
      income (loss) (GAAP)
                  
                  
                  (5,351
                  )
                  
                  
                  22,246
                  
                  
                  
                  (2,148
                  )
                  
                  
                  16,520Interest
      expense
                  
                  
                  (20,713
                  )
                  
                  
                  (21,418
                  )
                  
                  
                  (41,951
                  )
                  
                  
                  (42,457
                  )Loss
      on extinguishment of debt
                  
                  
                  (25,178
                  )
                  
                  
                  -
                  
                  
                  
                  (25,178
                  )
                  
                  
                  -Gain
      from a bargain purchase of a business
                  
                  
                  173
                  
                  
                  
                  -
                  
                  
                  
                  173
                  
                  
                  
                  -Other
      income (expense), net
                  
                  
                  (378
                  )
                  
                  
                  422
                  
                  
                  
                  (407
                  )
                  
                  
                  479Income
      (loss) before income taxes
                  
                  $
                  (51,447
                  )
                  
                  $
                  1,250
                  
                  
                  $
                  (69,511
                  )
                  
                  $
                  (25,458
                  )


- 25
-





Management
evaluates the operating results of our two segments based upon adjusted
operating income, which is pre-tax operating income before costs related to
amortization of acquired intangibles, share-based compensation, restructuring
expenses, business acquisition and merger related expenses, Termination of
Sponsor Advisory Agreement, loss on liquidation of foreign subsidiary and the
impact of any acquisition related adjustments. We have set out above our
adjusted operating income by segment and in the aggregate, and have provided a
reconciliation of adjusted operating income to operating income (loss) on a GAAP
basis and income (loss) before income taxes for the periods
presented.





14.
              Income
      Taxes





The
income tax benefit was $52.3 million for the six months ended December 31, 2010
on a pre-tax loss of $69.5 million.  We had an income tax provision
for the six months ended December 31, 2009 of $5.7 million on a pre-tax loss of
$25.5 million. The effective income tax rate for both 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, including
U.S. income tax on certain foreign net income, since we anticipate that we will
be repatriating these earnings to the U.S. The provisions are a combination of
U.S. tax benefits on domestic losses and foreign tax expense on foreign
earnings. The resulting projected net consolidated income tax benefit was then
applied to the projected consolidated pre-tax amount for the year to calculate
the annual effective tax rate, which contributed to the high income tax benefit
as a percentage of pre-tax loss.




During
the three months ended September 30, 2010, we identified an overstatement of
deferred income tax liabilities established in the fourth quarter of fiscal 2009
and throughout fiscal 2010 related to U.S. income taxes provided on unremitted
foreign earnings. After consideration of both quantitative and qualitative
factors, we determined the amounts were not material to any of those prior
period financial statements or the fiscal 2011 estimated results and thus
corrected the balance in the three months ended September 30,
2010.  The adjustment resulted in a reduction of deferred income tax
liabilities of $3.7 million, with a corresponding increase in income tax benefit
in the statement of operations for the three months ended September 30,
2010.  The adjustment did not impact the statement of cash
flows.




The
income tax benefit for the three and six months ended December 31, 2010 reflects
various discrete items, including a $1.2 million income tax benefit for the
retroactive reinstatement of the U.S. R&D credit and a reduction of $5.7
million of deferred tax liabilities related to U.S. income taxes previously
provided on unremitted foreign earnings.  As a direct result of
Aeroflex Holding’s IPO, and related repurchase of a portion of Aeroflex’s debt,
interest payments will decrease in the future.  Consequently, we have
changed our intent as to the amount and method of repatriations of foreign
earnings, which resulted in the reduction of deferred tax
liabilities.




The tax
provision for the six months ended December 31, 2009 was affected by the
unfavorable impact of a $7.7 million nondeductible loss on the liquidation of a
foreign subsidiary, and the favorable impact of a $10.3 million loss for tax
purposes on the write off of our investment in a foreign subsidiary in fiscal
2009.  For financial statement purposes, the loss had been recognized
in the prior periods, however, for tax purposes the loss was recognized at the
time of divestiture, effective September 2009.


- 26
-





15.
            Guarantor/Non-Guarantor
      Financial Information





The
following supplemental condensed consolidating financial information sets forth,
on an unconsolidated basis, the balance sheets at December 31, 2010 and June 30,
2010, the statements of operations for the three and six months ended December
31, 2010 and 2009 and the statements of cash flows for the six months ended
December 31, 2010 and 2009 for Aeroflex (”Parent”), the Guarantor Subsidiaries
and the Non-Guarantor Subsidiaries. The supplemental condensed consolidating
financial information reflects for all periods presented, the investments of
Parent in the Guarantor Subsidiaries as well as investments of Parent and the
Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, in all cases using the
equity method.  For purposes of this note, Guarantor Subsidiaries
refer to the subsidiaries of Parent that have guaranteed principal debt
obligations of Parent.  The purchase price allocation adjustments,
including applicable intangible assets, arising from business acquisitions have
been pushed down to the applicable subsidiary columns (see Note 3).





Each of
the Guarantor Subsidiaries is 100% owned directly or indirectly by the Parent
and guarantees the debt on an unconditional and joint and several
basis.





Aeroflex
Incorporated


Condensed
Consolidating Statement of Operations


For
the Three Months Ended December 31, 2010


(In
thousands)





Guarantor
                
                
                Non-GuarantorParent
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedNet
      sales
                
                $
                -
                
                
                $
                127,062
                
                
                $
                56,409
                
                
                $
                (1,892
                )
                
                $
                181,579Cost
      of sales
                
                
                -
                
                
                
                64,034
                
                
                
                24,915
                
                
                
                (2,210
                )
                
                
                86,739Gross
      profit
                
                
                -
                
                
                
                63,028
                
                
                
                31,494
                
                
                
                318
                
                
                
                94,840Selling,
      general and administrative costs
                
                
                4,800
                
                
                
                22,814
                
                
                
                10,652
                
                
                
                -
                
                
                
                38,266Research
      and development costs
                
                
                -
                
                
                
                13,800
                
                
                
                7,856
                
                
                
                -
                
                
                
                21,656Amortization
      of acquired intangibles
                
                
                -
                
                
                
                13,553
                
                
                
                2,290
                
                
                
                -
                
                
                
                15,843Termination
      of Sponsor Advisory Agreement
                
                
                18,133
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                18,133Restructuring
      charges
                
                
                -
                
                
                
                5,555
                
                
                
                738
                
                
                
                -
                
                
                
                6,293Operating
      income (loss)
                
                
                (22,933
                )
                
                
                7,306
                
                
                
                9,958
                
                
                
                318
                
                
                
                (5,351
                )Other
      income (expense):Interest
      expense
                
                
                (20,697
                )
                
                
                (16
                )
                
                
                -
                
                
                
                -
                
                
                
                (20,713
                )Loss
      on extinguishment of debt
                
                
                (25,178
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (25,178
                )Gain
      from a bargain purchase of a business
                
                
                -
                
                
                
                -
                
                
                
                173
                
                
                
                -
                
                
                
                173Other
      income (expense), net
                
                
                (292
                )
                
                
                20
                
                
                
                (106
                )
                
                
                -
                
                
                
                (378
                )Intercompany
      charges
                
                
                20,146
                
                
                
                (19,560
                )
                
                
                (586
                )
                
                
                -
                
                
                
                -Income
      (loss) before income taxes
                
                
                (48,954
                )
                
                
                (12,250
                )
                
                
                9,439
                
                
                
                318
                
                
                
                (51,447
                )Provision
      (benefit) for income taxes
                
                
                (28,837
                )
                
                
                (6,551
                )
                
                
                1,699
                
                
                
                (6,355
                )
                
                
                (40,044
                )Equity
      income (loss) of subsidiaries
                
                
                8,714
                
                
                
                7,288
                
                
                
                -
                
                
                
                (16,002
                )
                
                
                -Net
      income (loss)
                
                $
                (11,403
                )
                
                $
                1,589
                
                
                $
                7,740
                
                
                $
                (9,329
                )
                
                $
                (11,403
                )


- 27
-





Aeroflex
Incorporated


Condensed
Consolidating Statement of Operations


For
the Three Months Ended December 31, 2009


(In
thousands)





Guarantor
                
                
                Non-GuarantorParent
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedNet
      sales
                
                $
                -
                
                
                $
                120,120
                
                
                $
                47,969
                
                
                $
                (1,350
                )
                
                $
                166,739Cost
      of sales
                
                
                -
                
                
                
                60,394
                
                
                
                20,910
                
                
                
                (1,223
                )
                
                
                80,081Gross
      profit
                
                
                -
                
                
                
                59,726
                
                
                
                27,059
                
                
                
                (127
                )
                
                
                86,658Selling,
      general and administrative costs
                
                
                3,640
                
                
                
                18,942
                
                
                
                8,991
                
                
                
                -
                
                
                
                31,573Research
      and development costs
                
                
                -
                
                
                
                11,460
                
                
                
                5,801
                
                
                
                -
                
                
                
                17,261Amortization
      of acquired intangibles
                
                
                -
                
                
                
                13,276
                
                
                
                2,238
                
                
                
                -
                
                
                
                15,514Restructuring
      charges
                
                
                -
                
                
                
                -
                
                
                
                64
                
                
                
                -
                
                
                
                64Operating
      income (loss)
                
                
                (3,640
                )
                
                
                16,048
                
                
                
                9,965
                
                
                
                (127
                )
                
                
                22,246Other
      income (expense):Interest
      expense
                
                
                (21,399
                )
                
                
                (17
                )
                
                
                (2
                )
                
                
                -
                
                
                
                (21,418
                )Other
      income (expense), net
                
                
                (40
                )
                
                
                480
                
                
                
                (18
                )
                
                
                -
                
                
                
                422Intercompany
      charges
                
                
                19,797
                
                
                
                (19,318
                )
                
                
                (479
                )
                
                
                -
                
                
                
                -Income
      (loss) before income taxes
                
                
                (5,282
                )
                
                
                (2,807
                )
                
                
                9,466
                
                
                
                (127
                )
                
                
                1,250Provision
      (benefit) for income taxes
                
                
                (364
                )
                
                
                2,199
                
                
                
                2,046
                
                
                
                7,983
                
                
                
                11,864Equity
      income (loss) of subsidiaries
                
                
                (5,696
                )
                
                
                6,932
                
                
                
                -
                
                
                
                (1,236
                )
                
                
                -Net
      income (loss)
                
                $
                (10,614
                )
                
                $
                1,926
                
                
                $
                7,420
                
                
                $
                (9,346
                )
                
                $
                (10,614
                )


- 28
-





Aeroflex
Incorporated


Condensed
Consolidating Statement of Operations


For
the Six Months Ended December 31, 2010


(In
thousands)





Guarantor
                
                
                Non-GuarantorParent
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedNet
      sales
                
                $
                -
                
                
                $
                236,659
                
                
                $
                104,344
                
                
                $
                (3,493
                )
                
                $
                337,510Cost
      of sales
                
                
                -
                
                
                
                119,359
                
                
                
                47,352
                
                
                
                (3,867
                )
                
                
                162,844Gross
      profit
                
                
                -
                
                
                
                117,300
                
                
                
                56,992
                
                
                
                374
                
                
                
                174,666Selling,
      general and administrative costs
                
                
                8,687
                
                
                
                44,373
                
                
                
                21,909
                
                
                
                -
                
                
                
                74,969Research
      and development costs
                
                
                -
                
                
                
                27,447
                
                
                
                16,367
                
                
                
                -
                
                
                
                43,814Amortization
      of acquired intangibles
                
                
                -
                
                
                
                27,238
                
                
                
                4,568
                
                
                
                -
                
                
                
                31,806Termination
      of Sponsor Advisory Agreement
                
                
                18,133
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                18,133Restructuring
      charges
                
                
                -
                
                
                
                6,131
                
                
                
                1,961
                
                
                
                -
                
                
                
                8,092Operating
      income (loss)
                
                
                (26,820
                )
                
                
                12,111
                
                
                
                12,187
                
                
                
                374
                
                
                
                (2,148
                )Other
      income (expense):Interest
      expense
                
                
                (41,923
                )
                
                
                (28
                )
                
                
                -
                
                
                
                -
                
                
                
                (41,951
                )Loss
      on extinguishment of debt
                
                
                (25,178
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (25,178
                )Gain
      from a bargain purchase of a business
                
                
                -
                
                
                
                -
                
                
                
                173
                
                
                
                -
                
                
                
                173Other
      income (expense), net
                
                
                (285
                )
                
                
                118
                
                
                
                (240
                )
                
                
                -
                
                
                
                (407
                )Intercompany
      charges
                
                
                40,024
                
                
                
                (38,839
                )
                
                
                (1,185
                )
                
                
                -
                
                
                
                -Income
      (loss) before income taxes
                
                
                (54,182
                )
                
                
                (26,638
                )
                
                
                10,935
                
                
                
                374
                
                
                
                (69,511
                )Provision
      (benefit) for income taxes
                
                
                (29,074
                )
                
                
                (9,505
                )
                
                
                2,071
                
                
                
                (15,783
                )
                
                
                (52,291
                )Equity
      income (loss) of subsidiaries
                
                
                7,888
                
                
                
                8,487
                
                
                
                -
                
                
                
                (16,375
                )
                
                
                -Net
      income (loss)
                
                $
                (17,220
                )
                
                $
                (8,646
                )
                
                $
                8,864
                
                
                $
                (218
                )
                
                $
                (17,220
                )


- 29
-





Aeroflex
Incorporated


Condensed
Consolidating Statement of Operations


For
the Six Months Ended December 31, 2009


(In
thousands)





Guarantor
                
                
                Non-GuarantorParent
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedNet
      sales
                
                $
                -
                
                
                $
                218,015
                
                
                $
                81,359
                
                
                $
                (2,519
                )
                
                $
                296,855Cost
      of sales
                
                
                -
                
                
                
                111,714
                
                
                
                35,824
                
                
                
                (2,414
                )
                
                
                145,124Gross
      profit
                
                
                -
                
                
                
                106,301
                
                
                
                45,535
                
                
                
                (105
                )
                
                
                151,731Selling,
      general and administrative costs
                
                
                7,808
                
                
                
                37,156
                
                
                
                16,739
                
                
                
                -
                
                
                
                61,703Research
      and development costs
                
                
                -
                
                
                
                22,146
                
                
                
                12,296
                
                
                
                -
                
                
                
                34,442Amortization
      of acquired intangibles
                
                
                -
                
                
                
                26,659
                
                
                
                4,460
                
                
                
                -
                
                
                
                31,119Restructuring
      charges
                
                
                -
                
                
                
                -
                
                
                
                251
                
                
                
                -
                
                
                
                251Loss
      on liquidation of foreign subsidiary
                
                
                -
                
                
                
                7,696
                
                
                
                -
                
                
                
                -
                
                
                
                7,696Operating
      income (loss)
                
                
                (7,808
                )
                
                
                12,644
                
                
                
                11,789
                
                
                
                (105
                )
                
                
                16,520Other
      income (expense):Interest
      expense
                
                
                (42,421
                )
                
                
                (34
                )
                
                
                (2
                )
                
                
                -
                
                
                
                (42,457
                )Other
      income (expense), net
                
                
                341
                
                
                
                374
                
                
                
                (236
                )
                
                
                -
                
                
                
                479Intercompany
      charges
                
                
                39,591
                
                
                
                (38,636
                )
                
                
                (955
                )
                
                
                -
                
                
                
                -Income
      (loss) before income taxes
                
                
                (10,297
                )
                
                
                (25,652
                )
                
                
                10,596
                
                
                
                (105
                )
                
                
                (25,458
                )Provision
      (benefit) for income taxes
                
                
                (4,799
                )
                
                
                (492
                )
                
                
                2,265
                
                
                
                8,725
                
                
                
                5,699Equity
      income (loss) of subsidiaries
                
                
                (25,659
                )
                
                
                7,634
                
                
                
                -
                
                
                
                18,025
                
                
                
                -Net
      income (loss)
                
                $
                (31,157
                )
                
                $
                (17,526
                )
                
                $
                8,331
                
                
                $
                9,195
                
                
                $
                (31,157
                )


- 30
-


Aeroflex
Incorporated


Condensed
Consolidating Balance Sheet


As
of December 31, 2010


(In
thousands)





Guarantor
                      
                      
                      Non-GuarantorParent
                      
                      
                      Subsidiaries
                      
                      
                      Subsidiaries
                      
                      
                      Eliminations
                      
                      
                      ConsolidatedAssetsCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      31,727
                      
                      
                      $
                      1,449
                      
                      
                      $
                      37,467
                      
                      
                      $
                      -
                      
                      
                      $
                      70,643Marketable
      securities
                      
                      
                      8,357
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      8,357Accounts
      receivable, net
                      
                      
                      -
                      
                      
                      
                      72,603
                      
                      
                      
                      58,619
                      
                      
                      
                      -
                      
                      
                      
                      131,222Inventories
                      
                      
                      -
                      
                      
                      
                      111,810
                      
                      
                      
                      43,004
                      
                      
                      
                      (934
                      )
                      
                      
                      153,880Deferred
      income taxes
                      
                      
                      2,773
                      
                      
                      
                      23,266
                      
                      
                      
                      (9
                      )
                      
                      
                      -
                      
                      
                      
                      26,030Prepaid
      expenses and other current assets
                      
                      
                      1,385
                      
                      
                      
                      5,695
                      
                      
                      
                      4,172
                      
                      
                      
                      -
                      
                      
                      
                      11,252Total
      current assets
                      
                      
                      44,242
                      
                      
                      
                      214,823
                      
                      
                      
                      143,253
                      
                      
                      
                      (934
                      )
                      
                      
                      401,384Property,
      plant and equipment, net
                      
                      
                      12,493
                      
                      
                      
                      65,839
                      
                      
                      
                      21,557
                      
                      
                      
                      -
                      
                      
                      
                      99,889Deferred
      financing costs, net
                      
                      
                      17,435
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      17,435Other
      assets
                      
                      
                      13,850
                      
                      
                      
                      7,048
                      
                      
                      
                      2,306
                      
                      
                      
                      -
                      
                      
                      
                      23,204Intangible
      assets with definite lives, net
                      
                      
                      -
                      
                      
                      
                      186,320
                      
                      
                      
                      27,765
                      
                      
                      
                      -
                      
                      
                      
                      214,085Intangible
      assets with indefinite lives
                      
                      
                      -
                      
                      
                      
                      88,414
                      
                      
                      
                      25,430
                      
                      
                      
                      -
                      
                      
                      
                      113,844Goodwill
                      
                      
                      (10
                      )
                      
                      
                      414,257
                      
                      
                      
                      43,787
                      
                      
                      
                      -
                      
                      
                      
                      458,034Total
      assets
                      
                      $
                      88,010
                      
                      
                      $
                      976,701
                      
                      
                      $
                      264,098
                      
                      
                      $
                      (934
                      )
                      
                      $
                      1,327,875Liabilities and Stockholder's
      EquityCurrent
      liabilities:Current
      portion of long-term debt
                      
                      $
                      -
                      
                      
                      $
                      360
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      360Accounts
      payable
                      
                      
                      4
                      
                      
                      
                      17,326
                      
                      
                      
                      19,637
                      
                      
                      
                      -
                      
                      
                      
                      36,967Advance
      payments by customers and deferred revenue
                      
                      
                      -
                      
                      
                      
                      12,950
                      
                      
                      
                      10,235
                      
                      
                      
                      -
                      
                      
                      
                      23,185Income
      taxes payable
                      
                      
                      (1,254
                      )
                      
                      
                      259
                      
                      
                      
                      2,649
                      
                      
                      
                      -
                      
                      
                      
                      1,654Accrued
      payroll expenses
                      
                      
                      1,528
                      
                      
                      
                      15,814
                      
                      
                      
                      1,756
                      
                      
                      
                      -
                      
                      
                      
                      19,098Accrued
      expenses and other current liabilities
                      
                      
                      20,131
                      
                      
                      
                      17,349
                      
                      
                      
                      15,464
                      
                      
                      
                      -
                      
                      
                      
                      52,944Total
      current liabilities
                      
                      
                      20,409
                      
                      
                      
                      64,058
                      
                      
                      
                      49,741
                      
                      
                      
                      -
                      
                      
                      
                      134,208Long-term
      debt
                      
                      
                      695,523
                      
                      
                      
                      385
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      695,908Deferred
      income taxes
                      
                      
                      (13,239
                      )
                      
                      
                      103,683
                      
                      
                      
                      13,403
                      
                      
                      
                      (15,781
                      )
                      
                      
                      88,066Defined
      benefit plan obligations
                      
                      
                      5,605
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,605Other
      long-term liabilities
                      
                      
                      2,210
                      
                      
                      
                      6,909
                      
                      
                      
                      3,864
                      
                      
                      
                      -
                      
                      
                      
                      12,983Intercompany
      investment
                      
                      
                      (308,309
                      )
                      
                      
                      78,947
                      
                      
                      
                      229,362
                      
                      
                      
                      -
                      
                      
                      
                      -Intercompany
      receivable/payable
                      
                      
                      (848,195
                      )
                      
                      
                      883,360
                      
                      
                      
                      (34,682
                      )
                      
                      
                      (483
                      )
                      
                      
                      -Total
      liabilities
                      
                      
                      (445,996
                      )
                      
                      
                      1,137,342
                      
                      
                      
                      261,688
                      
                      
                      
                      (16,264
                      )
                      
                      
                      936,770Stockholder's
      equity
                      
                      
                      534,006
                      
                      
                      
                      (160,641
                      )
                      
                      
                      2,410
                      
                      
                      
                      15,330
                      
                      
                      
                      391,105Total
      liabilities and stockholder's equity
                      
                      $
                      88,010
                      
                      
                      $
                      976,701
                      
                      
                      $
                      264,098
                      
                      
                      $
                      (934
                      )
                      
                      $
                      1,327,875




- 31
-





Aeroflex
Incorporated


Condensed
Consolidating Balance Sheet


As
of June 30, 2010


(In
thousands)





Guarantor
                                    
                                    
                                    Non-GuarantorParent
                                    
                                    
                                    Subsidiaries
                                    
                                    
                                    Subsidiaries
                                    
                                    
                                    Eliminations
                                    
                                    
                                    ConsolidatedAssetsCurrent
      assets:Cash
      and cash equivalents
                                    
                                    $
                                    75,187
                                    
                                    
                                    $
                                    (3,821
                                    )
                                    
                                    $
                                    29,297
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    100,663Accounts
      receivable, net
                                    
                                    
                                    -
                                    
                                    
                                    
                                    88,051
                                    
                                    
                                    
                                    53,544
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    141,595Inventories
                                    
                                    
                                    -
                                    
                                    
                                    
                                    94,669
                                    
                                    
                                    
                                    33,209
                                    
                                    
                                    
                                    (1,310
                                    )
                                    
                                    
                                    126,568Deferred
      income taxes
                                    
                                    
                                    4,939
                                    
                                    
                                    
                                    23,224
                                    
                                    
                                    
                                    (145
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    28,018Prepaid
      expenses and other current assets
                                    
                                    
                                    3,046
                                    
                                    
                                    
                                    2,840
                                    
                                    
                                    
                                    5,097
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    10,983Total
      current assets
                                    
                                    
                                    83,172
                                    
                                    
                                    
                                    204,963
                                    
                                    
                                    
                                    121,002
                                    
                                    
                                    
                                    (1,310
                                    )
                                    
                                    
                                    407,827Property,
      plant and equipment, net
                                    
                                    
                                    12,491
                                    
                                    
                                    
                                    69,150
                                    
                                    
                                    
                                    20,021
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    101,662Non-current
      marketable securities, net
                                    
                                    
                                    9,769
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    9,769Deferred
      financing costs, net
                                    
                                    
                                    20,983
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    20,983Other
      assets
                                    
                                    
                                    13,634
                                    
                                    
                                    
                                    6,385
                                    
                                    
                                    
                                    1,799
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    21,818Intangible
      assets with definite lives, net
                                    
                                    
                                    -
                                    
                                    
                                    
                                    207,849
                                    
                                    
                                    
                                    30,464
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    238,313Intangible
      assets with indefinite lives
                                    
                                    
                                    -
                                    
                                    
                                    
                                    85,404
                                    
                                    
                                    
                                    24,490
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    109,894Goodwill
                                    
                                    
                                    (10
                                    )
                                    
                                    
                                    404,632
                                    
                                    
                                    
                                    41,252
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    445,874Total
      assets
                                    
                                    $
                                    140,039
                                    
                                    
                                    $
                                    978,383
                                    
                                    
                                    $
                                    239,028
                                    
                                    
                                    $
                                    (1,310
                                    )
                                    
                                    $
                                    1,356,140Liabilities and Stockholder's
      EquityCurrent
      liabilities:Current
      portion of long-term debt
                                    
                                    $
                                    21,457
                                    
                                    
                                    $
                                    360
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    21,817Accounts
      payable
                                    
                                    
                                    4
                                    
                                    
                                    
                                    14,376
                                    
                                    
                                    
                                    14,423
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    28,803Advanced
      payments by customers and deferred revenue
                                    
                                    
                                    -
                                    
                                    
                                    
                                    19,091
                                    
                                    
                                    
                                    11,650
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    30,741Income
      taxes payable
                                    
                                    
                                    969
                                    
                                    
                                    
                                    43
                                    
                                    
                                    
                                    3,603
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    4,615Accrued
      payroll expenses
                                    
                                    
                                    2,198
                                    
                                    
                                    
                                    18,834
                                    
                                    
                                    
                                    2,050
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    23,082Accrued
      expenses and other current liabilities
                                    
                                    
                                    33,904
                                    
                                    
                                    
                                    12,598
                                    
                                    
                                    
                                    12,315
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    58,817Total
      current liabilities
                                    
                                    
                                    58,532
                                    
                                    
                                    
                                    65,302
                                    
                                    
                                    
                                    44,041
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    167,875Long-term
      debt
                                    
                                    
                                    879,645
                                    
                                    
                                    
                                    385
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    880,030Deferred
      income taxes
                                    
                                    
                                    15,835
                                    
                                    
                                    
                                    109,570
                                    
                                    
                                    
                                    13,444
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    138,849Defined
      benefit plan obligations
                                    
                                    
                                    5,763
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,763Other
      long-term liabilities
                                    
                                    
                                    1,595
                                    
                                    
                                    
                                    8,303
                                    
                                    
                                    
                                    2,741
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    12,639Intercompany
      investment
                                    
                                    
                                    (287,515
                                    )
                                    
                                    
                                    60,154
                                    
                                    
                                    
                                    227,361
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Intercompany
      receivable/payable
                                    
                                    
                                    (842,950
                                    )
                                    
                                    
                                    878,174
                                    
                                    
                                    
                                    (34,740
                                    )
                                    
                                    
                                    (484
                                    )
                                    
                                    
                                    -Total
      liabilities
                                    
                                    
                                    (169,095
                                    )
                                    
                                    
                                    1,121,888
                                    
                                    
                                    
                                    252,847
                                    
                                    
                                    
                                    (484
                                    )
                                    
                                    
                                    1,205,156Stockholder's
      equity:
                                    
                                    
                                    309,134
                                    
                                    
                                    
                                    (143,505
                                    )
                                    
                                    
                                    (13,819
                                    )
                                    
                                    
                                    (826
                                    )
                                    
                                    
                                    150,984Total
      liabilities and stockholder's equity
                                    
                                    $
                                    140,039
                                    
                                    
                                    $
                                    978,383
                                    
                                    
                                    $
                                    239,028
                                    
                                    
                                    $
                                    (1,310
                                    )
                                    
                                    $
                                    1,356,140




- 32
-





Aeroflex
Incorporated


Condensed
Consolidating Statement of Cash Flows


For
the Six Months Ended December 31, 2010


(In
thousands)





Guarantor
                                    
                                    
                                    Non-GuarantorParent
                                    
                                    
                                    Subsidiaries
                                    
                                    
                                    Subsidiaries
                                    
                                    
                                    Eliminations
                                    
                                    
                                    ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                                    
                                    $
                                    (17,220
                                    )
                                    
                                    $
                                    (8,646
                                    )
                                    
                                    $
                                    8,864
                                    
                                    
                                    $
                                    (218
                                    )
                                    
                                    $
                                    (17,220
                                    )Changes
      in operating assets and liabilities andnon-cash items included in net
      income (loss)
                                    
                                    
                                    (33,876
                                    )
                                    
                                    
                                    38,809
                                    
                                    
                                    
                                    1,012
                                    
                                    
                                    
                                    218
                                    
                                    
                                    
                                    6,163Net
      cash provided by (used in) operating activities
                                    
                                    
                                    (51,096
                                    )
                                    
                                    
                                    30,163
                                    
                                    
                                    
                                    9,876
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (11,057
                                    )Cash
      flows from investing activities:Payments
      for purchase of businesses, net of cash acquired
                                    
                                    
                                    (5,621
                                    )
                                    
                                    
                                    (17,970
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (23,591
                                    )Capital
      expenditures
                                    
                                    
                                    (360
                                    )
                                    
                                    
                                    (7,389
                                    )
                                    
                                    
                                    (3,464
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (11,213
                                    )Proceeds
      from sale of marketable securities
                                    
                                    
                                    2,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,000Proceeds
      from sale of property, plant and equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    466
                                    
                                    
                                    
                                    275
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    741Net
      cash provided by (used in) investing activities
                                    
                                    
                                    (3,981
                                    )
                                    
                                    
                                    (24,893
                                    )
                                    
                                    
                                    (3,189
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (32,063
                                    )Cash
      flows from financing activities:Capital
      contribution from Aeroflex Holding
                                    
                                    
                                    244,097
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    244,097Repurchase
      of senior unsecured notes and senior subordinated unsecured term loans,
      including premiums and fees
                                    
                                    
                                    (207,690
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (207,690
                                    )Debt
      repayments
                                    
                                    
                                    (21,458
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (21,458
                                    )Debt
      financing costs
                                    
                                    
                                    (3,332
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (3,332
                                    )Net
      cash provided by (used in) financing activities of continuing
      operations
                                    
                                    
                                    11,617
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    11,617Effect
      of exchange rate changes on cash and cash equivalents
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,483
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,483Net
      increase (decrease) in cash and cash equivalents
                                    
                                    
                                    (43,460
                                    )
                                    
                                    
                                    5,270
                                    
                                    
                                    
                                    8,170
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (30,020
                                    )Cash
      and cash equivalents at beginning of period
                                    
                                    
                                    75,187
                                    
                                    
                                    
                                    (3,821
                                    )
                                    
                                    
                                    29,297
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    100,663Cash
      and cash equivalents at end of period
                                    
                                    $
                                    31,727
                                    
                                    
                                    $
                                    1,449
                                    
                                    
                                    $
                                    37,467
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    70,643




- 33
-





Aeroflex
Incorporated


Condensed
Consolidating Statement of Cash Flows


For
the Six Months Ended December 31, 2009


(In
thousands)





Guarantor
                                    
                                    
                                    Non-GuarantorParent
                                    
                                    
                                    Subsidiaries
                                    
                                    
                                    Subsidiaries
                                    
                                    
                                    Eliminations
                                    
                                    
                                    ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                                    
                                    $
                                    (31,157
                                    )
                                    
                                    $
                                    (17,526
                                    )
                                    
                                    $
                                    8,331
                                    
                                    
                                    $
                                    9,195
                                    
                                    
                                    $
                                    (31,157
                                    )Changes
      in operating assets and liabilities and non-cash items included in net
      income (loss)
                                    
                                    
                                    56,201
                                    
                                    
                                    
                                    22,336
                                    
                                    
                                    
                                    (16,072
                                    )
                                    
                                    
                                    (9,195
                                    )
                                    
                                    
                                    53,270Net
      cash provided by (used in) operating activities
                                    
                                    
                                    25,044
                                    
                                    
                                    
                                    4,810
                                    
                                    
                                    
                                    (7,741
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    22,113Cash
      flows from investing activities:Capital
      expenditures
                                    
                                    
                                    (171
                                    )
                                    
                                    
                                    (6,172
                                    )
                                    
                                    
                                    (2,058
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (8,401
                                    )Proceeds
      from sale of marketable securities
                                    
                                    
                                    1,000
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,000Proceeds
      from the sale of property, plant and equipment
                                    
                                    
                                    -
                                    
                                    
                                    
                                    737
                                    
                                    
                                    
                                    108
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    845Other,
      net
                                    
                                    
                                    (11
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (11
                                    )Net
      cash provided by (used in) investing activities
                                    
                                    
                                    818
                                    
                                    
                                    
                                    (5,435
                                    )
                                    
                                    
                                    (1,950
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (6,567
                                    )Cash
      flows from financing activities:Debt
      repayments
                                    
                                    
                                    (4,012
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,012
                                    )Net
      cash provided by (used in) financing activities
                                    
                                    
                                    (4,012
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (4,012
                                    )Effect
      of exchange rate changes on cash and cash equivalents
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (483
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (483
                                    )Net
      increase (decrease) in cash and cash equivalents
                                    
                                    
                                    21,850
                                    
                                    
                                    
                                    (625
                                    )
                                    
                                    
                                    (10,174
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    11,051Cash
      and cash equivalents at beginning of period
                                    
                                    
                                    31,221
                                    
                                    
                                    
                                    (15
                                    )
                                    
                                    
                                    26,542
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    57,748Cash
      and cash equivalents at end of period
                                    
                                    $
                                    53,071
                                    
                                    
                                    $
                                    (640
                                    )
                                    
                                    $
                                    16,368
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    68,799




- 34
-


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





This
quarterly report on Form 10-Q for the period ended December 31, 2010 is a
combined quarterly report being separately filed by two registrants: Aeroflex
Holding Corp. (“Aeroflex Holding”) and Aeroflex Incorporated (“Aeroflex”), a
direct wholly-owned subsidiary of Aeroflex Holding. Unless the context provides
otherwise, references to “we,” “our,” “the Company,” or “us” refer collectively
to Aeroflex Holding and its subsidiary, Aeroflex, including Aeroflex’s
consolidated subsidiaries.





Forward-Looking
Statements





This
report contains forward-looking statements. All statements other than statements
of historical fact are forward-looking statements for purposes of the U.S.
federal and state securities laws. These statements may be identified by the use
of forward looking terminology such as "anticipate," "believe," "continue,"
"could," "estimate," "expect," "intend," "may," "might," "plan," "potential,"
"predict," "should" or "will" or the negative thereof or other variations
thereon or comparable terminology.




We have
based these forward-looking statements on our current expectations, assumptions,
estimates and projections. While we believe these expectations, assumptions,
estimates and projections are reasonable, such forward-looking statements are
only predictions and involve known and unknown risks and uncertainties, many of
which are beyond our control. These and other important factors may cause our
actual results, performance or achievements to differ materially from any future
results, performance or achievements expressed or implied by these
forward-looking statements. A listing of some of the key factors that could
cause actual results to differ from our expectations is included under the
caption "Risk Factors" disclosed in Aeroflex Holding’s Registration Statement
and Aeroflex’s Fiscal 2010 Form 10-K.





Given
these risks and uncertainties, you are cautioned not to place undue reliance on
such forward-looking statements. The forward-looking statements included in this
Form 10-Q are made only as of the date hereof. We undertake no obligation to
update or revise any forward-looking statements, either to reflect new
developments, or for any other reason, except as required by law.





Overview





Company
Background





We are a
leading global provider of RF and microwave integrated circuits, components and
systems used in the design, development and maintenance of technically
demanding, high-performance wireless communication systems. Our solutions
include highly specialized microelectronic components and test and measurement
equipment used by companies in the space, avionics, defense, commercial wireless
communications, medical and other markets. We have targeted customers in these
end markets because we believe our solutions address their technically demanding
requirements. We were founded in 1937 and have proprietary technology that is
based on extensive know-how and a long history of research and development
focused on specialized technologies, often in collaboration with our
customers.





Business
Segments





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





Microelectronic
Solutions (“AMS”)





·
            HiRel
      microelectronics/semiconductors


·
            RF
      and microwave components


·
            Mixed-signal/digital
      ASICs


- 35
-


·
            Motion
      control products




Test
Solutions (“ATS”)





·
            Wireless
      test equipment


·
            Military
      radio and Private Mobile Radio, or PMR, test
  equipment


·
            Avionics
      test equipment


·
            Synthetic
      test equipment


·
            General
      purpose test equipment and other





Stock
Split





Aeroflex
Holding’s board of directors authorized an increase in Aeroflex Holding’s
authorized shares of common stock to 300,000,000 and a
65,000,000 for 1 common stock split, both of which became effective on
November 18, 2010. Aeroflex Holding’s stockholders’ equity has been
retroactively adjusted to give effect to the stock split for all periods
presented by reclassifying the par value of the additional shares issued in
connection with the split from additional paid-in capital to common stock. In
addition, all share numbers and per share amounts in Aeroflex Holding’s
consolidated financial statements have been retroactively adjusted to give
effect to the stock split.





Initial
Public Offering





On
November 19, 2010, Aeroflex Holding consummated an initial public offering
(“IPO”) of common stock in which it sold 19,789,180 shares of common stock, par
value of $.01 per share, at a price of $13.50 per share. Aeroflex Holding
received net proceeds of $244.1 million from the IPO, after deducting
underwriting discounts and offering expenses, including a $2.5 million
transaction fee which was paid to affiliates of the Sponsors under the advisory
agreement with them for services directly attributable to the equity offering
(“Transaction Fee”). Aeroflex Holding used the net proceeds of the IPO to
make a capital contribution to Aeroflex. In connection with the IPO,
Aeroflex:





·
            Repurchased
      $186.6 million of its senior unsecured notes and senior subordinated
      unsecured term loans and paid related
expenses;





·
            Paid
      a $16.9 million termination fee to affiliates of the Sponsors to terminate
      the advisory agreement with them, which, including the related write-off
      of prepaid advisory fees, resulted in an $18.1 million expense
      (“Termination Fee”); and





·
            Entered
      into an amendment of the credit agreement with the lenders of its senior
      secured credit facility, for which a $3.3 million fee was paid to the
      lenders





Debt
Repurchase





In
December 2010, Aeroflex repurchased approximately $32.2 million of its senior
unsecured notes and $154.4 million of its senior subordinated unsecured term
loans. This resulted in a $25.2 million loss on extinguishment of debt, which is
comprised of the following:





·
            an
      11% premium paid on the debt repurchased, which amounted to $20.5
      million;





·
            the
      write-off of the related deferred financing costs of $4.0 million;
      and





·
            professional
      fees of $614,000.


- 36
-


Amendment
to Senior Secured Debt Agreement





On
November 4, 2010, Aeroflex entered into an amendment of the credit agreement
with the lenders of its senior secured credit facility, for which it paid a $3.3
million fee to the lenders which was recorded as deferred financing costs and
$579,000 of other costs that were expensed as incurred, which allowed Aeroflex
to, among other things:





·
            increase
      the amount of cash it can spend for acquisitions of businesses from $20
      million per year and a $100 million aggregate amount, to $200 million in
      the aggregate (with no annual limit), from the effective date of the
      amendment to the credit facility maturity date, August 15,
      2014;





·
            pay certain fees to affiliates of
      the Sponsors upon the completion of the Aeroflex Holding IPO. These fees
      were paid on November 24, 2010, and consisted of the $2.5 million
      Transaction Feefor
      services directly attributable to the equity offering, which was recorded as a
      reduction of additional paid-in capital, and the $16.9 million Termination
      Fee. The Termination Fee, when combined with the related write-off of
      prepaid advisory fees, amounted to an $18.1 million expense which was
      recorded in a separate line on the statement of operations entitled
      Termination of Sponsor Advisory Agreement;
  and





·
            base its interest rate margin
      above LIBOR on a grid, with reference to its current credit rating. This
      increased the interest rate margin by 75 basis points for all tranches of
      debt within the secured credit
facility.


- 37
-


Results
of Operations





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





Three Months Ended
                                          
                                          
                                          Six Months EndedDecember 31,
                                          
                                          
                                          December 31,2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010
                                          
                                          
                                          2009Net
      sales
                                          
                                          
                                          100.0
                                          %
                                          
                                          
                                          100.0
                                          %
                                          
                                          
                                          100.0
                                          %
                                          
                                          
                                          100.0
                                          %Costs
      of sales
                                          
                                          
                                          47.8
                                          
                                          
                                          
                                          48.1
                                          
                                          
                                          
                                          48.2
                                          
                                          
                                          
                                          48.9Gross
      profit
                                          
                                          
                                          52.2
                                          
                                          
                                          
                                          51.9
                                          
                                          
                                          
                                          51.8
                                          
                                          
                                          
                                          51.1Operating
      expenses:Selling,
      general and administrative costs
                                          
                                          
                                          21.0
                                          
                                          
                                          
                                          18.9
                                          
                                          
                                          
                                          22.3
                                          
                                          
                                          
                                          20.8Research
      and development costs
                                          
                                          
                                          11.9
                                          
                                          
                                          
                                          10.4
                                          
                                          
                                          
                                          13.0
                                          
                                          
                                          
                                          11.6Amortization
      of acquired intangibles
                                          
                                          
                                          8.7
                                          
                                          
                                          
                                          9.3
                                          
                                          
                                          
                                          9.4
                                          
                                          
                                          
                                          10.5Termination
      of Sponsor Advisory Agreement
                                          
                                          
                                          10.0
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          5.4
                                          
                                          
                                          
                                          -Restructuring
      charges
                                          
                                          
                                          3.5
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2.4
                                          
                                          
                                          
                                          0.1Loss
      on liquidation of foreign subsidiary
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2.6Total
      operating expenses
                                          
                                          
                                          55.1
                                          
                                          
                                          
                                          38.6
                                          
                                          
                                          
                                          52.5
                                          
                                          
                                          
                                          45.6Operating
      income (loss)
                                          
                                          
                                          (2.9
                                          )
                                          
                                          
                                          13.3
                                          
                                          
                                          
                                          (0.7
                                          )
                                          
                                          
                                          5.5Other
      income (expense):Interest
      expense
                                          
                                          
                                          (11.4
                                          )
                                          
                                          
                                          (12.9
                                          )
                                          
                                          
                                          (12.5
                                          )
                                          
                                          
                                          (14.3
                                          )Loss
      on extinguishment of debt
                                          
                                          
                                          (13.9
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (7.5
                                          )
                                          
                                          
                                          -Gain
      from a bargain purchase of abusiness
                                          
                                          
                                          0.1
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          0.1
                                          
                                          
                                          
                                          -Other
      income (expense), net
                                          
                                          
                                          (0.2
                                          )
                                          
                                          
                                          0.3
                                          
                                          
                                          
                                          (0.1
                                          )
                                          
                                          
                                          0.1Income
      (loss) before income taxes
                                          
                                          
                                          (28.3
                                          )
                                          
                                          
                                          0.7
                                          
                                          
                                          
                                          (20.7
                                          )
                                          
                                          
                                          (8.7
                                          )Provision
      (benefit) for income taxes
                                          
                                          
                                          (22.0
                                          )
                                          
                                          
                                          7.1
                                          
                                          
                                          
                                          (15.6
                                          )
                                          
                                          
                                          1.9Net
      income (loss)
                                          
                                          
                                          (6.3
                                          )%
                                          
                                          
                                          (6.4
                                          )%
                                          
                                          
                                          (5.1
                                          )%
                                          
                                          
                                          (10.6
                                          )%




- 38
-


Three
Months Ended December 31, 2010 Compared to Three Months Ended December 31,
2009





Net Sales.Net sales
increased $14.8 million, or 9%, to $181.6 million for the three months ended
December 31, 2010 from $166.7 million for the three months ended December 31,
2009. Businesses acquired since December 31, 2009 contributed $12.1 million to
sales, or 7%, in the current quarter.





Net SalesThree Months
                          
                          
                          
                          
                          % of
                          
                          
                          
                          
                          
                          % ofEnded
                          
                          
                          
                          
                          Consolidated
                          
                          
                          
                          
                          
                          ConsolidatedDecember 31,
                          
                          AMS
                          
                          
                          Net Sales
                          
                          
                          ATS
                          
                          
                          Net Sales
                          
                          
                          Total(In
      thousands, except percentages)2009
                          
                          $
                          79,160
                          
                          
                          
                          47.5
                          %
                          
                          $
                          87,579
                          
                          
                          
                          52.5
                          %
                          
                          $
                          166,7392010
                          
                          $
                          89,225
                          
                          
                          
                          49.1
                          %
                          
                          $
                          92,354
                          
                          
                          
                          50.9
                          %
                          
                          $
                          181,579




Net sales
in the AMS segment increased $10.1 million, or 13%, to $89.2 million for
the three months ended December 31, 2010 from $79.2 million for the three months
ended December 31, 2009. Specific variances include a volume driven $5.5
million increase in sales of components, including $4.2 million from
Advanced Control Components, Inc., or ACC, acquired in August 2010, a
volume driven $5.2 million increase in sales of integrated circuits; and
additional sales of $1.5 million from Radiation Assured Devices, Inc., or
RAD, acquired in June 2010. The increases in sales were partially offset
by volume driven reductions of $1.5 million in sales of microelectronics
modules and $699,000 in sales of motion control products.




Net sales
in the ATS segment increased $4.8 million, or 5%, to $92.4 million for
the three months ended December 31, 2010 from $87.6 million for the three months
ended December 31, 2009. Specific variances include a volume driven
$2.7 million increase in sales from avionic products; a volume
driven $1.7 million increase in sales of wireless test products; and
additional wireless test products sales of $6.4 million from Willtek
Communications, or Willtek, acquired in May 2010. The increases in net sales
were partially offset by a volume driven reduction of $5.5 million in sales of
general purpose test products and a volume driven reduction of $549,000 in
sales of radio test products.





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 profit was $94.8 million, or 52.2% of net sales, for
the three months ended December 31, 2010 and $86.7 million, or 51.9% of net
sales, for the three months ended December 31, 2009.




Three Months
                                
                                
                                
                                
                                Gross ProfitEnded
                                
                                
                                
                                
                                % of
                                
                                
                                
                                
                                
                                % of
                                
                                
                                
                                
                                
                                % ofDecember 31,
                                
                                AMS
                                
                                
                                Net Sales
                                
                                
                                ATS
                                
                                
                                Net Sales
                                
                                
                                Total
                                
                                
                                Net Sales(In
      thousands, except percentages)2009
                                
                                $
                                39,202
                                
                                
                                
                                49.5
                                %
                                
                                $
                                47,456
                                
                                
                                
                                54.2
                                %
                                
                                $
                                86,658
                                
                                
                                
                                51.9
                                %2010
                                
                                $
                                44,696
                                
                                
                                
                                50.1
                                %
                                
                                $
                                50,144
                                
                                
                                
                                54.3
                                %
                                
                                $
                                94,840
                                
                                
                                
                                52.2
                                %





Gross
margins in the AMS segment were 50.1% for the three months ended December 31,
2010 and 49.5% for the three months ended December 31, 2009. The increase in
gross margins is principally attributable to increased sales of integrated
circuits, combined with the additional sales of RAD services, acquired in June
2010, (which have margins higher than the segment average). Gross profit
increased $5.5 million for the three months ended December 31, 2010 as compared
to the three months ended December 31, 2009 due to increased sales and the
aforementioned increase in gross margins.


- 39
-


Gross
margins in the ATS segment were 54.3% for the three months ended December 31,
2010 and 54.2% for the three months ended December 31, 2009. Gross profit
increased $2.7 million for the three months ended December 31, 2010 as compared
to the three months ended December 31, 2009 due to increased sales.





Selling, General and Administrative
Costs. Selling, general and administrative costs include office and
management salaries, fringe benefits, commissions, insurance and professional
fees.





On a
consolidated basis SG&A costs increased $6.7 million, or 21%, to $38.3
million for the three months ended December 31, 2010. This
increase was primarily attributable to the additional SG&A costs of the
acquired businesses, which were not fully integrated during the quarter, and the
expansion of our sales and marketing team in the Asia-Pacific region.As
a percentage of sales, SG&A costs increased from 18.9% to 21.0% from the
three months ended December 31, 2009 to the three months ended December 31,
2010. SG&A of the acquired businesses increased SG&A by $2.5 million, or
8% of 2009 total SG&A.





Three Months
                            
                            
                            
                            
                            Selling,GeneralandAdministrativeCostsEnded
                            
                            
                            
                            
                            % of
                            
                            
                            
                            
                            
                            % of
                            
                            
                            
                            
                            
                            
                            
                            
                            % ofDecember 31,
                            
                            AMS
                            
                            
                            Net Sales
                            
                            
                            ATS
                            
                            
                            Net Sales
                            
                            
                            Corporate
                            
                            
                            Total
                            
                            
                            Net Sales(In thousands, except percentages)2009
                            
                            $
                            10,595
                            
                            
                            
                            13.4
                            %
                            
                            $
                            17,338
                            
                            
                            
                            19.8
                            %
                            
                            $
                            3,640
                            
                            
                            $
                            31,573
                            
                            
                            
                            18.9
                            %2010
                            
                            $
                            13,596
                            
                            
                            
                            15.2
                            %
                            
                            $
                            19,870
                            
                            
                            
                            21.5
                            %
                            
                            $
                            4,800
                            
                            
                            $
                            38,266
                            
                            
                            
                            21.0
                            %





In the
AMS segment, SG&A costs increased $3.0 million, or 28%, to $13.6 million for
the three months ended December 31, 2010. This increase is primarily due to
additional SG&A costs of $1.4 million related to RAD, acquired in June 2010,
and ACC, acquired in August 2010 and general increases in our existing
businesses, primarily due to increased employee related expenses of $644,000;
external commissions of $262,000 and professional fees of $252,000. SG&A
costs in the AMS segment increased from 13.4% to 15.2%, as a percentage of
sales, from the three months ended December 31, 2009 to the three months ended
December 31, 2010.





In the
ATS segment, SG&A costs increased $2.5 million, or 15%, to $19.9 million for
the three months ended December 31, 2010, primarily due to increased employee
related expenses of $1.5 million and additional costs of $1.0 million related to
Willtek, acquired in May 2010. As a percentage of sales, SG&A costs in the
ATS segment increased from 19.8% to 21.5% from the three months ended December
31, 2009 to the three months ended December 31, 2010.





Corporate
general and administrative costs increased $1.2 million, for the three months
ended December 31, 2010 compared to the three months ended December 31, 2009,
primarily related to business acquisition costs of $876,000.





Research and Development
Costs. Research and development costs include materials, engineering
labor and allocated overhead.





On a
consolidated basis, research and development costs increased by $4.4 million, or
25%, to $21.7 million for the three months ended December 31, 2010. This
increase was primarily attributable to the additional costs of the acquired
businesses and the acceleration of research and development projects in our ATS
segment to meet customer requirements for new products.As a percentage
of sales, research and development costs increased from 10.4% to 11.9% from the
three months ended December 31, 2009 to the three months ended December 31,
2010. Research and development costs of acquired businesses increased research
and development by $1.4 million, or 8% of 2009 total research and development
costs.


- 40
-





Three Months
                            
                            
                            
                            
                            ResearchandDevelopmentCostsEnded
                            
                            
                            
                            
                            % of
                            
                            
                            
                            
                            
                            % of
                            
                            
                            
                            
                            
                            % ofDecember 31,
                            
                            AMS
                            
                            
                            Net Sales
                            
                            
                            ATS
                            
                            
                            Net Sales
                            
                            
                            Total
                            
                            
                            Net Sales(In thousands, except percentages)2009
                            
                            $
                            6,986
                            
                            
                            
                            8.8
                            %
                            
                            $
                            10,275
                            
                            
                            
                            11.7
                            %
                            
                            $
                            17,261
                            
                            
                            
                            10.4
                            %2010
                            
                            $
                            8,552
                            
                            
                            
                            9.6
                            %
                            
                            $
                            13,104
                            
                            
                            
                            14.2
                            %
                            
                            $
                            21,656
                            
                            
                            
                            11.9
                            %





AMS
segment self-funded research and development costs increased $1.6 million, or
22%, to $8.6 million for the three months ended December 31, 2010 primarily due
to the increased efforts in the development of next generation component
products and additional spending on projects within integrated circuits. As a
percentage of sales, AMS segment research and development costs increased from
8.8% for the three months ended December 31, 2009 to 9.6% for the three months
ended December 31, 2010.





ATS
segment self-funded research and development costs increased $2.8 million, or
28%, to $13.1 million for the three months ended December 31, 2010 primarily due
to increases in our radio test and avionics divisions, for the development of a
common platform technology, and additional costs of $1.1 related to Willtek,
acquired in May 2010. As a percentage of sales, ATS segment research and
development costs increased from 11.7% for the three months ended December 31,
2009 to 14.2% for the three months ended December 31, 2010.





Amortization of Acquired
Intangibles.Amortization of acquired intangibles increased $329,000 for
the three months ended December 31, 2010 primarily due to additional
amortization related to the acquisitions of Willtek, in May 2010; RAD, in June
2010; and ACC, in August 2010. The increases in amortization were partially
offset by certain intangibles becoming fully amortized during fiscal 2010. By
segment, the amortization increased $453,000 in the AMS segment and decreased
$124,000 in the ATS segment.





Termination of Sponsor Advisory
Agreement.In connection with the Aeroflex Holding IPO, we paid a $16.9
million Termination Fee to affiliates of the Sponsors on November 24, 2010 to
terminate the Sponsor Advisory Agreement with them and eliminate all future
payments to the Sponsors under that agreement, which, including the related
write-off of prepaid advisory fees, resulted in an $18.1 million expense. There
was no similar charge recorded for the three months ended December 31,
2009.





Restructuring Charges.The
AMS segment incurred total restructuring costs of $5.6 million for the three
months ended December 31, 2010 which primarily relate to consolidation of our
components operations by relocating a portion of our Whippany, New Jersey
facility’s production to our Ann Arbor, Michigan facility and a portion to our
Eatontown, New Jersey facility. In connection with this consolidation, we
recorded a $4.9 million impairment charge based on the fair value of the
Whippany, New Jersey facility we intend to sell. There were no comparable
charges for the three months ended December 31, 2009.





The ATS
segment incurred restructuring costs of $738,000 for the three months ended
December 31, 2010. In comparison, for the three months ended December 31, 2009,
the ATS segment incurred restructuring costs of $64,000. In both periods, the
costs related to consolidation and reorganization efforts in our U.K.
operations.





Other Income (Expense).Interest expense was $20.7 million for the three months ended December
31, 2010 and $21.4 million for the three months ended December 31, 2009. The
interest expense decreased, and will further decrease next quarter, as a result
of the repurchase, in December 2010, of $186.6 million of Aeroflex’ssenior unsecured
notes and senior subordinated unsecured term loans with the proceeds from the
IPO.During the three months ended December 31, 2010 we incurred a $25.2
million loss on extinguishment of debt, which was comprised primarily of $20.5
million in premiums paid on the debt repurchased and $4.0 million for the
write-off of the related deferred financing costs. In addition, we recognized a
$173,000 gain on bargain purchase related to the final working capital
adjustment to the purchase price of Willtek, acquired in June 2010. There
were no comparable charges for the three months ended December 31, 2009. Other
income (expense) of ($378,000) for the three months ended December 31, 2010
consisted primarily of ($688,000) of other than temporary impairments related to
the fair value of our auction rate securities, offset by $310,000 of interest
and miscellaneous income. Other income (expense) of $422,000 for the three
months ended December 31, 2009 consisted primarily of $768,000 of interest and
miscellaneous income, offset by ($346,000) of foreign currency transaction
losses.


- 41
-


Provision for Income Taxes.The income tax benefit was $40.0 million for the three months ended
December 31, 2010 on a pre-tax loss of $51.4 million. We had an income tax
provision for the three months ended December 31, 2009 of $11.9 million on
pre-tax income of $1.3 million. The effective income tax rate for both 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, including U.S. income tax on certain foreign net income, since we
anticipate that we will be repatriating these earnings to the U.S. The
provisions are a combination of U.S. tax benefits on domestic losses and foreign
tax expense on foreign earnings. The resulting projected net consolidated
income tax benefit was then applied to the projected net consolidated
pre-tax amount for the year to calculate the annual effective tax rate, which
contributed to the high income tax benefit as a percentage of
pre-tax loss. The income tax benefit for the three months ended
December 31, 2010 reflects various discrete items in the quarter, including a
$1.2 million tax benefit for the retroactive reinstatement of the U.S. R&D
credit and a reduction of $5.7 million of deferred tax liabilities related to
U.S. income taxes previously provided on unremitted foreign earnings. As a
direct result of Aeroflex Holding’s IPO, and related repurchase of a portion of
Aeroflex’s debt, interest payments will decrease in the future. Consequently, we
have changed our intent as to the amount and method of repatriations of foreign
earnings, which resulted in the reduction of deferred tax
liabilities.





In the
three months ended December 31, 2010, we paid income taxes of $6.5 million and
received tax refunds of $3.1 million related to federal, state and foreign
income taxes. In the three months ended December 31, 2009, we paid income taxes
of $1.5 million and received refunds of $29,000.





Net Loss. The net loss was
$11.4 million for the three months ended December 31, 2010 and $10.6 million for
the three months ended December 31, 2009.





Six
Months Ended December 31, 2010 Compared to Six Months Ended December 31,
2009





Net Sales.Net sales
increased $40.7 million, or 14%, to $337.5 million for the six months ended
December 31, 2010 from $296.9 million for the six months ended December 31,
2009. Businesses acquired since December 31, 2009 contributed $19.0 million to
sales, or 6%, in the current fiscal year.





Net SalesSix
      Months
                          
                          
                          
                          
                          %
      of
                          
                          
                          
                          
                          
                          %
      ofEnded
                          
                          
                          
                          
                          Consolidated
                          
                          
                          
                          
                          
                          ConsolidatedDecember
      31,
                          
                          AMS
                          
                          
                          Net
      Sales
                          
                          
                          ATS
                          
                          
                          Net
      Sales
                          
                          
                          Total(In
      thousands, except percentages)2009
                          
                          $
                          146,521
                          
                          
                          
                          49.4
                          %
                          
                          $
                          150,334
                          
                          
                          
                          50.6
                          %
                          
                          $
                          296,8552010
                          
                          $
                          166,530
                          
                          
                          
                          49.3
                          %
                          
                          $
                          170,980
                          
                          
                          
                          50.7
                          %
                          
                          $
                          337,510




Net sales
in the AMS segment increased $20.0 million, or 14%, to $166.5 million for
the six months ended December 31, 2010 from $146.5 million for the six months
ended December 31, 2009. Specific variances include a volume driven $11.4
million increase in sales of components, including $5.7 million from
ACC, acquired in August 2010, a volume driven $9.3 million increase in
sales of integrated circuits; and additional sales of $2.8 million from
RAD, acquired in June 2010. The increases in sales were partially offset
by volume driven reductions of $1.9 million in sales of
microelectronics modules and $1.6 million in sales of motion control
products.




Net sales
in the ATS segment increased $20.6 million, or 14%, to $171.0 million for
the six months ended December 31, 2010 from $150.3 million for the six months
ended December 31, 2009. Specific variances include a volume driven
$9.6 million increase in sales of wireless test products; a volume driven
$5.9 million increase in sales from avionic products; and a volume
driven $2.4 million increase in sales of radio test sets. In addition,
there were additional wireless test products sales of $10.4 million from
Willtek, acquired in May 2010. The increases in net sales were partially
offset by a volume driven reduction of $7.7 million in sales of general
purpose test products.


- 42
-





Gross Profit.On a
consolidated basis, gross profit was $174.7 million, or 51.8% of net sales, for
the six months ended December 31, 2010 and $151.7 million, or 51.1% of net
sales, for the six months ended December 31, 2009.





Six Months
                            
                            
                            
                            
                            Gross ProfitEnded
                            
                            
                            
                            
                            % of
                            
                            
                            
                            
                            
                            % of
                            
                            
                            
                            
                            
                            % ofDecember 31,
                            
                            AMS
                            
                            
                            Net Sales
                            
                            
                            ATS
                            
                            
                            Net Sales
                            
                            
                            Total
                            
                            
                            Net Sales(In
      thousands, except percentages)2009
                            
                            $
                            70,201
                            
                            
                            
                            47.9
                            %
                            
                            $
                            81,530
                            
                            
                            
                            54.2
                            %
                            
                            $
                            151,731
                            
                            
                            
                            51.1
                            %2010
                            
                            $
                            83,415
                            
                            
                            
                            50.1
                            %
                            
                            $
                            91,251
                            
                            
                            
                            53.4
                            %
                            
                            $
                            174,666
                            
                            
                            
                            51.8
                            %





Gross
margins in the AMS segment were 50.1% for the six months ended December 31, 2010
and 47.9% for the six months ended December 31, 2009. The increase in gross
margins is principally attributable to a favorable product mix and
increased sales of integrated circuits, combined with the additional sales of
RAD services, acquired in June 2010, (which have margins higher than the segment
average). Gross profit increased $13.2 million for the six months ended December
31, 2010 as compared to the six months ended December 31, 2009 principally due
to increased sales and the aforementioned increase in gross
margins.





Gross
margins in the ATS segment were 53.4% for the six months ended December 31, 2010
and 54.2% for the six months ended December 31, 2009. The decrease in gross
margins was principally attributable to wireless product sales, which included
more hardware products than software products as compared to the prior year
(while wireless hardware products have higher gross margins than the segment
average, they are not as high as the gross margins of wireless software
products). Despite the reduction in margins, gross profit increased $9.7 million
for the six months ended December 31, 2010 as compared to the six months ended
December 31, 2009 due to increased sales.





Selling, General and Administrative
Costs. On a consolidated basis SG&A costs increased $13.3 million, or
21%, to $75.0 million for the six months ended December 31, 2010. This
increase was primarily attributable to the additional SG&A costs of the
acquired businesses, which were not fully integrated during the period, and the
expansion of our sales and marketing team in the Asia-Pacific region.As
a percentage of sales, SG&A costs increased from 20.8% to 22.3% from the six
months ended December 31, 2009 to the six months ended December 31, 2010. The
SG&A of the acquired businesses increased SG&A by $4.4 million, or 7% of
total 2009 SG&A.





Six Months
                            
                            
                            
                            
                            Selling,GeneralandAdministrativeCostsEnded
                            
                            
                            
                            
                            % of
                            
                            
                            
                            
                            
                            % of
                            
                            
                            
                            
                            
                            
                            
                            
                            % ofDecember 31,
                            
                            AMS
                            
                            
                            Net Sales
                            
                            
                            ATS
                            
                            
                            Net Sales
                            
                            
                            Corporate
                            
                            
                            Total
                            
                            
                            Net Sales(In
      thousands, except percentages)2009
                            
                            $
                            20,583
                            
                            
                            
                            14.0
                            %
                            
                            $
                            33,312
                            
                            
                            
                            22.2
                            %
                            
                            $
                            7,808
                            
                            
                            $
                            61,703
                            
                            
                            
                            20.8
                            %2010
                            
                            $
                            25,980
                            
                            
                            
                            15.6
                            %
                            
                            $
                            40,302
                            
                            
                            
                            23.6
                            %
                            
                            $
                            8,687
                            
                            
                            $
                            74,969
                            
                            
                            
                            22.3
                            %





In the
AMS segment, SG&A costs increased $5.4 million, or 26%, to $26.0 million for
the six months ended December 31, 2010. This increase is primarily due to
additional costs of $2.3 million related to RAD, acquired in June 2010, and ACC,
acquired in August 2010; general increases in our existing businesses, primarily
due to increased employee related expenses of $1.4 million and external
commissions of $578,000; and increased professional fees of $504,000. SG&A
costs in the AMS segment increased from 14.0% to 15.6%, as a percentage of
sales, from the six months ended December 31, 2009 to the six months ended
December 31, 2010.


- 43
-


In the
ATS segment, SG&A costs increased $7.0 million, or 21%, to $40.3 million for
the six months ended December 31, 2010, primarily due to increased employee
related expenses of $2.7 million; increased commissions of $2.4 million, due to
the increase in sales volume and a change in product mix; and additional costs
of $2.1 million related to Willtek, acquired in May 2010. As a percentage of
sales, SG&A costs in the ATS segment increased from 22.2% to 23.6% from the
six months ended December 31, 2009 to the six months ended December 31,
2010.





Corporate
general and administrative costs increased $879,000, for the six months ended
December 31, 2010 compared to the six months ended December 31, 2009 primarily
related to business acquisition costs of $1.1 million, offset by reductions in
general expense of $187,000.





Research and Development
Costs. On a consolidated basis, research and development costs increased
by $9.4 million, or 27%, to $43.8 million for the six months ended December 31,
2010. This
increase was primarily attributable to the additional costs of the acquired
businesses and the acceleration of research and development projects in our ATS
segment to meet customer requirements for new products.As a percentage
of sales, research and development costs increased from 11.6% to 13.0% from the
six months ended December 31, 2009 to the six months ended December 31, 2010.
Research and development costs of acquired businesses increased research and
development by $2.4 million, or 7% of 2009 total research and development
costs.





Six Months
                                
                                
                                
                                
                                Research and Development CostsEnded
                                
                                
                                
                                
                                % of
                                
                                
                                
                                
                                
                                % of
                                
                                
                                
                                
                                
                                % ofDecember 31,
                                
                                AMS
                                
                                
                                Net Sales
                                
                                
                                ATS
                                
                                
                                Net Sales
                                
                                
                                Total
                                
                                
                                Net Sales(In
      thousands, except percentages)2009
                                
                                $
                                13,493
                                
                                
                                
                                9.2
                                %
                                
                                $
                                20,949
                                
                                
                                
                                13.9
                                %
                                
                                $
                                34,442
                                
                                
                                
                                11.6
                                %2010
                                
                                $
                                16,299
                                
                                
                                
                                9.8
                                %
                                
                                $
                                27,515
                                
                                
                                
                                16.1
                                %
                                
                                $
                                43,814
                                
                                
                                
                                13.0
                                %





AMS
segment self-funded research and development costs increased $2.8 million, or
21%, to $16.3 million for the six months ended December 31, 2010 primarily due
to the increased efforts in the development of next generation component
products and additional spending on projects within integrated circuits. As a
percentage of sales, AMS segment research and development costs increased from
9.2% for the six months ended December 31, 2009 to 9.8% for the six months ended
December 31, 2010.





ATS
segment self-funded research and development costs increased $6.6 million, or
31%, to $27.5 million for the six months ended December 31, 2010 primarily due
to increases in our radio test and avionics divisions, for the development of a
common platform technology, and additional costs of $2.0 million related to
Willtek, acquired in May 2010. As a percentage of sales, ATS segment research
and development costs increased from 13.9% for the six months ended December 31,
2009 to 16.1% for the six months ended December 31, 2010.





Amortization of Acquired
Intangibles.Amortization of acquired intangibles increased $687,000 for
the six months ended December 31, 2010 primarily due to additional amortization
related to the acquisitions of Willtek, in May 2010; RAD, in June 2010; and ACC,
in August 2010. The increases in amortization were partially offset by certain
intangibles becoming fully amortized during fiscal 2010. By segment, the
amortization increased $877,000 in the AMS segment and decreased $190,000 in the
ATS segment.





Termination of Sponsor Advisory
Agreement.In connection with the Aeroflex Holding IPO, we paid a $16.9
million Termination Fee to affiliates of the Sponsors on November 24, 2010 to
terminate the Sponsor Advisory Agreement with them and eliminate all future
payments to the Sponsors under that agreement, which, including the related
write-off of prepaid advisory fees, resulted in an $18.1 million expense. There
was no similar charge recorded for the six months ended December 31,
2009.





Restructuring Charges.The
AMS segment incurred total restructuring costs of $6.1 million for the six
months ended December 31, 2010 which primarily relate to consolidation of our
components operations by relocating a portion of our Whippany, New Jersey
facility’s production to our Ann Arbor, Michigan facility and a portion to our
Eatontown, New Jersey facility. In connection with this consolidation, we
recorded a $4.9 million impairment charge based on the fair value of the
Whippany, New Jersey facility we intend to sell. There were no comparable
charges for the six months ended December 31, 2009.


- 44
-


The ATS
segment incurred restructuring costs of $2.0 million for the six months ended
December 31, 2010. In comparison, for the six months ended December 31, 2009,
the ATS segment incurred restructuring costs of $251,000. In both periods, the
costs related to consolidation and reorganization efforts in our U.K.
operations.





Loss on Liquidation of Foreign
Subsidiary.During the six months ended December 31, 2009, we recognized
a $7.7 million non-cash loss on liquidation of a foreign subsidiary. There was
no similar charge recorded for the six months ended December 31,
2010.





Other Income (Expense).Interest expense was $42.0 million for the six months ended December 31,
2010 and $42.5 million for the six months ended December 31, 2009. The
interest expense decreased, and will further decrease next quarter, as a result
of the repurchase, in December 2010, of $186.6 million of Aeroflex’s senior unsecured
notes and senior subordinated unsecured term loans with the proceeds from the
IPO.During the six months ended December 31, 2010 we incurred a $25.2
million loss on extinguishment of debt, which was comprised primarily of $20.5
million in premiums paid on the debt repurchased and $4.0 million for the
write-off of the related deferred financing costs. In addition, we recognized a
$173,000 gain on bargain purchase related to the final working capital
adjustment to the purchase price of Willtek, acquired in June 2010. There
were no comparable charges for the six months ended December 31, 2009. Other
income (expense) of ($407,000) for the six months ended December 31, 2010
consisted primarily of a ($688,000) other than temporary impairment recorded on
our auction rate securities and ($305,000) of foreign currency transaction
losses offset by $586,000 of interest and miscellaneous income. Other income
(expense) of $479,000 for the six months ended December 31, 2009 consisted
primarily of $1.1 million of interest and miscellaneous income, offset by
($584,000) of foreign currency transaction losses.





Provision for Income Taxes.The income tax benefit was $52.3 million for the six months ended
December 31, 2010 on a pre-tax loss of $69.5 million. We had an income tax
provision for the six months ended December 31, 2009 of $5.7 million on a
pre-tax loss of $25.5 million. The effective income tax rate for both 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, including U.S. income tax on certain foreign net income, since we
anticipate that we will be repatriating these earnings to the U.S. The
provisions are a combination of U.S. tax benefits on domestic losses and foreign
tax expense on foreign earnings. The resulting projected net consolidated
income tax benefit was then applied to the projected consolidated pre-tax amount
for the year to calculate the annual effective tax rate, which contributed to
the high income tax benefit as a percentage of pre-tax loss. During the three
months ended September 30, 2010, we identified an overstatement of deferred
income tax liabilities established in the fourth quarter of fiscal 2009 and
throughout fiscal 2010 related to U.S. income taxes provided on unremitted
foreign earnings. After consideration of both quantitative and qualitative
factors, we determined the amounts were not material to any of those prior
period financial statements or the fiscal 2011 estimated results and thus
corrected the balance in the three months ended September 30, 2010. The
adjustment resulted in a reduction of deferred income tax liabilities of $3.7
million, with a corresponding increase in income tax benefit in the statement of
operations for the three months ended September 30, 2010. The adjustment did not
impact the statement of cash flows. The income tax benefit for the six months
ended December 31, 2010 reflects various discrete items, including a $1.2
million income tax benefit for the retroactive reinstatement of the U.S. R&D
credit and a reduction of $5.7 million of deferred tax liabilities related to
U.S. income taxes previously provided on unremitted foreign earnings. As a
direct result of Aeroflex Holding’s IPO, and related repurchase of a portion of
Aeroflex’s debt, interest payments will decrease in the future. Consequently, we
have changed our intent as to the amount and method of repatriations of foreign
earnings, which resulted in the reduction of deferred tax liabilities. The tax
provision for the six months ended December 31, 2009 was affected by the
unfavorable impact of a $7.7 million nondeductible loss on the liquidation of a
foreign subsidiary, and the favorable impact of a $10.3 million loss for tax
purposes on the write off of our investment in a foreign subsidiary in fiscal
2009. For financial statement purposes, the loss had been recognized in the
prior periods, however, for tax purposes the loss was recognized at the time of
divestiture, effective September 2009.





In the
six months ended December 31, 2010, we paid income taxes of $10.2 million and
received tax refunds of $3.1 million related to federal, state and foreign
income taxes. In the six months ended December 31, 2009, we paid income taxes of
$4.5 million and received refunds of $631,000.


- 45
-


Net income (loss). The net
loss was $17.2 million for the six months ended December 31, 2010 and $31.2
million for the six months ended December 31, 2009.





Liquidity
and Capital Resources





The
liquidity and capital resources of Aeroflex Holding are essentially identical to
the liquidity and capital resources of Aeroflex, with the following significant
exception: Aeroflex Holding, in connection with its IPO of common stock on
November 19, 2010, received net proceeds of $244.1 million after deducting
underwriting discounts and offering expenses, whereas Aeroflex received the net
proceeds of the IPO of $244.1 million in the form of a capital contribution from
Aeroflex Holding. All indebtedness has been incurred by Aeroflex; such
indebtedness is reflected on the balance sheets of Aeroflex Holding by virtue of
the principles of consolidation. Aeroflex Holding’s principal source of
liquidity has been the proceeds of the IPO. Aeroflex’s principal sources of
liquidity include cash generated from operations, borrowings and availability
under its credit facilities and contributions from Aeroflex
Holding.





As of
December 31, 2010, Aeroflex had $70.6 million of cash and cash equivalents,$267.2 million in working
capital and its current ratio was 2.99 to 1.





Its
principal liquidity requirements are to service its debt and interest and meet
its working capital and capital expenditure needs. As of December 31, 2010,
Aeroflex had $696.3 million of debt outstanding (of which $695.9 million was
long-term), including approximately $489.1 million under the senior secured
credit facility, $192.8 million of senior unsecured notes and $13.6 million
under the senior subordinated unsecured credit facility. Additionally, at
December 31, 2010 Aeroflex had a $50.0 million revolving senior secured credit
facility available to it, under which $0 was outstanding.





The
following is a summary of required principal repayments of Aeroflex’s debt for
the next five years and thereafter as of December 31, 2010:





Twelve Months Ended
                    December 31,
                  
                  (In thousands)2011
                  
                  $
                  3602012
                  
                  
                  3852013
                  
                  
                  -2014
                  
                  
                  489,1052015
                  
                  
                  206,418Thereafter
                  
                  
                  -Total
                  
                  $
                  696,268




- 46
-




As of
December 31, 2010, Aeroflex and its subsidiaries were in compliance with all of
the covenants contained in the loan agreements. Certain loan covenants are based
on Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA (net income (loss),
before interest expense, income taxes, depreciation and amortization), adjusted
to add back certain non-cash, non-recurring and other items, as required by
various covenants in the debt agreements.  Use of the term Adjusted
EBITDA may vary from others in our industry.  EBITDA and Adjusted
EBITDA are not measures of operating income (loss), performance or liquidity
under U.S. GAAP and are subject to important limitations.  A
reconciliation of net income (loss), which is a U.S. GAAP measure of our
operating results, to Adjusted EBITDA, as defined in the loan agreements, is as
follows:





Three Months Ended
                        
                        
                        Six Months EndedDecember 31,
                        
                        
                        December 31,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009(In
      thousands)Net
      income (loss)
                        
                        $
                        (11,403
                        )
                        
                        $
                        (10,614
                        )
                        
                        $
                        (17,220
                        )
                        
                        $
                        (31,157
                        )Interest
      expense
                        
                        
                        20,713
                        
                        
                        
                        21,418
                        
                        
                        
                        41,951
                        
                        
                        
                        42,457Provision
      (benefit) for income taxes
                        
                        
                        (40,044
                        )
                        
                        
                        11,864
                        
                        
                        
                        (52,291
                        )
                        
                        
                        5,699Depreciation
      and amortization
                        
                        
                        20,648
                        
                        
                        
                        20,528
                        
                        
                        
                        41,534
                        
                        
                        
                        41,774EBITDA
                        
                        
                        (10,086
                        )
                        
                        
                        43,196
                        
                        
                        
                        13,974
                        
                        
                        
                        58,773Non-cash
      purchase accounting adjustments
                        
                        
                        391
                        
                        
                        
                        33
                        
                        
                        
                        1,046
                        
                        
                        
                        311Merger
      related expenses
                        
                        
                        507
                        
                        
                        
                        771
                        
                        
                        
                        1,222
                        
                        
                        
                        1,464Restructuring
      costs (a)
                        
                        
                        6,293
                        
                        
                        
                        64
                        
                        
                        
                        8,092
                        
                        
                        
                        251Share-based
      compensation (b)
                        
                        
                        513
                        
                        
                        
                        556
                        
                        
                        
                        1,026
                        
                        
                        
                        1,045Termination
      of Sponsor Advisory Agreement
                        
                        
                        18,133
                        
                        
                        
                        -
                        
                        
                        
                        18,133
                        
                        
                        
                        -Loss
      on extinguishment of debt
                        
                        
                        25,178
                        
                        
                        
                        -
                        
                        
                        
                        25,178
                        
                        
                        
                        -Non-cash
      loss on liquidation of foreign subsidiary
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        7,696Other
      defined items (c)
                        
                        
                        1,392
                        
                        
                        
                        32
                        
                        
                        
                        2,061
                        
                        
                        
                        (342
                        )Adjusted
      EBITDA
                        
                        $
                        42,321
                        
                        
                        $
                        44,652
                        
                        
                        $
                        70,732
                        
                        
                        $
                        69,198





(a)
            Primarily
      reflects costs associated with the reorganization of our U.K. operations
      and consolidation of certain of our U.S. components facilities and the pro
      forma savings related thereto.  Pro forma savings reflects the
      amount of costs that we estimate would have been eliminated during the
      period in which a restructuring occurred had the restructuring occurred as
      of the first day of that period.





(b)
            Reflects
      non-cash share-based compensation
expense.





(c)
            Reflects
      other adjustments required in calculating debt covenant
      compliance.  These other defined items include pro forma EBITDA
      for periods prior to the acquisition dates for companies acquired during
      the periods presented.





Financial
covenants in Aeroflex’s senior secured credit facility include (i) a maximum
leverage ratio of total debt (less up to $15.0 million of unrestricted cash) to
Adjusted EBITDA, as defined in the senior secured credit facility, and (ii)
maximum consolidated capital expenditures. The maximum leverage ratio permitted
for the twelve months ended December 31, 2010 was 5.90, whereas the actual
leverage ratio was 4.12. The maximum leverage ratio remains at 5.90 until
September 30, 2011, when it decreases to 5.20.




- 47
-




Aeroflex’s
senior secured credit facility, senior subordinated unsecured credit facility
and the indenture governing its senior unsecured notes contain restrictions on
its activities, including but not limited to covenants that restrict Aeroflex
and its restricted subsidiaries, as defined in the senior subordinated unsecured
credit facility, from:





·
            incurring
      additional indebtedness and issuing disqualified stock or preferred
      stock;





·
            making
      certain investments or other restricted
  payments;





·
            paying
      dividends and making other distributions with respect to capital stock, or
      repurchasing, redeeming or retiring capital stock or subordinated
      debt;





·
            selling
      or otherwise disposing of assets;





·
            under
      certain circumstances, issuing or selling equity
  interests;





·
            creating
      liens on assets;





·
            consolidating
      or merging with, or acquiring in excess of specified annual limitations,
      another business, or selling or disposing of all or substantially all of
      their assets; and





·
            entering
      into certain transactions with
affiliates.




If for
any reason Aeroflex fails to comply with the covenants in the senior secured
credit facility, it would be in default under the terms of the agreements
governing its outstanding debt. If such a default were to occur, the lenders
under our senior secured credit facility could elect to declare all amounts
outstanding there under  immediately due and payable, and the lenders
would not be obligated to continue to advance funds to Aeroflex. In addition, if
such a default were to occur, any amounts then outstanding under the senior
subordinated unsecured term loan or senior unsecured notes could become
immediately due and payable. If the amounts outstanding under these debt
agreements are accelerated, Aeroflex’s assets may not be sufficient to repay in
full the amounts owed to debt holders.





We expect
that cash generated from operating activities and availability under the
revolving portion of Aeroflex’s senior secured credit facility will be
Aeroflex’s principal sources of liquidity. Aeroflex’s ability to make payments
on and to refinance its indebtedness and to fund working capital needs and
planned capital expenditures will depend on its 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. In addition, to the
extent Aeroflex has consolidated excess cash flows, as defined in the credit
agreement governing the senior secured credit facility, Aeroflex must use
specified portions of the excess cash flows to prepay senior secured credit
facilities. Based on its current level of operations, we believe Aeroflex’s cash
flow from operations and available borrowings under its senior secured credit
facility will be adequate to meet Aeroflex’s liquidity needs for at least the
next twelve months. We cannot assure you, however, that its business will
generate sufficient cash flow from operations, or those future borrowings will
be available under the senior secured credit facility in an amount sufficient to
enable Aeroflex to repay its indebtedness or to fund other liquidity needs.
Aeroflex may need to refinance all or a portion of its indebtedness on or before
the maturity thereof. We cannot assure you that Aeroflex will be able to
refinance any of its indebtedness on commercially reasonable terms or at
all.





Cash
Flows





For the
six months ended December 31, 2010, Aeroflex’s cash flow used by operations was
$11.1 million primarily due to increased inventory of $24.2 million in
anticipation of higher sales.  Its investing activities used cash of
$32.1 million, primarily for payments for the purchase of businesses of $23.6
million and for capital expenditures of $11.2 million. Aeroflex’s financing
activities provided cash of $11.6 million - $244.1 million was received by
Aeroflex as a capital contribution from Aeroflex Holding and was partially
offset by the repurchase of senior unsecured notes and senior subordinated
unsecured term loans, including premiums and fees, of $207.7 million plus debt
repayments of $21.5 million.


- 48
-




For the
six months ended December 31, 2009, Aeroflex’s cash flow provided by operations
was $22.1 million. Its investing activities used cash of $6.6 million, primarily
for capital expenditures of $8.4 million, partially offset by proceeds from the
sale of marketable securities of $1.0 million combined with the sale of
property, plant and equipment of $845,000.  Aeroflex’s financing
activities used cash of $4.0 million to repay indebtedness.





Aeroflex
Holding’s cash flows are identical to those of Aeroflex with the following
exception: Aeroflex Holding’s cash flows from financing activities for the six
months ended December 31, 2010 reflect the fact that Aeroflex Holding received
the $244.1 million proceeds from its IPO of common stock.





Capital
Expenditures





Capital
expenditures were $11.2 million and $8.4 million for the six months ended
December 31, 2010 and 2009, respectively.  Our capital expenditures
primarily consist of equipment replacements.





Contractual
Obligations





Debt
Repurchase





As of
June 30, 2010 Aeroflex had $225.0 million due under its senior unsecured notes
and $165.5 million due under its senior subordinated unsecured term
loans.  In connection with Aeroflex Holding’s IPO, the net proceeds
were used to make a capital contribution to Aeroflex to enable it to, among
other things, tender for a portion of its senior unsecured notes and offer to
repurchase a portion of its senior subordinated unsecured term loans. In
December 2010 Aeroflex repurchased approximately $32.2 million of senior
unsecured notes and $154.4 million of senior subordinated unsecured term
loans.





Termination of Sponsor
Advisory Agreement





Also in
connection with the Aeroflex Holding IPO, we paid a $16.9 million Termination
Fee to affiliates of the Sponsors on November 24, 2010 to terminate the Sponsor
Advisory Agreement with them and eliminate all future payments to the Sponsors
under that agreement, which including the related write-off of prepaid advisory
fees, resulted in an $18.1 million expense.





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 results of operations or financial
condition.




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.




Critical
Accounting Policies and Estimates





Information
regarding the Company’s critical accounting policies and estimates appears
within the “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included in Aeroflex Holding’s Registration Statement and
in Aeroflex’s Fiscal 2010 Form 10-K.  During the six month period
ended December 31, 2010, there were no significant changes to any critical
accounting policies or to the related estimates and judgments involved in
applying those policies.


- 49
-




Recently
Adopted Accounting Pronouncements





See Note
2 of the combined notes to the unaudited condensed consolidated financial
statements.





Recently
Issued Accounting Pronouncements Not Yet Adopted





See Note
2 of the combined notes to the unaudited condensed consolidated financial
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 Aeroflex’s senior secured credit facility.  Although
we currently have interest rate swap agreements hedging portions of this debt,
they expire in February 2011 before the borrowings are fully repaid and we
currently do not anticipate renewing them. As of December 31, 2010, there is
$489.1 million outstanding under the term-loan portion of the senior secured
credit facility, the un-hedged portion of which is subject to variable interest
rates. Each change of 1% in interest rates would result in a $4.6 million change
in our interest expense over the next year on the un-hedged portion of the
term-loan borrowings and a $507,000 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 to protect us from exchange rate fluctuation from
the time customers are invoiced in local currency until such currency is
exchanged for U.S. dollars. Aeroflex periodically enters into foreign currency
contracts, which are not designated as hedges, and the change in the fair value
is included in income currently within other income (expense). As of December
31, 2010, Aeroflex had $31.7 million of notional value foreign currency forward
contracts maturing through January 31, 2011. Notional amounts do not quantify
risk or represent assets or liabilities of Aeroflex, but are used in the
calculation of cash settlements under the contracts. The fair value of these
contracts at December 31, 2010 was an asset of $18,000.  If foreign
currency exchange rates (primarily the British pound and the Euro) change by 10%
from the levels at December 31, 2010, the effect on our comprehensive income
would be approximately $23.4 million.





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





ITEM
4.   CONTROLS AND PROCEDURES –
AEROFLEX HOLDING





Aeroflex
Holding’s 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 it files or submits 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. Aeroflex Holding’s disclosure controls and procedures are also
designed to ensure that information required to be disclosed in the reports that
it files or submits under the Securities Exchange Act is accumulated and
communicated to its management, including its chief executive officer and chief
financial officer, to allow timely decisions regarding required disclosure. The
Principal Executive Officer and the Principal Financial Officer, with the
assistance from other members of management, have reviewed the effectiveness of
its disclosure controls and procedures as of December 31, 2010 and, based on
their evaluation, have concluded that the disclosure controls and procedures
were effective as of such date.





There
have been no changes in Aeroflex Holding’s internal controls over financial
reporting that occurred during the quarter ended December 31, 2010 that has
materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting.


- 50
-




ITEM
4.   CONTROLS AND PROCEDURES -
AEROFLEX





Aeroflex’s
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 it files or submits 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. Aeroflex’s disclosure controls and procedures are also designed to
ensure that information required to be disclosed in the reports that it files or
submits under the Securities Exchange Act is accumulated and communicated to its
management, including its chief executive officer and chief financial officer,
to allow timely decisions regarding required disclosure. The Principal Executive
Officer and the Principal Financial Officer, with the assistance from other
members of management, have reviewed the effectiveness of its disclosure
controls and procedures as of December 31, 2010 and, based on their evaluation,
have concluded that the disclosure controls and procedures were effective as of
such date.





There
have been no changes in Aeroflex’s internal controls over financial reporting
that occurred during the quarter ended December 31, 2010 that has materially
affected, or is reasonably likely to materially affect, its internal control
over financial reporting.




PART
II – OTHER INFORMATION





Item
1.    Legal Proceedings





There
have been no material changes in our legal proceedings disclosed in Aeroflex
Holding’s Registration Statement and Aeroflex’s Fiscal 2010 Form
10-K.





Item 1A.  Risk
Factors





There
have been no material changes in our risk factors disclosed in Aeroflex
Holding’s Registration Statement and Aeroflex’s Fiscal 2010 Form
10-K.





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





None





Item 3.  Defaults
upon Senior Securities





None





Item 4.  [Removed
and Reserved]





Item 5.   Other
Information





None




- 51
-


Item
6.   Exhibits





Exhibit No.
                  
                  Exhibit Description10.1
                  
                  Form
      of Aeroflex Incorporated Indemnification Agreement31.1
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief
      Executive Officer)31.2
                  
                  Certification
      of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief
      Executive Officer)31.3
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief
      Financial Officer)31.4
                  
                  Certification
      of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief
      Financial Officer)31.5
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal
      Accounting Officer)31.6
                  
                  Certification
      of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal
      Accounting Officer)32.1
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief
      Executive Officer)32.2
                  
                  Certification
      of Aeroflex Incorporated pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief
      Executive Officer)32.3
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief
      Financial Officer)32.4
                  
                  Certification
      of Aeroflex Incorporated pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief
      Financial
Officer)




- 52
-




SIGNATURE




Pursuant
to the requirements of the Securities Exchange Act of 1934, Aeroflex Holding
Corp. and Aeroflex Incorporated have duly caused this report to be signed on
their behalf by the undersigned thereunto duly authorized.





AEROFLEX
      HOLDING CORP.February 9, 2011
                    
                    /s/ John Adamovich, Jr.John
      Adamovich, Jr.Senior
      Vice President andChief
      Financial Officer(Principal
      Financial
Officer)





AEROFLEX
      INCORPORATEDFebruary 9, 2011
                    
                    /s/ John Adamovich, Jr.John
      Adamovich, Jr.Senior
      Vice President andChief
      Financial Officer(Principal
      Financial
Officer)




- 53
-




EXHIBIT
INDEX




Exhibit No.
                  
                  Exhibit Description10.1
                  
                  Form
      of Aeroflex Incorporated Indemnification Agreement31.1
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief
      Executive Officer)31.2
                  
                  Certification
      of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief
      Executive Officer)31.3
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief
      Financial Officer)31.4
                  
                  Certification
      of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief
      Financial Officer)31.5
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal
      Accounting Officer)31.6
                  
                  Certification
      of Aeroflex Incorporated pursuant to Rules 13a-14(a)/15d-14a as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal
      Accounting Officer)32.1
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief
      Executive Officer)32.2
                  
                  Certification
      of Aeroflex Incorporated pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief
      Executive Officer)32.3
                  
                  Certification
      of Aeroflex Holding Corp. pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief
      Financial Officer)32.4
                  
                  Certification
      of Aeroflex Incorporated pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief
      Financial
Officer)




- 54
-