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
              September
      30, 2010
 Commission
File Number 033-88878
 __________________________
 
 AEROFLEX
INCORPORATED
 
 (Exact
name of Registrant as specified in its Charter)
 
 DELAWARE
              11-1974412(State
      or other jurisdiction
              (I.R.S.
      Employerof
      incorporation or organization)
              Identification
      No.)35
      South Service RoadP.O.
      Box 6022Plainview,
      N.Y.
              11803-0622(Address
      of principal executive offices)
              (Zip
      Code)
 
 (516)
694-6700
 (Registrant’s
telephone number, including area code)
 ________________________________________________
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x    No
o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its 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).  Yes o     No
o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer o
              Accelerated
      filer oNon-accelerated
      filer x
                (Do
      not check if a smaller reporting company)
              Smaller
      reporting company o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes o    No
x
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of the latest practicable date.
 
 November
      9, 2010
              1,000(Date)
              (Number
      of Shares)
 
 
  AEROFLEX
INCORPORATED
 AND
SUBSIDIARIES
 
 INDEX
 
 PART
      I:        FINANCIAL
      INFORMATION
              PAGEItem
      1
              UNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETSSeptember
      30, 2010 and June 30, 2010
              2UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSThree
      Months Ended September 30, 2010 and 2009
              3UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSThree
      Months Ended September 30, 2010 and 2009
              4NOTES
      TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              5
      – 24Item
      2
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF
      OPERATIONSThree
      Months Ended September 30, 2010 and 2009
              24
      – 36Item
      3
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              36Item
      4
              CONTROLS
      AND PROCEDURES
              36PART
      II:          OTHER
      INFORMATIONItem
      1
              LEGAL
      PROCEEDINGS
              37Item
      1A
              RISK
      FACTORS
              37Item
      2
              UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              37Item
      3
              DEFAULTS
      UPON SENIOR SECURITIES
              37Item
      4
              [REMOVED
      AND RESERVED]
              37Item
      5
              OTHER
      INFORMATION
              37Item
      6
              EXHIBITS
              37SIGNATURE
              38EXHIBIT
      INDEX
              39CERTIFICATIONS
              40-44
 
 - 1
-
 
 Aeroflex
Incorporated and Subsidiaries
 Unaudited
Condensed Consolidated Balance Sheets
 (In
thousands, except share and per share data)
 
 September
      30,
                
                
                June
      30,Assets
                
                2010
                
                
                2010Current
      assets:Cash
      and cash equivalents
                
                $
                65,130
                
                
                $
                100,663Accounts
      receivable, less allowance for doubtfulaccounts of $2,185 and
      $1,821
                
                
                129,306
                
                
                
                141,595Inventories
                
                
                142,553
                
                
                
                126,568Deferred
      income taxes
                
                
                26,938
                
                
                
                28,018Prepaid
      expenses and other current assets
                
                
                13,681
                
                
                
                10,983Total
      current assets
                
                
                377,608
                
                
                
                407,827Property,
      plant and equipment, net
                
                
                103,398
                
                
                
                101,662Non-current
      marketable securities, net
                
                
                9,806
                
                
                
                9,769Deferred
      financing costs, net
                
                
                19,790
                
                
                
                20,983Other
      assets
                
                
                22,888
                
                
                
                21,818Intangible
      assets with definite lives, net
                
                
                230,302
                
                
                
                238,313Intangible
      assets with indefinite lives
                
                
                114,168
                
                
                
                109,894Goodwill
                
                
                459,494
                
                
                
                445,874Total
      assets
                
                $
                1,337,454
                
                
                $
                1,356,140Liabilities
      and Stockholder's EquityCurrent
      liabilities:Current
      portion of long-term debt
                
                $
                360
                
                
                $
                21,817Accounts
      payable
                
                
                37,851
                
                
                
                28,803Advance
      payments by customers and deferred revenue
                
                
                30,218
                
                
                
                30,741Income
      taxes payable
                
                
                2,475
                
                
                
                4,615Accrued
      payroll expenses
                
                
                22,590
                
                
                
                23,082Accrued
      expenses and other current liabilities
                
                
                53,774
                
                
                
                58,817Total
      current liabilities
                
                
                147,268
                
                
                
                167,875Long-term
      debt
                
                
                882,463
                
                
                
                880,030Deferred
      income taxes
                
                
                130,782
                
                
                
                138,849Defined
      benefit plan obligations
                
                
                5,684
                
                
                
                5,763Other
      long-term liabilities
                
                
                14,103
                
                
                
                12,639Total
      liabilities
                
                
                1,180,300
                
                
                
                1,205,156Stockholder's
      equity:Common
      stock, par value $.10 per share; authorized 1,000shares; issued and
      outstanding 1,000 shares
                
                
                -
                
                
                
                -Additional
      paid-in capital
                
                
                399,116
                
                
                
                398,941Accumulated
      other comprehensive income (loss)
                
                
                (41,763
                )
                
                
                (53,575
                )Accumulated
      deficit
                
                
                (200,199
                )
                
                
                (194,382
                )Total
      stockholder's equity
                
                
                157,154
                
                
                
                150,984Total
      liabilities and stockholder's equity
                
                $
                1,337,454
                
                
                $
                1,356,140
   See notes
to unaudited condensed consolidated financial statements.
  - 2
-
 
 Aeroflex
Incorporated and Subsidiaries
 Unaudited
Condensed Consolidated Statements of Operations
 (In
thousands)
 Three
      Months Ended September 30,2010
              
              
              2009Net
      sales
              
              $
              155,931
              
              
              $
              130,116Cost
      of sales
              
              
              76,514
              
              
              
              65,122Gross
      profit
              
              
              79,417
              
              
              
              64,994Selling,
      general and administrative costs
              
              
              37,509
              
              
              
              30,238Research
      and development costs
              
              
              22,742
              
              
              
              17,181Amortization
      of acquired intangibles
              
              
              15,963
              
              
              
              15,605Loss
      on liquidation of foreign subsidiary
              
              
              -
              
              
              
              7,69676,214
              
              
              
              70,720Operating
      income (loss)
              
              
              3,203
              
              
              
              (5,726
              )Other
      income (expense):Interest
      expense
              
              
              (21,238
              )
              
              
              (21,039
              )Other
      income (expense), net
              
              
              (29
              )
              
              
              57Total
      other income (expense)
              
              
              (21,267
              )
              
              
              (20,982
              )Loss
      before income taxes
              
              
              (18,064
              )
              
              
              (26,708
              )Provision
      (benefit) for income taxes
              
              
              (12,247
              )
              
              
              (6,165
              )Net
      loss
              
              $
              (5,817
              )
              
              $
              (20,543
              )










- 3
-





Aeroflex
Incorporated and Subsidiaries
 Unaudited
Condensed Consolidated Statements of Cash Flows
 (In
thousands)
   Three
      Months Ended September 30,2010
                
                
                2009Cash
      flows from operating activities:Net
      income (loss)
                
                $
                (5,817
                )
                
                $
                (20,543
                )Adjustments
      to reconcile net income (loss)to net cash provided
      by (used in) operating activities:Depreciation
      and amortization
                
                
                20,886
                
                
                
                21,246Loss
      on liquidation of foreign subsidiary
                
                
                -
                
                
                
                7,696Deferred
      income taxes
                
                
                (13,305
                )
                
                
                (6,656
                )Share-based
      compensation
                
                
                513
                
                
                
                489Amortization
      of deferred financing costs
                
                
                1,193
                
                
                
                1,193Paid
      in kind interest
                
                
                2,434
                
                
                
                4,363Other,
      net
                
                
                905
                
                
                
                572Change
      in operating assets and liabilities,net of effects from purchases
      of businesses:Decrease
      (increase) in accounts receivable
                
                
                16,607
                
                
                
                40,066Decrease
      (increase) in inventories
                
                
                (11,964
                )
                
                
                (3,729
                )Decrease
      (increase) in prepaid expenses and other assets
                
                
                (3,165
                )
                
                
                (2,872
                )Increase
      (decrease) in accounts payable, accruedexpenses and other
    liabilities
                
                
                (855
                )
                
                
                (28,605
                )Net
      cash provided by (used in) operating activities
                
                
                7,432
                
                
                
                13,220Cash
      flows from investing activities:Payment
      for purchase of business, net of cash acquired
                
                
                (19,185
                )
                
                
                -Capital
      expenditures
                
                
                (4,708
                )
                
                
                (3,224
                )Proceeds
      from sale of marketable securities
                
                
                -
                
                
                
                1,000Other,
      net
                
                
                438
                
                
                
                (236
                )Net
      cash provided by (used in) investing activities
                
                
                (23,455
                )
                
                
                (2,460
                )Cash
      flows from financing activities:Debt
      repayments
                
                
                (21,458
                )
                
                
                (1,313
                )Net
      cash provided by (used in) financing activities
                
                
                (21,458
                )
                
                
                (1,313
                )Effect
      of exchange rate changes on cashand cash
      equivalents
                
                
                1,948
                
                
                
                (191
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                (35,533
                )
                
                
                9,256Cash
      and cash equivalents at beginning of period
                
                
                100,663
                
                
                
                57,748Cash
      and cash equivalents at end of period
                
                $
                65,130
                
                
                $
                67,004








- 4
-





AEROFLEX
INCORPORATED AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 1.
              Basis
      of Presentation
 
 The
accompanying unaudited condensed consolidated financial information of Aeroflex
Incorporated and subsidiaries (the “Company”, “we”, or “our”) has 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 September 30, 2010, results
of operations for the three month periods ended September 30, 2010 and 2009
and cash flows for the three month periods ended September 30, 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 the Company’s Annual
Report on Form 10-K for the fiscal year ended June 30, 2010 (the “Fiscal 2010
Form 10-K”).
 
 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 foreign
source income. 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.  Accordingly,
the consolidated balance sheet at September 30, 2010 presented in this Form 10-Q
has been adjusted to reduce deferred income tax liabilities by $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.
 
 Results
of operations for interim periods are not necessarily indicative of results to
be expected for the full fiscal year or any future periods.
 
 2.
              Accounting
      Pronouncements
 
 Recently
Adopted Accounting Pronouncements
  On July
1, 2010, we adopted the authoritative guidance issued by the 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 a material impact on our consolidated
financial statements.
  - 5
-
  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 have determined that we have control of this company and have consolidated
TEC’s assets and liabilities and results of operations, all of which were
insignificant, into our financial statements commencing October 1, 2007. On
August 5, 2010, we invested another $2.0 million in TEC. At September 30, 2010,
as a result of this and other capital transactions, our ownership interest
increased to 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.
 
 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.  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)
                
                $
                4,961Property,
      plant and equipment
                
                
                1,156Other
      assets
                
                
                60Customer
      related intangibles
                
                
                5,680Non-compete
      arrangements
                
                
                30Tradenames
                
                
                3,010Goodwill
                
                
                10,608Total
      assets acquired
                
                
                25,505Current
      liabilities
                
                
                (2,744
                )Deferred
      taxes
                
                
                (3,576
                )Total
      liabilities assumed
                
                
                (6,320
                )Net
      assets acquired
                
                $
                19,185
  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.
  - 6
-
  Intangible
Assets with Definite Lives
 
 The
components of amortizable intangible assets were as follows:
 
 September
      30, 2010
                
                
                June
      30, 2010(In
      thousands)Gross
                
                
                
                
                
                GrossCarrying
                
                
                Accumulated
                
                
                Carrying
                
                
                AccumulatedAmount
                
                
                Amortization
                
                
                Amount
                
                
                AmortizationDeveloped
      technology
                
                $
                199,759
                
                
                $
                104,251
                
                
                $
                197,422
                
                
                $
                94,672Customer
      related intangibles
                
                
                228,805
                
                
                
                101,821
                
                
                
                222,026
                
                
                
                94,656Non-compete
      arrangements
                
                
                10,335
                
                
                
                4,995
                
                
                
                10,087
                
                
                
                4,420Tradenames
                
                
                3,326
                
                
                
                856
                
                
                
                3,184
                
                
                
                658Total
                
                $
                442,225
                
                
                $
                211,923
                
                
                $
                432,719
                
                
                $
                194,406
  The
aggregate amortization expense for amortizable intangible assets was $16.0
million and $15.6 million for the three months ended September 30, 2010 and
2009, respectively.
 
 The
estimated aggregate amortization expense for each of the twelve month periods
ending September 30, is as follows:
  (In
      thousands)2011
                
                $
                63,1942012
                
                
                61,4702013
                
                
                52,3152014
                
                
                24,7302015
                
                
                17,191
  Goodwill
 
 The
carrying amount of goodwill, by segment, was as follows:
 
 Microelectronic
                
                
                TestSolutions
                
                
                Solutions
                
                
                Total(In
      thousands)Balance
      at June 30, 2010
                
                $
                287,136
                
                
                $
                158,738
                
                
                $
                445,874Goodwill
      recorded for acquisition of ACC
                
                
                10,608
                
                
                
                -
                
                
                
                10,608Other
                
                
                (40
                )
                
                
                -
                
                
                
                (40
                )Impact
      of foreign currency translation
                
                
                1,513
                
                
                
                1,539
                
                
                
                3,052Balance
      at September 30, 2010
                
                $
                299,217
                
                
                $
                160,277
                
                
                $
                459,494
  - 7
-
 
 4.
              Restructuring
      Charges
 
 The
following table sets forth the charges and payments related to the restructuring
liability for the period indicated:
 Balance
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  BalanceJune
      30,
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  September
      30,2010
                  
                  
                  Three
      Months Ended September 30, 2010
                  
                  
                  2010Effect
      ofRestructuring
                  
                  
                  
                  
                  
                  
                  
                  
                  foreign
                  
                  
                  RestructuringLiability
                  
                  
                  Net
      Additions
                  
                  
                  Cash
      Payments
                  
                  
                  currency
                  
                  
                  Liability(In
      thousands)Work
      forcereduction
                  
                  $
                  172
                  
                  
                  $
                  1,219
                  
                  
                  $
                  (327
                  )
                  
                  $
                  25
                  
                  
                  $
                  1,089Closure
      of facilities
                  
                  
                  632
                  
                  
                  
                  580
                  
                  
                  
                  (533
                  )
                  
                  
                  35
                  
                  
                  
                  714Total
                  
                  $
                  804
                  
                  
                  $
                  1,799
                  
                  
                  $
                  (860
                  )
                  
                  $
                  60
                  
                  
                  $
                  1,803
 For the
three months ended September 30, 2010, we recorded a $1.8 million charge in
connection with continued restructuring activities of certain manufacturing
operations, which consisted of $1.2 million of severance and other related costs
related to consolidation and reorganization efforts in our U.K. operations and
one of our components facilities in connection with the ACC acquisition and
$580,000 of facility closure costs in our U.K. operations.
 
 5.
              Inventories
 
 Inventories
consisted of the following:
 
 September
      30,
                      
                      
                      June
      30,2010
                      
                      
                      2010(In
      thousands)Raw
      materials
                      
                      $
                      68,320
                      
                      
                      $
                      61,278Work
      in process
                      
                      
                      50,865
                      
                      
                      
                      44,022Finished
      goods
                      
                      
                      23,368
                      
                      
                      
                      21,268$
                      142,553
                      
                      
                      $
                      126,568
  6.
              Product
      Warranty
 
 We
warrant our products against defects in design, materials and workmanship,
generally for one year from their date of shipment. A provision for estimated
future costs relating to these warranties is recorded in cost of sales when the
related revenue is recognized. Quarterly we analyze our warranty liability for
reasonableness based on a 15-month history of warranty costs incurred, the
nature of the products shipped subject to warranty and anticipated warranty
trends.
 
 - 8
-
    (In
      thousands)Balance
      at June 30, 2010
                
                $
                2,762Provision
      for warranty obligations
                
                
                681Cost
      of warranty obligations
                
                
                (627
                )Foreign
      currency impact
                
                
                66Balance
      at September 30, 2010
                
                $
                2,882
  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 September 30, 2010 and June 30, 2010 are presented as
follows:
 
 Asset
      (Liability) DerivativesSeptember
      30, 2010
                
                June
      30, 2010Balance
      Sheet
                
                
                
                Balance
      Sheet(In
      thousands)
                
                Location
                
                Fair
      Value(1)
                
                Location
                
                Fair
      Value(1)Derivatives
      not designated ashedging instruments:Interest
      rate swap contracts
                
                Accrued
      expenses and
                
                
                
                Accrued
      expenses andother
      current liabilities
                
                $
                (3,747
                )
                other
      current liabilities
                
                $
                (6,613
                )Derivatives
      not designated as hedging
      instruments:Foreign
      currency forward contracts
                
                Accrued
      expenses and
                
                
                
                
                Accrued
      expenses andother
      current liabilities
                
                
                (333
                )
                other
      current liabilities
                
                
                (293
                )Total
      derivatives, net
                
                
                
                $
                (4,080
                )
                
                
                $
                (6,906
                )
  (1)  See
Note 8 for further information about how the fair values of derivative assets
and liabilities are determined.
  - 9
-
  The gains
and losses related to our derivative financial instruments designated as hedging
instruments for the three months ended September 30, 2010 and 2009 were as
follows:
  Derivatives
      in Cash Flow
                    Hedging
      Relationships
                  
                  Amount
      of Gain or (Loss)
                    Recognized
      on Derivatives in
                    Other
      Comprehensive Income
                    (Effective
      Portion)(1)Three
      Months Ended September 302010
                  
                  
                  2009(In
      thousands)Interest
      rate swap contracts
                  
                  $
                  (575
                  )
                  
                  $
                  (3,081
                  )
 Location
      of Gain or (Loss)
                        Reclassified
      from
                        Accumulated
      Other Comprehensive Income
                        into
      Income (Effective Portion)
                    
                    Amount
      of Gain or (Loss)
                        Reclassified
      from
                        Accumulated
      Other Comprehensive Income
                        into
      Income (Effective Portion) (1)Three
      Months Ended September 302010
                    
                    
                    2009(In
      thousands)Interest
      expense
                    
                    $
                    (3,441
                    )
                    
                    $
                    (3,401
                    )
  (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 months ended September 30,
2010 and 2009 were as follows:
 
 Location
      of Gain or (Loss)
                
                
                Amount
      of Gain or (Loss)Derivatives
      Not Designated
                
                Recognized
      in Earnings on
                
                
                Recognized
      in Earnings onas
      Hedging Instruments
                
                Derivative
                
                
                DerivativeThree
      Months Ended September 30,2010
                
                
                2009(In
      thousands)Foreign
      currency forward contracts
                
                Other
      income (expense)
                
                $
                (40)
                
                $
                318
  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 September 30, 2010, all of which were entered
into in fiscal 2008 for an aggregate notional amount of $422.7 million, have
varying maturities through February 2011.
 
 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 September 30, 2010, we had $47.2 million of notional value foreign currency
forward contracts maturing through October 29, 2010. 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.
  - 10
-
  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
      activemarkets at the measurement date.
 Level
      2:
              Observable
      inputs other than quoted prices included in Level 1, such as
      quotedprices
      for similar assets and liabilities in active markets; quoted prices
      foridentical or similar assets and liabilities in markets that are not
      active; or otherinputs that are observable or can be corroborated by observable market
      data.
 Level
      3:
              Inputs
      reflect management’s best estimate of what market participants
      woulduse in pricing the asset or liability at the measurement
      date.  The inputs areunobservable
      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 September 30, 2010
                          
                          (Level
      1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      3)
                          
                          
                          Total(In
      thousands)Assets:Non-current
      marketable securities
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          9,806
                          
                          
                          $
                          9,806Liabilities:Foreign
      currency forward contracts
                          
                          $
                          -
                          
                          
                          $
                          333
                          
                          
                          $
                          -
                          
                          
                          $
                          333Interest
      rate swap contracts
                          
                          
                          -
                          
                          
                          
                          3,747
                          
                          
                          
                          -
                          
                          
                          
                          3,747Total
      Liabilities
                          
                          $
                          -
                          
                          
                          $
                          4,080
                          
                          
                          $
                          -
                          
                          
                          $
                          4,080
 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
  - 11
-
 
 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 three months ended September 30,
2010:
  Fair
      Value Measurements
                  Using
      Significant
                  Unobservable
      Inputs
                  (Level
      3)
                  Auction
                  Rate
                  Securities
                  (In
      thousands)Balance
      at June 30, 2010
                
                $
                9,769Unrealized
      gain (loss) in accumulated other comprehensive income
    (loss)
                
                
                37Balance
      at September 30, 2010
                
                $
                9,806
  Non-Current Marketable
Securities – Non-current marketable securities consist of auction rate
securities that currently have no active market from which we could obtain
pricing.  We have classified auction rate securities as Level 3 as
their valuation requires substantial judgment and estimation of factors that are
not currently observable in the market due to the lack of trading in the
securities.  To date, we have collected all interest payments on all
of our auction rate securities when due. Furthermore, we have the intent and are
able to hold these securities until the credit markets recover, or until their
maturities, which range from 2037 through 2041, if
necessary.   However, based on a discounted cash flow analysis,
which considered, among other items, the collateral underlying the securities,
the credit worthiness of the issuer, the timing of future cash flows and
liquidity risks, at September 30, 2010, we had a $1.3 million valuation
allowance against the auction rate securities.
 
 As fair
values have continued to be below cost, we have considered various factors in
determining that at September 30, 2010 a credit loss did not exist and there was
no requirement to recognize an other than temporary impairment charge, including
the length of time and the extent to which the fair value has been below the
cost basis, the timely receipt of all interest payments, the rating of the
security, the relatively low volatility of the security’s fair value, the
current financial condition of the issuer and our intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in market value.
 
 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.
  - 12
-
  9.
              Long
      Term Debt and Credit Agreements
 
 The fair
value of our debt instruments are summarized as follows:
  September
      30, 2010Carrying
                
                
                EstimatedAmount
                
                
                Fair
      Value(In
      thousands)Senior
      secured B-1 term loan
                
                $
                372,651
                
                
                $
                361,472Senior
      secured B-2 term loan
                
                
                116,454
                
                
                
                112,960Senior
      unsecured notes
                
                
                225,000
                
                
                
                244,125Senior
      subordinated unsecured term loan
                
                
                167,973
                
                
                
                145,297Other
                
                
                745
                
                
                
                745Total
      debt
                
                $
                882,823
                
                
                $
                864,599
  As of
June 30, 2010, our 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 our debt instruments are based on quoted market
prices for the same or similar issues. Fair value estimates related to our debt
instruments are made at a specific point in time based on relevant market
information.  These estimates are subjective in nature and involve
uncertainties and matters of significant judgments and therefore cannot be
determined with precision.  Changes in assumptions could significantly
affect the estimates.
 
 As of
September 30, 2010, we are in compliance with all of the covenants contained in
our loan agreements.
 
 Interest
paid was $21.6 million and $22.0 million for the three months ended September
30, 2010 and 2009, respectively. Accrued interest of $9.8 million and $13.9
million was included in accrued expenses and other current liabilities at
September 30, 2010 and June 30, 2010, respectively.
 
 10.
                Loss
      on Liquidation of Foreign
Subsidiary
 
 In
connection with the acquisition of one of our wireless businesses in the U.K. in
2003, 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 quarter ended September 30, 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 quarter ended September 30,
2009.  This loss is not deductible for income tax
purposes.
 
 - 13
-
 
 11.
              Comprehensive
      Income
 
 The
components of comprehensive income (loss) were as follows:
 Three
      Months Ended September 30,2010
                  
                  
                  2009(In
      thousands)Net
      income (loss)
                  
                  $
                  (5,817
                  )
                  
                  $
                  (20,543
                  )Increase
      (decrease) in fair value ofinterest rate swap contracts,
      net of tax provision (benefit) of $1,113 and
    $124
                  
                  
                  1,753
                  
                  
                  
                  196Valuation
      allowance againstnon-current marketable
      securities
                  
                  
                  37
                  
                  
                  
                  269Foreign
      currency translation adjustment,net of tax of $680 and
    $0
                  
                  
                  10,022
                  
                  
                  
                  5,884Total
      comprehensive income (loss)
                  
                  $
                  5,995
                  
                  
                  $
                  (14,194
                  )
  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
                )Three
      months' activity
                
                
                1,753
                
                
                
                37
                
                
                
                -
                
                
                
                10,022
                
                
                
                11,812Balance,
      September 30, 2010
                
                $
                (2,293
                )
                
                $
                (1,239
                )
                
                $
                (773
                )
                
                $
                (37,458
                )
                
                $
                (41,763
                )
  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.
 
 Prior to
fiscal 2009, the foreign currency translation adjustments were not adjusted for
income taxes as they related to indefinite investments in non-U.S.
subsidiaries.  Deferred U.S. income taxes have been provided on
certain undistributed foreign earnings for years subsequent to fiscal 2008 since
we expect that substantially all of these earnings will be distributed to the
U.S.  As of September 30, 2010, we have recorded a deferred U.S.
income tax on the foreign currency translation adjustment created by the
post-fiscal 2008 undistributed foreign earnings.
 
 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 September 30, 2010 was $1.6 million, of which
$322,000 was expected to be paid within one year.
  - 14
-
  In fiscal
2007, we became aware that certain RadHard bidirectional multipurpose
transceivers sold by us since 1999 may have been subject to the licensing
jurisdiction of the U.S. Department of State in accordance with ITAR.
Accordingly, we filed a Voluntary Disclosure with the Directorate of Defense
Trade Controls, Department of State, describing the details of the possible
inadvertent misclassification and identifying certain unauthorized exports from
the United States to end-users in a number of countries, including China and
Russia. Simultaneously, we filed a Commodity Jurisdiction request providing
detailed information and data supporting our contention that the product is not
subject to ITAR and requesting a determination that such product is not ITAR
controlled. On November 15, 2007, we were informed that the U.S. Department of
State had determined in response to our Commodity Jurisdiction request that the
product is subject to the licensing jurisdiction of the U.S. Department of State
in accordance with the ITAR. We requested reconsideration of this determination.
On February 7, 2008, we filed an addendum to the above referenced Voluntary
Disclosure advising the Directorate of Defense Trade Controls that other
products sold by us, similar in nature to the transceiver described above, may
also be subject to the ITAR. The Directorate of Defense Trade Controls agreed to
extend our time to file such addendum to the Voluntary Disclosure until a
decision was rendered with respect to our request for reconsideration of the
determination in connection with the above-referenced Commodity Jurisdiction
request. On August 5, 2008, we received a letter from the Office of Defense
Trade Controls Compliance, or DTCC, requesting that we provide documentation
and/or information relating to our compliance initiatives after November 15,
2007 as well as the results of any product reviews conducted by us, and
indicating that a civil penalty against us could be warranted in connection with
this matter following the review of such materials. We have provided all of the
materials and documentation requested by the DTCC. Our request for
reconsideration of the Commodity Jurisdiction request was denied by the
Directorate of Defense Trade Controls on August 19, 2008 which determined that
the product is subject to the licensing jurisdiction of the Department of State
in accordance with the ITAR. Accordingly, on September 18, 2008, we filed an
addendum to our Voluntary Disclosure identifying other products that may have
been subject to the licensing jurisdiction of the U.S. Department of State in
accordance with the ITAR but were inadvertently misclassified 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 any
outcome.
  We have
also identified other ITAR noncompliance in our past business activities as well
as in the pre-acquisition business activities of certain recently acquired
companies. These include the inadvertent export of products without a 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
during 2009 and 2010. At this time it is not possible to determine whether any
fines or other penalties will be asserted against us or the materiality of any
outcome.
  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 31%
of our sales for the three months ended September 30, 2010 and 36% for the three
months ended September 30, 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.
  - 15
-
  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
United Kingdom (“U.K.”).  Net sales from facilities located in the
U.K. were approximately $23.1 million for the three months ended September 30,
2010 and $26.3 million for the three months ended September 30,
2009.  Total assets of the U.K. operations were $171.0 million as of
September 30, 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 September 30,2010
                
                
                2009(In
      thousands)United
      States of America
                
                $
                88,520
                
                
                $
                80,185Europe
      and Middle East
                
                
                30,302
                
                
                
                28,467Asia
      and Australia
                
                
                33,111
                
                
                
                19,515Other
      regions
                
                
                3,998
                
                
                
                1,949$
                155,931
                
                
                $
                130,116
  - 16
-
  Selected
financial data by segment is as follows:
 
 Three
      Months Ended September 30,2010
                
                
                2009(In
      thousands)Net
      salesMicroelectronic
      solutions ("AMS")
                
                $
                77,305
                
                
                $
                67,361Test
      solutions ("ATS")
                
                
                78,626
                
                
                
                62,755Net
      sales
                
                $
                155,931
                
                
                $
                130,116Segment
      adjusted operating income-
      AMS
                
                $
                18,887
                
                
                $
                15,024-
      ATS
                
                
                6,857
                
                
                
                7,965General
      corporate expense
                
                
                (2,414
                )
                
                
                (2,931
                )Adjusted
      operating income
                
                
                23,330
                
                
                
                20,058Amortization
      of acquired intangibles-
      AMS
                
                
                (9,260
                )
                
                
                (8,836
                )-
      ATS
                
                
                (6,703
                )
                
                
                (6,769
                )Business
      acquisition costs-
      Corporate
                
                
                (190
                )
                
                
                -Share-based
      compensation-
      Corporate
                
                
                (513
                )
                
                
                (489
                )Restructuring
      charges-
      AMS
                
                
                (576
                )
                
                
                --
      ATS
                
                
                (1,223
                )
                
                
                (187
                )Merger
      related expenses - Corporate
                
                
                (715
                )
                
                
                (693
                )Loss
      on liquidation of foreign subsidiary - ATS
                
                
                -
                
                
                
                (7,696
                )Current
      period impact of acquisitionrelated adjustments:Inventory
      - AMS
                
                
                (183
                )
                
                
                (246
                )Inventory
      - ATS
                
                
                (447
                )
                
                
                -Depreciation
      - AMS
                
                
                (117
                )
                
                
                (275
                )Depreciation
      - ATS
                
                
                (120
                )
                
                
                (506
                )Depreciation
      - Corporate
                
                
                (55
                )
                
                
                (55
                )Deferred
      revenue - ATS
                
                
                (25
                )
                
                
                (32
                )Operating
      income (loss) (GAAP)
                
                
                3,203
                
                
                
                (5,726
                )Interest
      expense
                
                
                (21,238
                )
                
                
                (21,039
                )Other
      income (expense), net
                
                
                (29
                )
                
                
                57Income
      (loss) before income taxes
                
                $
                (18,064
                )
                
                $
                (26,708
                )
  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, 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.
 
 - 17
-
 
 14.
              Guarantor/Non-Guarantor
      Financial Information
 
 The
following supplemental condensed consolidating financial information sets forth,
on an unconsolidated basis, the balance sheets at September 30, 2010 and June
30, 2010 and the statements of operations and cash flows for the three months
ended September 30, 2010 and 2009 for Aeroflex Incorporated (”Parent”), the
Guarantor Subsidiaries and, on a combined basis, 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 by the Parent Company and guarantees
the debt on an unconditional and joint and several basis.
 Condensed
Consolidating Statement of Operations
 For
the Three Months Ended September 30, 2010
 (In
thousands)
 Guarantor
                
                
                Non-GuarantorParent
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedNet
      sales
                
                $
                -
                
                
                $
                109,597
                
                
                $
                47,935
                
                
                $
                (1,601
                )
                
                $
                155,931Cost
      of sales
                
                
                -
                
                
                
                55,723
                
                
                
                22,448
                
                
                
                (1,657
                )
                
                
                76,514Gross
      profit
                
                
                -
                
                
                
                53,874
                
                
                
                25,487
                
                
                
                56
                
                
                
                79,417Selling,
      general and administrative costs
                
                
                3,887
                
                
                
                21,737
                
                
                
                11,885
                
                
                
                -
                
                
                
                37,509Research
      and development costs
                
                
                -
                
                
                
                13,647
                
                
                
                9,095
                
                
                
                -
                
                
                
                22,742Amortization
      of acquired intangibles
                
                
                -
                
                
                
                13,685
                
                
                
                2,278
                
                
                
                -
                
                
                
                15,963Operating
      income (loss)
                
                
                (3,887
                )
                
                
                4,805
                
                
                
                2,229
                
                
                
                56
                
                
                
                3,203Other
      income (expense):Interest
      expense
                
                
                (21,226
                )
                
                
                (12
                )
                
                
                -
                
                
                
                -
                
                
                
                (21,238
                )Other
      income (expense), net
                
                
                7
                
                
                
                98
                
                
                
                (134
                )
                
                
                -
                
                
                
                (29
                )Intercompany
      charges
                
                
                19,878
                
                
                
                (19,279
                )
                
                
                (599
                )
                
                
                -
                
                
                
                -Income
      (loss) before income taxes
                
                
                (5,228
                )
                
                
                (14,388
                )
                
                
                1,496
                
                
                
                56
                
                
                
                (18,064
                )Provision
      (benefit) for income taxes
                
                
                (237
                )
                
                
                (2,954
                )
                
                
                372
                
                
                
                (9,428
                )
                
                
                (12,247
                )Equity
      income (loss) of subsidiaries
                
                
                (826
                )
                
                
                1,199
                
                
                
                -
                
                
                
                (373
                )
                
                
                -Net
      income (loss)
                
                $
                (5,817
                )
                
                $
                (10,235
                )
                
                $
                1,124
                
                
                $
                9,111
                
                
                $
                (5,817
                )
  - 18
-
 
 Condensed
      Consolidating Statement of OperationsFor
      the Three Months Ended September 30, 2009(In
      thousands)Guarantor
                  
                  
                  Non-GuarantorParent
                  
                  
                  Subsidiaries
                  
                  
                  Subsidiaries
                  
                  
                  Eliminations
                  
                  
                  ConsolidatedNet
      sales
                  
                  $
                  -
                  
                  
                  $
                  97,895
                  
                  
                  $
                  33,390
                  
                  
                  $
                  (1,169
                  )
                  
                  $
                  130,116Cost
      of sales
                  
                  
                  -
                  
                  
                  
                  51,320
                  
                  
                  
                  14,993
                  
                  
                  
                  (1,191
                  )
                  
                  
                  65,122Gross
      profit
                  
                  
                  -
                  
                  
                  
                  46,575
                  
                  
                  
                  18,397
                  
                  
                  
                  22
                  
                  
                  
                  64,994Selling,
      general and administrative costs
                  
                  
                  4,169
                  
                  
                  
                  18,213
                  
                  
                  
                  7,856
                  
                  
                  
                  -
                  
                  
                  
                  30,238Research
      and development costs
                  
                  
                  -
                  
                  
                  
                  10,686
                  
                  
                  
                  6,495
                  
                  
                  
                  -
                  
                  
                  
                  17,181Amortization
      of acquired intangibles
                  
                  
                  -
                  
                  
                  
                  13,383
                  
                  
                  
                  2,222
                  
                  
                  
                  -
                  
                  
                  
                  15,605Loss
      on liquidation of foreign subsidiary
                  
                  
                  -
                  
                  
                  
                  7,696
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,696Operating
      income (loss)
                  
                  
                  (4,169
                  )
                  
                  
                  (3,403
                  )
                  
                  
                  1,824
                  
                  
                  
                  22
                  
                  
                  
                  (5,726
                  )Other
      income (expense):Interest
      expense
                  
                  
                  (21,022
                  )
                  
                  
                  (17
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (21,039
                  )Other
      income (expense), net
                  
                  
                  381
                  
                  
                  
                  (106
                  )
                  
                  
                  (218
                  )
                  
                  
                  -
                  
                  
                  
                  57Intercompany
      charges
                  
                  
                  19,794
                  
                  
                  
                  (19,318
                  )
                  
                  
                  (476
                  )
                  
                  
                  -
                  
                  
                  
                  -Income
      (loss) before income taxes
                  
                  
                  (5,016
                  )
                  
                  
                  (22,844
                  )
                  
                  
                  1,130
                  
                  
                  
                  22
                  
                  
                  
                  (26,708
                  )Provision
      (benefit) for income taxes
                  
                  
                  (4,436
                  )
                  
                  
                  (2,690
                  )
                  
                  
                  219
                  
                  
                  
                  742
                  
                  
                  
                  (6,165
                  )Equity
      income (loss) of subsidiaries
                  
                  
                  (19,963
                  )
                  
                  
                  702
                  
                  
                  
                  -
                  
                  
                  
                  19,261
                  
                  
                  
                  -Net
      income (loss)
                  
                  $
                  (20,543
                  )
                  
                  $
                  (19,452
                  )
                  
                  $
                  911
                  
                  
                  $
                  18,541
                  
                  
                  $
                  (20,543
                  )
  - 19
-
 Condensed
      Consolidating Balance SheetAs
      of September 30, 2010(In
      thousands)Guarantor
                
                
                Non-GuarantorParent
                
                
                Subsidiaries
                
                
                Subsidiaries
                
                
                Eliminations
                
                
                ConsolidatedAssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                29,289
                
                
                $
                (2,109
                )
                
                $
                37,950
                
                
                $
                -
                
                
                $
                65,130Accounts
      receivable, net
                
                
                -
                
                
                
                75,810
                
                
                
                53,496
                
                
                
                -
                
                
                
                129,306Inventories
                
                
                -
                
                
                
                103,767
                
                
                
                40,039
                
                
                
                (1,253
                )
                
                
                142,553Deferred
      income taxes
                
                
                3,827
                
                
                
                23,114
                
                
                
                (3
                )
                
                
                -
                
                
                
                26,938Prepaid
      expenses and other current assets
                
                
                3,672
                
                
                
                5,368
                
                
                
                4,641
                
                
                
                -
                
                
                
                13,681Total
      current assets
                
                
                36,788
                
                
                
                205,950
                
                
                
                136,123
                
                
                
                (1,253
                )
                
                
                377,608Property,
      plant and equipment, net
                
                
                12,417
                
                
                
                69,483
                
                
                
                21,498
                
                
                
                -
                
                
                
                103,398Non-current
      marketable securities, net
                
                
                9,806
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,806Deferred
      financing costs, net
                
                
                19,790
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                19,790Other
      assets
                
                
                13,935
                
                
                
                6,645
                
                
                
                2,308
                
                
                
                -
                
                
                
                22,888Intangible
      assets with definite lives, net
                
                
                -
                
                
                
                199,874
                
                
                
                30,428
                
                
                
                -
                
                
                
                230,302Intangible
      assets with indefinite lives
                
                
                -
                
                
                
                88,414
                
                
                
                25,754
                
                
                
                -
                
                
                
                114,168Goodwill
                
                
                (10
                )
                
                
                415,200
                
                
                
                44,304
                
                
                
                -
                
                
                
                459,494Total
      assets
                
                $
                92,726
                
                
                $
                985,566
                
                
                $
                260,415
                
                
                $
                (1,253
                )
                
                $
                1,337,454Liabilities and
      Stockholder's EquityCurrent
      liabilities:Current
      portion of long-term debt
                
                $
                -
                
                
                $
                360
                
                
                $
                -
                
                
                $
                -
                
                
                $
                360Accounts
      payable
                
                
                4
                
                
                
                18,817
                
                
                
                19,030
                
                
                
                -
                
                
                
                37,851Advance
      payments by customers and deferredrevenue
                
                
                -
                
                
                
                17,910
                
                
                
                12,308
                
                
                
                -
                
                
                
                30,218Income
      taxes payable
                
                
                528
                
                
                
                259
                
                
                
                1,688
                
                
                
                -
                
                
                
                2,475Accrued
      payroll expenses
                
                
                2,758
                
                
                
                17,778
                
                
                
                2,054
                
                
                
                -
                
                
                
                22,590Accrued
      expenses and other current liabilities
                
                
                25,940
                
                
                
                13,308
                
                
                
                14,526
                
                
                
                -
                
                
                
                53,774Total
      current liabilities
                
                
                29,230
                
                
                
                68,432
                
                
                
                49,606
                
                
                
                -
                
                
                
                147,268Long-term
      debt
                
                
                882,078
                
                
                
                385
                
                
                
                -
                
                
                
                -
                
                
                
                882,463Deferred
      income taxes
                
                
                15,598
                
                
                
                110,083
                
                
                
                14,529
                
                
                
                (9,428
                )
                
                
                130,782Defined
      benefit plan obligations
                
                
                5,684
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,684Other
      long-term liabilities
                
                
                1,537
                
                
                
                8,281
                
                
                
                4,285
                
                
                
                -
                
                
                
                14,103Intercompany
      investment
                
                
                (308,715
                )
                
                
                79,354
                
                
                
                229,361
                
                
                
                -
                
                
                
                -Intercompany
      receivable/payable
                
                
                (839,214
                )
                
                
                873,971
                
                
                
                (34,273
                )
                
                
                (484
                )
                
                
                -Total
      liabilities
                
                
                (213,802
                )
                
                
                1,140,506
                
                
                
                263,508
                
                
                
                (9,912
                )
                
                
                1,180,300Stockholder's
      equity
                
                
                306,528
                
                
                
                (154,940
                )
                
                
                (3,093
                )
                
                
                8,659
                
                
                
                157,154Total
      liabilities and stockholder's equity
                
                $
                92,726
                
                
                $
                985,566
                
                
                $
                260,415
                
                
                $
                (1,253
                )
                
                $
                1,337,454
 - 20
-
 
 Condensed
      Consolidating Balance SheetAs
      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 deferredrevenue
                
                
                -
                
                
                
                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
  - 21
-
 
 Condensed
      Consolidating Statement of Cash FlowsFor
      the Three Months Ended September 30, 2010(In
      thousands)Non-Guarantor
              
              
              GuarantorParent
              
              
              Subsidiaries
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedCash
      flows from operating activities:Net
      income (loss)
              
              $
              (5,817
              )
              
              $
              (10,235
              )
              
              $
              1,124
              
              
              $
              9,111
              
              
              $
              (5,817
              )Changes
      in operating assets and liabilities andnon-cash items
      included in net income (loss)
              
              
              (18,514
              )
              
              
              33,651
              
              
              
              7,223
              
              
              
              (9,111
              )
              
              
              13,249Net
      cash provided by (used in) operating activities
              
              
              (24,331
              )
              
              
              23,416
              
              
              
              8,347
              
              
              
              -
              
              
              
              7,432Cash
      flows from investing activities:Payment
      for purchase of business, net of cash acquired
              
              
              -
              
              
              
              (19,185
              )
              
              
              -
              
              
              
              -
              
              
              
              (19,185
              )Capital
      expenditures
              
              
              (109
              )
              
              
              (2,746
              )
              
              
              (1,853
              )
              
              
              -
              
              
              
              (4,708
              )Other,
      net
              
              
              -
              
              
              
              227
              
              
              
              211
              
              
              
              -
              
              
              
              438Net
      cash provided by (used in) investing activities
              
              
              (109
              )
              
              
              (21,704
              )
              
              
              (1,642
              )
              
              
              -
              
              
              
              (23,455
              )Cash
      flows from financing activities:Debt
      repayments
              
              
              (21,458
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (21,458
              )Net
      cash provided by (used in) financing activities
              
              
              (21,458
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (21,458
              )Effect
      of exchange rate changes on cash and cash equivalents
              
              
              -
              
              
              
              -
              
              
              
              1,948
              
              
              
              -
              
              
              
              1,948Net
      increase (decrease) in cash and cash equivalents
              
              
              (45,898
              )
              
              
              1,712
              
              
              
              8,653
              
              
              
              -
              
              
              
              (35,533
              )Cash
      and cash equivalents at beginning of period
              
              
              75,187
              
              
              
              (3,821
              )
              
              
              29,297
              
              
              
              -
              
              
              
              100,663Cash
      and cash equivalents at end of period
              
              $
              29,289
              
              
              $
              (2,109
              )
              
              $
              37,950
              
              
              $
              -
              
              
              $
              65,130
  - 22
-


Condensed
      Consolidating Statement of Cash FlowsFor
      the Three Months Ended September 30, 2009(In
      thousands)Non-Guarantor
              
              
              GuarantorParent
              
              
              Subsidiaries
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedCash
      flows from operating activities:Net
      income (loss)
              
              $
              (20,543
              )
              
              $
              (19,452
              )
              
              $
              911
              
              
              $
              18,541
              
              
              $
              (20,543
              )Changes
      in operating assets and liabilities and non-cash items included in net
      income (loss)
              
              
              38,477
              
              
              
              21,245
              
              
              
              (7,418
              )
              
              
              (18,541
              )
              
              
              33,763Net
      cash provided by (used in) operating activities
              
              
              17,934
              
              
              
              1,793
              
              
              
              (6,507
              )
              
              
              -
              
              
              
              13,220Cash
      flows from investing activities:Capital
      expenditures
              
              
              (171
              )
              
              
              (2,195
              )
              
              
              (858
              )
              
              
              -
              
              
              
              (3,224
              )Proceeds
      from sale of marketable securities
              
              
              1,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,000Other,
      net
              
              
              (355
              )
              
              
              47
              
              
              
              72
              
              
              
              -
              
              
              
              (236
              )Net
      cash provided by (used in) investing activities
              
              
              474
              
              
              
              (2,148
              )
              
              
              (786
              )
              
              
              -
              
              
              
              (2,460
              )Cash
      flows from financing activities:Debt
      repayments
              
              
              (1,313
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,313
              )Net
      cash provided by (used in) financing activities
              
              
              (1,313
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,313
              )Effect
      of exchange rate changes on cash and cash equivalents
              
              
              -
              
              
              
              -
              
              
              
              (191
              )
              
              
              -
              
              
              
              (191
              )Net
      increase (decrease) in cash and cash equivalents
              
              
              17,095
              
              
              
              (355
              )
              
              
              (7,484
              )
              
              
              -
              
              
              
              9,256Cash
      and cash equivalents at beginning of period
              
              
              31,221
              
              
              
              (15
              )
              
              
              26,542
              
              
              
              -
              
              
              
              57,748Cash
      and cash equivalents at end of period
              
              $
              48,316
              
              
              $
              (370
              )
              
              $
              19,058
              
              
              $
              -
              
              
              $
              67,004


- 23
-
 
 15.
              Subsequent
      Events
 
 Registration Statement
Filing
 
 On
November 5, 2010, our parent corporation, Aeroflex Holding Corp., filed an
amended registration statement with the SEC relating to the proposed initial
public offering of its common stock.  Aeroflex Holding Corp. is
offering to sell 17,250,000 shares at a price per share between $13.50 and
$15.50.
 
 Debt Tender
Offer
 
 In
connection with the initial public offering, a portion of the net proceeds will
be used to make a capital contribution to the Company to enable us to, among
other things, tender for a portion of our senior notes and offer to purchase a
portion of our senior subordinated unsecured term loans.  On November
5, 2010 we commenced the tender offer, which is conditional upon, among other
things, the closing of Aeroflex Holding Corp.’s initial public offering of its
common stock.  We expect to purchase an aggregate of approximately
$175 million of senior notes and term loans at a premium to face value, which is
anticipated to result in a loss on partial extinguishment of debt and the
write-off of the related deferred financing costs.
 
 Amendment to Senior Secured
Credit Agreement
 
 On
November 4, 2010, we entered into an agreement with the lenders of our senior
secured credit facility, for which we paid a $3.3 million fee, to amend our
credit agreement to, among other things:
 
 ·
              increase
      the amount of cash we can spend for acquisitions of businesses from $20
      million per year and a $100 million aggregate amount, to $200 million in
      the aggregate, from the effective date of the amendment to the credit
      facility maturity date, August 15, 2014, with no annual
    cap;
 ·
              permit us to pay, upon the
      completion of the Aeroflex Holding Corp. initial public offering, a $2.5
      million transaction fee and a $16.9 million termination fee for the
      termination of the Advisory Agreement, in lieu of future advisory fees,
      and;
 ·
              set our interest rate margin,
      based on our current credit rating. Our current credit rating would
      increase our interest rate margin by 75 basis points for all tranches of
      debt within the secured credit
facility.
 
 ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
 
 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. Some of the key factors that could cause actual
results to differ from our expectations include:
  - 24
-
  ·
              adverse
      developments in the global economy;
  ·
              our
      inability to make payments on our significant
  indebtedness;
  ·
              our
      dependence on growth in our customers'
  businesses;
  ·
              our
      inability to remain competitive in the markets we
  serve;
  ·
              our
      inability to continue to develop, manufacture and market innovative,
      customized products and services that meet customer requirements for
      performance and reliability;
  ·
              any
      failure of our suppliers to provide us with raw materials and/or properly
      functioning component parts;
  ·
              termination
      of our key contracts, including technology license agreements, or loss of
      our key customers;
  ·
              our
      inability to protect our intellectual
property;
  ·
              our
      failure to comply with regulations such as ITAR and any changes in
      regulations;
  ·
              our
      exposure to auction rate securities and the impact this exposure has on
      our liquidity;
  ·
              our
      failure to realize anticipated benefits from completed acquisitions,
      divestitures or restructurings, or the possibility that such acquisitions,
      divestitures or restructurings could adversely affect
  us;
  ·
              the
      loss of key employees;
  ·
              our
      exposure to foreign currency exchange rate
  risks;
  ·
              terrorist
      acts or acts of war; and
  ·
              other
      risks and uncertainties, including those listed under the caption "Risk
      Factors" disclosed in our 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
 
 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.
 
 - 25
-
 
 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 September 30,2010
                
                
                2009Net
      sales
                
                
                100.0
                %
                
                
                100.0
                %Costs
      of sales
                
                
                49.1
                
                
                
                50.0Gross
      profit
                
                
                50.9
                
                
                
                50.0Operating
      expenses:Selling,
      general and administrative costs
                
                
                24.1
                
                
                
                23.3Research
      and development costs
                
                
                14.6
                
                
                
                13.2Amortization
      of acquired intangibles
                
                
                10.2
                
                
                
                12.0Loss
      on liquidation of foreign subsidiary
                
                
                -
                
                
                
                5.9Total
      operating expenses
                
                
                48.9
                
                
                
                54.4Operating
      income (loss)
                
                
                2.0
                
                
                
                (4.4
                )Interest
      expense
                
                
                (13.6
                )
                
                
                (16.1
                )Other
      income (expense), net
                
                
                -
                
                
                
                -Income
      (loss) before income taxes
                
                
                (11.6
                )
                
                
                (20.5
                )Provision
      (benefit) for income taxes
                
                
                (7.9
                )
                
                
                (4.7
                )Net
      income (loss)
                
                
                (3.7
                )
      %
                
                
                (15.8
                )%
  - 26
-
 
 Statements
of Operations
 
 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, loss on liquidation
of foreign subsidiary and the impact of any acquisition related adjustments. We
have set out below 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.
  Three
      Months Ended September 30,2010
                
                
                2009(In
      thousands)Net
      salesMicroelectronic
      solutions ("AMS")
                
                $
                77,305
                
                
                $
                67,361Test
      solutions ("ATS")
                
                
                78,626
                
                
                
                62,755Net
      sales
                
                $
                155,931
                
                
                $
                130,116Segment
      adjusted operating income-
      AMS
                
                $
                18,887
                
                
                $
                15,024-
      ATS
                
                
                6,857
                
                
                
                7,965General
      corporate expense
                
                
                (2,414
                )
                
                
                (2,931
                )Adjusted
      operating income
                
                
                23,330
                
                
                
                20,058Amortization
      of acquired intangibles-
      AMS
                
                
                (9,260
                )
                
                
                (8,836
                )-
      ATS
                
                
                (6,703
                )
                
                
                (6,769
                )Business
      acquisition costs-
      Corporate
                
                
                (190
                )
                
                
                -Share-based
      compensation-
      Corporate
                
                
                (513
                )
                
                
                (489
                )Restructuring
      charges-
      AMS
                
                
                (576
                )
                
                
                --
      ATS
                
                
                (1,223
                )
                
                
                (187
                )Merger
      related expenses - Corporate
                
                
                (715
                )
                
                
                (693
                )Loss
      on liquidation of foreign subsidiary - ATS
                
                
                -
                
                
                
                (7,696
                )Current
      period impact of acquisitionrelated adjustments:Inventory
      - AMS
                
                
                (183
                )
                
                
                (246
                )Inventory
      - ATS
                
                
                (447
                )
                
                
                -Depreciation
      - AMS
                
                
                (117
                )
                
                
                (275
                )Depreciation
      - ATS
                
                
                (120
                )
                
                
                (506
                )Depreciation
      - Corporate
                
                
                (55
                )
                
                
                (55
                )Deferred
      revenue - ATS
                
                
                (25
                )
                
                
                (32
                )Operating
      income (loss) (GAAP)
                
                
                3,203
                
                
                
                (5,726
                )Interest
      expense
                
                
                (21,238
                )
                
                
                (21,039
                )Other
      income (expense), net
                
                
                (29
                )
                
                
                57Income
      (loss) before income taxes
                
                $
                (18,064
                )
                
                $
                (26,708
                )
  - 27
-
  Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009
 
 Net Sales.Net
sales increased $25.8 million, or 20%, to $155.9 million for the three months
ended September 30, 2010 from $130.1 million for the three months ended
September 30, 2009.  Businesses acquired since September 30, 2009
contributed $6.9 million to sales, or 5% in the current quarter.
  Net sales
in the AMS segment increased 15% to $77.3 million for the three months
ended September 30, 2010 from $67.4 million for the three months ended September
30, 2009.  Specific variances include a volume driven $5.9 million
increase in sales of components, including $1.5 million from
ACC, acquired in August 2010, a volume driven $4.1 million increase in
sales of integrated circuits; and additional sales of $1.3 million from
Radiation Assured Devices, Inc., or RAD, acquired in June 2010.  The
increases in sales were partially offset by volume driven reductions of
$913,000 in sales of motion control products and $399,000 in sales of
microelectronics modules.
  Net sales
in the ATS segment increased 25% to $78.6 million for the three months
ended September 30, 2010 from $62.8 million for the three months ended
September 30, 2009.  Specific variances include a volume driven
$7.9 million increase in sales of wireless test products; a volume driven
$3.2 million increase in sales from avionic products; and a volume
driven $3.0 million increase in sales of radio test sets. In addition,
there were additional wireless test products sales of $4.0 million from
Willtek Communications, or Willtek, acquired in May 2010.  The
increases in net sales were partially offset by a volume driven reduction of
$2.2 million in sales of general purpose 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 $79.4 million, or 50.9% of net sales, for
the three months ended September 30, 2010 and $65.0 million, or 50.0% of net
sales, for the three months ended September 30, 2009.
 
 Gross
      ProfitThree
      MonthsEnded
                
                
                
                
                %
      of
                
                
                
                
                
                %
      of
                
                
                
                
                
                %
      ofSeptember
      30,
                
                AMS
                
                
                Net
      Sales
                
                
                ATS
                
                
                Net
      Sales
                
                
                Total
                
                
                Net
      Sales(In
      thousands, except percentages)2009
                
                $
                30,999
                
                
                
                46.0
                %
                
                $
                33,995
                
                
                
                54.2
                %
                
                $
                64,994
                
                
                
                50.0
                %2010
                
                $
                38,321
                
                
                
                49.6
                %
                
                $
                41,096
                
                
                
                52.3
                %
                
                $
                79,417
                
                
                
                50.9
                %
 
 Gross
margins in the AMS segment were 49.6% for the three months ended September 30,
2010 and 46.0% for the three months ended September 30, 2009.  The
increase in gross margins is principally attributable to (i) favorable product
mix and volume efficiencies in components; and (ii) 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
margins in the ATS segment were 52.3% for the three months ended September 30,
2010 and 54.2% for the three months ended September 30, 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 $7.1 million for the three months ended September 30, 2010 as compared
to the three months ended September 30, 2009 due to increased
sales.
 
 - 28
-
 
 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 $7.3 million, or 24%, to $37.5
million for the three months ended September 30, 2010.  As a
percentage of sales, SG&A costs increased from 23.2% to 24.1% from the three
months ended September 30, 2009 to the three months ended September 30,
2010.   The SG&A of the acquired businesses increased
SG&A by $2.0 million.
 
 Selling, General and
      Administrative CostsThree
      MonthsEnded
                
                
                
                
                %
      of
                
                
                
                
                
                %
      of
                
                
                
                
                
                
                
                
                %
      ofSeptember
      30,
                
                AMS
                
                
                Net
      Sales
                
                
                ATS
                
                
                Net
      Sales
                
                
                Corporate
                
                
                Total
                
                
                Net
      Sales(In
      thousands, except percentages)2009
                
                $
                9,988
                
                
                
                14.8
                %
                
                $
                16,082
                
                
                
                25.6
                %
                
                $
                4,168
                
                
                $
                30,238
                
                
                
                23.3
                %2010
                
                $
                12,562
                
                
                
                16.2
                %
                
                $
                21,060
                
                
                
                26.8
                %
                
                $
                3,887
                
                
                $
                37,509
                
                
                
                24.1
                %
 
 In the
AMS segment, SG&A costs increased $2.6 million, or 26%, to $12.6 million for
the three months ended September
30, 2010. This increase is primarily due to additional costs of $859,000 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 $714,000 and commissions of $271,000; and increased
restructuring costs of $178,000.  SG&A costs in the AMS segment
increased from 14.8% to 16.2%, as a percentage of sales, from the three months
ended September 30, 2009 to the three months ended September 30,
2010.
 
 In the
ATS segment, SG&A costs increased $5.0 million, or 31%, to $21.1 million for
the three months ended September
30, 2010, primarily due to increased commissions of $2.2 million, due to the
increase in sales volume and a change in product mix; increased employee related
expenses of $1.2 million; additional costs of $1.1 million related to Willtek,
acquired in May 2010; and a net increase in restructuring costs of
$520,000.  As a percentage of sales, SG&A costs in the ATS segment
increased from 25.6% to 26.8% from the three months ended September 30, 2009 to
the three months ended September 30, 2010.
 
 Corporate
general and administrative costs decreased $282,000.
 
 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 $5.6 million, or
32%, to $22.7 million for the three months ended September 30, 2010. As a
percentage of sales, research and development costs increased from 13.2% to
14.6% from the three months ended September 30, 2009 to the three months ended
September 30, 2010.
 
 Research and
      Development CostsThree
      MonthsEnded
                
                
                
                
                %
      of
                
                
                
                
                
                %
      of
                
                
                
                
                
                %
      ofSeptember
      30,
                
                AMS
                
                
                Net
      Sales
                
                
                ATS
                
                
                Net
      Sales
                
                
                Total
                
                
                Net
      Sales(In
      thousands, except percentages)2009
                
                $
                6,508
                
                
                
                9.7
                %
                
                $
                10,673
                
                
                
                17.0
                %
                
                $
                17,181
                
                
                
                13.2
                %2010
                
                $
                7,747
                
                
                
                10.0
                %
                
                $
                14,995
                
                
                
                19.1
                %
                
                $
                22,742
                
                
                
                14.6
                %
 
 AMS
segment self-funded research and development costs increased $1.2 million, or
19%, to $7.7 million for the three months ended September 30, 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 9.7% for the three months ended September 30,
2009 to 10.0% for the three months ended September 30, 2010.
  - 29
-
  ATS
segment self-funded research and development costs increased $4.3 million, or
40%, to $15.0 million for the three months ended September 30, 2010 primarily
due to increases in our radio test and avionics divisions, for the development
of a common platform technology, and additional costs of $871,000 related to
Willtek, acquired in May 2010.
 
 Restructuring
Costs.The AMS segment incurred total restructuring costs of
$576,000 ($398,000 in cost of sales and $178,000 in SG&A), for the three
months ended September 30, 2010 which primarily relate to consolidation and
reorganization efforts in one of our components facilities in connection with
the ACC acquisition.  There were no comparable charges for the three
months ended September 30, 2009.
 
 The ATS
segment incurred restructuring costs of $1.2 million for the three months ended
September 30, 2010 ($10,000 in cost of sales, $628,000 in SG&A and $585,000
in R&D).  In comparison, for the three months ended September 30,
2009, the ATS segment incurred restructuring costs of $187,000 ($79,000 in cost
of sales and $108,000 in SG&A). In both periods, the costs related to
consolidation and reorganization efforts in our U.K. operations.
 
 Amortization of Acquired
Intangibles.Amortization of acquired intangibles increased
$358,000 for the three months ended September 30, 2010 primarily due to
additional amortization related to various acquisitions; 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
$424,000 in the AMS segment and decreased $66,000 in the ATS
segment.
 
 Loss on Liquidation of Foreign
Subsidiary.During the three months ended September 30, 2009, we
recognized a $7.7 million non-cash loss on liquidation of a foreign
subsidiary.  There was no similar charge recorded for the three months
ended September 30, 2010.
 
 Other Income
(Expense).Interest expense was $21.2 million for the three
months ended September 30, 2010 and $21.0 million for the three months ended
September 30, 2009. Other income (expense) of ($29,000) for the three months
ended September 30, 2010 consisted primarily of ($202,000) of foreign currency
transaction losses, offset by $173,000 of interest and miscellaneous
income.  Other income (expense) of $57,000 for the three months ended
September 30, 2009 consisted primarily of $296,000 of interest and miscellaneous
income, offset by ($239,000) of foreign currency transaction
losses.
 
 Provision for Income
Taxes.The income tax benefit was $12.2 million for the
three months ended September 30, 2010, an effective income tax rate of
67.8%.  We had an income tax benefit for the three months ended
September 30, 2009 of $6.2 million, an effective income tax rate of 23.1%. 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.  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 foreign source income.
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.  Accordingly, the consolidated
balance sheet at September 30, 2010 presented in this Form 10-Q has been
adjusted to reduce deferred income tax liabilities by $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 tax benefit of $6.2 million
for the three months ended September 30, 2009 was also 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 divesture, effective September 2009.
  - 30
-
  In the
three months ended September 30, 2010, we paid income taxes of $3.7 million and
received tax refunds of $20,000 related to federal, state and foreign income
taxes.  In the three months ended September 30, 2009, we paid income
taxes of $3.1 million and received refunds of $603,000.
 
 Net income
(loss).  The net loss was $5.8 million for the three months
ended September 30, 2010 and $20.5 million for the three months ended September
30, 2009.
 
 Liquidity
and Capital Resources
 
 As of
September 30, 2010, we had $65.1 million of cash and cash equivalents,$230.3 million in working
capital and our current ratio was 2.56 to 1.
  In early
February 2008, when auctions for auction rate securities began to fail, our
gross investment in marketable securities consisted of $46.5 million of auction
rate securities. Auction rate securities represent long-term variable rate bonds
that generally carry maturities of ten years to thirty-five years from the date
of issuance, and whose rates are tied to short-term interest rates that are
reset through an auction process every seven to thirty-five days, and are
classified as available for sale securities. From early February 2008 to
September 2010, $35.4 million of our auction rate securities were redeemed by
the issuers of the auction rate securities at an average of 99.1% of par. The
$11.1 million of auction rate securities that we currently hold are partially
offset by a valuation allowance of $1.3 million.
  All but
one (with the one security having a carrying value of $1.7 million and a rating
of A-) of our remaining auction rate securities retain a triple-A rating by at
least one nationally recognized statistical rating
organization.  Should credit market disruptions continue or increase
in magnitude, we may be required to record a further impairment on our
investments or consider that an ultimate liquidity event may take longer than
currently anticipated.
 
 Our
principal liquidity requirements are to service our debt and interest and meet
our working capital and capital expenditure needs. As of September 30, 2010, we
had $882.8 million of debt outstanding (of which $882.5 million was long-term),
including approximately $489.1 million under our senior secured credit facility,
$225.0 million of senior unsecured notes and $168.0 million under our senior
subordinated unsecured credit facility, including paid-in-kind interest.
Additionally, at September 30, 2010 we were able to borrow $50.0 million under
the revolving portion of our senior secured credit facility.
 
 The
following is a summary of required principal repayments of our debt for the next
five years and thereafter as of September 30, 2010:
  Twelve
      Months Ended
                  September
      30,
                
                (In
      thousands)2011
                
                $
                3602012
                
                
                3852013
                
                
                -2014
                
                
                489,1052015
                
                
                392,973Thereafter
                
                
                -Total
                
                $
                882,823
  - 31
-
  As of
September 30, 2010, we and our subsidiaries were in compliance with all of the
covenants contained in our 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 our debt agreements.  Our 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 our debt agreements, is as follows:
  Three
      Months Ended September 30,2010
                
                
                2009(In
      thousands)Net
      income (loss)
                
                $
                (5,817
                )
                
                $
                (20,543
                )Interest
      expense
                
                
                21,238
                
                
                
                21,039Provision
      (benefit) for income taxes
                
                
                (12,247
                )
                
                
                (6,165
                )Depreciation
      and amortization
                
                
                20,886
                
                
                
                21,246EBITDA
                
                
                24,060
                
                
                
                15,577Non-cash
      purchase accounting adjustments
                
                
                655
                
                
                
                278Merger
      related expenses
                
                
                715
                
                
                
                693Restructuring
      costs (a)
                
                
                1,799
                
                
                
                187Share-based
      compensation (b)
                
                
                513
                
                
                
                489Business
      acquisition expenses
                
                
                190
                
                
                
                -Non-cash
      loss on liquidation of foreign subsidiary
                
                
                -
                
                
                
                7,696Other
      defined items (c)
                
                
                479
                
                
                
                (374
                )Adjusted
      EBITDA
                
                $
                28,411
                
                
                $
                24,546
 (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 our 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 our 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 our senior secured credit facility, and (ii) maximum
consolidated capital expenditures. The maximum leverage ratio permitted for the
twelve months ended September 30, 2010 was 5.90, whereas our actual leverage
ratio was 5.14. The maximum leverage ratio remains at 5.90 until September 30,
2011, when it decreases to 5.20.
 
 Our
senior secured credit facility, our senior subordinated unsecured credit
facility and the indenture governing the senior notes contain restrictions on
our activities, including but not limited to covenants that restrict us and our
restricted subsidiaries, as defined in our 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 our
assets;
 
 ·
              under
      certain circumstances, issuing or selling equity
  interests;
  - 32
-
  ·
              creating
      liens on our 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
      our assets; and
 
 ·
              entering
      into certain transactions with our
affiliates.
  If for
any reason we fail to comply with the covenants in our senior secured credit
facility, we would be in default under the terms of our agreements governing our
outstanding debt. If such adefault
were to occur, the lenders under our senior secured credit facility could elect
to declare all amounts outstanding under our senior secured credit facility
immediately due and payable, and the lenders would not be obligated to continue
to advance funds to us. In addition, if such a default were to occur, any
amounts then outstanding under the senior subordinated unsecured credit facility
or senior notes could become immediately due and payable. If the amounts
outstanding under these debt agreements are accelerated, our assets may not be
sufficient to repay in full the amounts owed to our debt
holders.
 
 We expect
that cash generated from operating activities and availability under the
revolving portion of our senior secured credit facility will be our principal
sources of liquidity. Our ability to make payments on and to refinance our
indebtedness and to fund working capital needs and planned capital expenditures
will depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive and other factors
that are beyond our control. In addition, to the extent we have consolidated
excess cash flows, as defined in the credit agreement governing our senior
secured credit facility, we must use specified portions of the excess cash flows
to prepay senior secured debt. Based on our current level of operations, we
believe our cash flow from operations and available borrowings under our senior
secured credit facility will be adequate to meet our liquidity needs for at
least the next twelve months. We cannot assure you, however, that our business
will generate sufficient cash flow from operations, or those future borrowings
will be available to us under our senior secured credit facility in an amount
sufficient to enable us to repay our indebtedness or to fund other liquidity
needs. We may need to refinance all or a portion of our indebtedness on or
before the maturity thereof. We cannot assure you that we will be able to
refinance any of our indebtedness on commercially reasonable terms or at
all.
 
 Cash
Flows
 
 For the
three months ended September 30, 2010, our cash flow provided by operations was
$7.4 million.  Our investing activities used cash of $23.5 million,
primarily for payments for the purchase of business of $19.2 million and for
capital expenditures of $4.7 million. Our financing activities used cash of
$21.5 million to repay indebtedness.
 
 For the
three months ended September 30, 2009, our cash flow provided by operations was
$13.2 million. Our investing activities used cash of $2.5 million, primarily for
capital expenditures of $3.2 million, partially offset by proceeds from the sale
of marketable securities of $1.0 million.  Our financing activities
used cash of $1.3 million to repay indebtedness.
 
 Capital
Expenditures
 
 Capital
expenditures were $4.7 million and $3.2 million for the three months ended
September 30, 2010 and 2009, respectively.  Our capital expenditures
primarily consist of equipment replacements.
  - 33
-
  Contractual
Obligations
 
 The
following table summarizes our obligations and commitments to make future
payments under debt and other obligations as of September 30, 2010:
  Payments
      Due By Period (1)(In
      millions)BeyondTotal
                
                
                Year
      1
                
                
                Years
      2 - 3
                
                
                Years
      4 - 5
                
                
                5
      YearsSenior
      secured credit facility
                
                $
                489.1
                
                
                $
                -
                
                
                $
                -
                
                
                $
                489.1
                
                
                $
                -Senior
      notes
                
                
                225.0
                
                
                
                -
                
                
                
                -
                
                
                
                225.0
                
                
                
                -Subordinated
      unsecured credit facility
                
                
                168.0
                
                
                
                -
                
                
                
                -
                
                
                
                168.0
                
                
                
                -Other
      long-term debt
                
                
                0.8
                
                
                
                0.4
                
                
                
                0.4
                
                
                
                -
                
                
                
                -Operating
      leases(2)
                
                
                23.0
                
                
                
                7.3
                
                
                
                9.1
                
                
                
                3.2
                
                
                
                3.4Employment
      agreements
                
                
                8.4
                
                
                
                5.1
                
                
                
                3.2
                
                
                
                0.1
                
                
                
                -Advisory
      fee (3)
                
                
                5.8
                
                
                
                2.9
                
                
                
                2.9
                
                
                
                -
                
                
                
                -Contingent
      consideration for acquired companies(4)
                
                
                28.1
                
                
                
                5.6
                
                
                
                9.8
                
                
                
                7.3
                
                
                
                5.4Total
                
                $
                948.2
                
                
                $
                21.3
                
                
                $
                25.4
                
                
                $
                892.7
                
                
                $
                8.8
  
  (1)
              Amounts
      do not include interest payments.
 
 (2)
                We
      do not expect any future minimum sub-lease rentals associated with
      operating leasecommitments
      shown in the above table.
 
 (3)
              The
      annual advisory fee is payable to our Sponsors - The Veritas Capital Fund
      III, L.P., Golden Gate Private Equity, Inc. and GS Direct, L.L.C. -
      throughout the term of an advisory agreement, which has an initial term
      expiring on December 31, 2013 and is automatically renewable for
      additional one year terms thereafter unless terminated. For purposes of
      this table we have assumed that such agreement terminates December 31,
      2013. The annual fee is calculated as the greater of $2.1 million or 1.8%
      of adjusted EBITDA (as defined in the agreement governing our senior
      secured credit facility) for the prior fiscal year.  See Note 15
      – “Subsequent Events – Amendment to Senior Secured Credit Agreement,” for
      a discussion of a potential termination of this
  agreement.
 
 (4)
              Represents
      contingent consideration for business acquisitions based upon the
      achievement of certain financial targets for the following amounts: (i)
      $4.6 million on October 31, 2010 earned in connection with our acquisition
      of Gaisler Research AB, or Gaisler, and (ii) $1.0 million on October 31,
      2010 earned in connection with our acquisition of Airflyte Electronics
      Company. We may also be required to pay additional contingent
      consideration for business acquisitions up to the following amounts: (i)
      $6.0 million on October 31, 2011 in connection with our acquisition of
      Gaisler; (ii) an aggregate of $1.8 million over the four year period of
      fiscal 2011 to fiscal 2014 in connection with our acquisition of Hi-Rel
      Components; and (iii) in connection with our acquisition of RAD, 50% of
      adjusted EBITDA, as defined in the purchase agreement, generated by its
      business over the five year period of fiscal 2011 to fiscal
      2015.
 
 In the
normal course of business, we routinely enter into binding and non-binding
purchase obligations primarily covering anticipated purchases of inventory and
equipment. None of these obligations are individually significant. We do not
expect that these commitments, as of September 30, 2010, will have a material
adverse affect on our liquidity.
 
 Off-Balance
Sheet Arrangements
 
 We do not
maintain any off-balance sheet arrangements, transactions, obligations or other
relationships with unconsolidated entities that would be expected to have
material current or future effect upon our results of operations or financial
condition.
  - 34
-
  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
 
 This
discussion and analysis of the Company’s financial condition and results of
operations is based upon the unaudited condensed consolidated financial
statements included in this Quarterly Report, which have been prepared in
accordance with U.S. GAAP and applicable SEC regulations for preparation of
interim financial statements.
 
 The
preparation of financial statements and related disclosures in conformity with
U.S. GAAP requires that management of the Company make a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the more significant estimates included in our
consolidated financial statements are revenue and cost recognition under
long-term contracts; the valuation of accounts receivable, inventories,
investments and deferred tax assets; the depreciable lives of fixed assets and
useful lives of amortizable intangible assets; recognizing and measuring
goodwill or a gain from a bargain purchase of a business; the valuation of
assets acquired and liabilities assumed in business combinations; the
recoverability of long-lived amortizable intangible assets, tradenames and
goodwill; share-based compensation; restructuring charges; asset retirement
obligations; fair value measurement of financial assets and liabilities and
certain accrued expenses and contingencies.
 
 We are
subject to uncertainties such as the impact of future events, economic,
environmental and political factors and changes in the business climate;
therefore, actual results may differ from those estimates. When no estimate in a
given range is deemed to be better than any other when estimating contingent
liabilities, the low end of the range is accrued. Accordingly, the accounting
estimates in the preparation of our consolidated financial statements will
change as new events occur, as more experience is acquired, as additional
information is obtained and as our operating environment changes. Changes in
estimates are made when circumstances warrant them. Such changes and refinements
in estimation methodologies are reflected in reported results of operations; if
material, the effects of changes in estimates are disclosed in the notes to the
consolidated financial statements.
 
 We
believe that the critical accounting policies involving significant estimates
listed below are important to the portrayal of our financial condition, results
of operations and cash flows, and require critical management judgments and
estimates about matters that are inherently uncertain.
 
 ·
              Financial
      Instruments and Derivatives
 
 ·
              Revenue
      Recognition
 
 ·
              Acquisition
      Accounting
 
 ·
              Long-Lived
      Assets
 
 ·
              Income
      Taxes
 
 ·
              Foreign
      Currency Translations
 
 Further
information regarding these policies appears within the “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2010.  During the three month period ended September 30, 2010, there
were no significant changes to any critical accounting policies or to the
related estimates and judgments involved in applying those
policies.
  - 35
-
  Recently
Adopted Accounting Pronouncements
 
 See Note
2 of the notes to the unaudited condensed consolidated financial
statements.
 
 Recently
Issued Accounting Pronouncements Not Yet Adopted
 
 See Note
2 of the 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 our senior secured credit facility.  Although we
currently have interest rate swap agreements hedging portions of this debt, they
will expire within the next year before the borrowings are fully repaid and we
currently do not anticipate renewing them. As of September 30, 2010, we have
$489.1 million outstanding under the term-loan portion of our 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 $3.7 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. We periodically enter 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 September
30, 2010, we had $47.2 million of notional value foreign currency forward
contracts maturing through October 29, 2010. Notional amounts do not quantify
risk or represent assets or liabilities of the Company, but are used in the
calculation of cash settlements under the contracts. The fair value of these
contracts at September 30, 2010 was a liability of $333,000.  If
foreign currency exchange rates (primarily the British pound and the Euro)
change by 10% from the levels at September 30, 2010, the effect on our
comprehensive income would be approximately $22.6 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
 
 Our
disclosure controls and procedures under the Securities Exchange Act of 1934, as
amended, are designed to ensure that information required to be disclosed in the
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Our disclosure controls and procedures are also designed to ensure
that information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act is accumulated and communicated to our
management, including our 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 our disclosure
controls and procedures as of September 30, 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 our internal controls over financial reporting that
occurred during the quarter ended September 30, 2010 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
 
 - 36
-
 
 PART
II – OTHER INFORMATION
 
 Item 1.
              Legal
      Proceedings
 
 There
have been no material changes in our legal proceedings disclosed in the fiscal
2010 Form 10-K.
  Item 1A.
              Risk
      Factors
 
 There
have been no material changes in our risk factors disclosed in the 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
 
 Item 6.
              Exhibits
 
 Exhibit
      No.
              Exhibit
      Description31.1
              Certification
      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
      pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002. (Chief Financial Officer)31.3
              Certification
      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
      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
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002. (Chief Financial
  Officer)
 
 - 37
-
  SIGNATURE
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
  AEROFLEX
      INCORPORATED
                (REGISTRANT)November
      9, 2010
              
              /s/
      John Adamovich, Jr.John
      Adamovich, Jr.Senior
      Vice President andChief
      Financial Officer
  - 38
-
 
 EXHIBIT
INDEX
 
 Exhibit
      No.
                Exhibit
      Description31.1
                Certification
      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
      pursuant to Rules 13a-14(a)/15d-14a as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002. (Chief Financial Officer)31.3
                Certification
      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
      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
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002. (Chief Financial
  Officer)
  - 39
-