**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549**

**FORM 10-K**

ANNUAL REPORTPURSUANT TO SECTIONS 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
| **(Mark One)**                               | ** **                                                                                     |
|----------------------------------------------|------------------------------------------------------------------------------------------------|
| **x**                                        | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE  ACT OF 1934**     |
| ** **                                   | ** **                                                                                     |
| **For the  fiscal year ended June 30, 2006** |
| ** **                                   | ** **                                                                                     |
| **OR**                                       |
| ** **                                   | ** **                                                                                     |
| **o**                                        | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

** **

**For thetransition period from              to                      **

**CommissionFile No. 000-02324**

**AeroflexIncorporated**(Exact name of registrant as specified in its charter)

| **Delaware**                                    |   | **11-1974412**       |
|-------------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of                |   | (I.R.S. Employer     |
| Incorporation or  Organization)                 |   | Identification  No.) |
|                                            |   |                 |
| **35  South Service Road, Plainview, New York** |   | **11803**            |
| (Address of  Principal Executive Offices)       |   | (Zip Code)           |

 

Registrant’stelephone number, including area code:   **(516) 694-6700**

Securitiesregistered pursuant to Section 12(b) of the Act:

| **Title of Class**               |   | **Name of  Each Exchange on Which Registered** |
|----------------------------------|--------|------------------------------------------------|
| Common Stock,  $.10 par value    |   | The NASDAQ Stock  Market LLC                   |
| Preferred Share Purchase  Rights |   | The NASDAQ Stock  Market LLC                   |

 

Securities registeredpursuant to Section 12(g) of the Act:  None

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.   Yes  x   No  o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Rule 13 or Section15(d) of the Exchange Act.   Yes  o   No  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes  x   No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K  x.

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definitionof  “accelerated filer and large acceleratedfiler” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes  o   No  x

State the aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, orthe average bid and asked prices of such common equity, as of the last businessday of the registrant’s most recently completed second fiscal quarter.  As of December 31, 2005 — approximately$794,564,000.

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date (applicable only to corporate registrants).  Common Stock, par value $.10 per share;outstanding as of September 11, 2006 - 73,727,790.

Documents incorporated byreference:  Part III (Items 10, 11, 12,13 and 14) — registrant’s definitive proxy statement to be filed pursuant toRegulation 14A of the Securities Act of 1934.

 

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**ITEM 1-  BUSINESS**

**Overview**

We use our advanced design, engineering and manufacturing capabilitiesto produce microelectronic and test solutions that we sell primarily into thebroadband communications, aerospace and defense markets.  We also design and manufacture motion controlsystems which are used for aerospace and defense applications.

Our operating strategy is based on the following key objectives:

·                  to strengthen and expand our portfolio ofproprietary technologies;

·                  to broaden the applications and targetmarkets for our existing products;

·                  to expand the scope of our content in ourcustomers’ products;

·                  to increase our operating efficiencies;

·                  to maintain a conservative capital structure;and

·                  to opportunistically pursue strategicacquisitions.

**Microelectronic Solutions**

We have been a designer and supplier ofmicroelectronics for more than 20 years.  Our products include (i) custom and standardintegrated circuits, such as databuses, transceivers, microcontrollers,microprocessors and memories, and (ii) components, sub-assemblies and modulesfor military and commercial communication systems.

Our design, engineering and manufacturing know-how allow us to achievethe critical tolerances required for aerospace and defense components and highGigahertz RF and microwave signals.  Weare one of the world’s leading manufacturers of application specificmulti-function modules and space hybrid microcircuits that are highly reliable,small and lightweight — attributes that are significant for space components.

In addition, many of our integrated circuits are radiation tolerant forsatellite and space applications.  Wehave pioneered the use of commercial foundries to produce radiation tolerantintegrated circuits, known as Commercial RadHardTM.  Our products are on over 100 aerospaceplatforms.

We also design, develop and produce motion control systems, includingstabilization and tracking devices, magnetic motors and scanning devices.

In September 2003, we acquired MCE Technologies, Inc.  MCE designs, manufactures and markets a broadrange of devices, components and subsystems that are used in wireless broadbandaccess, cable head-end systems, fiber optic networking and satelliteapplications.

**Test Solutions**

We design, develop and manufacture a broad line of test equipment whichincludes:

·                          *Wireless Test Equipment. *Weoffer an extensive line of standard test platforms for research anddevelopment, conformance testing, base station and handset testing, as well asprotocol test systems and interference analyzers.  We supply products and customized solutionsto both leading manufacturers within the wireless cellular industry and towireless service providers.

·                          *Frequency Synthesizers. *Ourline of frequency synthesizers offers a superior combination of high speed andlow phase noise, covering all communications frequencies.  These synthesizers are used in variousapplications such as automatic test systems, radar systems and semiconductortest systems.

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·                          *Radio Test Equipment. *Weoffer test systems for both military and private mobile radio testsystems.  Our products are used to testradio communications for military, police, fire and emergency response units,which we expect to be increasingly important in homeland defense programs.

·                          *Synthetic Test Systems. *Wehave developed a new concept in test systems which significantly reduces testtime by replacing the traditional single instrument concept of a “rack andstack” system with a modular system that uses our synthesizer and receivertechnology, together with proprietary software algorithms, to make multiplecomplex measurements simultaneously. These synthetic test systems are easily reconfigurable and upgradeableand are used in satellite testing, transmit receive module testing and basestation testing.

·                          *Avionics Test Equipment. *Ourextensive line of avionics test equipment is used in the design, manufacture,test and maintenance of both commercial and military avionics systems.

·                          *Radar Systems*.  Wedevelop and manufacture leading edge radar cross section and radar trackingsystems for military applications.

·                          *Other General Purpose Test Equipment.*  We also offer a wide range of general purposetest equipment for a variety of applications including broadcast testing,spectrum analysis and production test.

We recently acquired four businesses in this segment:

·     InJuly 2003, we acquired Racal Instruments Wireless Solutions Group (“RIWS”)which added the bulk of the wireless test equipment capabilities referred toabove.

·     InOctober 2003, we acquired the business of Celerity Systems, Inc. (CA), whichdesigns, develops and manufactures modular digital test and measurementsolutions for the communications, satellite, wireless and broadband testmarkets, including broadband signal generators.

·     InApril 2005, we acquired JcAIR Test Systems, which manufactures customizedavionics test solutions, both manual and automated, for manufacturing, repairand ground support operations.

·     InMay 2005, we acquired the SPG division of UbiNetics Holding Limited, which is adeveloper, manufacturer and integrator of wireless test and measurementsolutions specific to commercial wireless development organizations and serviceoperations.

We are incorporated under the laws of the state of Delaware.  Our executive offices are located at 35 SouthService Road, Plainview, New York, 11803, our telephone number is (516)694-6700 and our website is located at www.aeroflex.com.

**Customers**

We have hundreds of customers in the communications, satellite andaerospace/defense industries.  No onecustomer accounted for more than 5% of our net sales in each of the years inthe three-year period ended June 30, 2006.

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**Marketing and Distribution**

We use a team-based sales approach to assist our personnel to closelymanage relationships at multiple levels of the customer’s organization,including management, engineering and purchasing personnel.  Our integrated sales approach involves a teamconsisting of a senior executive, a business development specialist and membersof our engineering department.   Our useof experienced engineering personnel as part of the sales effort enables closetechnical collaboration with our customers during the design and qualificationphase of new technologies and equipment. We believe that this is critical to the integration of our product intoour customers’ equipment.  Some of ourexecutive officers are also involved in all aspects of our relationships withour major customers and work closely with their senior management.  We also use manufacturers’ representativesand independent sales representatives as needed.  Our acquisitions since fiscal 2002 expandedthe number of our sales and distribution locations to include additionaloffices in California, Kansas, Maryland, Michigan and New Jersey, in the UnitedStates; Stevenage, Burnham and Cambridge in England; Scotland, France, Spain,Germany and Denmark, in Europe; Japan; Hong Kong; Beijing, Shenzen and Nanjing,in China.

**Research and Development**

Our research and development efforts primarily involve engineering anddesign relating to:

·                  developing new products,

·                  improving existing products,

·                  adapting existing products to newapplications and

·                  developing prototype components to bid onspecific programs.

Certain product development and similar costs are recoverable undercontractual arrangements and those that are not recoverable are expensed in theyear incurred.  The costs of ourself-funded research activities were approximately $75.9 million for fiscal2006, $61.4 million for fiscal 2005, and $50.0 million for fiscal 2004.  In connection with our SPG and JcAIRacquisitions in fiscal 2005, we allocated $2.8 million and $200,000,respectively, of the purchase price to in-process research and developmentprojects.   In connection with our acquisitionsof MCE, RIWS and Celerity in fiscal 2004, we allocated $420,000, $2.7 millionand $1.1 million, respectively, of the purchase price to in-process researchand development projects.

**Backlog**

We include in backlog firm purchase orders or contracts providing fordelivery of products and services.  AtJune 30, 2006, our order backlog was approximately $240.3 million,approximately 86% of which was scheduled to be delivered on or before June 30,2007.  Approximately 56% of this backlogrepresents commercial contracts and approximately 44% of this backlogrepresents government contracts. Generally, government contracts are cancelable with payment to us ofamounts which we have spent under the contract together with a reasonableprofit, if any, while commercial contracts are not cancelable.

At June 30, 2005, our backlog of orders was approximately $209.5 million.Approximately 91% of this backlog was scheduled to be delivered beforeJune 30, 2006. Approximately 46% of this backlog represented orders for governmentcontracts.

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**Competition**

In all phases of our operations, we compete primarily on the basis ofboth performance and price.  In themanufacture of microelectronics, we believe our primary competitors areILC/Data Devices Corp., BAE Systems and Honeywell International.  In the manufacture of test products, webelieve our primary competitors are Agilent Technologies, Rohde & Schwartz,Anritsu, Spirent and Anite.  We alsoexperience significant competition from the in-house capabilities of our currentand potential customers.  We believe thatin all of our operations we compete favorably in the principal competitiveareas of:

·                  technology,

·                  performance,

·                  reliability,

·                  quality,

·                  customer service and

·                  price.

We believe that to remain competitive in the future, we will need toinvest significant financial resources in research and development.

To the extent that we are engaged in government contracts, our successor failure, to a large measure, is based upon our ability to competesuccessfully for contracts and to complete them at a profit.  Government business is necessarily affectedby many factors such as variations in the military requirements of thegovernment and defense budget allocations.

**Government Sales**

Approximately 29% of our sales for fiscal 2006, 32% of our sales forfiscal 2005 and 34% of our sales for fiscal 2004 were to agencies of the UnitedStates government or to prime defense contractors or subcontractors of theUnited States government.  Our governmentcontracts have been awarded either on a bid basis or after negotiation.  Our government contracts are primarily fixedprice contracts, although we sometimes have government contracts providing forcost plus fixed fee.  Our governmentcontracts have customary provisions for termination at the convenience of thegovernment without cause.  In the eventof such termination, we are generally entitled to reimbursement for our costsand to receive a reasonable profit, if any, on the work done prior totermination.

**Manufacturing**

We assemble, test, package and ship products at our manufacturingfacilities located in:

·                  Cupertino, California,

·                  Sunnyvale, California,

·                  Colorado Springs, Colorado,

·                  New Century, Kansas,

·                  Wichita, Kansas,

·                  Frederick, Maryland,

·                  Ann Arbor, Michigan,

·                  Whippany, New Jersey,

·                  Hauppauge, New York,

·                  Plainview, New York,

·                  Powell, Ohio,

·                  Nanjing, China,

·                  Elancourt, France and

·                  Stevenage, United Kingdom.

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We have been manufacturing products for defense programs for many yearsin compliance with stringent military specifications. Our microelectronicmanufacturing in Plainview and Colorado Springs are space certified andqualified.  We believe we have brought tothe commercial market the manufacturing quality and discipline we havedemonstrated in the defense and space markets. For example, most of our manufacturing plants are ISO-9001 certified,our Plainview, Hauppauge, and Colorado Springs facilities are also certified tothe more stringent AS9100 standard.

Many of the component parts we use in our products are purchased,including:

·                  semiconductors,

·                  transformers and

·                  amplifiers.

Although we have several sole source arrangements, all the materialsand components we use, including those purchased from a sole source, arereadily available and are or can be purchased from time to time in the openmarket.  We have no long-term commitmentsfor their purchase.  No supplier providesmore than 10% of our raw materials.

**Patents and Trademarks**

We own several patents, patent licenses and trademarks.  In order to protect our intellectual propertyrights, we rely on a combination of trade secret, copyright, patent andtrademark laws and employee and third-party nondisclosure agreements.  We also limit access to and distribution ofour proprietary information.  While webelieve that in the aggregate our patents and trademarks are important to ouroperations, we do not believe that one or any group of them is so importantthat its termination could materially affect us.

**Seasonality**

Although our business is not affected by seasonality, historically ourrevenues and earnings increase sequentially from quarter to quarter within afiscal year, but the first quarter is typically less than the previous year’sfourth quarter.

**Employees**

As of June 30, 2006, we had approximately 2,675 employees, of whom1,415 were employed in a manufacturing capacity, and 1,260 were employed inengineering, sales, administrative or clerical positions.   Approximately 110 of our employees arecovered by a collective bargaining agreement. The collective bargaining agreement expires September 30, 2007.   We believe that our employee relations aresatisfactory.

**Regulation**

Our operations are subject to various environmental, health andemployee safety laws.  We have expendedfunds and management has spent time complying with environmental, health andworker safety laws which apply to our operations and facilities and we expectthat we will continue to do so.  Ourprincipal products or services do not require any governmental approval exceptfor the requirement that we obtain export licenses for certain of ourproducts.  Compliance with environmentallaws has not historically materially affected our capital expenditures,earnings or competitive position.  We donot expect compliance with environmental laws to have a material effect on usin the future.

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Because we participate in the defense industry, we are subject to auditfrom time to time for our compliance with government regulations by variousagencies, including (1) the Defense Contract Audit Agency, (2) the DefenseInvestigative Service, and (3) the Defense Logistics Agency.  These and other governmental agencies mayalso, from time to time, conduct inquiries or investigations regarding a broadrange of our activities.  Responding toany audits, inquiries or investigations may involve significant expense anddivert management attention.  Also, anadverse finding in any audit, inquiry or investigation could involve penaltiesthat may have a material adverse effect on our business, results of operationsor financial condition.

We believe that we generally comply with all applicable environmental,health and worker safety laws and governmental regulations.  Nevertheless, we cannot guarantee that in thefuture we will not incur additional costs for compliance or that those costswill not be material.

**Financial Information About Industry Segments**

The sales and operating profits of our two industry segments and theidentifiable assets attributable to each segment for each of three years in theperiod ended June 30, 2006 are set forth in Note 15 of Notes to ConsolidatedFinancial Statements.

**Financial Information About Geographic Areas**

The majority of our customers are located in the United States, butsales to customers in foreign countries accounted for 42% of our total sales in2006, 40% in 2005 and 36% in 2004.  Infiscal year 2006, 58% of our sales were to customers located in the UnitedStates, 27% to Europe and the Middle East, 13% to Asia and Australia, and 2% tothe rest of the world.  In fiscal year2005, 60% of our sales were to customers located in the United States, 27% toEurope and the Middle East, 12% to Asia and Australia, and 1% to the rest ofthe world.

Most of our operations are located in the United States, however, wealso have operations in Europe and Asia. Each of Aeroflex International Limited, which we acquired in May 2002,Racal Instruments Wireless Solutions Limited, which we acquired in July 2003and SPG, which we acquired in May 2005 have significant operations in theUnited Kingdom.  Specifically, net salesfrom facilities located in the United Kingdom were approximately $153 millionin 2006, $131 million in 2005 and $121 million in 2004.  Total assets of the United Kingdom operationsas of June 30 were $216 million in 2006, $206 million in 2005, and $115 millionin 2004.

**Available Information**

We file reports with the SEC. The public may read and copy any materials filed by us with the SEC atthe SEC’s public reference room at 450 Fifth Street, NW, Washington, D.C.,20549.  The public may obtain informationabout the operation of the SEC’s public reference rooms by calling the SEC at1-800-SEC-0330.  The SEC also maintainsan internet site at www.sec.gov that contains reports, proxy andinformation statements and other information about issuers like us that fileelectronically with the SEC.

In addition, we make available free of charge on ourwebsite at www.aeroflex.com our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) under theExchange Act as soon as reasonably practical after we electronically file suchmaterial with, or furnish it to, the SEC.

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**ITEM 1A — RISK FACTORS**

**Risks Relating to our Business**

*General economic conditions could adversely affect our revenues, grossmargins and expenses*.

Our revenues and gross margins will depend significantly on the overalldemand for microelectronic products and testing solutions, particularly in theproduct and service segments in which we compete.  Weaker demand for our products and servicescaused by economic weakness may result in decreased revenues, earnings levelsor growth rates and problems with the saleability of inventory and realizabilityof customer receivables.  In the past, wehave observed effects of global economic downturns in many areas of ourbusiness.  Delays or reductions inspending for our products could have a material adverse effect on our business,results of operations and financial condition.

*Our operating results may fluctuate significantly on a quarterly basis.*

Our sales and other operating results have fluctuated significantly inthe past, and we expect this trend will continue.  Factors which affect our results include:

·                  thetiming, cancellation or rescheduling of customer estimates, orders andshipments;

·                  thepricing and mix of products sold;

·                  newproduct introductions;

·      ourability to obtain components and subassemblies from contract manufacturers andsuppliers; and

·                  variationsin manufacturing efficiencies.

Many of these factors are beyond our control.  Our performance in any one fiscal quarter isnot necessarily indicative of any financial trends or future performance.

*In theevent that certain of our customers encounter financial difficulties and failto pay us, it could adversely affect our results of operations and financialcondition.*

We manufacture products to customer specifications and purchaseproducts in response to customer orders. In addition, we may commit significant amounts to maintain inventory inanticipation of customer orders.  In theevent that our customers, for whom we maintain inventory, experiences financialdifficulties, we may be unable to sell such inventory at its current profitmargin, if at all.  In such an event, ourgross margins would decline.  Inaddition, if the financial condition of a significant portion of our customersdeteriorates, resulting in an impairment of their ability to pay us amountsowed in respect of a significant amount of outstanding receivables, ourfinancial condition would be adversely affected.

*If we cannot rapidly continue to develop, manufacture and marketinnovative products and services that meet customer requirements forperformance and reliability, we may lose market share and our revenues maysuffer*.

The process of developing new high technology products and services iscomplex and uncertain, and failure to anticipate customers’ changing needs andemerging technological trends accurately and to develop or obtain appropriateintellectual property could significantly harm our results of operations.  We must make long-term investments and commitsignificant resources before knowing whether our predictions will eventuallyresult in products that the market will accept. We must accurately forecast volumes, mix of products and configurationsthat meet customer requirements, and we may not succeed.

*Due tothe international nature of our business, political or economic changes couldharm our future revenues, costs and expenses and financial condition.*

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Our future revenues, costs and expenses could be adversely affected bya variety of international factors, including:

·                  changesin a country’s or region’s political or economic conditions;

·                  longeraccounts receivable cycles;

·                  tradeprotection measures;

·                  unexpectedchanges in regulatory requirements;

·                  differingtechnology standards and/or customer requirements; and

·                  importor export licensing requirements, which could affect our ability to obtainfavorable terms for components or lead to penalties or restrictions.

A portion of our product and component manufacturing, along with keysuppliers, is located outside of the United States, and also could be disruptedby some of the international factors described above.

*We areexposed to foreign currency exchange rate risks that could adversely affect ourbusiness, results of operations and financial condition.*

We are exposed to foreign currency exchange rate risks that areinherent in our sales commitments, anticipated sales, and assets andliabilities that are denominated in currencies other than the United Statesdollar.  Failure to sufficiently hedge orotherwise manage foreign currency risks properly could adversely affect ourbusiness, results of operations and financial condition.

*As part of our business strategy, we may complete acquisitions ordivest non-strategic businesses and product lines.  These actions could adversely affect ourbusiness, results of operations and financial condition.*

As part of our business strategy, we engage in discussions with thirdparties regarding, and enter into agreements relating to, possibleacquisitions, strategic alliances, ventures and divestitures in order to manageour product and technology portfolios and further our strategic objectives.  In order to pursue this strategysuccessfully, we must identify suitable acquisition, alliance or divestiturecandidates, complete these transactions, some of which may be large andcomplex, and integrate acquired companies. Integration and other risks of acquisitions and strategic alliances canbe more pronounced for larger and more complicated transactions, or if multipleacquisitions are pursued simultaneously.

The integration of acquisitions may make the completion and integrationof subsequent acquisitions more difficult. However, if we fail to identify and complete these transactions, we maybe required to expend resources to internally develop products and technologyor may be at a competitive disadvantage or may be adversely affected by negativemarket perceptions, which may have a material effect on our revenues, marginsand selling, general and administrative expenses taken as a whole.

Acquisitions and strategic alliances may require us to integrate with adifferent company culture, management team and business infrastructure andotherwise manage integration risks.  Evenif an acquisition or alliance is successfully integrated, we may not receivethe expected benefits of the transaction. Managing acquisitions, alliances and divestitures requires varyinglevels of management resources, which may divert management’s attention fromthe other business operations. Acquisitions, including abandoned acquisitions, also may result insignificant costs and expenses and charges to earnings.  As a result, any completed, pending or futuretransactions may contribute to our financial results differing from theinvestment community’s expectations in a given quarter.

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*In order to be successful, we must retain and motivate key employees,and failure to do so could seriously harm us.*

In order to be successful, we must retain and motivate executives andother key employees, including those in managerial, technical, marketing andinformation technology support positions. In particular, our product generation efforts depend on hiring andretaining qualified engineers. Attracting and retaining skilled workers and qualified salesrepresentatives is also critical to us. Experienced management and technical, marketing and support personnel inthe microelectronics and test solutions industries are in demand andcompetition for their talents is intense. Employee retention may be a particularly challenging issue followingacquisitions since we also must continue to motivate employees and keep themfocused on our strategies and goals, which may be particularly difficult due tothe potential distractions related to integrating the acquired operations.

*Terroristacts or acts of war may seriously harm our business, results of operations andfinancial condition.*

Terrorist acts or acts of war (wherever located around the world) maycause damage or disruption to us, our employees, facilities, partners,suppliers, distributors and resellers, and customers, which could significantlyimpact our revenues, expenses and financial condition.  The potential for future terrorist attacks,the national and international responses to terrorist attacks, and other actsof war or hostility have created many economic and political uncertainties,which could adversely affect our business and results of operations in waysthat cannot presently be predicted.  Inaddition, as a company with headquarters and significant operations located inthe United States, we may be impacted by actions against the United States.  We will be predominantly uninsured for lossesand interruptions caused by terrorist acts or acts of war.

*Our stock price has historically fluctuated and may continue tofluctuate.*

Our stock price, like that of other technology companies, can bevolatile. Some of the factors that can affect our stock price are:

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

·                  quarterlyincreases or decreases in our revenue or earnings;

·                  changesin quarterly revenue or earnings estimates by the investment community; and

·                  speculationin the press or investment community about our strategic position, financialcondition, results of operations, business or significant transactions.

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

**ITEM 1B — UNRESOLVED STAFF COMMENTS**

None

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**ITEM 2 — PROPERTIES**

Following is a description of the significant properties owned orleased by us at June 30, 2006:

·                  Our executive offices and the manufacturingfacilities of Aeroflex Plainview, Inc., one of our subsidiaries, are anaggregate of approximately 69,000 square feet and are located in premises whichwe own in Plainview, Long Island, New York. (1)

·                  Aeroflex Plainview, Inc., also leases amanufacturing facility in Hauppauge, Long Island, New York, of approximately47,000 square feet, with an annual rental of approximately $289,000.  The lease expires in 2010. (3)

·                  Our subsidiary, Aeroflex Powell, Inc., leasesapproximately 20,000 square feet of space in Powell, Ohio, with an annualrental of approximately $230,000.  Thelease expires in 2008.  This subsidiaryalso leases approximately 16,000 square feet of space in Cupertino, California,with an annual rental of approximately $255,000.  This lease expires in 2009. (2)

·                  Our subsidiary, Aeroflex Colorado Springs,Inc., conducts manufacturing operations at a plant located in Colorado Springs,Colorado.  The plant, which we own, isapproximately 102,000 square feet. (3)

·                  Our subsidiary, Europtest, S.A., leasesapproximately 14,000 square feet of space in Elancourt, France, with an annualrental of approximately $128,000.  Thelease expires in 2009.  (2)

·                  Our subsidiary, Aeroflex Wichita, Inc.,conducts manufacturing operations at a plant located in Wichita, Kansas.  The plant, which we own, is approximately156,000 square feet. This subsidiary also leases two facilities totalingapproximately 38,000 square feet in New Century, Kansas, with an annual rentalof approximately $129,000.  Both of theseleases expire in 2007. (2)

·                  Our subsidiary, Aeroflex International Ltd.,conducts manufacturing operations at three owned facilities in Stevenage,England, comprising approximately 81,000, 34,000 and 27,000 square feet. (2)

·                  Our subsidiary, Racal Instruments WirelessSolutions Limited, leases two facilities totaling 88,000 square feet inBurnham, England, with total annual rentals of $1.6 million.  One lease expires in 2007 and the other in 2010.(2)

·                  Our subsidiary, Aeroflex Inmet, Inc.,conducts manufacturing operations at a plant located in Ann Arbor,Michigan.  The plant, which we own, isapproximately 32,000 square feet. (3)

·                  Our subsidiary, Aeroflex KDI, Inc., conductsmanufacturing operations at a plant located in Whippany, New Jersey.  The plant, which we own, is approximately57,000 square feet. (3)

·                  Our subsidiary, Aeroflex Weinschel, Inc.,leases approximately 32,000 square feet of space in Frederick, Maryland, withan annual rental of approximately $388,000. This lease expires in 2011. (3)

·                  Our subsidiary, Aeroflex Metelics, Inc.,leases approximately 20,000 square feet in Sunnyvale, California, with anannual rental of approximately $316,000. This lease expires in 2012. (3)

·                  Our subsidiary, Aeroflex Nanjing, leasesapproximately 10,000 square feet in Nanjing, China, with an annual rental ofapproximately $22,000.  This leaseexpires in 2009. (3)

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·                  Our subsidiary, Aeroflex Cambridge, leasesapproximately 14,000 square feet in Cambridge, England, with an annual rentalof approximately $370,000.  This leaseexpires in 2011. (2)

We believe that our facilities are adequate for our current andpresently foreseeable needs and that we will be able to renew or replace ourexpiring leases on our rental properties on commercially reasonable terms.

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(1)                                  Used by both Microelectronic Solutions andTest Solutions segments.

(2)                                  Used by Test Solutions segment.

(3)                                  Used by Microelectronic Solutions segment.

**ITEM 3 —  LEGAL PROCEEDINGS**

We are involved in various routine legal matters.  We believe the outcome of these matters willnot have a material adverse effect on us.

**ITEM 4 —  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

Not applicable.

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**PART II**

**ITEM 5 —MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER**

**MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES**

Market Information

Our common stock trades on the Nasdaq National Market System under thesymbol “ARXX”.  The following table setsforth, for the fiscal periods indicated, the high and low closing sales pricesof our common stock as reported by the Nasdaq National Market.

|                                                              | ** ** | **Common Stock** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **High**              | ** ** | **Low** | ** ** |
| **    Fiscal  Year Ended June 30, 2005** | ** ** | ** **            | ** ** | ** ** | ** ** |
| First Quarter                                                |       | $                     | 13.95      |   | $ | 9.06 |   |
| Second Quarter                                               |       | 13.41                 |       | 10.23 |   |
| Third Quarter                                                |       | 11.69                 |       | 8.92 |   |
| Fourth Quarter                                               |       | 9.23                  |       | 6.60 |   |
|                                                         |       |                  |       |   |   |
| **    Fiscal  Year Ended June 30, 2006** | ** ** | ** **            | ** ** | ** ** | ** ** |
| First Quarter                                                |       | $                     | 9.80       |   | $ | 8.26 |   |
| Second Quarter                                               |       | 11.48                 |       | 8.60 |   |
| Third Quarter                                                |       | 13.87                 |       | 10.81 |   |
| Fourth Quarter                                               |       | 13.51                 |       | 10.77 |   |

 

Holders

As of September 11, 2006, there were approximately 574record holders of our common stock.

Dividends

We have never declared or paid any cash dividends on our commonstock.  There have been no stockdividends declared or paid on our common stock during the past threeyears.  We currently intend to retain anyfuture earnings for use in the operation and development of our business, foracquisitions and to repurchase our common stock.  We do not intend to declare or pay any cashdividends on our common stock in the foreseeable future.  In addition, our bank revolving creditagreement restricts us from paying cash dividends and how much we can expendtoward the repurchase of our common stock.

13

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Equity Compensation Plan Information as of June 30, 2006
| ** **                                                  | ** ** | ** **                            | ** ** | ** **                      | ** ** | **Number of securities**  | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| ** **                                                  | ** ** | ** **                            | ** ** | ** **                      | ** ** | **remaining available**        | ** ** |
| ** **                                                  | ** ** | ** **                            | ** ** | ** **                      | ** ** | **for future issuance**   | ** ** |
| ** **                                                  | ** ** | **Number of securities**    | ** ** | ** **                      | ** ** | **under equity**               | ** ** |
| ** **                                                  | ** ** | **to be issued upon**  | ** ** | **Weighted-average**            | ** ** | **compensation plans**         | ** ** |
| ** **                                                  | ** ** | **exercise of outstanding** | ** ** | **exercise price of** | ** ** | **(excluding securities**      | ** ** |
| ** **                                                  | ** ** | **options**                           | ** ** | **outstanding options**    | ** ** | **reflected column (a))** | ** ** |
| ** **                                                  | ** ** | **(a)**                               | ** ** | **(b)**                         | ** ** | **(c)**                             | ** ** |
| Plan Category  (1)                                          |       |                                  |       |                            |       |                                |       |
|                                                        |       |                                  |       |                            |       |                                |       |
| Equity  compensation plans approved by security holders     |       | 7,495,821                             |       | $                               | 12.60      |                                | 550,346    |   |
| Equity  compensation plans not approved by security holders |       | 7,266,878                             |       | $                               | 11.21      |                                | 2,524,307  |   |
| Total                                                       |       | 14,762,699                            |       | $                               | 11.92      |                                | 3,074,653  |   |

Issuer Purchases of EquitySecurities

Thefollowing table sets forth information with respect to shares of our commonstock that we purchased during the three fiscal months ended June 30, 2006.
| ** ** | ** ** | ** **                    | ** ** | ** **                   | ** ** | **Total Number of** | ** ** | **Maximum Number**      | ** ** |
|------------|------------|-------------------------------|------------|------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** ** | ** ** | ** **                    | ** ** | ** **                   | ** ** | **Shares Purchased**     | ** ** | **of Shares that** | ** ** |
| ** ** | ** ** | ** **                    | ** ** | ** **                   | ** ** | **as Part of**      | ** ** | **May Yet be**     | ** ** |
| ** ** | ** ** | **Total Number of** | ** ** | ** **                   | ** ** | **Publicly**                  | ** ** | **Purchased under**     | ** ** |
| ** ** | ** ** | **Shares**                    | ** ** | **Average Price**       | ** ** | **Announced Plans**      | ** ** | **the Plans or**   | ** ** |
| **Period** | ** ** | **Purchased (2)**        | ** ** | **Paid Per Share** | ** ** | **or Programs**          | ** ** | **Programs**                 | ** ** |
|       |       |                          |       |                         |       |                          |       |                         |       |
| June 2006  |       | 10,000                        |       | $                            | 11.89      |                          | 85,000     |                         | 2,915,000  |   |
|            |            |                               |            |                              |            |                               |            |                              |            |  |

----

(1)             For description ofplans, see Note 9 to the Consolidated Financial Statements.

(2)             All purchases weremade in open market transactions.  Our3.0 million share stock buyback program has been in effect since May 23,2005.  There is no time limit on therepurchases to be made under this program.  Since July 1, 2006, we have purchased an additional 1.8 millionshares for $17.2 million through September 11, 2006.

 

14

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**ITEM 6—SELECTED FINANCIAL DATA**

Thecomparability of the information provided below is effected by, among otherthings, certain accounting changes, business combinations and dispositions,which are more completely described in the notes to our consolidated financialstatements appearing elsewhere herein.

(Inthousands, except percentages, footnotes and per share amounts)
| ** **                                                  | ** ** | **Years ended June 30,** | ** **      |
|-------------------------------------------------------------|------------|-----------------------------------------|-----------------|
| ** **                                                  | ** ** | **2006**                                | ** **      | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Operations  Statement Data**                              |       |                                    |            |   |   |   |   |   |   |   |   |
| Net sales                                                   |       | $                                       | 551,846         |   | $ | 463,371 |   | $ | 414,101 |   | $ | 265,807 |   | $ | 171,531 |   |
| Income from continuing  operations                          |       | 28,096                                  |   (1) | 18,644 |  (2) | 20,464 |  (3) | 10,895 |   | 7,621 |   (4) |
| Discontinued  operations,net                                |       | —                                  |            | (1,603 | ) | (8,317 | ) | (4,500 | ) | (18,402 | ) |
| Cumulative  effect of a change in accounting principle, net |       | (1,137                                  | ) (1)      | — |   | — |   | — |   | — |   |
| Net income  (loss)                                          |       | 26,959                                  |   (1) | 17,041 |  (2) | 12,147 |  (3) | 6,395 |   | (10,781 | ) (4) |
| Income from  continuing                                     |       |                                    |            |   |   |   |   |   |   |   |   |
| operations per  common share                                |       |                                    |            |   |   |   |   |   |   |   |   |
| Basic                                                       |       | $                                       | 0.37            |   (1) | $ | 0.25 |  (2) | $ | 0.30 |  (3) | $ | 0.18 |   | $ | 0.13 |   (4) |
| Diluted                                                     |       | 0.37                                    |   (1) | 0.25 |  (2) | 0.29 |  (3) | 0.18 |   | 0.12 |   (4) |
| Weighted average  number of common shares outstanding       |       |                                    |            |   |   |   |   |   |   |   |   |
| Basic                                                       |       | 75,028                                  |            | 74,634 |   | 67,917 |   | 60,193 |   | 59,973 |   |
| Diluted                                                     |       | 76,576                                  |            | 75,885 |   | 69,931 |   | 60,753 |   | 62,012 |   |

 
| ** **                                                              | ** ** | **As of or for the years ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Balance Sheet Data**                                                  |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Working capital                                                         |       | $                                                                                 | 209,139    |   | $ | 161,749 |   | $ | 237,865 |   | $ | 161,925 |   | $ | 145,095 |   |
| Total assets                                                            |       | 638,022                                                                           |       | 589,849 |   | 551,391 |   | 331,262 |   | 318,096 |   |
| Long-term debt (including  current portion)                             |       | 4,165                                                                             |       | 4,824 |   | 10,275 |   | 9,270 |   | 11,244 |   |
| Stockholders’ equity                                               |       | 487,670                                                                           |       | 443,980 |   | 427,097 |   | 258,415 |   | 249,482 |   |
| **Other Statistics**                                                    |       |                                                                              |       |   |   |   |   |   |   |   |   |
| After tax profit margin  from continuing operations                     |       | 5.1                                                                               | % (1) | 4.0 | % (2) | 4.9 | % (3) | 4.1 | % | 4.4 | % (4) |
|                                                                    |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Return on average  stockholders’ equity from continuing operations |       | 6.0                                                                               | % (1) | 4.3 | % (2) | 6.0 | % (3) | 4.3 | % | 3.0 | % (4) |
|                                                                    |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity per share (5)                                 |       | $                                                                                 | 6.48       |   | $ | 5.95 |   | $ | 5.75 |   | $ | 4.30 |   | $ | 4.16 |   |

----

(1)             Includes(a) $6.8 million ($4.2 million, net of tax, or $.05 per diluted share) chargefor share based compensation, (b) a $3.2 million ($2.0 million, net of tax, or$.03 per diluted share) charge for restructuring costs for the consolidation ofour three United Kingdom operations into one division, and (c) a $3.9 million($2.4 million, net of tax, or $.03 per diluted share) adjustment for adevelopment contract, (d) the cumulative effect of a change in accountingprinciple relates to the adoption of FASB Interpretation No. 47, effective June30, 2006, including the recording of a fixed asset and an asset retirementobligation liability for certain leases of $2.4 million each and$1.6 million accumulated depreciation, and after tax charge of $l.1million.

(2)             Includes(a) $3.0 million ($3.0 million, net of tax, or $.04 per diluted share) chargefor the write-off of in-process research and development acquired in connection with the purchases of JcAIR andSPG, and (b) includes $ 3.1 million ($1.9 million, net of tax, or $.02 perdiluted share) charge for the restructuring of our European sales andmanagement organization.

(3)             Includes$4.2 million ($3.9 million, net of tax, or $.06 per diluted share) charge forthe write-off of in-process research and development acquired in connectionwith the purchases of MCE, RIWS and Celerity.

(4)             Includes(a) $3.1 million ($2.1 million, net of tax, or $.03 per diluted share) chargefor the consolidation of our manufacturing operations in order to take advantage of excess manufacturingcapacity and reduce operating costs including charges related to excess equipment capacity, and (b) includes$1.1 million ($1.1 million, net of tax, or $.02 per diluted share) charge forthe write-off of in-process research and development acquired in connection with the purchase of IFR Systems, Inc. in May 2002.

(5)             Calculatedby dividing stockholders’ equity, at the end of the year, by the number of sharesoutstanding at the end of the year.

15

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**ITEM 7—MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND**

**RESULTSOF OPERATIONS**

**Overview**

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

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

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

16

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**Statement of Earnings**

Thefollowing table sets forth our net sales and operating income by businesssegment and a reconciliation to income from continuing operations before incometaxes for the periods indicated.
| ** **                                                                                                                                                                                                                                                                                                                                           | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                           | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                           | ** ** | **(In thousands)**                 | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                           | ** ** | ** **                              | ** ** | **(Restated)(1)** | ** ** | **(Restated)(2)** | ** ** |
| Net sales:                                                                                                                                                                                                                                                                                                                                           |       |                                    |       |   |   |   |   |
| Microelectronic Solutions (“AMS”)                                                                                                                                                                                                                                                                                                          |       | $                                       | 241,052    |   | $ | 207,868 |   | $ | 178,929 |   |
| Test Solutions (“ATS”)                                                                                                                                                                                                                                                                                                                     |       | 310,794                                 |       | 255,503 |   | 235,172 |   |
| Net Sales                                                                                                                                                                                                                                                                                                                                            |       | $                                       | 551,846    |   | $ | 463,371 |   | $ | 414,101 |   |
|                                                                                                                                                                                                                                                                                                                                                 |       |                                    |       |   |   |   |   |
| Segment adjusted  operating income (3):                                                                                                                                                                                                                                                                                                              |       |                                    |       |   |   |   |   |
| AMS                                                                                                                                                                                                                                                                                                                                                  |       | $                                       | 58,467     |   | $ | 46,193 |   | $ | 40,478 |   |
| ATS                                                                                                                                                                                                                                                                                                                                                  |       | 25,923                                  |       | 22,002 |   | 20,244 |   |
| General corporate expenses                                                                                                                                                                                                                                                                                                                           |       | (15,279                                 | )          | (20,289 | ) | (12,737 | ) |
|                                                                                                                                                                                                                                                                                                                                                 |       | 69,111                                  |       | 47,906 |   | 47,985 |   |
| Amortization of  acquired intangibles                                                                                                                                                                                                                                                                                                                |       |                                    |       |   |   |   |   |
| AMS                                                                                                                                                                                                                                                                                                                                                  |       | (2,134                                  | )          | (2,154 | ) | (1,982 | ) |
| ATS                                                                                                                                                                                                                                                                                                                                                  |       | (11,644                                 | )          | (6,742 | ) | (5,748 | ) |
| Share based  compensation                                                                                                                                                                                                                                                                                                                            |       |                                    |       |   |   |   |   |
| AMS                                                                                                                                                                                                                                                                                                                                                  |       | (1,488                                  | )          | — |   | — |   |
| ATS                                                                                                                                                                                                                                                                                                                                                  |       | (1,851                                  | )          | — |   | — |   |
| Corporate                                                                                                                                                                                                                                                                                                                                            |       | (3,433                                  | )          | — |   | — |   |
| Restructuring  charges - ATS                                                                                                                                                                                                                                                                                                                         |       | (3,214                                  | )          | (3,124 | ) | — |   |
| Acquired  in-process research and development—AMS                                                                                                                                                                                                                                                                                               |       | —                                  |       | — |   | (420 | ) |
|                                                                             —ATS |       | —                                  |       | (2,974 | ) | (3,800 | ) |
| Current period  impact of acquisition related adjustment to inventory—ATS                                                                                                                                                                                                                                                                       |       | (1,088                                  | )          | (840 | ) | — |   |
| Interest expense                                                                                                                                                                                                                                                                                                                                     |       | (608                                    | )          | (895 | ) | (1,403 | ) |
| Other income  (expense), net                                                                                                                                                                                                                                                                                                                         |       | 1,666                                   |       | 1,844 |   | (1,711 | ) |
| Income from continuing  operations before income taxes                                                                                                                                                                                                                                                                                               |       | $                                       | 45,317     |   | $ | 33,021 |   | $ | 32,921 |   |

----

(1)             Restatedfor the transfer of the Motion Control Systems business from ATS to AMS due toan internal reorganization in fiscal 2006. Sales and operating income for the Motion Control Systems business was$14.9 million and $816,000, respectively, for the year ended June 30, 2005.

(2)             Restatedfor the transfer of the Motion Control Systems business from ATS to AMS due toan internal reorganization in fiscal 2006. Sales and operating loss for the Motion Control Systems business was$14.4 million and $1.6 million, respectively, for the year ended June 30, 2004.

(3)             Managementevaluates the operating results of the two segments based upon reportedoperating income, before cost related to amortization of acquired intangibles,share based compensation, restructuring charges, acquired in-process researchand development charges and the impact of acquisition related adjustments toinventory.

17

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The following table sets forth certain items from our statement ofearnings as a percentage of net sales for the periods indicated.
| ** **                                           | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                 |       |                                    |       |   |   |   |   |
| Net sales                                            |       | 100.0                                   | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                        |       | 53.2                                    |       | 52.8 |   | 53.5 |   |
| Gross profit                                         |       | 46.8                                    |       | 47.2 |   | 46.5 |   |
|                                                 |       |                                    |       |   |   |   |   |
| Operating  expenses:                                 |       |                                    |       |   |   |   |   |
| Selling, general and administrative costs            |       | 22.5                                    |       | 24.5 |   | 22.9 |   |
| Research and development costs                       |       | 13.8                                    |       | 13.3 |   | 12.0 |   |
| Amortization of acquired intangibles                 |       | 2.5                                     |       | 1.9 |   | 1.9 |   |
| Acquired in-process research and development         |       | —                                  |       | 0.6 |   | 1.0 |   |
| Total operating expenses                             |       | 38.8                                    |       | 40.3 |   | 37.8 |   |
|                                                 |       |                                    |       |   |   |   |   |
| Operating income                                     |       | 8.0                                     |       | 6.9 |   | 8.7 |   |
|                                                 |       |                                    |       |   |   |   |   |
| Other income  (expense), net                         |       | 0.2                                     |       | 0.2 |   | (0.8 | ) |
|                                                 |       |                                    |       |   |   |   |   |
| Income before  income taxes                          |       | 8.2                                     |       | 7.1 |   | 7.9 |   |
| Provision for  income taxes                          |       | 3.1                                     |       | 3.1 |   | 3.0 |   |
|                                                 |       |                                    |       |   |   |   |   |
| Income from  continuing operations                   |       | 5.1                                     |       | 4.0 |   | 4.9 |   |
| Discontinued  operations                             |       | —                                  |       | (0.3 | ) | (2.0 | ) |
| Cumulative  effect of change in accounting principle |       | (0.2                                    | )          | — |   | — |   |
| Net income                                           |       | 4.9                                     | %          | 3.7 | % | 2.9 | % |

 

**Fiscal Year Ended June 30, 2006 Compared to Fiscal Year Ended June 30,2005**

*Net Sales. *Net sales increased 19% to $551.8 million infiscal 2006 from $463.4 million in fiscal 2005.   On a consolidated basis, organic growth was10%. (Revenues for business units in operation throughout fiscal 2006 andfiscal 2005)

Net sales in the microelectronic solutions (“AMS”) segment increased16%, all of which was organic, to $241.0 million in fiscal 2006 from $207.9million in fiscal 2005 due to increased sales volume of components,microelectronic modules and integrated circuits.  Net sales in the test solutions (“ATS”)segment increased 22%**to $310.8 million in fiscal 2006from $255.5 million in fiscal 2005. Organic growth in ATS was 6% with the balance due to the addition ofsales from our fourth quarter fiscal 2005 acquisitions of JcAIR and SPG.

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

On a consolidated basis, gross profit was 46.8% in fiscal 2006 comparedto 47.2% in fiscal 2005.  Fiscal 2006included an adjustment of $3.9 million to the estimate to complete a contractin our radar division and restructuring costs of $1.1 million that are includedin cost of sales, that had the effect of reducing gross profit margins by 90 basispoints.

18

----

 
| **Fiscal Year**    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**               | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| **June 30,**       | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **(In thousands)** | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| 2006                    |       | $          | 120,492    |          | 50.0       | %          | $          | 137,926       |       | 44.4       | %          | $             | 258,418    |   | 46.8 | % |
| 2005                    |       | $          | 102,818    |          | 49.5       | %          | $          | 115,794       |       | 45.3       | %          | $             | 218,612    |   | 47.2 | % |

 

Gross profit increased $17.7 million, or 17%, and gross margins improved50 basis points in the AMS segment primarily as a result of the increased salesvolume and increased margins in our microelectronic modules and integratedcircuits business, partially offset by reduced margins in our componentsbusiness.  Gross profit increased $22.1million, or 19%, in the ATS segment primarily as a result of the increasedsales volume, partially offset by reduced margins in our wireless testsolutions and radar test systems business. ATS gross margins reduced 90 basis points due to $1.1 million ofrestructuring costs in our UK wireless business and a $3.9 million adjustmentto the estimate to complete a contract in the radar business.

*Selling, General and Administrative Costs. *Selling, general and administrative costs include office and managementsalaries, fringe benefits, commissions, insurance and professional fees.  On a consolidated basis, these costs decreased200 basis points as a percentage of sales.
| **Fiscal Year**    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**               | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| **June 30,**       | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** **    | ** ** | ** ** | ** ** | **% of** | ** ** |
| **(In thousands)** | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| 2006                    |       | $          | 38,540     |          | 16.0       | %          | $          | 67,229        |       | 21.6          | %          | $          | 18,712     |          | $          | 124,481 |   | 22.5 | % |
| 2005                    |       | $          | 33,213     |          | 16.0       | %          | $          | 59,769        |       | 23.4          | %          | $          | 20,289     |          | $          | 113,271 |   | 24.5 | % |

 

Selling,general and administrative costs increased $5.3 million, or 16%, in the AMSsegment due primarily to general increases in expenses related to the increasein sales and the recognition of share based compensation of $1.4 million.  Selling, general and administrative costsincreased $7.5 million, or 12%, in the ATS segment primarily as a result of ourfiscal 2005 fourth quarter acquisitions of JcAIR and SPG, restructuring chargesof $2.1 million related to our consolidation of our three United Kingdomoperations into one division and share based compensation of $1.3 million,offset, partially, by reduced expenditures as a result of restructuringactivities.  Corporate selling, generaland administrative expenses decreased $1.6 million due primarily to reductionsin external Sarbanes Oxley compliance related expenses of $5.3 million,partially offset by stock based compensation of $3.4 million.

In fiscal 2006, we initiated strategic plans to consolidate three ofour United Kingdom operations into one division in our Test Solutions businesssegment.  In connection with thisrestructuring, we recorded charges of $2.1 million in the fiscal year endedJune 30, 2006 for workforce reductions, primarily in management, engineeringand sales.  The restructuring charge isexpected to generate savings of approximately $5.0 million per year, about $1.5million of savings were realized in fiscal 2006.

*Research and Development Costs.*  Research and development costs include materials, engineering labor andallocated overhead.
| **Fiscal Year**    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**               | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| **June 30,**       | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **(In thousands)** | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| 2006                    |       | $          | 24,974     |          | 10.4       | %          | $          | 50,926        |       | 16.4       | %          | $             | 75,900     |   | 13.8 | % |
| 2005                    |       | $          | 23,412     |          | 11.3       | %          | $          | 37,987        |       | 14.9       | %          | $             | 61,399     |   | 13.3 | % |

 

19

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Self-funded research and development costs increased $1.6 million, or7%, in the AMS segment primarily due to the increased development of integratedcircuits.  Research and development costsincreased $12.9 million, or 34%, in the ATS segment primarily due to theaddition of the expense of SPG ($9.3 million) and the development of a radartracking system ($5.2 million).

*Amortization of Acquired Intangibles. * Amortization increased $4.9 million, or 55%,to $13.8 million, primarily due to the acquisitions of JcAIR and SPG in thefourth quarter of fiscal 2005.

*Other Income (Expense).  *Interest expense was $608,000 in fiscal 2006and $895,000 in fiscal 2005.  Otherincome of $1.7 million in fiscal 2006 consisted primarily of $1.1 million ofinterest income.  Other income of $1.8million in fiscal 2005 consisted primarily of $1.7 million of interestincome.   Interest expense decreased infiscal 2006 due to lower outstanding debt. The decline in interest income was due to the lower balances in cash,cash equivalents and marketable securities due to our fourth quarter fiscal2005 acquisitions.

*Provision for Income Taxes.  *The income tax provision was $17.2 million(an effective income tax rate of 38.0%) in fiscal 2006 and $14.4 million (aneffective income tax rate of 43.5%) in fiscal 2005.  The effective income tax rate for the twoperiods differed from the amount computed by applying the U.S. Federal incometax rate to income before income taxes primarily due to foreign, state andlocal income taxes, and research and development credits, non-repatriatedforeign earnings and non-deductible in-process research and development costs.The primary difference in rates between the two years is due to a manufacturingcredit in 2006 and a non deductible in-process research and development chargein 2005.

*Income from Continuing Operations.  *Income fromcontinuing operations for the year ended June 30, 2006 was $28.1 million, or$.37 per diluted share, versus $18.6 million, or $.25 per diluted share, in2005.  Fiscal 2006 income from continuingoperations included a $6.8 million ($4.2 million after tax) charge for sharebased compensation in fiscal 2006 (for which there was no comparable expense inthe prior year).  Fiscal 2005 income fromcontinuing operations included a $3.0 million charge ($3.0 million, net of tax)for in-process research and development related to the acquisitions of JcAIR,and SPG.

*Cumulative Effect of Change in Accounting Principle.*  TheCompany adopted FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations” (FIN 47) in the fourth quarter of fiscal 2006.  The adoption of FIN 47 resulted in therecognition of a fixed asset and asset retirement obligation liability forcertain leased premises of $2.4 million each, accumulated depreciation of $1.6million and an after tax charge of $1.1 million, which is reflected as acumulative change in accounting principle in the Consolidated Statements of Earnings.

**Fiscal Year Ended June 30, 2005 Compared to Fiscal Year Ended June 30,2004**

*Net Sales.  *Net sales increased 12% to $463.4 million infiscal 2005 from $414.1 million in fiscal 2004.   Net sales in the microelectronic solutions (“AMS”)segment increased 16%**to**$207.9million in fiscal 2005 from $178.9 million in fiscal 2004 due primarily to theinclusion of MCE, acquired in September 2003, for a full year versus ten monthsin fiscal 2004, together with organic growth in MCE and also as a result ofincreased sales of our microelectronic modules and integrated circuits.   Net sales in the test solutions (“ATS”)segment increased 9% to $255.5 million in fiscal 2005 from $235.2 million infiscal 2004 primarily due to increased sales in our wireless communication testproducts business, and, to a lesser degree, sales from the JcAIR and SPGbusinesses which were acquired in the fourth quarter of fiscal 2005.

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*Gross Profit.*
| **Fiscal Year**    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**               | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| **June 30,**       | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **(In thousands)** | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| 2005                    |       | $          | 102,818    |          | 49.5       | %          | $          | 115,794       |       | 45.3       | %          | $             | 218,612    |   | 47.2 | % |
| 2004                    |       | $          | 86,020     |          | 48.1       | %          | $          | 106,672       |       | 45.4       | %          | $             | 192,692    |   | 46.5 | % |

 

Gross profit increased $16.8 million, or 20%, in the AMS segment primarily as a result of the effect of theacquisition of MCE in September 2003, organic growth of volume of MCE fromfiscal 2004 and an increase in sales in our microelectronic modules andintegrated circuits businesses.  Grossprofit increased $9.1 million, or 9%, in the ATS segment primarily as a resultof increased sales and margins in our wireless communications test productsbusiness and, to a lesser degree, the contribution of the JcAIR and SPGbusinesses.

*Selling, General and Administrative Costs.*
| **Fiscal Year**    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**               | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| **June 30,**       | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** **    | ** ** | ** ** | ** ** | **% of** | ** ** |
| **(In thousands)** | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Corporate** | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| 2005                    |       | $          | 33,213     |          | 16.0       | %          | $          | 59,769        |       | 23.4          | %          | $          | 20,289     |          | $          | 113,271 |   | 24.5 | % |
| 2004                    |       | $          | 29,556     |          | 16.5       | %          | $          | 52,442        |       | 22.3          | %          | $          | 12,737     |          | $          | 94,735 |   | 22.9 | % |

 

Selling, general and administrative costs increased $3.7 million, or 12%*,*in the AMS segment due primarily to the addition of the expenses of MCE for afull year versus ten months in fiscal 2004 and increased commissions resultingfrom increased sales.  Selling,general and administrative costs increased $7.3 million, or 14%, in the ATSsegment due primarily to restructuring charges of $3.1 million in our Europeanoperations, $1.3 million due to the addition of the expenses of JcAIR and SPGand $1.2 million due to the full year impact of RIWS in fiscal 2005 versuseleven months in fiscal 2004.  Corporateselling, general and administrative expenses increased $7.6 million dueprimarily to increased compensation expense, professional fees of $7.1 millionand insurance expense.

*Research and Development Costs.*
| **Fiscal Year**    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **Ended**               | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** |
| **June 30,**       | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| **(In thousands)** | ** ** | **AMS**    | ** ** | **sales**     | ** ** | **ATS**    | ** ** | **sales**     | ** ** | **Total**  | ** ** | **sales**     | ** ** |
| 2005                    |       | $          | 23,412     |          | 11.3       | %          | $          | 37,987        |       | 14.9       | %          | $             | 61,399     |   | 13.3 | % |
| 2004                    |       | $          | 15,985     |          | 8.9        | %          | $          | 33,987        |       | 14.5       | %          | $             | 49,972     |   | 12.0 | % |

 

Self funded research and development costs increased $7.4 million, or46%, in the AMS segment primarily dueto the increased development cost associated with field programmable gatearrays ($3.8 million) and microelectronic modules ($1.4 million) and to alesser degree, the inclusion of MCE for a full year versus ten months in fiscal2004 ($1.2 million).* *Research and development costs**increased $4.0 million, or 12%, inthe ATS segment primarily due to the addition of the developmental expenses forwireless communication test equipment, which is expected to continue to havehigher research and development costs.

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*Amortization of Acquired Intangibles*.  Amortization increased $1.2 million, or 15%, to $8.9 million dueprimarily to the acquisitions of JcAIR and SPG.

*Acquired In-Process Research and Development. *In connection with the acquisition of SPG, we allocated $2.8 million ofthe purchase price to incomplete research and development projects.  In connection with the acquisition of JcAIR,we allocated $200,000 of the purchase price to incomplete research anddevelopment projects.  These allocationsrepresented the estimated fair value of such incomplete research anddevelopment projects, at the acquisition date, based on future cash flows thathave been adjusted by the respective projects’ completion percentage.   At the respective acquisition dates, thedevelopment of these projects had not yet reached technological feasibility andthe research and development in progress had no alternative future uses.  Accordingly, we expensed these costs as ofthe respective acquisition dates in accordance with accounting principlesgenerally accepted in the United States of America.

*Other Income (Expense).  *Interest expense was $895,000 in fiscal 2005and $1.4 million in fiscal 2004.  Otherincome of $1.8 million in fiscal 2005 consisted primarily of $1.7 million ofinterest income.  Other expense of $1.7million in fiscal 2004 consisted primarily of $2.0 million of foreign currencytransaction losses partially offset by interest income of $456,000.  Interest expense decreased in fiscal 2005 dueto lower borrowings. Foreign currency transaction losses decreased primarilydue to foreign currency contract strategies that we employed in fiscal2005.  Interest income increasedprimarily due to higher average levels of cash, cash equivalents and marketablesecurities.

*Provision for Income Taxes.  *The income tax provision was $14.4 million(an effective income tax rate of 43.5%) in fiscal 2005 and $12.5 million (aneffective income tax rate of 37.8%) in fiscal 2004.  The effective income tax rate for the twoperiods differed from the amount computed by applying the U.S. Federal incometax rate to income before income taxes primarily due to foreign, state andlocal income taxes, research and development credits and non-deductiblein-process research and development costs. The primary difference in rates between the two years is due to theincrease in domestic income relative to foreign income and a valuationallowance recorded on foreign losses.  Domestic income is taxed at higher effective tax rates than foreignincome which increases the overall global tax rate.

*Income from Continuing Operations.  *Income fromcontinuing operations for the year ended June 30, 2005 was $18.6 million, or$.25 per diluted share, versus $20.5 million, or $.29 per diluted share, in2004.  Fiscal 2005 income from continuingoperations included a $3.0 million charge ($3.0 million, net of tax) forin-process research and development related to the acquisitions of JcAIR andSPG.  Fiscal 2004 income from continuingoperations included a $4.2 million charge ($3.9 million, net of tax) forin-process research and development related to the acquisitions of MCE, RIWSand Celerity.

**Liquidity and Capital Resources**

As of June 30, 2006, we had $209.1 million of working capital whichincludes $38.7 million of cash and short term investments.  Our current ratio was 2.8 to 1 at June 30,2006.  On March 21, 2006, we executed aloan agreement with four banks which replaced a previous $50 million loanagreement.  The unsecured multi-currencyrevolving credit facility increased our line of credit to $100 million throughMarch 2011.  Approximately $11.0 millionin letters of credit issued under the previous facility constitute letters ofcredit issued under the new facility. Under certain circumstances, upon our request, the commitments under thecredit facility may be increased by an additional $50 million to $150million.  The interest rates onborrowings under this agreement are at varying rates depending on certainfinancial ratios with the current rate substantially equivalent to LIBOR plus..575% (5.9% at June 30, 2006) on the revolving credit borrowings.  We are required to pay an annual facility feeof .175% on the entire credit line.

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The terms of the loan agreement, as amended in August 2006, requirecompliance with certain financial covenants including maintenance of variousfinancial ratios, limitations on indebtedness, treasury stock repurchases andprohibition of the payment of cash dividends.  The amendment increased the amount we can expend for the stockrepurchases by $30.0 million to approximately $40.0 million as of the date ofthe amendment.  We are currently in fullcompliance with all of the covenants contained in the loan agreement.  At June 30, 2006 our available unused line ofcredit was approximately $89.0 million after consideration of outstandingletters of credit.  We expect to be incompliance with all covenants for the foreseeable future.

On July 31, 2003, we acquired RIWS for cash of $38 million and adeferred payment of up to $16.5 million in either cash or Aeroflex commonstock, at our option, depending on RIWS achieving certain performance goals forthe year ending July 31, 2004.  Althoughwe believe that the performance goals have not been met, the determination isnot final.

In fiscal 2006, our cash flow from operations provided $36.7 million,primarily from our continued profitability offset by increases in accountsreceivable ($21.5 million) and inventory ($11.7 million) due to increasedsales.  In fiscal 2006, our investingactivities used cash of $42.6 million principally for net purchases ofmarketable securities ($28.3 million) and capital expenditures ($15.5million).  In fiscal 2006, our financingactivities provided $3.7 million principally from the proceeds on the exerciseof stock options.

We believe that existing cash and short term investments, coupled withinternally generated funds and available lines of credit will be sufficient forour working capital requirements, capital expenditure needs and the servicingof our debt for the foreseeable future. One of our pension plans currently is unfunded by $17.2 million, but isexpected to be funded from the cash surrender value of life insurance policiesthat are being held in a rabbi trust valued at $6.3 million as of June 30,2006.  We do not believe that our fundingof the pension obligations remaining after application of such policy proceedswill be material in the near term.  Ourcash, short term investments and available lines of credit are available tofund acquisitions, for share repurchases under a board approved program and forother potential large cash needs that may arise.  Since July 1, 2006, we repurchased 1.8million shares for $17.2 million through September 11, 2006, fromavailable cash funds.

*Contractual Obligations*

The following table summarizes our obligations and commitments to makefuture payments under debt, operating leases, and employment contracts as ofJune 30, 2006:
| ** **            | ** ** | **Payments due by period** | ** ** |
|-----------------------|------------|-------------------------------------------|------------|
| ** **            | ** ** | ** **                                | ** ** | **Less Than** | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **            | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| ** **            | ** ** | **(In thousands)**                   | ** ** |
| Long-term debt        |       | $                                         | 4,165      |   | $ | 607 |   | $ | 2,471 |   | $ | 702 |   | $ | 385 |   |
| Operating leases      |       | 35,337                                    |       | 8,174 |   | 10,579 |   | 5,607 |   | 10,977 |   |
| Employment  contracts |       | 5,855                                     |       | 2,384 |   | 2,873 |   | 598 |   | — |   |
| Total                 |       | $                                         | 45,357     |   | $ | 11,165 |   | $ | 15,923 |   | $ | 6,907 |   | $ | 11,362 |   |

 

The operating lease commitments shown in the above table have not beenreduced by future minimum sub-lease rentals of $3.0 million.

In the normal course of business, we routinely enter into binding andnon-binding purchase obligations primarily covering anticipated purchases ofinventory and equipment.  None of theseobligations are individually significant. We do not expect that these commitments, as of June 30, 2006, will havea material adverse affect on our liquidity.

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**Legal Proceedings**

We are involved in various routine legal matters.  We believe the outcome of these matters willnot have a material adverse effect on our consolidated financial statements.

**Accounting Policies Involving Significant Estimates**

The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesof America requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements and the recognition ofrevenue and expenses during the period reported.  The following accounting policies require usto make estimates and assumptions based on the circumstances, informationavailable and our experience and judgment. These estimates and assumptions are reviewed periodically and theeffects of revisions are reflected in the period that they are determined to benecessary.  If actual results differsignificantly from our estimates, our financial statements could be materiallyimpacted.

Revenueand Cost Recognition Under Long-Term Contracts

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

For arrangements other than certain long-term contracts, revenue(including shipping and handling fees) is recognized when products are shippedand title has passed to the customer. If title does not pass until the productreaches the customer’s delivery site, then recognition of the revenue isdeferred until that time. Certain of our sales are to distributors which have aright to return some portion of product within eighteen months of sale.  We recognize revenue on these sales at thetime of shipment to the distributor as the returns under these arrangementshave been insignificant and can be reasonably estimated.  An estimate of such returns is recorded atthe time sales are recognized.

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

Revenue from sales of products where software is other than incidentalto their performance, including related software support and maintenancecontracts is recognized in accordance with SOP-97-2, “Software RevenueRecognition.”

Inventories

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

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PurchaseAccounting and Recoverability of Long-Lived and Intangible Assets

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

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

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

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

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

Although we didnot experience impairment of goodwill and other long lived assets during fiscal2006, in response to recent operating results in certain businesses within ourtest solutions segment (which has goodwill of approximately $117 million atJune 30, 2006), we may conduct another impairment review prior to June 30, 2007.

Restructuring Charges

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

Income Taxes

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

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

Share-Based Compensation

With the adoption of SFAS No. 123(R) on July 1, 2005, we are requiredto record the fair value of share based compensation awards as an expense.  In order to determine the fair value of stockoptions on the date of grant, the Company utilizes the Black-Scholesoption-pricing model.  Inherent in thismodel are assumptions related to expected stock price volatility, option life,risk-free interest rate and dividend yield. Expected volatilities are based on historical volatility of our sharesusing daily price observations over a period consistent with the expectedlife.  We use the safe harbor guidance inSAB 107 to estimate the expected life of options granted during fiscal2006.  The risk-fee rate is based on theU.S. Treasury yield curve in effect at the time of grant for periods similar tothe expected life.  While the risk-freeinterest rate and dividend yield are less subjective assumptions, typicallybased on factual data derived from public sources, the expected stock pricevolatility and option life assumptions require a greater level of judgmentwhich makes them critical accounting estimates.

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**Off-BalanceSheet Arrangements**

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

**Issued But Not Adopted Accounting Pronouncements**

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and ErrorCorrections,” which (a) establishes, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle, (b) addresses the reporting of a correctionof an error by restating previously issued financial statements, and (c) iseffective in fiscal years beginning after December 15, 2005. This statementwill have no effect on our consolidated financial statements when adopted onJuly 1, 2006.

InJune 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48clarifies the accounting for uncertainty in income taxes by prescribing arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods anddisclosure. FIN 48 is effective for fiscaI years beginning after December 15,2006. We are in the process of evaluating the impact FIN 48 will have on ourconsolidated financial statments.

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**Forward-Looking Statements**

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

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**ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

We are exposed to market risk related to changes in interest rates andto foreign currency exchange rates.  Mostof our debt is at fixed rates of interest or at a variable rate with aninterest rate swap agreement which effectively converts the variable rate debtinto fixed rate debt.  Therefore, ifmarket interest rates increase by 10% from levels at June 30, 2006, the effecton our net income as well as the fair value of our swap would be insignificant. Most of our invested cash, cashequivalents and marketable securities are at variable rates of interest.  If market interest rates decrease by 10percent from levels at June 30, 2006, the effect on our net income would beinsignificant.  If foreign currencyexchange rates (primarily the British Pound and the Euro) change by 10% fromlevels at June 30, 2006, the effect on our other comprehensive income would beapproximately $17.1 million.  Foreigncurrency contracts are used to protect us from short term fluctuations inexchange rates principally related to outstanding trade receivables.  We periodically enter into foreign currencycontracts, which are not designated as hedges, and the change in fair value isincluded in income currently, within other income (expense).  As of June 30, 2006, we had $2.6 million ofnotional value foreign currency forward contracts maturing through September2006.  Notional amounts do not quantifyrisk or represent assets or liabilities, but are used in the calculation ofcash settlements under the contracts. The fair value of these contracts at June 30, 2006 was immaterial.

**ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

The financial statements and supplementary data listed in the accompanyingIndex to Financial Statements and Schedules are attached as part of thisreport.

**ITEM 9—CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None.

**ITEM 9A—CONTROLS AND PROCEDURES**

**(a)           Disclosure Controlsand Procedures**

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed by us in thereports that we file or submit to the Securities and Exchange Commission underthe Securities Exchange Act of 1934, as amended, (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specifiedby the Commission’s rules and forms, and that information is accumulated andcommunicated to our management, including our chief executive officer and ourchief financial officer, as appropriate to allow timely decisions regardingrequired disclosure.  The effectivenessof our disclosure controls and procedures is subject to certain limitations,including the exercise of judgment in designing, implementing and evaluatingthe controls and procedures, the assumptions used in identifying the likelihoodof future events, and the inability to eliminate errors or misconductcompletely.  As a result, there can be noassurance that our disclosure controls and procedures will detect all errors orfraud.  By their nature, any system ofinternal control, including our system, can provide only reasonable assuranceregarding management’s control objectives.

Under the supervision and with the participation ofour management, including our Chief Executive Officer and our Chief FinancialOfficer, we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) under the ExchangeAct) as of June 30, 2006, the end of the period covered by this report.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of June 30, 2006.

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**(b)           Management’s Reporton Internal Control Over Financial Reporting**

Our**management is responsible forestablishing and maintaining adequate internal control over financial reporting(as defined in Rules 13a-15(f) of the Exchange Act, as amended).

Under the supervision of and with the participation of our ChiefExecutive Officer and our Chief Financial Officer, our management conducted anassessment of the effectiveness of our internal control over financialreporting based on the framework and criteria established in *Internal Control — Integrated Framework*, issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, our management hasconcluded that, as of June 30, 2006, our internal control over financialreporting was effective.

KPMG LLP, the independent registered public accounting firm that auditsour consolidated financial statements, has issued its attestation report onmanagement’s assessment of internal control over financial reporting. Thatattestation report appears onpage S-1.

**(c)           Changes in InternalControls**

 A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with U.S. generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordancewith U.S. generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

There were no significant changes in our internal controls overfinancial reporting that occurred during the quarter ended June 30, 2006 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**ITEM 9B—OTHER INFORMATION**

None.

29

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**PART III**

The information required by items 10, 11, 12, 13 and 14 of Part III isincorporated by reference to our definitive proxy statement in connection withour Annual Meeting of Stockholders scheduled to be held on November 9, 2006.  The proxy statement is to be filed with theSecurities and Exchange Commission within 120 days following the end of ourfiscal year ended June 30, 2006.

**ITEM 15—EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

**(a)          **See index to Financial Statements at beginningof attached financial statements.

**(b)           Exhibits**

| 3.1    | Certificate of Incorporation, as amended.  (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended  September 30, 2001).                                                                                                                                                                                                    |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                             |
| 3.2    | By-Laws, as amended. (Incorporated by reference to  Exhibit 3.1 to Quarterly Report on Form 8-K filed on August 17, 2005).                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 4.1    | Rights agreement, dated as of August 13, 1998,  between Aeroflex Incorporated and American Stock Transfer Company  (Incorporated by reference to Exhibit 4 to report on Form 8-K filed August  14, 1998).                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 4.2    | Code of ethics for Chairman, Chief Executive Officer  and Senior Financial Officers of Aeroflex Incorporated.                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.1   | Fifth Amended and Restated Loan and Security  Agreement dated as of February 14, 2003 among the Registrant, certain of its  subsidiaries, JPMorgan Chase Bank and Fleet National Bank. (Incorporated by  reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 31,  2002).                                                       |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.2   | Eighth Amendment Agreement dated March 21, 2006,  between and among Aeroflex Incorporated, and certain of its domestic  subsidiaries, Bank of America, N.A. as the Fronting Bank and Administrative  Agent and JPMorgan Chase Bank, N.A., as Syndication Agent (incorporated by  reference to Exhibit 10.3 of Form 8-K filed on March 27, 2006). |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.3   | Credit Agreement, dated March 21, 2006, between and  among Aeroflex Incorporated, Aeroflex Test Solutions Limited, the Lenders  party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent  Incorporated by reference to Exhibit 10.1 of the Report on Form 8-K filed on  March 27, 2006).                                             |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.4   | Guarantee Agreement, dated March 21, 2006, between  Aeroflex Incorporated and certain of its domestic subsidiaries, and JPMorgan  Chase Bank, N.A., as Administrative Agent Incorporated by reference to  Exhibit 10.2 of Form 8-K filed on March 27, 2006).                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.5   | First Amendment Agreement, dated August 28, 2006, to  the Credit Agreement, by and among Aeroflex Incorporated, Aeroflex Test  Solutions, the Lenders party thereto and JPMorgan Chase Bank, N.A., as  Administrative Agent (Incorporated by reference to Exhibit 10.1 of Report on Form  8-K filed on September 1, 2006).                       |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.6   | 1994 Non-Qualified Stock Option Plan. (Incorporated  by reference to Exhibit 10.2 to Annual Report on Form 10-K for the year ended  June 30, 1994).                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.7   | 1994 Outside Directors Stock Option Plan.  (Incorporated by reference to Exhibit 10.3 of Annual Report on Form 10-K for  the year ended June 30, 1994).                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.8   | Employment Agreement between Aeroflex Incorporated  and Harvey R. Blau. (Incorporated by reference to Exhibit 10.1 to Report on  Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.9   | Employment Agreement between Aeroflex Incorporated  and Michael Gorin. (Incorporated by reference to Exhibit 10.2 to Report on  Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.10  | Employment Agreement between Aeroflex Incorporated  and Leonard Borow. (Incorporated by reference to Exhibit 10.3 to Report on  Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.11  | 1996 Stock Option Plan. (Incorporated by reference  to Exhibit A to Definitive schedule 14A filed September 30, 1996).                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.12  | 1998 Stock Option Plan. (Incorporated by reference  to Exhibit 10 to Quarterly Report on Form 10-Q for the quarter ended March  31, 1998).                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.13  | 1999 Stock Option Plan. (Incorporated by reference  to Exhibit 4.1 to Registration Statement on Form S-8, Registration Statement  #333-31654).                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.14  | Key Employee Stock Option Plan. (Incorporated by  reference to Exhibit 4.1 to Registration Statement on Form S-8, Registration  Statement #333-53622).                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                             |
| 10.15  | 2000 Stock Option Plan, as amended. (Incorporated by  reference to Exhibit 4 to Registration Statement on Form S-8, #333-97027).                                                                                                                                                                                                                 |

 

30

----

 

| 10.16  | 2002 Stock Option Plan. (Incorporated by reference  to Exhibit 4 to Registration Statement on Form S-8, #333-97029).                                                                                                           |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                           |
| 10.17  | Amendment No. 1 to Employment Agreement between  Aeroflex Incorporated and Harvey R. Blau, effective September 1, 1999.  (Incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year  ended June 30, 2000).   |
|   |                                                                                                                                                                                                                           |
| 10.18  | Amendment No. 1 to Employment Agreement between  Aeroflex Incorporated and Michael Gorin, effective September 1, 1999. (Incorporated  by reference to Exhibit 10.18 to Form 10-K for the fiscal year ended June 30,  2000).    |
|   |                                                                                                                                                                                                                           |
| 10.19  | Amendment No. 1 to Employment Agreement between  Aeroflex Incorporated and Leonard Borow, effective September 1, 1999.  (Incorporated by reference to Exhibit 10.19 to Form 10-K for the fiscal year  ended June 30, 2000).    |
|   |                                                                                                                                                                                                                           |
| 10.20  | Amendment No. 2 to Employment Agreement between  Aeroflex Incorporated and Harvey R. Blau, effective August 13, 2001.  (Incorporated by reference to Exhibit 10.16 to Form 10-K for the fiscal year  ended June 30, 2001).     |
|   |                                                                                                                                                                                                                           |
| 10.21  | Amendment No. 2 to Employment Agreement between  Aeroflex Incorporated and Michael Gorin, effective August 13, 2001.  (Incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year  ended June 30, 2001). |
|   |                                                                                                                                                                                                                           |
| 10.22  | Amendment No. 2 to Employment Agreement between  Aeroflex Incorporated and Leonard Borow, effective August 13, 2001.  (Incorporated by reference to Exhibit 10.18 to Form 10-K for the fiscal year  ended June 30, 2001).      |
|   |                                                                                                                                                                                                                           |
| 10.23  | Aeroflex Incorporated Key Employee Deferred  Compensation Plan. (Incorporated by reference to Exhibit 10.19 to Form 10-K  for the fiscal year ended June 20, 2001).                                                            |
|   |                                                                                                                                                                                                                           |
| 10.24  | Trust Under Deferred Compensation Plan.  (Incorporated by reference to Exhibit 10.20 to Form 10-K for the fiscal year  ended June 30, 2001).                                                                                   |
|   |                                                                                                                                                                                                                           |
| 10.25  | Amendment No. 3 to Employment Agreement between  Aeroflex Incorporated and Harvey R. Blau, effective November 8, 2001.  (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended  September 30, 2001).    |
|   |                                                                                                                                                                                                                           |
| 10.26  | Amendment No. 3 to Employment Agreement between  Aeroflex Incorporated and Michael Gorin, effective November 8, 2001.  (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended  September 30, 2001).     |
|   |                                                                                                                                                                                                                           |
| 10.27  | Amendment No. 3 to Employment Agreement between  Aeroflex Incorporated and Leonard Borow, effective November 8, 2001.  (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended  September 30, 2001).     |
|   |                                                                                                                                                                                                                           |
| 10.28  | Agreement and Plan of Merger, dated as of June 27,  2003, among Aeroflex Incorporated, Acquisition, MCE and Michael J. Endres.  (Incorporated by reference to Exhibit 99.1 of Report on Form 8-K filed July 2,  2003).    |
|   |                                                                                                                                                                                                                           |
| 10.29  | Form of Warrant Exchange Agreement. (Incorporated by  reference to Exhibit 99.2 of Report on Form 8-K filed July 2, 2003).                                                                                                     |
|   |                                                                                                                                                                                                                           |
| 10.30  | Form of MCE Shareholders’ Agreement. (Incorporated  by reference to Exhibit 99.3 of Report on Form 8-K filed July 2, 2003).                                                                                               |
|   |                                                                                                                                                                                                                           |
| 10.31  | Employment Agreement between Aeroflex Incorporated  and John Adamovich, Jr., dated November 9, 2005. (Incorporated by reference to Exhibit 10.1 of  Report on Form 8-K filed on November 15, 2005).                            |

 

31

----

 

| 10.32  | Stock Purchase Agreement dated as of July 31, 2003,  by and among Racal Instruments Group Limited, Aeroflex and IFR Systems  Limited, a wholly-owned subsidiary of Aeroflex Incorporated. (Incorporated by  reference to Exhibit 99.1 to Report on Form 8-K dated July 31, 2003). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                              |
| 10.33  | Asset Purchase Agreement dated as of July 31, 2003,  by and between Racal Instruments Inc. and Aeroflex Incorporated.  (Incorporated by reference to Exhibit 99.2 to Report on Form 8-K dated July  31, 2003).                                                                    |
|   |                                                                                                                                                                                                                                                                              |
| 10.34  | Asset Purchase Agreement dated as of July 31, 2003,  by and among Racal Instruments Group Limited and Aeroflex Incorporated.  (Incorporated by reference to Exhibit 99.3 to Report on Form 8-K dated July  31, 2003).                                                             |
|   |                                                                                                                                                                                                                                                                              |
| 10.35  | Employment Agreement between Aeroflex Incorporated  and Carl Caruso dated November 6, 2003. (Incorporated by reference to Exhibit 10.2 to Report on Form 10-Q for  the quarter ended December 31, 2003).                                                                          |
|   |                                                                                                                                                                                                                                                                              |
| 10.36  | Employment Agreement  between Aeroflex Incorporated and Charles Badlato dated November 6, 2003. (Incorporated  by reference to Exhibit 10.1 to Report on Form 10-Q for the quarter ended  December 31, 2003).                                                                     |
|   |                                                                                                                                                                                                                                                                              |
| 10.37  | Amendment No. 4 to  Employment Agreement between Aeroflex Incorporated and Harvey R. Blau dated  as of May 13, 2004. (Incorporated by reference to Exhibit 10.1 to Form 10-Q  for the quarter ended March 31, 2004).                                                         |
|   |                                                                                                                                                                                                                                                                              |
| 10.38  | Amended No. 4 to  Employment Agreement between Aeroflex Incorporated and Michael Gorin dated as  of May 13, 2004. (Incorporated by reference to Exhibit 10.2 to Form 10-Q for  the quarter ended March 31, 2004).                                                                 |
|   |                                                                                                                                                                                                                                                                              |
| 10.39  | Amendment No. 4 to  Employment Agreement between Aeroflex Incorporated and Leonard Borow dated  May 13, 2004. (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the  quarter ended March 31, 2004).                                                                     |
|   |                                                                                                                                                                                                                                                                              |
| 10.40  | Amendment No. 1 to  Employment Agreement between Aeroflex Incorporated and Carl Caruso dated  March 11, 2005. (Incorporated by reference to Exhibit 10.1 of Report on Form  8-K filed March 31, 2005).                                                                            |
|   |                                                                                                                                                                                                                                                                              |
| 10.41  | Sale and Purchase  Agreement, dated as of May 23, 2005, between UbiNetics Holdings Limited and  Aeroflex Test Solutions Limited. (Incorporated by reference to Exhibit 10.1  to Report on Form 8-K filed May 27, 2005).                                                           |
|   |                                                                                                                                                                                                                                                                              |
| 10.42  | Deed of Guarantee, dated  as of May 23, 2005, made between Aeroflex Incorporated and UbiNetics Holdings  Limited. (Incorporated by reference to Exhibit 10.2 to Report on Form 8-K  filed May 27, 2005).                                                                          |
|   |                                                                                                                                                                                                                                                                              |
| 10.43  | Amendment No. 5 to  Employment Agreement between Aeroflex Incorporated and Harvey R. Blau dated  August 17, 2005. (Incorporated by reference to Exhibit 10.1 to Report on Form  8-K filed August 17, 2005).                                                                       |
|   |                                                                                                                                                                                                                                                                              |
| 10.44  | Amendment No. 5 to  Employment Agreement between Aeroflex Incorporated and Michael Gorin dated  August 17, 2005. (Incorporated by reference to Exhibit 10.2 to Report on Form  8-K filed August 17, 2005).                                                                        |
|   |                                                                                                                                                                                                                                                                              |
| 10.45  | Amendment No. 5 to Employment Agreement between  Aeroflex Incorporated and Leonard Borow dated August 17, 2005. (Incorporated  by reference to Exhibit 10.3 to Report on Form 8-K filed August 17, 2005).                                                                         |

 

32

----

 

| 10.46  | Consulting and Retirement Agreement between Aeroflex  Incorporated and Michael Gorin dated August 17, 2005. (Incorporated by  reference to Exhibit 10.4 to Report on Form 8-K filed August 17, 2005). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                  |
| 21     | The following is a list of the Registrant’s  subsidiaries as of June 30, 2006:                                                                                                                   |

 

|                                               | ** ** | **Jurisdiction of** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|
| **Name**                                      | ** ** | ** **               | ** ** | **Incorporation** | ** ** |
| Aeroflex  Cambridge, Ltd.                     |       | England                  |       |
| Aeroflex  Colorado Springs, Inc.              |       | Delaware                 |       |
| Aeroflex / Inmet,  Inc.                       |       | Michigan                 |       |
| Aeroflex  International Ltd.                  |       | England                  |       |
| Aeroflex / KDI,  Inc.                         |       | Michigan                 |       |
| Aeroflex /  Metelics, Inc.                    |       | California               |       |
| Aeroflex  Microelectronics Solutions, Inc.    |       | Michigan                 |       |
| Aeroflex  Plainview, Inc.                     |       | Delaware                 |       |
| Aeroflex Powell,  Inc.                        |       | Ohio                     |       |
| Aeroflex Systems  Corp.                       |       | Delaware                 |       |
| Aeroflex /  Weinschel, Inc.                   |       | Michigan                 |       |
| Aeroflex  Wichita, Inc.                       |       | Delaware                 |       |
| Europtest, S.A.                               |       | France                   |       |
| MCE Technologies  (Nanjing) Co., Ltd.         |       | China                    |       |
| Racal Instruments  Wireless Solutions Limited |       | England                  |       |
|                                               |            |                          |            |  |  |

 

| 23     | Consent of Independent Registered Public Accounting  Firm                                             |
|--------|-------------------------------------------------------------------------------------------------------|
|   |                                                                                                  |
| 31.1   | Certification of Chairman of the Board pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.        |
|   |                                                                                                  |
| 31.2   | Certification of Chief Financial Officer pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.      |
|   |                                                                                                  |
| 31.3   | Certification of Chief Operating Officer pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.      |
|   |                                                                                                  |
| 31.4   | Certification of Principal Accounting Officer  pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|   |                                                                                                  |
| 32.1   | Certification of Chief Executive Officer pursuant to  Section 906 of Sarbanes-Oxley Act of 2002.      |
|   |                                                                                                  |
| 32.2   | Certification of Chief Financial Officer pursuant to  Section 906 of Sarbanes-Oxley Act of 2002.      |

 

33

----

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
|                           | Aeroflex Incorporated |
|---------------------------|-----------------------|
| Date: September 12,  2006 |                  |   |
|                      | By:                   | /s/ HARVEY R.  BLAU |
|                      |                  | Harvey R. Blau,  Chairman and |
|                      |                  | Chief Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons in the capacities and on the datesindicated:
| /s/ Harvey R. Blau            |   | Chairman of the Board               |   | September 12, 2006 |
|-------------------------------|--------|-------------------------------------|--------|--------------------|
| Harvey R. Blau                |   | (Chief Executive  Officer)          |   |               |
|                          |   |                                |   |               |
| /s/ Leonard  Borow            |   | President, Chief Operating Officer, |   | September 12, 2006 |
| Leonard Borow                 |   | Secretary and  Director             |   |               |
|                          |   |                                |   |               |
| /s/ John  Adamovich, Jr.      |   | Senior Vice President and           |   | September 12, 2006 |
| John Adamovich,  Jr.          |   | Chief Financial  Officer            |   |               |
|                          |   |                                |   |               |
| /s/ Charles  Badlato          |   | Vice President - Treasurer and      |   | September 12, 2006 |
| Charles Badlato               |   | Assistant Secretary                 |   |               |
|                          |   | (Principal Accounting Officer)      |   |               |
|                          |   |                                |   |               |
|                          |   |                                |   |               |
| /s/ Paul  Abecassis           |   | Director                            |   | September 12, 2006 |
| Paul Abecassis                |   |                                |   |               |
|                          |   |                                |   |               |
| /s/ John F.  Benedik          |   | Director                            |   | September 12, 2006 |
| John F. Benedik               |   |                                |   |               |
|                          |   |                                |   |               |
| /s/ Milton  Brenner           |   | Director                            |   | September 12, 2006 |
| Milton Brenner                |   |                                |   |               |
|                          |   |                                |   |               |
| /s/ Ernest E.  Courchene, Jr. |   | Director                            |   | September 12, 2006 |
| Ernest E.  Courchene, Jr.     |   |                                |   |               |
|                          |   |                                |   |               |
| /s/ Michael A.  Nelson        |   | Director                            |   | September 12, 2006 |
| Michael A.  Nelson            |   |                                |   |               |
|                          |   |                                |   |               |
| /s/ Joseph Pompeo             |   | Director                            |   | September 12, 2006 |
| Joseph Pompeo                 |   |                                |   |               |
|                          |   |                                |   |               |
| /s/ Barton D.  Strong         |   | Director                            |   | September 12, 2006 |
| Barton D. Strong              |   |                                |   |               |

 

 

34

----

 

**AEROFLEX INCORPORATED**

**AND SUBSIDIARIES**

----

**FINANCIAL STATEMENTS ANDSCHEDULES**

**COMPRISING ITEM 8 OF ANNUALREPORT ON FORM 10-K**

**TO SECURITIES AND EXCHANGECOMMISSION**

**AS OF JUNE 30, 2006 AND 2005**

**AND FOR THE YEARS**

**ENDED JUNE 30, 2006, 2005 AND2004**

 

----

**FINANCIAL STATEMENTS ANDSCHEDULES**
|             | ** ** | **INDEX**                                                                                                                             | ** ** | ** **  | ** ** | **PAGE** | ** ** |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|
|        |       |                                                                                                                                  |       |        |       |
| ITEM 15 (a) |       |                                                                                                                                  |       |        |       |
|        |       |                                                                                                                                  |       |        |       |
| 1.          |       | FINANCIAL STATEMENTS:                                                                                                                 |       |        |       |
|        |       |                                                                                                                                  |       |        |       |
|        |       | Reports of Independent Registered Public Accounting  Firm                                                                             |       | S-1 to S-3  |       |
|        |       |                                                                                                                                  |       |        |       |
|        |       | Consolidated  financial statements:                                                                                                   |       |        |       |
|        |       |                                                                                                                                  |       |        |       |
|        |       | Balance  sheets—June 30, 2006 and 2005                                                                                           |       | S-4 to S-5  |       |
|        |       |                                                                                                                                  |       |        |       |
|        |       | Statements of earnings—each of the years in the three  year period ended June 30, 2006                                      |       | S-6         |       |
|        |       |                                                                                                                                  |       |        |       |
|        |       | Statements of stockholders’ equity and comprehensive  income—each of the years in the three year period ended June 30, 2006 |       | S-7         |       |
|        |       |                                                                                                                                  |       |        |       |
|        |       | Statements of cash flows—each of the years in the  three year period ended June 30, 2006                                         |       | S-8         |       |
|        |       |                                                                                                                                  |       |        |       |
|        |       | Notes (1-15)                                                                                                                          |       | S-9 to S-36 |       |
|        |       |                                                                                                                                  |       |        |       |
|        |       | Quarterly financial data (unaudited)                                                                                                  |       | S-37        |       |
|        |       |                                                                                                                                  |       |        |       |
| 2.          |       | FINANCIAL STATEMENT  SCHEDULE:                                                                                                        |       |        |       |
|        |       |                                                                                                                                  |       |        |       |
|        |       | II—Valuation and qualifying accounts                                                                                             |       | S-38        |       |

 

Allother schedules have been omitted because they are inapplicable, not required,or the information is included elsewhere in the financial statements or notesthereto.

 

----

# **Reportof Independent Registered Public Accounting Firm**

The Board of Directorsand StockholdersAeroflex Incorporated:

We have auditedmanagement’s assessment, included in the accompanying Item 9A(b), *Management’s Report on Internal Control OverFinancial Reporting,*that Aeroflex Incorporated (the Company) maintainedeffective internal control over financial reporting as of June 30, 2006, basedon criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO)*.*AeroflexIncorporated’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted ouraudit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, evaluating management’s assessment, testing andevaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion,management’s assessment that Aeroflex Incorporated maintained effectiveinternal control over financial reporting as of June 30, 2006, is fairlystated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO)*.* Also, in our opinion, AeroflexIncorporated maintained, in all material respects, effective internal controlover financial reporting as of June 30, 2006,

S-1

----

based on criteriaestablished in Internal Control—Integrated Framework issued by the *Committee of Sponsoring Organizations of the Treadway Commission (COSO)*.

 

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of AeroflexIncorporated and subsidiaries as of June 30, 2006 and 2005, and the relatedconsolidated statements of earnings, stockholders’ equity and comprehensiveincome, and cash flows for each of the years in the three-year period endedJune 30, 2006, and our report dated September 12, 2006, expressed anunqualified opinion on those consolidated financial statements. Our report,dated September 12, 2006, refers to the Company’s adoption of FASB InterpretationNo. 47, *Accounting for Conditional Asset RetirementObligations*, effective June 30, 2006, and the adoption of Statementof Financial Accounting Standards No. 123(R) *Share-BasedPayment*, effective July 1, 2005.

 
| Melville, New York  |
|---------------------|
| September 12,  2006 |

S-2

----

**Report of Independent Registered Public Accounting Firm**

TheBoard of Directors and StockholdersAeroflex Incorporated:

We have audited the accompanying consolidatedbalance sheets of Aeroflex Incorporated andsubsidiaries as of June 30, 2006 and 2005, and the related consolidated statements of earnings,stockholders’ equity and comprehensive income, and cash flows for each of theyears in the three-year period ended June 30, 2006. In connection with ouraudits of the consolidated financial statements, we also have audited thefinancial statement schedule listed in Item 15(a)2.  These consolidatedfinancial statements and the financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidatedfinancial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Aeroflex Incorporated and subsidiaries asof June 30, 2006, and 2005, and the results of their operations and their cashflows for each of the years in the three-year period ended June 30, 2006, inconformity with U.S. generally accepted accounting principles.  Also in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

As discussed innote 1 to the consolidated financial statements, the Company adopted theprovisions of FASB Interpretation No. 47, *Accounting for ConditionalAsset Retirement Obligations*, effective June 30, 2006. Also, as discussedin notes 1 and 9 to the consolidated financial statements, the Company adoptedthe provisions of Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*, effective July 1, 2005.

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness ofAeroflex Incorporated’s internal control over financial reporting as of June30, 2006, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO), and ourreport dated September 12, 2006, expressed an unqualified opinion on management’s assessment of, and the effectiveoperation of, internal control over financial reporting.
| Melville, New York  |
|---------------------|
| September 12,  2006 |

 

S-3

----

 

**AeroflexIncorporatedand Subsidiaries**

**Consolidated Balance Sheets**(In thousands)
| ** **                                                                      | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                      | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| Assets                                                                          |       |              |       |              |       |
| Current assets:                                                                 |       |              |       |              |       |
| Cash and cash equivalents                                                       |       | $                 | 10,387     |              | $          | 12,974 |   |
| Marketable securities                                                           |       | 28,332            |       | —            |       |
| Accounts receivable, less allowance for doubtful  accounts of $1,350 and $1,210 |       | 120,296           |       | 101,317           |       |
| Inventories                                                                     |       | 133,420           |       | 118,906           |       |
| Deferred income taxes                                                           |       | 24,732            |       | 18,499            |       |
| Prepaid expenses and other current assets                                       |       | 11,187            |       | 11,107            |       |
| Total current assets                                                            |       | 328,354           |       | 262,803           |       |
| Property, plant and equipment, net                                              |       | 77,940            |       | 78,195            |       |
| Other assets                                                                    |       | 14,276            |       | 13,537            |       |
| Intangible  assets with definite lives, net                                     |       | 54,215            |       | 67,266            |       |
| Goodwill                                                                        |       | 163,237           |       | 168,048           |       |
| Total assets                                                                    |       | $                 | 638,022    |              | $          | 589,849 |   |

 

See notes toconsolidated financial statements

S-4

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**AeroflexIncorporatedand Subsidiaries**

**Consolidated Balance Sheets(continued)**(In thousands, except per share data)
| ** **                                                                                                                                                                       | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| Liabilities and  Stockholders’ Equity                                                                                                                                       |       |              |       |              |       |
| Current liabilities:                                                                                                                                                             |       |              |       |              |       |
| Current portion of long-term debt                                                                                                                                                |       | $                 | 607        |              | $          | 634 |   |
| Accounts payable                                                                                                                                                                 |       | 37,832            |       | 35,907            |       |
| Advance payments by customers                                                                                                                                                    |       | 21,128            |       | 15,183            |       |
| Income taxes payable                                                                                                                                                             |       | 9,162             |       | 3,657             |       |
| Accrued payroll and related expenses                                                                                                                                             |       | 17,440            |       | 15,222            |       |
| Accrued expenses and other current liabilities                                                                                                                                   |       | 33,046            |       | 30,451            |       |
| Total current liabilities                                                                                                                                                        |       | 119,215           |       | 101,054           |       |
| Long-term debt                                                                                                                                                                   |       | 3,558             |       | 4,190             |       |
| Deferred income  taxes                                                                                                                                                           |       | 4,631             |       | 17,146            |       |
| Other long-term  liabilities                                                                                                                                                     |       | 22,948            |       | 23,479            |       |
| Total liabilities                                                                                                                                                                |       | 150,352           |       | 145,869           |       |
| Stockholders’ equity:                                                                                                                                                       |       |              |       |              |       |
| Preferred stock, par value $.10 per share;  authorized 1,000 shares Series A Junior Participating Preferred Stock, par  value $.10 per share, authorized 110 shares; none issued |       | —            |       | —            |       |
| Common stock, par value $.10 per share; authorized  110,000 shares; issued and outstanding 75,270 and 74,618 shares                                                              |       | 7,527             |       | 7,462             |       |
| Additional paid-in capital                                                                                                                                                       |       | 384,870           |       | 372,666           |       |
| Accumulated other comprehensive income                                                                                                                                           |       | 13,468            |       | 9,020             |       |
| Retained earnings                                                                                                                                                                |       | 81,805            |       | 54,846            |       |
|                                                                                                                                                                             |       | 487,670           |       | 443,994           |       |
| Less: Treasury stock, at cost (4 shares)                                                                                                                                         |       | —            |       | 14                |       |
| Total stockholders’ equity                                                                                                                                                  |       | 487,670           |       | 443,980           |       |
| Total  liabilities and stockholders’ equity                                                                                                                                 |       | $                 | 638,022    |              | $          | 589,849 |   |

 

See notes toconsolidated financial statements

S-5

----

 

**AeroflexIncorporatedand Subsidiaries**

**ConsolidatedStatements of Earnings**(In thousands, except per share data)
| ** **                                                                                                         | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                         | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                                                                          |       | $                                       | 551,846    |   | $ | 463,371 |   | $ | 414,101 |   |
| Cost of sales  (including restructuring charges of $1,101 in 2006)                                                 |       | 293,428                                 |       | 244,759 |   | 221,409 |   |
| Gross profit                                                                                                       |       | 258,418                                 |       | 218,612 |   | 192,692 |   |
| Selling, general and administrative costs (including  restructuring charges of $2,113 and $3,124 in 2006 and 2005) |       | 124,481                                 |       | 113,271 |   | 94,735 |   |
| Research and  development costs                                                                                    |       | 75,900                                  |       | 61,399 |   | 49,972 |   |
| Amortization of  acquired intangibles                                                                              |       | 13,778                                  |       | 8,896 |   | 7,730 |   |
| Acquired in-process research and development cost                                                                  |       | —                                  |       | 2,974 |   | 4,220 |   |
|                                                                                                               |       | 214,159                                 |       | 186,540 |   | 156,657 |   |
| Operating income                                                                                                   |       | 44,259                                  |       | 32,072 |   | 36,035 |   |
|                                                                                                               |       |                                    |       |   |   |   |   |
| Other income  (expense)                                                                                            |       |                                    |       |   |   |   |   |
| Interest expense                                                                                                   |       | (608                                    | )          | (895 | ) | (1,403 | ) |
| Other income (expense)                                                                                             |       | 1,666                                   |       | 1,844 |   | (1,711 | ) |
| Total other income (expense)                                                                                       |       | 1,058                                   |       | 949 |   | (3,114 | ) |
| Income from continuing operations before income  taxes                                                             |       | 45,317                                  |       | 33,021 |   | 32,921 |   |
| Provision for  income taxes                                                                                        |       | 17,221                                  |       | 14,377 |   | 12,457 |   |
| Income from continuing operations                                                                                  |       | 28,096                                  |       | 18,644 |   | 20,464 |   |
| Discontinued operations                                                                                            |       |                                    |       |   |   |   |   |
| Income (loss) from discontinued operations, net of tax  benefit of $(100) and $(1,030)                             |       | —                                  |       | (791 | ) | (2,158 | ) |
| Income (loss) on disposal of operations, net of tax  provision (benefit) of $355 and $(2,941)                      |       | —                                  |       | (812 | ) | (6,159 | ) |
| Income (loss) from discontinued operations, net of tax                                                             |       | —                                  |       | (1,603 | ) | (8,317 | ) |
| Income before cumulative effect of change in  accounting principle                                                 |       | 28,096                                  |       | 17,041 |   | 12,147 |   |
| Cumulative effect of change in accounting principle,  net of tax benefit of $490                                   |       | (1,137                                  | )          | — |   | — |   |
| Net income                                                                                                         |       | $                                       | 26,959     |   | $ | 17,041 |   | $ | 12,147 |   |
| Income (loss) per common share:                                                                                    |       |                                    |       |   |   |   |   |
| Basic                                                                                                              |       |                                    |       |   |   |   |   |
| Continuing operations                                                                                              |       | $                                       | 0.37       |   | $ | 0.25 |   | $ | 0.30 |   |
| Discontinued operations                                                                                            |       | —                                  |       | (0.02 | ) | (0.12 | ) |
| Cumulative effect of change in accounting principle                                                                |       | (0.01                                   | )          | — |   | — |   |
| Net income                                                                                                         |       | $                                       | 0.36       |   | $ | 0.23 |   | $ | 0.18 |   |
|                                                                                                               |       |                                    |       |   |   |   |   |
| Diluted                                                                                                            |       |                                    |       |   |   |   |   |
| Continuing operations                                                                                              |       | $                                       | 0.37       |   | $ | 0.25 |   | $ | 0.29 |   |
| Discontinued operations                                                                                            |       | —                                  |       | (0.03 | ) | (0.12 | ) |
| Cumulative effect of change in accounting principle                                                                |       | (0.02                                   | )          | — |   | — |   |
| Net income                                                                                                         |       | $                                       | 0.35       |   | $ | 0.22 |   | $ | 0.17 |   |
| Weighted average number of common shares outstanding:                                                              |       |                                    |       |   |   |   |   |
| Basic                                                                                                              |       | 75,028                                  |       | 74,634 |   | 67,917 |   |
| Diluted                                                                                                            |       | 76,576                                  |       | 75,885 |   | 69,931 |   |

 

See notes to consolidatedfinancial statements

S-6

----

 

**Aeroflex Incorporated andSubsidiariesConsolidated Statements of Stockholders’ Equityand Comprehensive Income**(In thousands)

 
| ** **                                                          | ** ** | ** ** | ** ** | ** **            | ** ** | ** **         | ** ** | ** **     | ** ** | **Accumulated**  | ** ** | ** **              | ** ** | ** **  | ** ** | ** ** | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|--------------------|------------|----------------|------------|------------------|------------|-------------------------|------------|-------------|------------|------------|------------|-------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | ** **            | ** ** | ** **         | ** ** | **Additional** | ** ** | **Other  Comp-** | ** ** | ** **              | ** ** | ** **  | ** ** | ** ** | ** ** | **Compre-** | ** ** |
| ** **                                                          | ** ** | ** ** | ** ** | **Common Stock** | ** ** | **Paid-in**        | ** ** | **rehensive**  | ** ** | **Retained**     | ** ** | **Treasury Stock** | ** ** | **hensive** | ** ** |
| ** **                                                          | ** ** | **Total**  | ** ** | **Shares**            | ** ** | **Par Value** | ** ** | **Capital**    | ** ** | **Income**       | ** ** | **Earnings**            | ** ** | **Shares**  | ** ** | **Cost**   | ** ** | **Income**  | ** ** |
|                                                                |       |       |       |                  |       |               |       |           |       |             |       |                    |       |        |       |       |       |        |       |
| Balance, July 1, 2003                                               |       | $          | 258,415    |                  | 60,122     |               | $          | 6,012          |       | $                | 222,943    |                    | $          | 3,816       |       | $          | 25,658     |        | 4          |   | $ | (14 | ) |   |   |
| Stock issued upon  exercise of stock options, including tax benefit |       | 7,639      |       | 910                   |       | 91                 |       | 7,548          |       |             |       |                    |       |        |       |       |       |        |       |
| Stock and options issued  for acquisition of businesses             |       | 50,151     |       | 6,250                 |       | 625                |       | 49,526         |       | —           |       | —                  |       | —      |       | —     |       |        |       |
| Stock issued in public  offering                                    |       | 91,170     |       | 7,000                 |       | 700                |       | 90,470         |       | —           |       | —                  |       | —      |       | —     |       |        |       |
| Deferred compensation                                               |       | 4          |       | —                |       | —             |       | 4              |       | —           |       | —                  |       | —      |       | —     |       |        |       |
| Other comprehensive  income                                         |       | 7,571      |       | —                |       | —             |       | —         |       | 7,571            |       | —                  |       | —      |       | —     |       | $           | 7,571      |   |
| Net income                                                          |       | 12,147     |       | —                |       | —             |       | —         |       | —           |       | 12,147                  |       | —      |       | —     |       | 12,147      |       |
| Balance, June 30, 2004                                              |       | 427,097    |       | 74,282                |       | 7,428              |       | 370,491        |       | 11,387           |       | 37,805                  |       | 4           |       | (14        | )          | $           | 19,718     |   |
| Stock issued upon  exercise of stock options, including tax benefit |       | 2,625      |       | 386                   |       | 39                 |       | 2,586          |       | —           |       | —                  |       |        |       |       |       |        |       |
| Stock repurchase and  retirement                                    |       | (416       | )          | (50                   | )          | (5                 | )          | (411           | )          | —           |       | —                  |       | —      |       | —     |       |        |       |
| Other comprehensive loss                                            |       | (2,367     | )          | —                |       | —             |       | —         |       | (2,367           | )          | —                  |       | —      |       | —     |       | $           | (2,367     | ) |
| Net income                                                          |       | 17,041     |       | —                |       | —             |       | —         |       | —           |       | 17,041                  |       | —      |       | —     |       | 17,041      |       |
| Balance, June 30, 2005                                              |       | 443,980    |       | 74,618                |       | 7,462              |       | 372,666        |       | 9,020            |       | 54,846                  |       | 4           |       | (14        | )          | $           | 14,674     |   |
| Stock issued upon  exercise of stock options, including tax benefit |       | 5,913      |       | 691                   |       | 69                 |       | 5,844          |       | —           |       | —                  |       |        |       |       |       |        |       |
| Share-based compensation                                            |       | 6,772      |       | —                |       | —             |       | 6,772          |       | —           |       | —                  |       | —      |       | —     |       |        |       |
| Stock repurchase and  retirement                                    |       | (402       | )          | (39                   | )          | (4                 | )          | (412           | )          | —           |       | —                  |       | (4          | )          | 14         |       |        |       |
| Other comprehensive  income                                         |       | 4,448      |       | —                |       | —             |       | —         |       | 4,448            |       | —                  |       | —      |       | —     |       | $           | 4,448      |   |
| Net income                                                          |       | 26,959     |       | —                |       | —             |       | —         |       | —           |       | 26,959                  |       | —      |       | —     |       | 26,959      |       |
| Balance, June 30, 2006                                              |       | $          | 487,670    |                  | 75,270     |               | $          | 7,527          |       | $                | 384,870    |                    | $          | 13,468      |       | $          | 81,805     |        | —     |   | $ | — |   | $ | 31,407 |   |

 

See notes to consolidated financial statements

S-7

----

**Aeroflex Incorporated**

**and Subsidiaries**

**Consolidated Statements of CashFlows**

(In thousands)

 
| ** **                                                                                                           | ** ** | **Years Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                           | ** ** | **June 30,**    | ** ** |
| ** **                                                                                                           | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                                               |       |                 |       |   |   |   |   |
| Net income                                                                                                           |       | $                    | 26,959     |   | $ | 17,041 |   | $ | 12,147 |   |
| Cumulative  effect of change in accounting principle, net of tax                                                     |       | 1,137                |       | — |   | — |   |
| Loss from  discontinued operations, net of tax                                                                       |       | —               |       | 1,603 |   | 8,317 |   |
| Income from  continuing operations                                                                                   |       | 28,096               |       | 18,644 |   | 20,464 |   |
| Adjustments to  reconcile income from continuing operations to net cash provided by (used in)  operating activities: |       |                 |       |   |   |   |   |
| Acquired  in-process research and development                                                                        |       | —               |       | 2,974 |   | 4,220 |   |
| Depreciation and  amortization                                                                                       |       | 30,469               |       | 24,412 |   | 21,856 |   |
| Deferred income  taxes                                                                                               |       | (13,797              | )          | (4,208 | ) | (469 | ) |
| Non - cash share  based compensation                                                                                 |       | 6,772                |       | — |   | — |   |
| Excess tax  benefits from share based compensation arrangements                                                      |       | (551                 | )          | — |   | — |   |
| Other, net                                                                                                           |       | 653                  |       | (219 | ) | 118 |   |
| Change in  operating assets and liabilities, net of effects from purchases of  businesses:                           |       |                 |       |   |   |   |   |
| Decrease  (increase) in accounts receivable                                                                          |       | (21,453              | )          | 160 |   | (19,818 | ) |
| Decrease  (increase) in inventories                                                                                  |       | (11,716              | )          | (18,853 | ) | (5,291 | ) |
| Decrease  (increase) in prepaid expenses and other assets                                                            |       | 496                  |       | (2,847 | ) | 2,241 |   |
| Increase  (decrease) in accounts payable, accrued expenses and other liabilities                                     |       | 17,728               |       | 17,767 |   | 2,619 |   |
|                                                                                                                 |       |                 |       |   |   |   |   |
| Net cash provided by  continuing operations                                                                          |       | 36,697               |       | 37,830 |   | 25,940 |   |
| Net cash provided by  (used in) discontinued operations                                                              |       | —               |       | (1,219 | ) | (1,840 | ) |
| Net cash provided by  operating activities                                                                           |       | 36,697               |       | 36,611 |   | 24,100 |   |
|                                                                                                                 |       |                 |       |   |   |   |   |
| Cash flows from  investing activities:                                                                               |       |                 |       |   |   |   |   |
| Payment for  purchase of businesses, net of cash acquired                                                            |       | —               |       | (117,825 | ) | (61,760 | ) |
| Capital  expenditures                                                                                                |       | (15,492              | )          | (15,636 | ) | (11,138 | ) |
| Proceeds from  the sale of property, plant and equipment                                                             |       | 116                  |       | 1,644 |   | 220 |   |
| Purchase of  marketable securities                                                                                   |       | (348,545             | )          | (634,807 | ) | — |   |
| Proceeds from  sale of marketable securities                                                                         |       | 320,213              |       | 634,807 |   | — |   |
| Preacquisition  tax refund received                                                                                  |       | 1,232                |       | — |   | — |   |
| Other, net                                                                                                           |       | (77                  | )          | — |   | — |   |
|                                                                                                                 |       |                 |       |   |   |   |   |
| Net cash used in  investing activities by continuing operations                                                      |       | (42,553              | )          | (131,817 | ) | (72,678 | ) |
| Net cash provided by  (used in) discontinued operations                                                              |       | —               |       | 14,171 |   | (389 | ) |
| Net cash used in  investing activities                                                                               |       | (42,553              | )          | (117,646 | ) | (73,067 | ) |
|                                                                                                                 |       |                 |       |   |   |   |   |
| Cash flows from financing  activities:                                                                               |       |                 |       |   |   |   |   |
| Net proceeds  from issuance of common stock                                                                          |       | —               |       | — |   | 91,170 |   |
| Purchase and  retirement of treasury stock                                                                           |       | (402                 | )          | (416 | ) | — |   |
| Borrowings under  debt agreements                                                                                    |       | —               |       | 37 |   | 26,115 |   |
| Debt repayments                                                                                                      |       | (658                 | )          | (5,489 | ) | (28,041 | ) |
| Bank loan  transaction costs                                                                                         |       | (308                 | )          | — |   | — |   |
| Excess tax  benefits from share based compensation arrangements                                                      |       | 551                  |       | — |   | — |   |
| Proceeds from  the exercise of stock options and warrants                                                            |       | 4,565                |       | 1,829 |   | 5,177 |   |
| Amounts paid for  withholding taxes on stock option exercises                                                        |       | (1,062               | )          | (226 | ) | (2,083 | ) |
| Withholding  taxes collected for stock option exercises                                                              |       | 1,062                |       | 226 |   | 2,083 |   |
| Net cash provided by  (used in) financing activities                                                                 |       | 3,748                |       | (4,039 | ) | 94,421 |   |
| Effect of exchange rate  changes on cash and cash equivalents                                                        |       | (479                 | )          | (454 | ) | 1,741 |   |
|                                                                                                                 |       |                 |       |   |   |   |   |
| Net increase (decrease)  in cash and cash equivalents                                                                |       | (2,587               | )          | (85,528 | ) | 47,195 |   |
| Cash and cash  equivalents at beginning of period                                                                    |       | 12,974               |       | 98,502 |   | 51,307 |   |
| Cash and cash  equivalents at end of period                                                                          |       | $                    | 10,387     |   | $ | 12,974 |   | $ | 98,502 |   |
|                                                                                                                 |       |                 |       |   |   |   |   |

 

See notes toconsolidated financial statements

S-8

----

**AEROFLEX INCORPORATED AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**1.             Summary of Significant Accounting Principles andPolicies**

**The Company**

Aeroflex Incorporated andits subsidiaries (the “Company”) design, engineer and manufacturemicroelectronic and test solution products that are sold primarily into thebroadband communications, aerospace and defense markets.  Our fiscal year ends on June 30.

**Presentation and Use of Estimates**

Our financial statements areprepared in conformity with U.S. generally accepted accounting principles (“GAAP”).  They consolidate our subsidiaries all ofwhich are wholly-owned. All significant intercompany balances and transactionshave been eliminated.

The preparation of financialstatements and related disclosures in conformity with U.S. GAAP requires thatmanagement of the Company make a number of estimates and assumptions relatingto the reporting of assets and liabilities and the disclosure of contingentassets and liabilities.  Among the moresignificant estimates included in our consolidated financial statements arerevenue and cost recognition under long-term contracts, the valuation ofaccounts receivable, inventories and deferred tax assets; the  depreciable lives of fixed assets and usefullives of amortizable intangible assets; the valuation of assets acquired andliabilities assumed in business combinations; the recoverability of long-livedintangible assets and goodwill, share-based compensation; restructuringcharges; asset retirement obligations and certain accrued expenses andcontingencies.

The Company is subject touncertainties such as impact of future events, economic, environmental andpolitical factors, and changes in the business climate; therefore, actualresults may differ from those estimates. When no estimate in a given range is deemed to be better than any otherwhen estimating contingent liabilities, the low end of the range is accrued.  Accordingly, the accounting estimates in thepreparation of our consolidated financial statements will change as new eventsoccur, as more experience is acquired, as additional information is obtainedand as our operating environment changes. Changes in estimates are made when circumstances warrant.  Such changes and refinements in estimationmethodologies are reflected in reported results of operations; if material, theeffects of changes in estimates are disclosed in the notes to the consolidatedfinancial statements.

Certain reclassificationshave been made to the 2005 and 2004 consolidated financial statements toconform to the 2006 presentation.

**Cash and Cash Equivalents**

All highly liquidinvestments having maturities of three months or less at the date ofacquisition are considered to be cash equivalents.

**Inventories**

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

S-9

----

 

**Financial Instruments and Derivatives**

Foreign currency contractsare used to protect us from fluctuations in exchange rates.  We enter into foreign currency contracts,which are not designated as hedges.  Thusthe change in fair value is included in income currently, within other income(expense).  As of June 30, 2006, we had$2.6 million of notional value foreign currency forward contracts maturingthrough September 2006.  Notional amountsdo not quantify risk or represent assets or liabilities of the Company, but areused in the calculation of cash settlements under the contracts.  The fair value of these contracts at June 30,2006 was immaterial.

Our interest rate swapderivatives are designated as cash flow hedges. As such, they are recorded on the balance sheet as assets or liabilitiesat their fair value, with changes in the fair value of such derivatives beingrecorded as components of other comprehensive income.

**Marketable Securities**

Marketable securities areconsidered as available-for-sale and are recorded at fair market value withunrealized gains and losses, net of taxes, reported as a separate component ofshareholders’ equity.  Realized gains andlosses and declines in market value judged to be other than temporary, of whichthere were none for the three years ended June 30, 2006, are included in otherincome.  Interest and dividends are alsoincluded in other income.  Marketablesecurities consist solely of auction rate bonds, whose carrying amount equaledtheir fair value as of June 30, 2006.  Auctionrate notes represent long-term (generally, maturities of 10 years to35 years from date of issuances) variable rate bonds tied to short-terminterest rates that are reset through an auction process, which occurs everyseven to thirty-five days, and are classified as available for sale securities.Auction rate notes are considered highly liquid by market participants becauseof the auction process.

**Revenue Recognition**

We recognize revenue whenpersuasive evidence of an arrangement exists, the selling price is fixed ordeterminable, and collectibility of the resulting receivable is reasonablyassured.

For arrangements other thancertain long-term contracts, revenue (including shipping and handling fees) isrecognized when products are shipped and title has passed to the customer.  If title does not pass until the productreaches the customer’s delivery site, then recognition of the revenue isdeferred until that time. Certain of our sales are to distributors which have aright to return some portion of product within eighteen months of sale.  We recognize revenue on these sales at thetime of shipment to the distributor as the returns under these arrangementshave been insignificant and can be reasonably estimated.  An estimate of such returns is recorded atthe time sales are recognized.

Long-term contracts areaccounted for in accordance with SOP 81-1 “Accounting for Performance ofConstruction-Type and Certain Production Type Contracts.” We determineestimated contract profit rates and use the percentage-of-completion method torecognize revenues and associated costs as work progresses on certain long-term contracts.  We measure the extent of progress towardcompletion generally based upon one of the following methods (based upon anassessment of which method most closely aligns to the underlying earningsprocess): (i) the units-of-delivery method, (ii) the cost-to-cost method, usingthe ratio of contract costs incurred as a percentage of total estimated costsat contract completion (based upon engineering and production estimates), or(iii) the achievement of contractual milestones.  Provisions for anticipated losses orrevisions in estimated profits on contracts-in-process are recorded in theperiod in which such anticipated losses or revisions become evident.

Revenue from sales ofproducts where software is other than incidental to their performance,including related software support and maintenance contracts is recognized inaccordance with SOP-97-2, “Software Revenue Recognition.”

S-10

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**Acquisition Accounting**

We use the purchase methodto account for business combinations, whereby the total cost of an acquisitionis allocated to the tangible and intangible assets acquired and liabilitiesassumed based upon their respective fair values at the date ofacquisition.  The allocation of thepurchase price is dependent upon certain valuations and other studies, whichcontain estimates and assumptions.

**Long-Lived Assets**

We do not amortize goodwill,but instead test it annually for impairment and whenever events orcircumstances indicate impairment might have occurred.  We evaluate the recoverability of goodwillusing a two-step impairment test approach at the reporting unit level. In thefirst step, the overall fair value for the reporting unit is compared to its carryingamount including goodwill.  If the fairvalue of a reporting unit is less than the carrying amount, a second step isperformed which compares the implied fair value of the reporting unit’sgoodwill to the carrying amount of the goodwill.  The implied fair value for the goodwill isdetermined based on the difference between the fair value of the reporting unitand the fair value of its net identifiable assets.  If the implied fair value of the goodwill isless than its carrying amount, the difference is recognized as an impairment.

Our amortizable intangibleassets, which are comprised primarily of developed technology, tradenames andcustomer related intangibles, are subject to amortization for periods rangingup to 16 years, principally on a straight-line basis.  Property, plant and equipment are stated atcost.  Depreciation of plant andequipment is provided over the estimated useful lives of the respective assets,principally on the straight-line basis. Leasehold improvements are amortized over the life of the lease,including anticipated renewals, or the estimated life of the asset, which isshorter.

We periodically review itsdepreciable and amortizable long-lived assets for impairment whenever events orcircumstances indicate that the carrying amount of an asset may not berecoverable.  If the sum of the expectedcash flows, undiscounted, is less than the carrying amount of the asset, animpairment loss is recognized as the amount by which the carrying amount of theasset exceeds its fair value.

InApril 2005, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset RetirementObligations — An Interpretation of FASB Statement No. 143.”  FIN 47 clarifies the terms of FASB StatementNo. 143 and requires an entity to recognize a liability for a conditional assetretirement obligation if there is sufficient information to reasonably estimateits fair value.   We adopted FIN 47 inthe fourth quarter of fiscal 2006.   Theadoption of FIN 47 resulted in the recognition of fixed assets and an assetretirement obligation liability for certain leased premises of $2.4 million each,accumulated depreciation of $1.6 million and an after tax charge of $1.1million which is reflected as a cumulative effect of change in accountingprinciple. The impact to prior periods was not material, therefore no proformainformation for prior periods is presented.

**Research and Development Costs**

We charge all research anddevelopment costs to expense as incurred. See Note 3 for a discussion of acquired in-process research anddevelopment.  For our software products,costs incurred between the date of technological feasibility and the date thatthe software is available for general release are capitalized.  Historically, such costs have beeninsignificant.

S-11

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**Earnings Per Share**

Theconsolidated statements of earnings present basic and diluted earnings pershare.  Basic earnings per share isdetermined by dividing income available to common stockholders by the weightedaverage number of common shares outstanding for the period.  Diluted earnings per share considers thepotential effect of dilution on basic earnings per share assuming potentiallydilutive securities that meet certain criteria, such as stock options, wereoutstanding since issuance.  The treasurystock method is used to determine the dilutive effect of potentially dilutivesecurities.

Thefollowing table reconciles basic shares outstanding to diluted sharesoutstanding:

|                             | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                  | ** ** | **(In thousands)**                 | ** ** |
|                        |       |                                    |       |   |   |   |   |
| Basic shares  outstanding   |       | 75,028                                  |       | 74,634 |   | 67,917 |   |
| Effect of  dilutive options |       | 1,548                                   |       | 1,251 |   | 2,014 |   |
| Diluted shares  outstanding |       | 76,576                                  |       | 75,885 |   | 69,931 |   |
|                        |       |                                    |       |   |   |   |   |

 

Optionsto purchase 7.0 million shares at exercise prices ranging between $9.22 and$34.41 per share were not included in the computation of diluted earnings pershare for the year ended June 30, 2006, because their effect would have beenanti-dilutive.  Options to purchase 11.2million shares at exercise prices ranging between $8.10 and $34.41 per sharewere not included in the computation of diluted earnings per share for the yearended June 30, 2005, because their effect would have been anti-dilutive.  Options to purchase 6.8 million shares atexercise prices ranging between $13.48 and $34.41 per share were not includedin the computation of diluted earnings per share for the year ended June 30,2004, because their effect would have been anti-dilutive.

**Accounting for Share-Based Compensation**

Prior to fiscal 2006, weapplied the intrinsic value method to account for stock option grants.  Under the intrinsic value method, nocompensation expense was recognized if the exercise price of our employee stockoptions equaled the market price of the underlying stock on the date of thegrant.   Since all options granted had anexercise price equal to the market value of the underlying common stock on thedate of grant, no compensation cost was recognized in the accompanyingconsolidated statements of earnings prior to fiscal year 2006 on stock optionsgranted to employees.

Effective July 1, 2005, weadopted SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) and nowrecognize the estimated fair value of share based compensation as an expense inour financial statements. This statement was adopted using the modifiedprospective method. Therefore, prior period financial statements have not beenrestated.  Under this method, in additionto reflecting compensation expense for new share based awards, expense is alsorecognized to reflect the remaining service period of outstanding awards thathad been included in pro forma disclosures in prior periods.  SFAS No. 123(R) also requires that excess taxbenefits related to stock option exercises be reflected as financing cashinflows instead of operating cash inflows. The adoption of this pronouncementresulted in increased compensation expense of $6.8 million partially offset bya tax benefit of $2.6 million, which caused net income to decrease by $4.2million or $0.05 per diluted share for the year ended June 30, 2006, as well ascash flows from financing activities increasing by $551,000 while cash flowsfrom operating activities decreased  bythe same amount for the year ended June 30, 2006.

S-12

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**Income Taxes**

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

**Foreign Currency Translations**

The financial statements ofour foreign subsidiaries are measured in their local currency and thentranslated into U.S. dollars using the current rate method.  Under the current rate method, assets andliabilities are translated using the exchange rate at the balance sheetdate.  Revenues and expenses aretranslated at average rates prevailing throughout the year.

Gains and losses resulting fromthe translation of financial statements of the foreign subsidiaries areaccumulated in other comprehensive income (loss) and presented as part ofstockholders’ equity.  Realized andunrealized exchange gains or losses from the settlement of foreign currencytransactions are reflected in other income (expense).

**Comprehensive Income**

Comprehensive incomeconsists of net income and equity adjustments relating to foreign currencytranslation, fair value of derivatives and minimum pension liability and is presentedin the Consolidated Statements of Stockholders’ Equity and ComprehensiveIncome.

**Recent Accounting Pronouncements Not Yet Adopted**

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and ErrorCorrections,” which (a) establishes, unless impracticable, retrospectiveapplication as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle, (b) addresses the reporting of a correctionof an error by restating previously issued financial statements, and (c) iseffective in fiscal years beginning after December 15, 2005.  The adoption of this statement is notexpected to have a material effect on our consolidated financial statementswhen adopted on July 1, 2006.

InJune 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN48”).  FIN 48 clarifies the accountingfor uncertainty in income taxes by prescribing a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  The interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods and disclosure.  FIN 48 iseffective for fiscal years beginning after December 15, 2006.  We are in the process of evaluating theimpact FIN 48 will have on our consolidated financial statements.

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**2.           Discontinued Operations**

As a result of continuedoperating losses, the Board of Directors of the Company, in February 2004,approved a formal plan to divest our thin film interconnect manufacturingoperation (“MIC”) and to seek a strategic buyer.  This operation had previously been includedin our Microelectronic Solutions segment. As a result of this decision, we recorded a $9.1 million ($6.2 million,net of tax) loss on disposal. This charge included a cash requirement of $2.6million primarily for existing equipment leases, and a non-cash charge of $6.5million for the write down of goodwill, other intangibles and owned equipment.

In September 2004, we soldthe stock of MIC for $8.8 million and recorded an additional loss on disposalof $1.3 million ($1.3 million, net of tax). Since the sale of the stock created a capital loss for tax purposes andwe have no current capital gains to offset it, we recorded a full valuationallowance against the tax benefit.  Underthe terms of the sale agreements, we retained certain liabilities relating to potential adverse environmentalconditions that may have existed as of the date of sale, litigation pendingagainst MIC as of the date of sale and product defects in products designed, developed,manufactured or sold by MIC prior to the sale date which result in a recall,withdrawal or market suspension of the product or result in injury to personsor property.  We believe thesecontingencies will not have a material adverse effect on our consolidatedfinancial statements.

In June 2004, our Board ofDirectors approved a formal plan to divest our shock and vibration controldevice manufacturing business (“VMC”) and to seek a strategic buyer.  This operation had previously comprised theIsolator Products segment.  In March2005, we sold the net assets of VMC for $8.4 million in cash and recorded again on disposition of $860,000 ($505,000, net of tax).  Under the terms of the sale agreements, weretained certain liabilities relating to adverse environmental conditions thatexisted at the premises occupied by VMC as of the date of sale, litigationpending against VMC as of the date of sale, and to the extent covered byinsurance, for product liability for products sold prior to the closing date.  We recorded a reserve for the estimatedremediation costs related to adverse environmental conditions that existed atthe VMC premises when it was sold.

S-14

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These business units havebeen reported as discontinued operations and, accordingly, income and lossesfrom operations and the gain and (losses) on disposal have been reportedseparately from continuing operations. Net sales and income (loss) from discontinued operations (includinggains (losses) on disposal) for the years ended June 30, 2006, 2005 and 2004were as follows:  

|                                             | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                  | ** ** | **(In thousands)**                 | ** ** |
|                                        |       |                                    |       |   |   |   |   |
| Net sales                                   |       |                                    |       |   |   |   |   |
| MIC                                         |       | $                                       | —     |   | $ | 3,313 |   | $ | 10,689 |   |
| VMC                                         |       | —                                  |       | 12,406 |   | 16,025 |   |
|                                        |       | $                                       | —     |   | $ | 15,719 |   | $ | 26,714 |   |
|                                        |       |                                    |       |   |   |   |   |
| Income (loss)  from discontinued operations |       |                                    |       |   |   |   |   |
| MIC                                         |       | $                                       | —     |   | $ | (1,140 | ) | $ | (8,599 | ) |
| VMC                                         |       | —                                  |       | (477 | ) | 282 |   |
| Other                                       |       | —                                  |       | 14 |   | — |   |
|                                        |       | $                                       | —     |   | $ | (1,603 | ) | $ | (8,317 | ) |

 

**3.           Acquisitions ofBusinesses and Intangible Assets**

 

RacalInstruments Wireless Solutions Group

On July 31, 2003, we acquiredthe Racal Instruments Wireless Solutions Group (“RIWS”) for cash of $38 millionand a deferred payment of up to $16.5 million in either cash or Aeroflex commonstock, at our option, depending on RIWS achieving certain performance goals forthe year ending July 31, 2004.  We didnot include this contingent consideration in its initial purchase priceallocation as the payment of this consideration was not considered to becertain beyond a reasonable doubt at the date of acquisition.  Although we believe that the performancegoals have not been met, the determination is not final. RIWS develops,manufactures and integrates digital wireless testing and measurementsolutions.  The addition of RIWS testingsolutions products and technologies enabled us to provide a full spectrum ofwireless testing solutions from development to production and servicesprimarily for infrastructure testing and mobile handset testing.

MCETechnologies, Inc.

On September 3, 2003, weacquired all of the outstanding stock of MCE Technologies, Inc. (“MCE”) forapproximately 5.8 million shares of Aeroflex common stock with a fair value ofapproximately $43.5 million.  Inaddition, we discharged $22.8 million of MCE outstanding bank debt, otherindebtedness and preferred stock. Further, we issued fully vested stock options for 315,000 shares ofAeroflex common stock with exercise prices ranging from $2.88 to $9.59 inexchange for fully vested outstanding options of MCE.  The fair value of these options wasapproximately $2.4 million utilizing the Black-Scholes option pricingmodel.  MCE designs, manufactures andmarkets a broad range of microelectronic devices, components and multi-functionmodules servicing wireless, broadband infrastructure, satellite communicationsand defense markets.  These productofferings complemented  existing productlines.

S-15

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CeleritySystems Inc. (CA)

On October 31, 2003, weacquired Celerity Systems Inc. (CA) (“Celerity”) for $4.0 million of cash,428,000 shares of Aeroflex common stock with a fair market value ofapproximately $4.2 million and a release of certain liabilities totaling $1.8million.  Celerity designs, develops andmanufactures modular digital test and measurement solutions for thecommunications, satellite, wireless and broadband test markets, includingbroadband signal generators.  Celerity’stechnology enhanced our automatic systems capability.

JcAIR Test Systems

On April 19, 2005, weacquired all of the outstanding stock of JcAIR Test Systems (“JcAIR”) for cashof $35 million.  JcAIR provides customizedavionics test solutions in all areas of manual and automatic test equipment formanufacturing, repair and ground support operation.  The addition of JcAIR enhanced our avionicsproduct portfolio by providing more complete testing solutions for the avionicssystem test market.

We allocated the purchaseprice, including the acquisition costs of approximately $445,000, based on theestimated fair value of the assets acquired and liabilities assumed as follows:

|                                              | ** ** | **In thousands** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|
|                                         |       |                  |       |
| Current assets  (excluding cash of $568,000) |       | $                     | 9,897      |   |
| Property, plant  and equipment               |       | 1,525                 |       |
| Developed  technology                        |       | 12,000                |       |
| Customer related  intangibles                |       | 1,100                 |       |
| Goodwill                                     |       | 20,422                |       |
| In-process  research and development         |       | 200                   |       |
| Total assets acquired                        |       | 45,144                |       |
| Current  liabilities                         |       | (5,898                | )          |
| Deferred taxes                               |       | (4,369                | )          |
| Total liabilities assumed                    |       | (10,267               | )          |
| Net assets acquired                          |       | $                     | 34,877     |   |

 

The developed technology andcustomer related intangibles are being amortized on a straight-line basis overa range of 3 to 15 years.  The goodwillis not deductible for tax purposes.  Atthe acquisition date, we expensed the value of the acquired in-process researchand development because it was not considered to have reached technologicalfeasibility and had no alternative future uses. The allocation to in-process research and development represents theestimated fair value of such incomplete research and development, at theacquisition date, based on future cash flows that have been adjusted by therespective projects’ completion percentage. As of the acquisition date, cash flows from these projects were expectedto commence in fiscal 2006.  A 24% riskadjusted discount rate was applied to the projects’ cash flows in determiningfair value.   At the acquisition date, JcAIRwas conducting development activities associated with the completion of theMode 5 General Avionic Test Equipment sets.

S-16

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SPG Division of UbiNeticsHoldings Limited

On May 23, 2005, we acquiredthe stock of UbiNetics Limited, as well as certain assets located in India,Japan and Hong Kong, all of which constituted UbiNetics Holdings Limited’s SPGtest and measurement business (“SPG”) for cash of $84 million and a deferredpayment of up to approximately $4 million depending on SPG achieving certainperformance goals for the year ending June 30, 2006.  We did not include this contingentconsideration in its initial purchase price allocation as the payment of thisconsideration was not considered to be certain beyond a reasonable doubt at thedate of acquisition.  SPG did not achievethe specified goals.  SPG develops,manufactures and integrates wireless test and measurement solutions specific tocommercial wireless product development organizations and serviceoperators.  The addition of SPG’swireless test and measurement products and technologies enhanced our wirelessproduct portfolio and enabled us to provide more complete testing solutions forthe development, manufacturing and service markets.

We allocated the purchaseprice, including the acquisition costs of approximately $3.0 million, based onthe estimated fair value of the assets acquired and liabilities assumed asfollows:

|                                                  | ** ** | **In thousands** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
|                                             |       |                  |       |
| Current assets  (excluding cash of $4.0 million) |       | $                     | 5,320      |   |
| Property, plant  and equipment                   |       | 2,283                 |       |
| Developed  technology                            |       | 21,000                |       |
| Customer related  intangibles                    |       | 750                   |       |
| Goodwill                                         |       | 64,083                |       |
| In-process  research and development             |       | 2,800                 |       |
| Total assets acquired                            |       | 96,236                |       |
| Current  liabilities                             |       | (5,794                | )          |
| Deferred taxes                                   |       | (7,026                | )          |
| Other long term  liabilities                     |       | (468                  | )          |
| Total liabilities assumed                        |       | (13,288               | )          |
| Net assets acquired                              |       | $                     | 82,948     |   |

 

The developed technology andcustomer related intangibles are being amortized on a straight-line basis overa range of 1 to 5 years.  The goodwill isnot deductible for tax purposes.  At theacquisition date, we expensed the value of the acquired in-process research anddevelopment because it was not considered to have reached technologicalfeasibility and had no alternative future uses. The allocation to in-process research and development represents theestimated fair value of such incomplete research and development, at theacquisition date, based on future cash flows that have been adjusted by therespective projects’ completion percentage. As of the acquisition date, cash flows from these projects were expectedto commence in fiscal year 2006.  As ofthe acquisition date, cash flows were expected under two scenarios — base case(assuming the contingent payment is not earned) and earnout case (assuming thecontingent payment is earned).  Indetermining fair value, a 24% risk adjusted discount rate was applied to theprojects’ cash flows under the base case, and a 40% risk adjusted discount ratewas applied to the projects’ cash flows under the earnout case.   At the acquisition date, SPG was conductingdevelopment activities associated with the completion of test mobile productsused to test evolving 3G (third-generation) mobile communications networks andequipment that tests the functionality and performance of Wide-Band-Code-Division-Multiple-Accesstechnology.

 

S-17

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The operating results ofJcAIR and SPG have been included in the consolidated statement of earnings andthe Test Solutions segment from their respective acquisition dates.

Summarized below are the unaudited pro formaresults of operations of the Company as if RIWS, MCE, Celerity, JcAIR and SPGhad been acquired at the beginning of the fiscal periods presented.  The in-process research and developmentwrite-offs for JcAIR ($200,000) and SPG ($2.8 million) have been includedin the June 30, 2005 pro forma income but not the June 30, 2004 pro formaincome and the in-process research and development write-offs for RIWS($2.7 million), MCE ($420,000) and Celerity ($1.1 million) have beenincluded in the June 30, 2004 pro forma income in order to provide comparabilityto the respective historical periods.

|                       | ** ** | **Pro Forma**                                                 | ** ** |
|-----------------------|------------|--------------------------------------------------------------------|------------|
| ** **            | ** ** | **Years Ended**                                               | ** ** |
| ** **            | ** ** | **June 30**                                                   | ** ** |
| ** **            | ** ** | **2005**                                                           | ** ** | **2004** | ** ** |
| ** **            | ** ** | **(In thousands, except per share data)** | ** ** |
|                  |       |                                                               |       |   |   |
| Net sales             |       | $                                                                  | 516,265    |   | $ | 471,489 |   |
| Net income            |       | 25,608                                                             |       | 4,920 |   |
| Net income per  share |       |                                                               |       |   |   |
| Basic                 |       | $                                                                  | 0.34       |   | $ | 0.07 |   |
| Diluted               |       | 0.34                                                               |       | 0.07 |   |

 

The pro forma financial information presentedabove is not necessarily indicative of either the results of operations thatwould have occurred had the acquisitions taken place at the beginning of the periodspresented or of future operating results of the combined companies.

**Intangibles with Definite Lives**

The components ofamortizable intangible assets are as follows:

|                      | ** ** | **As of June 30, 2006** | ** ** | **As of June 30, 2005** | ** ** |
|----------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **           | ** ** | **Gross Carrying**                     | ** ** | **Accumulated**                             | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** |
| ** **           | ** ** | **Amount**                                  | ** ** | **Amortization**                            | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| ** **           | ** ** | **(In thousands)**                     | ** ** |
|                 |       |                                        |       |                                        |       |   |   |   |   |
| Existing  technology |       | $                                           | 83,488     |                                        | $          | 33,155 |   | $ | 82,179 |   | $ | 20,665 |   |
| Tradenames           |       | 2,328                                       |       | 2,009                                       |       | 2,321 |   | 1,457 |   |
| Customer related     |       | 6,317                                       |       | 2,754                                       |       | 6,238 |   | 1,350 |   |
| Total                |       | $                                           | 92,133     |                                        | $          | 37,918 |   | $ | 90,738 |   | $ | 23,472 |   |
|                 |       |                                        |       |                                        |       |   |   |   |   |

 

The aggregate amortizationexpense for amortized intangible assets was $13.8 million, $8.9 million and$7.7 million for the years ended June 30, 2006, 2005 and 2004, respectively.

The estimated aggregateamortization expense for each of the next five fiscal years is as follows:

|        | ** ** | **(In thousands)** | ** ** |
|--------|------------|-------------------------|------------|
| 2007   |       | $                       | 12,452     |   |
| 2008   |       | 11,681                  |       |
| 2009   |       | 9,188                   |       |
| 2010   |       | 7,833                   |       |
| 2011   |       | 3,589                   |       |
|   |       |                    |       |
|        |            |                         |            |  |

S-18

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**Goodwill**

The carrying amount ofgoodwill is as follows:
| ** **         | ** ** | **Balance**                | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** | **Effect of** | ** ** | **Balance**                 | ** ** |
|--------------------|------------|----------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|-----------------------------|------------|
| ** **         | ** ** | **as of**             | ** ** | **Adjustment**    | ** ** | **Adjustment**    | ** ** | **Adjustment**    | ** ** | **foreign**        | ** ** | **as of**              | ** ** |
| ** **         | ** ** | **July 1, 2005** | ** ** | **(Note a)** | ** ** | **(Note b)** | ** ** | **(Note c)** | ** ** | **currency**       | ** ** | **June 30, 2006** | ** ** |
| ** **         | ** ** | **(In thousands)**    | ** ** |
|               |       |                       |       |              |       |              |       |              |       |               |       |                        |       |
| Microelectronic    |       |                       |       |              |       |              |       |              |       |               |       |                        |       |
| Solutions  Segment |       | $                          | 46,688     |              | $          | —            |       | $                 | —     |               | $          | —                      |       | $ | — |   | $ | 46,688 |   |
| Test Solutions     |       |                       |       |              |       |              |       |              |       |               |       |                        |       |
| Segment            |       | 121,360                    |       | (5,930            | )          | (1,089            | )          | 83                |       | 2,125              |       | 116,549                     |       |
|               |       |                       |       |              |       |              |       |              |       |               |       |                        |       |
| Total              |       | $                          | 168,048    |              | $          | (5,930            | )          | $                 | (1,089     | )                  | $          | 83                          |       | $ | 2,125 |   | $ | 163,237 |   |
|               |       |                       |       |              |       |              |       |              |       |               |       |                        |       |

 
| ** **         | ** ** | **Balance**                | ** ** | ** **        | ** ** | ** **        | ** ** | ** **        | ** ** | **Effect of** | ** ** | **Balance**                 | ** ** |
|--------------------|------------|----------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|-----------------------------|------------|
| ** **         | ** ** | **as of**             | ** ** | **Acquisitions**  | ** ** | **Adjustment**    | ** ** | **Adjustment**    | ** ** | **foreign**        | ** ** | **as of**              | ** ** |
| ** **         | ** ** | **July 1, 2004** | ** ** | **(Note d)** | ** ** | **(Note e)** | ** ** | **(Note f)** | ** ** | **currency**       | ** ** | **June 30, 2005** | ** ** |
| ** **         | ** ** | **(In thousands)**    | ** ** |
|               |       |                       |       |              |       |              |       |              |       |               |       |                        |       |
| Microelectronic    |       |                       |       |              |       |              |       |              |       |               |       |                        |       |
| Solutions  Segment |       | $                          | 46,371     |              | $          | —            |       | $                 | 317        |               | $          | —                      |       | $ | — |   | $ | 46,688 |   |
| Test Solutions     |       |                       |       |              |       |              |       |              |       |               |       |                        |       |
| Segment            |       | 41,917                     |       | 84,644            |       | (2,059            | )          | (1,912            | )          | (1,230             | )          | 121,360                     |       |
|               |       |                       |       |              |       |              |       |              |       |               |       |                        |       |
| Total              |       | $                          | 88,288     |              | $          | 84,644            |       | $                 | (1,742     | )                  | $          | (1,912                      | )          | $ | (1,230 | ) | $ | 168,048 |   |
|               |       |                       |       |              |       |              |       |              |       |               |       |                        |       |

 

Note a -                These adjustments to goodwill areprimarily the result of tax adjustments related to the acquisitions of   Aeroflex International Ltd. and RIWS pertaining to pre-acquisition tax periods.

Note b -               This adjustment to goodwill relates tothe write down of a pre-acquisition rent accrual for RIWS.

Note c -                These adjustments to goodwill pertainto final adjustments to the fair value of assets and liabilitiesassumed in the acquisitions of RIWS, JcAIR and the SPG Division of UbiNetics.

Note d -               Relates to the acquisition of JcAIR andSPG.

Note e -                These adjustments to goodwill pertainto final adjustments to the fair value of assets and liabilities assumed in the acquisitions of MCE in the Microelectronic Solutions segmentand                of RIWS and Celerity in the Test Solutions segment.

Note f -                  This adjustment to goodwill is aresult of a reduction in the purchase price of RIWS in connection with the amount of actual working capital acquired as of the acquisition date.

S-19

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**4.             RestructuringCharges**

In fiscal 2005, we initiatedstrategic plans to reorganize certain European operations in our Test Solutionsbusiness segment and recorded a charge of $3.1 million for workforce reductionsprimarily in management, sales, and engineering.  The restructuring charge was allocatedentirely to selling, general and administrative costs.

In fiscal 2006, we initiatedfurther steps to consolidate our three Test Solutions businesses in the UnitedKingdom.  The current plan, which isexpected to be completed in the first half of fiscal 2007, contemplates themove of manufacturing operations into one facility and the creation of ashared-services environment for all finance and administrative functions.  In connection with this plan, approximately40 employees will be terminated and certain contract positions will beeliminated.  In fiscal 2006, we recordedcharges of $3.2 million primarily for workforce reductions in all departments.The workforce restructuring charge was allocated primarily to selling, generaland administrative costs.

Thefollowing tables set forth the charges and payments related to therestructuring reserve, which is included in accrued expenses and other currentliabilities in the accompanying balance sheet, for the years ended June 30,2006 and 2005:

|                      | ** ** | **Balance July 1,** | ** ** | ** **                                       | ** ** | **Balance June 30,** | ** ** |
|----------------------|------------|-------------------------------|------------|--------------------------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **2005**                      | ** ** | **Year Ended June 30, 2006** | ** ** | **2006**                       | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **(In thousands)**                          | ** ** | ** **                     | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **Net Addition**                            | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **to**                                           | ** ** | ** **                     | ** ** | **Foreign** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Restructuring**             | ** ** | **Restructuring**                                | ** ** | **Cash**                       | ** ** | **Currency** | ** ** | **Restructuring** | ** ** |
| ** **           | ** ** | **Reserve**                   | ** ** | **Reserve**                                      | ** ** | **Payments**                   | ** ** | **Impact** | ** ** | **Reserve** | ** ** |
|                 |       |                          |       |                                             |       |                           |       |   |   |   |   |
| Work force reduction |       | $                             | 924        |                                             | $          | 2,858                          |       | $ | (2,714 | ) | $ | 23 |   | $ | 1,091 |   |
|                 |       |                          |       |                                             |       |                           |       |   |   |   |   |
| Other                |       | 100                           |       | —                                           |       | —                         |       | — |   | 100 |   |
|                 |       |                          |       |                                             |       |                           |       |   |   |   |   |
| Total                |       | $                             | 1,024      |                                             | $          | 2,858                          |       | $ | (2,714 | ) | $ | 23 |   | $ | 1,191 |   |
|                 |       |                          |       |                                             |       |                           |       |   |   |   |   |

 

|                      | ** ** | **Balance July 1,** | ** ** | **Year Ended June 30, 2005** | ** ** | **Balance June 30,** | ** ** |
|----------------------|------------|-------------------------------|------------|--------------------------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **2004**                      | ** ** | **(In thousands)**                          | ** ** | **2005**                       | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **Adjustments**                                  | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **                    | ** ** | **to**                                           | ** ** | ** **                     | ** ** | **Foreign** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Restructuring**             | ** ** | **Restructuring**                                | ** ** | **Cash**                       | ** ** | **Currency** | ** ** | **Restructuring** | ** ** |
| ** **           | ** ** | **Reserve**                   | ** ** | **Reserve**                                      | ** ** | **Payments**                   | ** ** | **Impact** | ** ** | **Reserve** | ** ** |
|                 |       |                          |       |                                             |       |                           |       |   |   |   |   |
| Work force reduction |       | $                             | 3          |                                             | $          | 3,124                          |       | $ | (2,128 | ) | $ | (75 | ) | $ | 924 |   |
|                 |       |                          |       |                                             |       |                           |       |   |   |   |   |
| Other                |       | 120                           |       | —                                           |       | (20                            | )          | — |   | 100 |   |
|                 |       |                          |       |                                             |       |                           |       |   |   |   |   |
| Total                |       | $                             | 123        |                                             | $          | 3,124                          |       | $ | (2,148 | ) | $ | (75 | ) | $ | 1,024 |   |
|                 |       |                          |       |                                             |       |                           |       |   |   |   |   |

 

S-20

----

**5.             Inventories**

Inventories consist of thefollowing:

|                 | ** ** | **June 30,**       | ** ** |
|-----------------|------------|-------------------------|------------|
| ** **      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **      | ** ** | **(In thousands)** | ** ** |
|            |       |                    |       |   |   |
| Raw materials   |       | $                       | 52,796     |   | $ | 43,158 |   |
| Work-in-process |       | 57,020                  |       | 53,115 |   |
| Finished goods  |       | 23,604                  |       | 22,633 |   |
|            |       | $                       | 133,420    |   | $ | 118,906 |   |
|            |       |                    |       |   |   |

 

Inventories include contracts-in-process of $37.4million and $30.9 million at June 30, 2006 and 2005, respectively, whichconsist substantially of unbilled material, labor and overhead costs.  These unbilled costs are expected to bebilled during the succeeding fiscal year.

**6.             Property, Plant andEquipment**

Property, plant andequipment consists of the following:

|                                       | ** ** | **June 30,**       | ** ** | **Estimated**     | ** ** |
|---------------------------------------|------------|-------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2006**                | ** ** | **2005**          | ** ** | **Useful Life** | ** ** |
| ** **                            | ** ** | **(In thousands)** | ** ** | **In Years** | ** ** |
|                                  |       |                    |       |              |       |   |   |   |   |
| Land                                  |       | $                       | 11,625     |              | $          | 11,478 |   |   |   |   |   |
| Building and leasehold  improvements  |       | 31,992                  |       | 28,783            |       |   | 2 to 40 |   |   |
| Machinery and equipment               |       | 104,124                 |       | 92,389            |       |   | 2 to 10 |   |   |
| Furniture and fixtures                |       | 17,411                  |       | 14,867            |       |   | 3 to 10 |   |   |
| Assets recorded under  capital leases |       | 6,110                   |       | 6,110             |       |   | 2 to 30 |   |   |
|                                  |       | 171,262                 |       | 153,627           |       |   |   |   |   |
| Less accumulated  depreciation and    |       |                    |       |              |       |   |   |   |   |
| amortization                          |       | 93,322                  |       | 75,432            |       |   |   |   |   |
|                                  |       | $                       | 77,940     |              | $          | 78,195 |   |   |   |   |   |
|                                  |       |                    |       |              |       |   |   |   |   |

 

Depreciationexpense on property, plant and equipment was $16.7 million, $15.5 million and$14.1 million for the years ended June 30, 2006, 2005 and 2004, respectively.

Repairsand maintenance expense on property, plant and equipment was $6.2 million, $5.5million and $5.5 million for the years ended June 30, 2006, 2005 and 2004,respectively.

S-21

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**7.             Product Warranty**

Wewarrant our products against defects in design, materials and workmanship,generally for one year from their date of shipment.  A provision for estimated future costsrelating to these warranties is recorded when revenue is recognized and isincluded in cost of goods sold.

Activityrelated to our product warranty liability was as follows:

|                                     | ** ** | **Years Ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|
| ** **                          | ** ** | **2006**                                | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(In thousands)**                 | ** ** |
|                                |       |                                    |       |   |   |
| Balance at  beginning of period     |       | $                                       | 2,056      |   | $ | 1,702 |   |
| Provision for  warranty obligations |       | 3,072                                   |       | 2,033 |   |
| Liability  assumed in acquisition   |       |                                    |       |   |   |
| of businesses                       |       | —                                  |       | 167 |   |
| Charges incurred                    |       | (2,571                                  | )          | (1,840 | ) |
| Foreign currency  impact            |       | 26                                      |       | (6 | ) |
|                                |       |                                    |       |   |   |
| Balance at end  of period           |       | $                                       | 2,583      |   | $ | 2,056 |   |
|                                |       |                                    |       |   |   |

 

**8.             Long-Term Debt andCredit Arrangements**

Long-term debt consists ofthe following:

|                                                           | ** ** | **June 30,**       | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                | ** ** | **(In thousands)** | ** ** |
|                                                      |       |                    |       |   |   |
| Revolving credit  borrowings (a)                          |       | $                       | —     |   | $ | — |   |
| Mortgage (b)                                              |       | 2,150                   |       | 2,475 |   |
| Capitalized facility  and equipment lease obligations (c) |       | 1,990                   |       | 2,260 |   |
| Other                                                     |       | 25                      |       | 89 |   |
|                                                      |       | 4,165                   |       | 4,824 |   |
| Less current maturities                                   |       | 607                     |       | 634 |   |
|                                                      |       | $                       | 3,558      |   | $ | 4,190 |   |
|                                                      |       |                    |       |   |   |

 

Aggregate debt as of June30, 2006 matures in each fiscal year as follows:

|            | ** ** | **(In thousands)** | ** ** |
|------------|------------|-------------------------|------------|
|       |       |                    |       |
| 2007       |       | $                       | 607        |   |
| 2008       |       | 2,143                   |       |
| 2009       |       | 328                     |       |
| 2010       |       | 342                     |       |
| 2011       |       | 360                     |       |
| Thereafter |       | 385                     |       |
|       |       | $                       | 4,165      |   |
|       |       |                    |       |

 

Interestpaid was $608,000, $1.0 million and $1.2 million during the years ended June30, 2006, 2005 and 2004, respectively.

S-22

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(a)  On March 21, 2006, we executed a loanagreement with four banks which replaced a previous $50 million loanagreement.  The unsecured multi-currencyrevolving credit facility increased our line of credit to $100 million throughMarch 2011.  Approximately $11.0 millionin letters of credit issued under the previous facility constitute letters ofcredit issued under the new facility. Under certain circumstances, at our request, the commitments under thecredit facility may be increased by an additional $50 million to $150million.  The interest rates onborrowings under this agreement are at varying rates depending on certainfinancial ratios with the current rate substantially equivalent to LIBOR plus..575% (5.9% at June 30, 2006) on the revolving credit borrowings.  We paid closing fees of $308,000 includinglegal costs and are required to pay an annual facility fee of .175% on theentire credit line.

The terms of the loanagreement as most recently amended on August 28, 2006, require compliance withcertain financial covenants including maintenance of various financial ratios,limitations on indebtedness, prohibition of the payment of cash dividends andcertain other payments.  We are currentlyin full compliance with all of the covenants contained in the loanagreement.  At June 30, 2006, ouravailable unused line of credit was approximately $89.0 million afterconsideration of outstanding letters of credit.

(b)  The mortgage on our Plainview, New Yorkproperty for $2.2 million remains outstanding under the prior loanagreement.  The mortgage is payable inmonthly installments of approximately $26,000 through March 2008 and a balloonpayment of $1.6 million in April 2008. We entered into an interest rate swap agreement for the outstandingamount under the mortgage agreement at approximately 7.6% in order to reducethe interest rate risk associated with these borrowings.  The fair market value of the interest rateswap agreements was $20,000 as of June 30, 2006 in favor of the banks.  If this mortgage was prepaid, although wehave no intention of doing so, the $20,000 would be charged to the statement ofoperations at that time.

(c)  In connection with the acquisition of IFR, weassumed a capital lease obligation for $3.0 million on IFR’s Wichita, Kansasfacility and certain equipment.  Theobligation requires quarterly payments of approximately $100,000  through 2012 and bears interest atapproximately 6.3%. The net book value of the capitalized leases was$1.5 million at June 30, 2006.

**9.             Stockholders’Equity**

**StockRepurchase Program**

Duringfiscal 2005, our Board of Directors authorized a stock repurchase program of upto 3.0 million shares of the Company’s Common Stock, subject to certain limitationsimposed by our lending banks.  Purchasesare made from time to time, depending upon market conditions at prices deemedappropriate by management.  During fiscal2006 a total of 35,000 shares were repurchased for $402,000 and retired.  As of June 30, 2006, 85,000 shares have beenrepurchased and retired since the inception of this program for $818,000.  Since July 1, 2006, we have repurchased anadditional 1.8 million shares for $17.2 million through September 11,2006.

S-23

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**Stock Options and Warrants**

Underour stock option plans, options may be granted to purchase shares of theCompany’s Common Stock exercisable at prices generally equal to the fair marketvalue on the date of grant.

InDecember 1993, the Board of Directors adopted the Outside Director Stock OptionPlan (the “Directors’ Plan”) which provides options to non-employee directors thatbecome exercisable in three installments. The Directors’ Plan, as amended, covers 1.3 million shares of theCompany’s Common Stock.  In November1994, shareholders approved the Directors’ Plan and the 1994 Non-QualifiedStock Option Plan (the “1994 Plan”).  InNovember 1996, shareholders approved the 1996 Stock Option Plan (the “1996 Plan”).  In April 1998, the Board of Directors adoptedthe 1998 Stock Option Plan (the “1998 Plan”). In January 2000, shareholders approved the 1999 Stock Option Plan (the “1999Plan”).  In March 2000, the Board ofDirectors adopted the 2000 Stock Option Plan (the “2000 Plan”).  In November 2000, shareholders approved theKey Employee Stock Option Plan (the “Key Employee Plan”).  In June 2002, the Board of Directors adoptedthe 2002 Stock Option Plan (the “2002 Plan”). In November 2002, shareholders approved the 2002 Outside Directors’Stock Option Plan (the “2002 Directors’ Plan”), which provides options tonon-employee directors that become exercisable in three installments.

The1994 Plan, the 1996 Plan, the 1998 Plan, the 1999 Plan, the 2000 Plan, the KeyEmployee Plan and the 2002 Plan provide for options which become exercisable inone or more installments.  The 1994 Plan,the 1996 Plan and the 1998 Plan each cover 3.8 million shares of the Company’sCommon Stock.  The 1999 Plan covers 2.3million shares, the 2000 Plan covers 6.2 million shares, the Key Employee Plancovers 4.0 million shares, the 2002 Plan covers 1.5 million shares and the 2002Directors’ Plan, as amended and approved by the shareholders in November 2005,covers 1.1 million shares. As of June 30, 2006, 3.1 million shares of theCompany’s Common Stock are reserved and available for grants pursuant to theseplans.

Duringfiscal 2005 and fiscal 2004, in connection with certain of its acquisitions,and the hiring of employees, we issued to employees, who are not executiveofficers, options to purchase 310,000 and 710,000 shares respectively, ofCommon Stock which were not covered by one of the above plans.

Theexercise period for all stock options does not exceed ten years from the dateof grant.  Stock option grants toindividuals generally become exercisable in substantively equal tranches over aservice period of up to five years and the exercise price is equal to the stockprice at the grant date for all plans.  We have elected to recognize compensation cost on a straight line basisover the requisite service period for the entire award.

Ourstock option plans allow employees to use shares received from the exercise ofoptions only to satisfy the tax withholding requirements.  During fiscal years 2006, 2005 and 2004, nopayroll tax on stock option exercises was withheld from employees in shares ofthe Company’s Common Stock.

Theweighted average grant date fair value of stock options granted for the yearsended June 30, 2006, 2005 and 2004 was $8.86, $5.07 and $6.99,respectively.   The total intrinsic valueof stock options exercised for the years ended June 30, 2006, 2005 and 2004 was$3.6 million, $2.2 million and $6.8 million, respectively.

Thefair value of each share option award is estimated on the date of grant usingthe Black-Scholes option-pricing model based on the weighted averageassumptions noted in the following table. Expected volatilities are based on historical volatility of our sharesusing daily price observations over a period consistent with the expected life.

Weuse the Securities and Exchange Commission’s safe harbor guidance in SAB 107 toestimate the expected life of options granted during fiscal 2006.  The risk-free rate is based on the U.S.Treasury yield curve in effect at the time of grant for periods similar to theexpected life.

|                                                   | ** ** | **Years Ended June 30,** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                              |       |                                    |       |   |   |   |   |
| Weighted average  expected stock price volatility |       | 92                                      | %          | 75 | % | 76 | % |
| Weighted average  expected option life            |       | 6.1 years                               |       | 3.9 years |   | 5.2 years |   |
| Average risk free  interest rate                  |       | 4.5                                     | %          | 3.8 | % | 4.6 | % |
| Average dividend  yield                           |       | —                                  |       | — |   | — |   |
| Discount for  post-vesting restrictions           |       | N/A                                     |       | N/A |   | N/A |   |

 

Sharebased compensation expense is attributable to the granting, and the remainingrequisite service periods, of stock options.  Compensation expense attributable to sharebased compensation in the fiscal year ended June 30, 2006 was $6.8 million($4.2 million after tax, or basic and diluted earnings per share of $0.06 and$0.05, respectively).  As of June 30,2006, the total unrecognized compensation cost related to nonvested stockawards was $6.8 million and the related weighted average period over which itis expected to be recognized is approximately 2.3 years.

Priorto our adoption of SFAS No. 123(R), we provided pro forma information regardingnet earnings and net earnings per common share as if compensation cost for theCompany’s share based awards had been determined in accordance with the fairvalue method prescribed therein.    Thepro forma charge for compensation cost related to share based awards grantedwas recognized over the service period. For stock options, the service period represents the period of timebetween the date of grant and the date each option becomes exercisable withoutconsideration of certain acceleration provisions, such as change of control.

S-24

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Thefollowing table illustrates the effect on the net earnings per common share asif the fair value method had been applied to all outstanding awards for thefiscal years ended June 30, 2005 and 2004: 

|                                                     | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **(In thousands)**                 | ** ** |
|                                                |       |                                    |       |   |   |
| Net income, as reported                             |       | $                                       | 17,041     |   | $ | 12,147 |   |
| Deduct: Total share  based compensation expense     |       |                                    |       |   |   |
| determined under  fair value method for all awards, |       |                                    |       |   |   |
| net of related  tax effects                         |       | (12,832                                 | )          | (12,524 | ) |
|                                                |       |                                    |       |   |   |
| Pro forma net income  (loss)                        |       | $                                       | 4,209      |   | $ | (377 | ) |
|                                                |       |                                    |       |   |   |
| Net income (loss) per  share:                       |       |                                    |       |   |   |
| Basic, as  reported                                 |       | $                                       | 0.23       |   | $ | 0.18 |   |
|                                                |       |                                    |       |   |   |
| Basic, pro forma                                    |       | $                                       | 0.06       |   | $ | (0.01 | ) |
|                                                |       |                                    |       |   |   |
| Diluted, as  reported                               |       | $                                       | 0.22       |   | $ | 0.17 |   |
|                                                |       |                                    |       |   |   |
| Diluted, pro  forma                                 |       | $                                       | 0.06       |   | $ | (0.01 | ) |
|                                                |       |                                    |       |   |   |

Additionalinformation with respect to our stock options is as follows:

|                                    | ** ** | ** **              | ** ** | ** **   | ** ** | ** **              | ** ** | **Weighted**              | ** ** |
|------------------------------------|------------|-------------------------|------------|--------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                         | ** ** | ** **              | ** ** | **Weighted** | ** ** | ** **              | ** ** | **Average**               | ** ** |
| ** **                         | ** ** | ** **              | ** ** | **Average**  | ** ** | **Aggregate**           | ** ** | **Contractual Life** | ** ** |
| ** **                         | ** ** | ** **              | ** ** | **Exercise** | ** ** | **Intrinsic**           | ** ** | **Remaining in**     | ** ** |
| ** **                         | ** ** | **Shares**              | ** ** | **Price**    | ** ** | **Value (1)**      | ** ** | **Years**                 | ** ** |
| ** **                         | ** ** | **(In thousands)** | ** ** | ** **   | ** ** | **(In thousands)** | ** ** | ** **                | ** ** |
|                               |       |                    |       |         |       |                    |       |                      |       |
| Outstanding at June 30,  2005      |       | 15,384                  |       | $            | 11.72      |                    |       |                      |       |   |
| Granted                            |       | 529                     |       | 11.41        |       |                    |       |                      |       |
| Forfeited                          |       | (459                    | )          | 12.64        |       |                    |       |                      |       |
| Expired                            |       | —                  |       | —       |       |                    |       |                      |       |
| Exercised                          |       | (691                    | )          | 6.61         |       |                    |       |                      |       |
|                               |       |                    |       |         |       |                    |       |                      |       |
| Outstanding at June 30,  2006      |       | 14,763                  |       | $            | 11.92      |                    | $          | 28,278                    |       | 5.4 |   |
|                               |       |                    |       |         |       |                    |       |                      |       |
| Exercisable at June 30,  2006      |       | 13,435                  |       | $            | 12.12      |                    | $          | 25,640                    |       | 5.1 |   |
|                               |       |                    |       |         |       |                    |       |                      |       |
| Expected to vest at  June 30, 2006 |       | 1,228                   |       | $            | 9.86       |                    | $          | 2,405                     |       | 8.6 |   |
|                               |       |                    |       |         |       |                    |       |                      |       |

(1)             The intrinsic value is the result ofmultiplying shares by the amount by which the current market value of theunderlying stock exceeds the exercise price of the option.

S-25

----

 

Thetotal fair value of shares vested during the year ended June 30, 2006 was $8.8million.

**Shareholders’ Rights Plan**

OnAugust 13, 1998, the Company’s Board of Directors approved a Shareholders’Rights Plan which provides for a dividend distribution of one right for eachshare to holders of record of the Company’s Common Stock on August 31, 1998 andthe issuance of one right for each share of Common Stock that shall besubsequently issued.  The rights becomeexercisable only in the event a person or group (“Acquiring Person”)accumulates 15% or more of the Company’s Common Stock, or if an AcquiringPerson announces an offer which would result in it owning 15% or more of theCommon Stock.  The rights expire onAugust 31, 2008.  Each right will entitlethe holder to buy 1/2500 of a share of Series A Junior Participating PreferredStock, as amended, of the Company at a price of $65.  In addition, upon the occurrence of a mergeror other business combination, or the acquisition by an Acquiring Person of 50%or more of the Common Stock, holders of the rights, other than the AcquiringPerson, will be entitled to purchase either Common Stock of the Company orcommon stock of the Acquiring Person at half their respective marketvalues.  The Company will be entitled toredeem the rights for $.01 per right at any time prior to a person becoming anAcquiring Person.

**RestrictedStock**

Infiscal 2006 we granted 10,000 shares of Restricted Stock of which none vestedor foreited in fiscal 2006.  This award had an estimated fair value ofapproximately $105,000 which will be recognized on a straight line basis overthe requisite service period of two years.

**10.          Comprehensive Income**

Thecomponents of comprehensive income are as follows:

|                                                                                         | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                              | ** ** | **(In thousands)**                 | ** ** |
|                                                                                    |       |                                    |       |   |   |   |   |
| Net income                                                                              |       | $                                       | 26,959     |   | $ | 17,041 |   | $ | 12,147 |   |
| Unrealized gain  (loss) on interest rate swap agreement, net of tax of $37, $21 and $72 |       | 63                                      |       | 54 |   | 139 |   |
| Minimum pension  liability adjustment, net of tax of $(349), (959), and $111            |       | (548                                    | )          | (1,424 | ) | 237 |   |
| Foreign currency  translation adjustment                                                |       | 4,933                                   |       | (997 | ) | 7,195 |   |
| Total  comprehensive income (loss)                                                      |       | $                                       | 31,407     |   | $ | 14,674 |   | $ | 19,718 |   |
|                                                                                    |       |                                    |       |   |   |   |   |

 

S-26

----

Accumulated othercomprehensive income (loss) is as follows:

|                         | ** ** | **Unrealized**             | ** ** | ** **                 | ** ** | ** **      | ** ** | ** **                 | ** ** |
|-------------------------|------------|----------------------------|------------|----------------------------|------------|-----------------|------------|----------------------------|------------|
| ** **              | ** ** | **Gain (Loss)**       | ** ** | **Minimum**                | ** ** | ** **      | ** ** | ** **                 | ** ** |
| ** **              | ** ** | **on Interest**       | ** ** | **Pension**                | ** ** | **Foreign**     | ** ** | ** **                 | ** ** |
| ** **              | ** ** | **Rate Swap**         | ** ** | **Liability**              | ** ** | **Currency**    | ** ** | ** **                 | ** ** |
| ** **              | ** ** | **Agreements**             | ** ** | **Adjustment**             | ** ** | **Translation** | ** ** | **Total**                  | ** ** |
| ** **              | ** ** | **(net of tax)** | ** ** | **(net of tax)** | ** ** | **Adjustment**  | ** ** | **(net of tax)** | ** ** |
| ** **              | ** ** | **(In thousands)**    | ** ** |
|                    |       |                       |       |                       |       |            |       |                       |       |
| Balance, July 1,  2003  |       | $                          | (268       | )                          | $          | (2,445          | )          | $                          | 6,529      |   | $ | 3,816 |   |
| Annual change           |       | 139                        |       | 237                        |       | 7,195           |       | 7,571                      |       |
| Balance, June  30, 2004 |       | (129                       | )          | (2,208                     | )          | 13,724          |       | 11,387                     |       |
| Annual change           |       | 54                         |       | (1,424                     | )          | (997            | )          | (2,367                     | )          |
| Balance, June  30, 2005 |       | (75                        | )          | (3,632                     | )          | 12,727          |       | 9,020                      |       |
| Annual change           |       | 63                         |       | (548                       | )          | 4,933           |       | 4,448                      |       |
| Balance, June  30, 2006 |       | $                          | (12        | )                          | $          | (4,180          | )          | $                          | 17,660     |   | $ | 13,468 |   |

 

**11.          Income Taxes**

The amount of income fromcontinuing operations before taxes attributable to domestic and foreignoperations are as follows

 

|                          | ** ** | **Year ended June 30, 2006** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic                 |       | $                                                | 50,927     |   | $ | 43,288 |   | $ | 34,631 |   |
| Foreign                  |       | (5,610                                           | )          | (10,267 | ) | (1,710 | ) |
|      |       | $                                                | 45,317     |   | $ | 33,021 |   | $ | 32,921 |   |

 

The provision for incometaxes from continuing operations consists of the following:

|                 | ** ** | **Years Ended June 30,** | ** ** |
|-----------------|------------|-----------------------------------------|------------|
| ** **      | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **      | ** ** | **(In thousands)**                 | ** ** |
|            |       |                                    |       |   |   |   |   |
| Current:        |       |                                    |       |   |   |   |   |
| Federal         |       | $                                       | 26,623     |   | $ | 18,267 |   | $ | 10,827 |   |
| State and local |       | 3,029                                   |       | 1,666 |   | 2,076 |   |
| Foreign         |       | 1,366                                   |       | (1,348 | ) | 23 |   |
|            |       | 31,018                                  |       | 18,585 |   | 12,926 |   |
|            |       |                                    |       |   |   |   |   |
| Deferred:       |       |                                    |       |   |   |   |   |
| Federal         |       | (9,447                                  | )          | (3,823 | ) | 1,637 |   |
| State and local |       | 24                                      |       | 803 |   | (493 | ) |
| Foreign         |       | (4,374                                  | )          | (1,188 | ) | (1,613 | ) |
|            |       | (13,797                                 | )          | (4,208 | ) | (469 | ) |
|            |       | $                                       | 17,221     |   | $ | 14,377 |   | $ | 12,457 |   |

 

S-27

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The provision for incometaxes varies from the amount computed by applying the U.S. Federal income taxrate to income from continuing operations before income taxes as a result ofthe following:

|                                                                       | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                            | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                            | ** ** | **(In thousands)**                 | ** ** |
|                                                                  |       |                                    |       |   |   |   |   |
| Tax at statutory  rate                                                |       | $                                       | 15,861     |   | $ | 11,557 |   | $ | 11,523 |   |
|                                                                  |       |                                    |       |   |   |   |   |
| Non-deductible  acquired in-process research and   development charge |       | —                                  |       | 1,050 |   | 1,092 |   |
| Undistributed  earnings of foreign subsidiaries                       |       | (1,306                                  | )          | (1,368 | ) | (1,283 | ) |
| Valuation  allowance against foreign loss                             |       | 516                                     |       | 1,480 |   | — |   |
| State and local  income tax                                           |       | 1,992                                   |       | 1,532 |   | 1,185 |   |
| Domestic  manufacturing credit                                        |       | (664                                    | )          | — |   | — |   |
| Non deductible foreign interest                                       |       | 514                                     |       | — |   | — |   |
| Research and  development credit and other, net                       |       | 308                                     |       | 126 |   | (60 | ) |
|                                                                  |       | $                                       | 17,221     |   | $ | 14,377 |   | $ | 12,457 |   |

 

Deferred tax assets and liabilities consist of:

|                                                 | ** ** | **June 30,**       | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(In thousands)** | ** ** |
|                                            |       |                    |       |   |   |
| Accounts  receivable                            |       | $                       | 373        |   | $ | 287 |   |
| Inventories                                     |       | 12,788                  |       | 10,351 |   |
| Accrued expenses  and other current liabilities |       | 11,571                  |       | 7,861 |   |
| Current assets                                  |       | 24,732                  |       | 18,499 |   |
| Other long-term  liabilities                    |       | 14,956                  |       | 6,834 |   |
| Capital loss  carryforwards                     |       | 8,191                   |       | 8,200 |   |
| Tax loss  carryforwards                         |       | 4,480                   |       | 5,171 |   |
| Tax credit  carryforwards                       |       | 44                      |       | 354 |   |
| Less: valuation  allowance                      |       | (12,237                 | )          | (12,078 | ) |
| Non-current assets                              |       | 15,434                  |       | 8,481 |   |
| Property, plant  and equipment                  |       | (2,503                  | )          | (3,800 | ) |
| Intangibles                                     |       | (17,562                 | )          | (21,827 | ) |
| Long-term liabilities                           |       | (20,065                 | )          | (25,627 | ) |
| Net non-current assets (liabilities)            |       | (4,631                  | )          | (17,146 | ) |
| Total                                           |       | $                       | 20,101     |   | $ | 1,353 |   |
|                                            |       |                    |       |   |   |

 

Werecorded credits of $1.3 million, $796,000 and $2.5 million to additionalpaid-in capital during the years ended June 30, 2006, 2005 and 2004,respectively, in connection with the tax benefit related to compensationdeductions on the exercise of stock options.

Thetax loss carryforwards and tax credit carryforwards expire through 2023.

Deferredtax assets have resulted primarily from our future deductible temporarydifferences and net operating loss and capital carry forwards.  In assessing the realizability of deferredtax assets, management considers whether it is more likely than not that someportion or all of the deferred tax asset will not be realized. The Company’sability to realize its deferred tax assets depends upon the generation ofsufficient future taxable income to allow for the utilization in the periods inwhich temporary differences become deductible. If such estimates and relatedassumptions change in the future, we may be required to record additionalvaluation allowances against our deferred tax assets resulting in additionalincome tax expense in our consolidated statements of earnings. Managementevaluates the realizability of the deferred tax assets and the need foradditional valuation allowances quarterly. At this time, based on current facts and circumstances, managementbelieves that it is more likely than not that we will realize benefit for ourgross deferred tax assets, except those deferred tax assets against which avaluation allowance has been recorded.

Werecorded a valuation allowance primarily against foreign and state net operatingloss carryforwards, capital loss carryforwards and certain other tax creditcarryforwards which we believe are likely to expire before they can beutilized.

S-28

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Deferredtaxes have not been provided on undistributed earnings of foreign subsidiaries sincewe expect that substantially all of these earnings will be permanentlyreinvested in foreign operations. Determination of the amount of unrecognized deferred U.S. income taxliabilities and potential foreign tax credits is not practical to calculatebecause of the complexity of this hypothetical calculation.

Duringthe fourth quarter we repatriated $1.5 million of foreign earnings. This$1.5 million dividend was an extraordinary dividend that qualified underprovisions of the American Jobs Creation Act for the 85 percent dividendreceived deduction.

Weare undergoing routine audits by taxing authorities of its state income taxreturns covering periods from 2002 to 2004. We believe that the probable outcome of these various audits will notmaterially affect our consolidated financial statements.

Wemade income tax payments of $25.7 million, $14.0 million and $12.7 million andreceived refunds of $2.9 million, $9,000 and $202,000 during the years endedJune 30, 2006, 2005 and 2004 respectively.

**12.          Employment Contracts**

Wehave employment agreements with our officers and certain other key employeesfor periods through December 31, 2009 with annual remuneration ranging from $135,000to $450,000, plus cost of living adjustments and, in some cases, additionalcompensation based upon earnings of the Company.  Future aggregate minimum payments under thesecontracts are $2.4 million per year. Certain of the contracts provide for a three-year consulting period atthe expiration of the employment term at two-thirds of salary.  In addition, these officers have the optionto terminate their employment agreements upon a change in control of theCompany, as defined, and receive lump sum payments equal to the salary andbonus, if any, for the remainder of the term.

**13.          Employee Benefit Plans**

401(k)and Profit Sharing Plans

Allemployees of the Company and certain subsidiaries who are not members of acollective bargaining agreement are eligible to participate in a companysponsored 401(k) plan.  Each participanthas the option to contribute a portion of his or her compensation and receive adiscretionary employer matching contribution. Furthermore, employees of one subsidiary are eligible to participate ina qualified profit sharing plan and receive an allocation of a discretionaryshare of the subsidiary’s profits.  Forfiscal years ended June 30, 2006, 2005 and 2004, these 401(k) and profitsharing plans had an aggregate expense of $4.0 million, $3.8 million and $3.3million, respectively.

DefinedBenefit Pension Plans

EffectiveJanuary 1, 1994, we established a Supplemental Executive Retirement Plan (the “SERP”)which provides retirement, death and disability benefits to certain of itsofficers.  The SERP is currentlyunfunded, however there are funds being held in a Rabbi Trust for the SERPconsisting primarily of cash surrender value of life insurance policies.  Those assets (which are included in otherassets) totaled $6.3 million and $5.5 million at June 30, 2006 and 2005,respectively, and are not considered in the fair value of plan assets.  The measurement date for the SERP is June 30.

Weacquired MCE on September 3, 2003, including its defined benefit pension plan(the “MCE Plan”).  The MCE Plan has beenfrozen since December 31, 1993.  Themeasurement date for the MCE Plan is March 31.

S-29

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**Obligationsand Funded Status:**
| ** **                                      | ** ** | **June 30,**       | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(In thousands)** | ** ** |
|                                            |       |                    |       |   |   |
| **Change in projected benefit  obligation**     | ** ** | ** **              | ** ** | ** ** | ** ** |
| Benefit obligation at  beginning of year        |       | $                       | 18,654     |   | $ | 12,145 |   |
| Service cost                                    |       | 147                     |       | 305 |   |
| Interest cost                                   |       | 1,079                   |       | 990 |   |
| Plan participants’  contributions          |       | —                  |       | — |   |
| Amendments                                      |       | —                  |       | — |   |
| Actuarial (gain) loss                           |       | 378                     |       | 5,382 |   |
| Acquisition                                     |       | —                  |       | — |   |
| Benefits paid                                   |       | (408                    | )          | (168 | ) |
| Benefit obligation at  end of year              |       | $                       | 19,850     |   | $ | 18,654 |   |
|                                            |       |                    |       |   |   |
| **Change in plan assets**                       | ** ** | ** **              | ** ** | ** ** | ** ** |
| Fair value of plan  assets at beginning of year |       | $                       | 2,111      |   | $ | 1,839 |   |
| Actual return on plan  assets                   |       | 258                     |       | 101 |   |
| Acquisitions                                    |       | —                  |       | — |   |
| Employer contributions                          |       | 384                     |       | 339 |   |
| Plan participants’  contributions          |       | —                  |       | — |   |
| Benefits paid                                   |       | (408                    | )          | (168 | ) |
| Fair value of plan  assets at end of year       |       | $                       | 2,345      |   | $ | 2,111 |   |
|                                            |       |                    |       |   |   |
| Funded status                                   |       | $                       | (17,505    | ) | $ | (16,543 | ) |
| Unrecognized net  transition asset              |       | 386                     |       | 424 |   |
| Unrecognized net  actuarial loss (gain)         |       | 7,904                   |       | 8,308 |   |
| Unrecognized prior  service cost (benefit)      |       | —                  |       | — |   |
| Net amount recognized                           |       | $                       | (9,215     | ) | $ | (7,811 | ) |

 

**Amountsrecognized in the statement of financial position consist of:**

 
| ** **                                                      | ** ** | **June 30,**       | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(In thousands)** | ** ** |
|                                                            |       |                    |       |   |   |
| Prepaid cost                                                    |       | $                       | —     |   | $ | — |   |
| Accrued benefit cost  (included in other long-term liabilities) |       | (16,238                 | )          | (13,974 | ) |
| Intangible assets  (included in other assets)                   |       | 386                     |       | 424 |   |
| Accumulated other  comprehensive income                         |       | 6,637                   |       | 5,739 |   |
| Net amount recognized                                           |       | $                       | (9,215     | ) | $ | (7,811 | ) |

 

Theaccumulated benefit obligation for all defined benefit pension plans was $18.6million and $16.1 million at June 30, 2006 and 2005, respectively.

S-30

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Information for pension plans with accumulatedbenefit obligations and projected benefit obligations in excess of plan assetsis as follows:

|                                 | ** ** | **June 30,**       | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(In thousands)** | ** ** |
|                            |       |                    |       |   |   |
| Projected benefit  obligation   |       | $                       | (19,850    | ) | $ | (18,654 | ) |
| Accumulated benefit  obligation |       | (18,583                 | )          | (16,085 | ) |
| Fair value of plan assets       |       | 2,345                   |       | 2,111 |   |
|                                 |            |                         |            |  |  |  |  |

 

**Components of Net Periodic Benefit Cost**

|                                                    | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | **(In thousands)**                 | ** ** |
|                                               |       |                                    |       |   |   |   |   |
| Service cost                                       |       | $                                       | 147        |   | $ | 305 |   | $ | 417 |   |
| Interest cost                                      |       | 1,079                                   |       | 990 |   | 653 |   |
| Expected return  on plan assets                    |       | (162                                    | )          | (145 | ) | (104 | ) |
| Amortization of  net transition (asset) obligation |       | 38                                      |       | 38 |   | 38 |   |
| Recognized  actuarial (gain) loss                  |       | 687                                     |       | 451 |   | 200 |   |
| Net periodic  benefit cost                         |       | $                                       | 1,789      |   | $ | 1,639 |   | $ | 1,204 |   |

 

**AdditionalInformation**

 

|                                                                                  | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(In thousands)**                 | ** ** |
|                                                                             |       |                                    |       |   |   |   |   |
| Increase  (decrease) in minimum liability included in other comprehensive income |       | $                                       | 898        |   | $ | 2,383 |   | $ | (348 | ) |
|                                                                                  |            |                                         |            |  |  |  |  |  |  |  |

 

**Assumptions**

 

**Weighted-average assumptions used to determine benefit obligations**

 

|                                | ** ** | **SERP**          | ** ** | **MCE Plan** | ** ** |
|--------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                     | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                     | ** ** | **2006**          | ** ** | **2005**          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                           |       |              |       |              |       |   |   |   |   |
| Discount rate                  |       | 6.25              | %          | 5.25              | %          | 6.00 | % | 5.75 | % |
| Rate of compensation  increase |       | 3.00              | %          | 0.00              | %          | N/A |   | N/A |   |
|                           |       |              |       |              |       |   |   |   |   |

 

**Weighted-averageassumptions used to determine net periodic benefit cost**

 

|                                           | ** ** | **SERP**                                | ** ** | **MCE Plan**                       | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **Years Ended June 30,** | ** ** | **Years Ended June 30,** | ** ** |
| ** **                                | ** ** | **2006**                                | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | ** **                              | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                             |       | 5.25                                    | %          | 6.25                                    | %          | 6.00 | % | 5.75 | % | 5.75 | % | 6.25 | % |
| Expected  long-term return on plan assets |       | N/A                                     |       | N/A                                     |       | N/A |   | 7.75 | % | 7.75 | % | 7.75 | % |
| Rate of  compensation increase            |       | 3.00                                    | %          | 0.00                                    | %          | 0.00 | % | N/A |   | N/A |   | N/A |   |

 

In determining the long-term rate of return for theMCE Plan, we consider the historical rates of return, the nature of the Plan’sinvestment and an expectation of the Plan’s investment strategy.

S-31

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**Plan Assets**

The MCE pension plan weighted-average assetallocations at June 30, 2006 and 2005 by asset category are as follows:
| ** **                   | ** ** | **June 30,** | ** ** |
|------------------------------|------------|-------------------|------------|
| ** **                   | ** ** | **2006**          | ** ** | **2005** | ** ** |
|                         |       |              |       |   |   |
| **Actual asset allocation:** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Equity securities            |       | 70.26             | %          | 70.20 | % |
| Debt securities              |       | 26.28             |       | 27.62 |   |
| Other                        |       | 3.46              |       | 2.18 |   |
| Total                        |       | 100.00            | %          | 100.00 | % |
|                         |       |              |       |   |   |
| **Target asset allocation:** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Equity securities            |       | 60.00             | %          | 60.00 | % |
| Debt securities              |       | 40.00             |       | 40.00 |   |
| Total                        |       | 100.00            | %          | 100.00 | % |
|                         |       |              |       |   |   |

 

The target policy was set to maximize returns withconsideration to the long-term nature of the obligations and maintaining alower level of overall volatility through the allocation to debtsecurities.  During the year, the assetallocation is reviewed for adherence to the target policy and is rebalancedperiodically towards the target weights.

We expect to contribute approximately $1.5 millionto the MCE pension and SERP plans in the fiscal year ending June 30, 2007.

The following benefit payments, which reflectexpected future service, as appropriate, are expected to be paid:

|                 | ** ** | **Years Ending June 30,** | ** ** |
|-----------------|------------|------------------------------------------|------------|
| ** **      | ** ** | **(In thousands)**                  | ** ** |
|            |       |                                     |       |
| 2007            |       | $                                        | 1,551      |   |
| 2008            |       | 1,551                                    |       |
| 2009            |       | 1,562                                    |       |
| 2010            |       | 1,567                                    |       |
| 2011            |       | 1,578                                    |       |
| Years 2012-2016 |       | 7,934                                    |       |
|                 |            |                                          |            |  |

 

S-32

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**14.          Commitments and Contingencies**

**Operating Leases**

Severalof our operating facilities and certain machinery and equipment are leasedunder agreements expiring through 2020. The leases for machinery and equipment generally contain options topurchase at the then fair market value of the related leased assets.

Futureminimum payments under operating leases as of June 30, 2006 are as follows forthe fiscal years:

|                                | ** ** | **(In thousands)** | ** ** |
|--------------------------------|------------|-------------------------|------------|
| 2007                           |       | $                       | 8,174      |   |
| 2008                           |       | 6,121                   |       |
| 2009                           |       | 4,458                   |       |
| 2010                           |       | 3,288                   |       |
| 2011                           |       | 2,319                   |       |
| Thereafter                     |       | 10,977                  |       |
| Future minimum lease  payments |       | 35,337                  |       |
| Sub-lease income               |       | 2,953                   |       |
| Net minimum lease  payments    |       | $                       | 32,384     |   |

 

Rentalexpense was $9.7 million, $9.6 million and $8.7 million during the fiscal years2006, 2005 and 2004, respectively. Sub-lease rental income was $1.1 million, $1.2 million and $1.1 millionfor the fiscal years 2006, 2005 and 2004, respectively.

**Legal Matters**

Weare involved in various routine legal matters. Management believes the outcome of these matters will not have amaterially adverse effect on our consolidated financial statements.

**15.**                               **Business Segments**

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

**Microelectronic Solutions (“AMS”):**

·                  MicroelectronicComponents, Sub-assemblies and Modules

·                  IntegratedCircuits

·                  Motion Control Systems

**Test Solutions (“ATS”):**

·                  Instrument Products and Test Systems

S-33

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Wemanufacture advanced technology systems and components for commercial industry,government and defense contractors. Approximately 29%, 32% and 34% of our sales for the fiscal years 2006,2005 and 2004, respectively, were to agencies of the United States governmentor to prime defense contractors or subcontractors of the United Statesgovernment.  No one customer constitutedmore than 5% of sales during any year in the periods presented.  Inter-segment sales were not material andhave been eliminated from the tables below.

Mostof our operations are located in the United States; however, we also haveoperations in Europe and Asia.  Each ofAeroflex International Limited, which we acquired in May 2002, RIWS, which weacquired in July 2003, and SPG, which we acquired in May 2005, have significantoperations in the United Kingdom. Specifically, net sales from facilities located in the United Kingdom,all of which are in the ATS segment, were approximately $153 million, $131 millionand $121 million for the fiscal years 2006, 2005 and 2004, respectively.  Total assets of the United Kingdom operationswere $216 million, $206 million and $115 million for the fiscal years endedJune 30, 2006, 2005 and 2004, respectively.

Oursales to customers by geographic region were:

|                             | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                        |       |                                    |       |   |   |   |   |
| United States               |       | 58                                      | %          | 60 | % | 64 | % |
| Europe and the Middle  East |       | 27                                      |       | 27 |   | 26 |   |
| Asia and Australia          |       | 13                                      |       | 12 |   | 9 |   |
| Other Regions               |       | 2                                       |       | 1 |   | 1 |   |
|                        |       | 100                                     | %          | 100 | % | 100 | % |

 

S-34

----

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **Years Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **                              | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **                              | ** ** | **(Restated) (1)** | ** ** | **(Restated) (2)** | ** ** |
| **Business Segment Data:**                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales:                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                    |       |   |   |   |   |
| Microelectronic  Solutions (“AMS”)                                                                                                                                                                                                                                                                                                                                                                                                                             |       | $                                       | 241,052    |   | $ | 207,868 |   | $ | 178,929 |   |
| Test Solutions  (“ATS”)                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 310,794                                 |       | 255,503 |   | 235,172 |   |
| Net sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | $                                       | 551,846    |   | $ | 463,371 |   | $ | 414,101 |   |
| Segment adjusted  operating income (3):                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                    |       |   |   |   |   |
| AMS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | $                                       | 58,467     |   | $ | 46,193 |   | $ | 40,478 |   |
| ATS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 25,923                                  |       | 22,002 |   | 20,244 |   |
| General  corporate expenses                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | (15,279                                 | )          | (20,289 | ) | (12,737 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 69,111                                  |       | 47,906 |   | 47,985 |   |
| Amortization of  acquired intangibles                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                    |       |   |   |   |   |
| AMS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | (2,134                                  | )          | (2,154 | ) | (1,982 | ) |
| ATS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | (11,644                                 | )          | (6,742 | ) | (5,748 | ) |
| Share based  compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |                                    |       |   |   |   |   |
| AMS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | (1,488                                  | )          | — |   | — |   |
| ATS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | (1,851                                  | )          | — |   | — |   |
| Corporate                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | (3,433                                  | )          | — |   | — |   |
| Restructuring charges-  ATS                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | (3,214                                  | )          | (3,124 | ) | — |   |
| Acquired in-process  research and development- AMS                                                                                                                                                                                                                                                                                                                                                                                                                       |       | —                                  |       | — |   | (420 | ) |
|                                                                            -  ATS |       | —                                  |       | (2,974 | ) | (3,800 | ) |
| Current period impact  of acquisition related adjustment   to inventory - ATS                                                                                                                                                                                                                                                                                                                                                                                            |       | (1,088                                  | )          | (840 | ) | — |   |
| Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | (608                                    | )          | (895 | ) | (1,403 | ) |
| Other income (expense),  net                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 1,666                                   |       | 1,844 |   | (1,711 | ) |
| Income from continuing  operations before income taxes                                                                                                                                                                                                                                                                                                                                                                                                                   |       | $                                       | 45,317     |   | $ | 33,021 |   | $ | 32,921 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                    |       |   |   |   |   |
| Total assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                    |       |   |   |   |   |
| AMS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | $                                       | 186,531    |   | $ | 180,498 |   | $ | 192,606 |   |
| ATS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 387,160                                 |       | 377,664 |   | 240,505 |   |
| Corporate                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 64,331                                  |       | 31,687 |   | 96,653 |   |
| Assets of  discontinued operations                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | —                                  |       | — |   | 21,627 |   |
| Total assets                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | $                                       | 638,022    |   | $ | 589,849 |   | $ | 551,391 |   |
| Capital expenditures:                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |                                    |       |   |   |   |   |
| AMS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | $                                       | 6,255      |   | $ | 6,997 |   | $ | 4,108 |   |
| ATS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 8,904                                   |       | 8,560 |   | 6,076 |   |
| Corporate                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 333                                     |       | 79 |   | 954 |   |
| Total capital  expenditures                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | $                                       | 15,492     |   | $ | 15,636 |   | $ | 11,138 |   |
| Depreciation and  amortization expense:                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                                    |       |   |   |   |   |
| AMS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | $                                       | 8,949      |   | $ | 9,073 |   | $ | 8,227 |   |
| ATS                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 21,347                                  |       | 15,183 |   | 13,549 |   |
| Corporate                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       | 173                                     |       | 156 |   | 80 |   |
| Total  depreciation and amortization expense                                                                                                                                                                                                                                                                                                                                                                                                                             |       | $                                       | 30,469     |   | $ | 24,412 |   | $ | 21,856 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |                                    |       |   |   |   |   |

(1)                   Restated for the transfer of the MotionControl Systems business from ATS to AMS due to an internal reorganization.  Sales and operating income for the MotionControl Systems business was $14.9 million and $816,000, respectively, for theyear ended June 30, 2005.

(2)                   Restated for the transfer of the MotionControl Systems business from ATS to AMS due to an internal reorganization.  Sales and operating loss for the MotionControl Systems business was $14.4 million and $1.6 million, respectively, forthe year ended June 30, 2004.

(3)                   Management evaluates the operating results ofthe two segments based upon reported operating income, before costs related toamortization of acquired intangibles, share based compensation, restructuringand the impact of acquisition related adjustments to inventory and acquiredin-process research and development charges.

S-35

----

**Quarterly Financial Data** (Unaudited):

(In thousands, except per share amounts)
| ** **                                    | ** ** | **Quarter** | ** ** | **Year Ended** | ** ** |
|-----------------------------------------------|------------|-------------|------------|---------------------|------------|
| **2006**                                      | ** ** | **First**   | ** ** | **Second**          | ** ** | **Third** | ** ** | **Fourth** | ** ** | **June 30,** | ** ** |
|                                          |       |        |       |                |       |   |   |   |   |   |   |
| Net sales                                     |       | $           | 125,648    |                | $          | 135,156 |   | $ | 140,528 |   | $ | 150,514 |   | $ | 551,846 |   |
| Gross profit                                  |       | 58,926      |       | 64,554              |       | 67,066 |   | 67,872 |   | 258,418 |   |
| Income from continuing  operations            |       | $           | 4,527      |                | $          | 7,775 |   | $ | 7,746 |   | $ | 8,048 |   | $ | 28,096 |   |
| Income from continuing  operations per share: |       |        |       |                |       |   |   |   |   |   |   |
| Basic                                         |       | $           | 0.06       |                | $          | 0.10 |   | $ | 0.10 |   | $ | 0.11 |   | $ | 0.37 |   |
| Diluted                                       |       | $           | 0.06       |                | $          | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.37 |   |
|                                          |       |        |       |                |       |   |   |   |   |   |   |

 
| ** **                                    | ** ** | **Quarter** | ** ** | **Year Ended** | ** ** |
|-----------------------------------------------|------------|-------------|------------|---------------------|------------|
| **2005**                                      | ** ** | **First**   | ** ** | **Second**          | ** ** | **Third** | ** ** | **Fourth** | ** ** | **June 30,** | ** ** |
|                                          |       |        |       |                |       |   |   |   |   |   |   |
| Net sales                                     |       | $           | 109,183    |                | $          | 112,469 |   | $ | 113,754 |   | $ | 127,965 |   | $ | 463,371 |   |
| Gross profit                                  |       | 51,332      |       | 53,481              |       | 53,791 |   | 60,008 |   | 218,612 |   |
| Income from continuing  operations            |       | $           | 6,400      |                | $          | 6,142 |   | $ | 3,867 |   | $ | 2,235 |   | $ | 18,644 |   |
| Income from continuing  operations per share: |       |        |       |                |       |   |   |   |   |   |   |
| Basic                                         |       | $           | 0.09       |                | $          | 0.08 |   | $ | 0.05 |   | $ | 0.03 |   | $ | 0.25 |   |
| Diluted                                       |       | $           | 0.08       |                | $          | 0.08 |   | $ | 0.05 |   | $ | 0.03 |   | $ | 0.25 |   |
|                                          |       |        |       |                |       |   |   |   |   |   |   |

 

Since per share information is computed independentlyfor each quarter and the full year, based on the respective average number ofcommon and common equivalent shares outstanding, the sum of the quarterly pershare amounts does not necessarily equal the per share amounts for each year.

S-36

----

**AEROFLEXINCORPORATED**

**ANDSUBSIDIARIES**

**SCHEDULEII - VALUATION AND QUALIFYING ACCOUNTS**

**(Inthousands)**

 
| **Column A**               | ** ** | **Column B**     | ** ** | **Column C**   | ** ** | **Column D**   | ** ** | **Column E**     | ** ** |
|---------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                      | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **          | ** ** | ** **            | ** ** |
| ** **                      | ** ** | ** **            | ** ** | ** **          | ** ** | **Charged**         | ** ** | ** **            | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **Balance at**   | ** ** | **Charged to** | ** ** | **to other**   | ** ** | ** **            | ** ** | **Balance at** | ** ** |
| ** **                      | ** ** | **beginning of** | ** ** | **costs and**  | ** ** | **accounts -** | ** ** | **Deductions -** | ** ** | **end of** | ** ** |
| **Description**                 | ** ** | **period**            | ** ** | **expenses**        | ** ** | **describe**        | ** ** | **describe**          | ** ** | **period** | ** ** |
|                            |       |                  |       |                |       |                |       |                  |       |   |   |
| YEAR ENDED JUNE 30,  2006:      |       |                  |       |                |       |                |       |                  |       |   |   |
|                            |       |                  |       |                |       |                |       |                  |       |   |   |
| Allowance for doubtful accounts |       | $                     | 1,210      |                | $          | 278                 |       | $                     | —     |   | $ | 138 | (B) | $ | 1,350 |   |
|                            |       |                  |       |                |       |                |       |                  |       |   |   |
| YEAR ENDED JUNE 30,  2005:      |       |                  |       |                |       |                |       |                  |       |   |   |
|                            |       |                  |       |                |       |                |       |                  |       |   |   |
| Allowance for doubtful accounts |       | $                     | 1,618      |                | $          | (486                | )          | $                     | 170        | (A) | $ | 92 | (B) | $ | 1,210 |   |
|                            |       |                  |       |                |       |                |       |                  |       |   |   |
| YEAR ENDED JUNE 30,  2004:      |       |                  |       |                |       |                |       |                  |       |   |   |
|                            |       |                  |       |                |       |                |       |                  |       |   |   |
| Allowance for doubtful accounts |       | $                     | 1,487      |                | $          | 87                  |       | $                     | 340        | (A) | $ | 296 | (B) | $ | 1,618 |   |
|                            |       |                  |       |                |       |                |       |                  |       |   |   |

Note:      (A)  —  Acquired in purchase of businesses.

(B)            —  Netwrite-offs of uncollectible amounts.

S-37

----

**AEROFLEXINCORPORATEDINDEX TO EXHIBITS**
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Certificate of Incorporation, as amended.  (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter ended  September 30, 2001).                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 3.2                 |       | By-Laws, as amended. (Incorporated by reference to  Exhibit 3.1 to Quarterly Report on Form 8-K filed on August 17, 2005).                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 4.1                 |       | Rights agreement, dated as of August 13, 1998,  between Aeroflex Incorporated and American Stock Transfer Company  (Incorporated by reference to Exhibit 4 to report on Form 8-K filed August  14, 1998).                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 4.2                 |       | Code of Ethics for Chairman, Chief Executive Officer  and Senior Financial Officers of Aeroflex Incorporated.                                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.1                |       | Fifth Amended and Restated Loan and Security  Agreement dated as of February 14, 2003 among the Registrant, certain of its  subsidiaries, JPMorgan Chase Bank and Fleet National Bank. (Incorporated by  reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 31,  2002).                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.2                |       | Eighth Amendment Agreement dated March 21, 2006,  between and among Aeroflex Incorporated, and certain of its domestic  subsidiaries, Bank of America, N.A. as the Fronting Bank and Administrative  Agent and JPMorgan Chase Bank, N.A., as Syndication Agent (incorporated by  reference to Exhibit 10.3 of Form 8-K filed on March 27, 2006). |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.3                |       | Credit Agreement, dated March 21, 2006, between and  among Aeroflex Incorporated, Aeroflex Test Solutions Limited, the Lenders  party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent  Incorporated by reference to Exhibit 10.1 of the Report on Form 8-K filed on  March 27, 2006).                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.4                |       | Guarantee Agreement, dated March 21, 2006, between  Aeroflex Incorporated and certain of its domestic subsidiaries, and JPMorgan  Chase Bank, N.A., as Administrative Agent Incorporated by reference to  Exhibit 10.2 of Form 8-K filed on March 27, 2006).                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.5                |       | First Amendment Agreement, dated August 28, 2006, to  the Credit Agreement, by and among Aeroflex Incorporated, Aeroflex Test  Solutions, the Lenders party thereto and JPMorgan Chase Bank, N.A., as  Administrative Agent (Incorporated by reference to Exhibit 10.1 of Report on  Form 8-K filed on September 1, 2006).                       |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.6                |       | 1994 Non-Qualified Stock Option Plan. (Incorporated  by reference to Exhibit 10.2 to Annual Report on Form 10-K for the year ended  June 30, 1994).                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.7                |       | 1994 Outside Directors Stock Option Plan.  (Incorporated by reference to Exhibit 10.3 of Annual Report on Form 10-K for  the year ended June 30, 1994).                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.8                |       | Employment Agreement between Aeroflex Incorporated  and Harvey R. Blau. (Incorporated by reference to Exhibit 10.1 to Report on  Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.9                |       | Employment Agreement between Aeroflex Incorporated  and Michael Gorin. (Incorporated by reference to Exhibit 10.2 to Report on  Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.10               |       | Employment Agreement between Aeroflex Incorporated  and Leonard Borow. (Incorporated by reference to Exhibit 10.3 to Report on  Form 10-Q for the quarter ended March 31, 1999).                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.11               |       | 1996 Stock Option Plan. (Incorporated by reference  to Exhibit A to Definitive schedule 14A filed September 30, 1996).                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.12               |       | 1998 Stock Option Plan. (Incorporated by reference  to Exhibit 10 to Quarterly Report on Form 10-Q for the quarter ended March  31, 1998).                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.13               |       | 1999 Stock Option Plan. (Incorporated by reference  to Exhibit 4.1 to Registration Statement on Form S-8, Registration Statement  #333-31654).                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.14               |       | Key Employee Stock Option Plan. (Incorporated by  reference to Exhibit 4.1 to Registration Statement on Form S-8, Registration  Statement #333-53622).                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                             |
| 10.15               |       | 2000 Stock Option Plan, as amended. (Incorporated by  reference to Exhibit 4 to Registration Statement on Form S-8, #333-97027).                                                                                                                                                                                                                 |

 

----

 

| 10.16  | 2002 Stock Option Plan. (Incorporated by reference  to Exhibit 4 to Registration Statement on Form S-8, #333-97029).                                                                                                           |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                           |
| 10.17  | Amendment No. 1 to Employment Agreement between  Aeroflex Incorporated and Harvey R. Blau, effective September 1, 1999.  (Incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year  ended June 30, 2000).   |
|   |                                                                                                                                                                                                                           |
| 10.18  | Amendment No. 1 to Employment Agreement between  Aeroflex Incorporated and Michael Gorin, effective September 1, 1999.  (Incorporated by reference to Exhibit 10.18 to Form 10-K for the fiscal year  ended June 30, 2000).    |
|   |                                                                                                                                                                                                                           |
| 10.19  | Amendment No. 1 to Employment Agreement between  Aeroflex Incorporated and Leonard Borow, effective September 1, 1999.  (Incorporated by reference to Exhibit 10.19 to Form 10-K for the fiscal year  ended June 30, 2000).    |
|   |                                                                                                                                                                                                                           |
| 10.20  | Amendment No. 2 to Employment Agreement between  Aeroflex Incorporated and Harvey R. Blau, effective August 13, 2001.  (Incorporated by reference to Exhibit 10.16 to Form 10-K for the fiscal year  ended June 30, 2001).     |
|   |                                                                                                                                                                                                                           |
| 10.21  | Amendment No. 2 to Employment Agreement between  Aeroflex Incorporated and Michael Gorin, effective August 13, 2001.  (Incorporated by reference to Exhibit 10.17 to Form 10-K for the fiscal year  ended June 30, 2001). |
|   |                                                                                                                                                                                                                           |
| 10.22  | Amendment No. 2 to Employment Agreement between  Aeroflex Incorporated and Leonard Borow, effective August 13, 2001.  (Incorporated by reference to Exhibit 10.18 to Form 10-K for the fiscal year  ended June 30, 2001).      |
|   |                                                                                                                                                                                                                           |
| 10.23  | Aeroflex Incorporated Key Employee Deferred  Compensation Plan. (Incorporated by reference to Exhibit 10.19 to Form 10-K  for the fiscal year ended June 20, 2001).                                                            |
|   |                                                                                                                                                                                                                           |
| 10.24  | Trust Under Deferred Compensation Plan.  (Incorporated by reference to Exhibit 10.20 to Form 10-K for the fiscal year  ended June 30, 2001).                                                                                   |
|   |                                                                                                                                                                                                                           |
| 10.25  | Amendment No. 3 to Employment Agreement between  Aeroflex Incorporated and Harvey R. Blau, effective November 8, 2001.  (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended  September 30, 2001).    |
|   |                                                                                                                                                                                                                           |
| 10.26  | Amendment No. 3 to Employment Agreement between  Aeroflex Incorporated and Michael Gorin, effective November 8, 2001.  (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended  September 30, 2001).     |
|   |                                                                                                                                                                                                                           |
| 10.27  | Amendment No. 3 to Employment Agreement between  Aeroflex Incorporated and Leonard Borow, effective November 8, 2001.  (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended  September 30, 2001).     |
|   |                                                                                                                                                                                                                           |
| 10.28  | Agreement and Plan of Merger, dated as of June 27,  2003, among Aeroflex Incorporated, Acquisition, MCE and Michael J. Endres.  (Incorporated by reference to Exhibit 99.1 of Report on Form 8-K filed July 2,  2003).    |
|   |                                                                                                                                                                                                                           |
| 10.29  | Form of Warrant Exchange Agreement. (Incorporated by  reference to Exhibit 99.2 of Report on Form 8-K filed July 2, 2003).                                                                                                     |
|   |                                                                                                                                                                                                                           |
| 10.30  | Form of MCE Shareholders’ Agreement. (Incorporated  by reference to Exhibit 99.3 of Report on Form 8-K filed July 2, 2003).                                                                                               |
|   |                                                                                                                                                                                                                           |
| 10.31  | Employment Agreement between Aeroflex Incorporated  and John Adamovich, Jr., dated November 9, 2005. (Incorporated by reference to Exhibit 10.1 of  Report on Form 8-K filed on November 15, 2005).                            |

 

----

 

| 10.32  | Stock Purchase Agreement dated as of July 31, 2003,  by and among Racal Instruments Group Limited, Aeroflex and IFR Systems  Limited, a wholly-owned subsidiary of Aeroflex Incorporated. (Incorporated by  reference to Exhibit 99.1 to Report on Form 8-K dated July 31, 2003). |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                              |
| 10.33  | Asset Purchase Agreement dated as of July 31, 2003,  by and between Racal Instruments Inc. and Aeroflex Incorporated.  (Incorporated by reference to Exhibit 99.2 to Report on Form 8-K dated July  31, 2003).                                                                    |
|   |                                                                                                                                                                                                                                                                              |
| 10.34  | Asset Purchase Agreement dated as of July 31, 2003,  by and among Racal Instruments Group Limited and Aeroflex Incorporated.  (Incorporated by reference to Exhibit 99.3 to Report on Form 8-K dated July  31, 2003).                                                             |
|   |                                                                                                                                                                                                                                                                              |
| 10.35  | Employment Agreement between Aeroflex Incorporated  and Carl Caruso dated November 6, 2003. (Incorporated by reference to Exhibit 10.2 to Report on Form 10-Q for  the quarter ended December 31, 2003).                                                                          |
|   |                                                                                                                                                                                                                                                                              |
| 10.36  | Employment Agreement  between Aeroflex Incorporated and Charles Badlato dated November 6, 2003.  (Incorporated by reference to Exhibit 10.1 to Report on Form 10-Q for the  quarter ended December 31, 2003).                                                                     |
|   |                                                                                                                                                                                                                                                                              |
| 10.37  | Amendment No. 4 to  Employment Agreement between Aeroflex Incorporated and Harvey R. Blau dated  as of May 13, 2004. (Incorporated by reference to Exhibit 10.1 to Form 10-Q  for the quarter ended March 31, 2004).                                                         |
|   |                                                                                                                                                                                                                                                                              |
| 10.38  | Amended No. 4 to  Employment Agreement between Aeroflex Incorporated and Michael Gorin dated as  of May 13, 2004. (Incorporated by reference to Exhibit 10.2 to Form 10-Q for  the quarter ended March 31, 2004).                                                                 |
|   |                                                                                                                                                                                                                                                                              |
| 10.39  | Amendment No. 4 to  Employment Agreement between Aeroflex Incorporated and Leonard Borow dated  May 13, 2004. (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the  quarter ended March 31, 2004).                                                                     |
|   |                                                                                                                                                                                                                                                                              |
| 10.40  | Amendment No. 1 to  Employment Agreement between Aeroflex Incorporated and Carl Caruso dated  March 11, 2005. (Incorporated by reference to Exhibit 10.1 of Report on Form  8-K filed March 31, 2005).                                                                            |
|   |                                                                                                                                                                                                                                                                              |
| 10.41  | Sale and Purchase  Agreement, dated as of May 23, 2005, between UbiNetics Holdings Limited and  Aeroflex Test Solutions Limited. (Incorporated by reference to Exhibit 10.1  to Report on Form 8-K filed May 27, 2005).                                                           |
|   |                                                                                                                                                                                                                                                                              |
| 10.42  | Deed of Guarantee, dated  as of May 23, 2005, made between Aeroflex Incorporated and UbiNetics Holdings  Limited. (Incorporated by reference to Exhibit 10.2 to Report on Form 8-K  filed May 27, 2005).                                                                          |
|   |                                                                                                                                                                                                                                                                              |
| 10.43  | Amendment No. 5 to  Employment Agreement between Aeroflex Incorporated and Harvey R. Blau dated  August 17, 2005. (Incorporated by reference to Exhibit 10.1 to Report on Form  8-K filed August 17, 2005).                                                                       |
|   |                                                                                                                                                                                                                                                                              |
| 10.44  | Amendment No. 5 to  Employment Agreement between Aeroflex Incorporated and Michael Gorin dated  August 17, 2005. (Incorporated by reference to Exhibit 10.2 to Report on Form  8-K filed August 17, 2005).                                                                        |
|   |                                                                                                                                                                                                                                                                              |
| 10.45  | Amendment No. 5 to Employment Agreement between  Aeroflex Incorporated and Leonard Borow dated August 17, 2005. (Incorporated  by reference to Exhibit 10.3 to Report on Form 8-K filed August 17, 2005).                                                                         |

 

----

 

| 10.46  | Consulting and Retirement Agreement between Aeroflex  Incorporated and Michael Gorin dated August 17, 2005. (Incorporated by  reference to Exhibit 10.4 to Report on Form 8-K filed August 17, 2005). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                  |
| 21     | The following is a list of the Registrant’s  subsidiaries as of June 30, 2006:                                                                                                                   |

 

|                                               | ** ** | **Jurisdiction of** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|
| **Name**                                      | ** ** | ** **               | ** ** | **Incorporation** | ** ** |
| Aeroflex  Cambridge, Ltd.                     |       | England                  |       |
| Aeroflex  Colorado Springs, Inc.              |       | Delaware                 |       |
| Aeroflex /  Inmet, Inc.                       |       | Michigan                 |       |
| Aeroflex  International Ltd.                  |       | England                  |       |
| Aeroflex / KDI,  Inc.                         |       | Michigan                 |       |
| Aeroflex /  Metelics, Inc.                    |       | California               |       |
| Aeroflex  Microelectronics Solutions, Inc.    |       | Michigan                 |       |
| Aeroflex  Plainview, Inc.                     |       | Delaware                 |       |
| Aeroflex Powell,  Inc.                        |       | Ohio                     |       |
| Aeroflex Systems  Corp.                       |       | Delaware                 |       |
| Aeroflex /  Weinschel, Inc.                   |       | Michigan                 |       |
| Aeroflex  Wichita, Inc.                       |       | Delaware                 |       |
| Europtest, S.A.                               |       | France                   |       |
| MCE Technologies  (Nanjing) Co., Ltd.         |       | China                    |       |
| Racal Instruments  Wireless Solutions Limited |       | England                  |       |
|                                               |            |                          |            |  |  |

 

| 23     | Consent of Independent Registered Public Accounting  Firm                                             |
|--------|-------------------------------------------------------------------------------------------------------|
|   |                                                                                                  |
| 31.1   | Certification of Chairman of the Board pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.        |
|   |                                                                                                  |
| 31.2   | Certification of Chief Financial Officer pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.      |
|   |                                                                                                  |
| 31.3   | Certification of Chief Operating Officer pursuant to  Section 302 of Sarbanes-Oxley Act of 2002.      |
|   |                                                                                                  |
| 31.4   | Certification of Principal Accounting Officer  pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|   |                                                                                                  |
| 32.1   | Certification of Chief Executive Officer pursuant to  Section 906 of Sarbanes-Oxley Act of 2002.      |
|   |                                                                                                  |
| 32.2   | Certification of Chief Financial Officer pursuant to  Section 906 of Sarbanes-Oxley Act of 2002.      |

 

 

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