UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
__________________

FORM 10-Q
__________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedMarch 31, 20092010
Commission File Number 000-02324033-88878
__________________________

AEROFLEX INCORPORATED

(Exact name of Registrant as specified in its Charter)

DELAWARE11-1974412
(State or other jurisdiction(I.R.S. Employer
of incorporation or organization)Identification No.)

35 South Service Road 
P.O. Box 6022 
Plainview, N.Y.11803-0622
(Address of principal executive offices)(Zip Code)

(516) 694-6700
(Registrant’s telephone number, including area code)



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

Yes xNo ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationsRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨
Accelerated filer¨
Non-accelerated filer x
Smaller reporting company ¨
(Do not check if a smaller reporting company) 

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

Yes ¨No x

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

May 14, 200912, 20101,000
(Date)
(Date)(Number of Shares)
 

AEROFLEX INCORPORATED
AND SUBSIDIARIES

INDEX

   
PAGE
 PART 1:        FINANCIAL INFORMATION  
    
Item 1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 20092010 and June 30, 20082009
 2
    
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 20092010 and 2008
2009
Nine Months Ended March 31, 2009 and
Periods from July 1, 2007 to August 14, 2007
2010 and August 15, 2007 to March 31, 20082009 3 – 4
    
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2009 and
Periods from July 1, 2007 to August 14, 2007
2010 and August 15, 2007 to March 31, 20082009 5
    
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  6 – 3830
    
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three and Nine Months Ended March 31, 20092010 and 20082009
 3930 – 5345
    
Item 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 5345
    
Item 4TCONTROLS AND PROCEDURES 5345
    
 PART II:          OTHER INFORMATION  
    
Item 1LEGAL PROCEEDINGS 5446
    
Item 1ARISK FACTORS 5546
    
Item 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 5546
    
Item 3DEFAULTS UPON SENIOR SECURITIES 5546
    
Item 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS[REMOVED AND RESERVED] 5546
    
Item 5OTHER INFORMATION 5646
    
Item 6EXHIBITS 5647
    
SIGNATURESSIGNATURE 5748
   
EXHIBIT INDEX 5849
   
CERTIFICATIONS 59 – 63
50-54

 
- 1 - -
 

Aeroflex Incorporated
and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except share and per share data )

 March 31,  June 30, 
 2009  2008  March 31,  June 30, 
 Successor Entity  Successor Entity  2010  2009 
Assets            
Current assets:            
Cash and cash equivalents $53,931  $54,149  $96,348  $57,748 
Accounts receivable, less allowance for doubtful accounts of $3,059 and $2,683  113,468   147,983 
Accounts receivable, less allowance for doubtful accounts of $2,189 and $2,250  116,708   130,429 
Inventories  137,854   134,891   128,441   135,603 
Deferred income taxes  25,736   27,039   38,769   35,164 
Prepaid expenses and other current assets  10,897   12,184   9,818   9,938 
Total current assets  341,886   376,246   390,084   368,882 
                
Property, plant and equipment, net  98,173   104,649   96,908   100,907 
Non-current marketable securities  17,523   19,960 
Non-current marketable securities, net  9,779   17,677 
Deferred financing costs, net  26,947   30,185   22,176   25,754 
Other assets  15,611   18,560   17,880   15,425 
Intangible assets with definite lives, net  298,594   344,866   244,679   292,553 
Intangible assets with indefinite lives  113,665   123,378   110,291   112,266 
Goodwill  454,252   461,155   426,884   428,133 
                
Total assets $1,366,651  $1,478,999  $1,318,681  $1,361,597 
        
                
Liabilities and Stockholder's Equity                
Current liabilities:                
Current portion of long-term debt $5,383  $5,574  $5,516  $5,590 
Accounts payable  36,811   39,382   26,703   36,574 
Advance payments by customers and deferred revenue  32,731   27,144   29,004   33,418 
Income taxes payable  11,373   1,936   6,610   5,080 
Accrued payroll expenses  20,979   24,525   19,490   18,876 
Accrued expenses and other current liabilities  34,359   56,830   45,968   47,938 
Total current liabilities  141,636   155,391   133,291   147,476 
                
Long-term debt  881,213   873,237   893,197   883,758 
Deferred income taxes  123,448   159,457   146,671   143,048 
Defined benefit plan obligations  6,043   6,263   5,942   6,079 
Other long-term liabilities  23,314   8,003   3,933   21,476 
Total liabilities  1,175,654   1,202,351   1,183,034   1,201,837 
                
Stockholder's equity:                
Common stock, par value $.10 per share; authorized 1,000 shares; issued and outstanding 1,000 shares  -   -   -   - 
Additional paid-in capital  396,018   381,666   398,351   396,573 
Accumulated other comprehensive income (loss)  (74,858)  407   (52,290)  (54,700)
Accumulated deficit  (130,163)  (105,425)  (210,414)  (182,113)
Total stockholder's equity  190,997   276,648   135,647   159,760 
                
Total liabilities and stockholder's equity $1,366,651  $1,478,999  $1,318,681  $1,361,597 

See notes to unaudited condensed consolidated financial statements.

 
- 2 - -
 

Aeroflex Incorporated and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands)

 Three Months Ended March 31, 
 2009  2008  Three Months Ended March 31, 
 Successor Entity  Successor Entity  2010  2009 
            
Net sales $139,439  $157,304  $168,435  $139,439 
Cost of sales  72,834   88,068   78,138   72,834 
Gross profit  66,605   69,236   90,297   66,605 
                
        
Selling, general and administrative costs 30,954  32,194  31,377  30,954 
Research and development costs 17,941  18,154  20,854  17,941 
Amortization of acquired intangibles 14,956  20,872  15,408  14,956 
Acquired in-process research and development costs 2,291  -   -   2,291 
Company sale transaction expenses  -   850 
  66,142   72,070   67,639   66,142 
Operating income (loss)  463   (2,834)
Operating income  22,658   463 
                
Other income (expense)        
Other income (expense):        
Interest expense (20,566) (20,536) (20,815) (20,566)
Other income (expense), net  (47)  1,960   222   (47)
Total other income (expense)  (20,613)  (18,576)  (20,593)  (20,613)
                
Income (loss) from continuing operations before income taxes (20,150) (21,410)
Income (loss) before income taxes 2,065  (20,150)
Provision (benefit) for income taxes  (6,416)  (5,973)  (791)  (6,416)
Income (loss) from continuing operations (13,734) (15,437)
        
Income (loss) from discontinued operations, net of taxes  -   (968)
                
Net income (loss) $(13,734) $(16,405) $2,856  $(13,734)

See notes to unaudited condensed consolidated financial statements.

 
- 3 - -
 

Aeroflex Incorporated and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(In thousands)

  Nine Months Ended March 31, 
  2010  2009 
       
Net sales $465,290  $437,099 
Cost of sales  223,405   229,976 
Gross profit  241,885   207,123 
         
Selling, general and administrative costs  93,188   96,612 
Research and development costs  55,296   52,045 
Amortization of acquired intangibles  46,527   47,546 
Acquired in-process research and development costs  -   2,291 
Loss on liquidation of foreign subsidiary (Note 10)  7,696   - 
   202,707   198,494 
Operating income  39,178   8,629 
         
Other income (expense):        
Interest expense  (63,272)  (63,031)
Other income (expense), net  701   12,366 
Total other income (expense)  (62,571)  (50,665)
         
Loss before income taxes  (23,393)  (42,036)
Provision (benefit) for income taxes  4,908   (17,298)
         
Net Loss $(28,301) $(24,738)
  Nine Months Ended  August 15, 2007  July 1, 2007 
  March 31, 2009  to March 31, 2008  to August 14, 2007 
  Successor Entity  Successor Entity  Predecessor Entity 
          
Net sales $437,099  $420,076  $38,221 
Cost of sales  229,976   258,952   22,861 
Gross profit  207,123   161,124   15,360 
             
Selling, general and administrative costs  96,612   84,150   19,031 
Research and development costs  52,045   48,556   12,178 
Amortization of acquired intangibles  47,546   52,281   1,692 
Acquired in-process research and development costs  2,291   24,340   - 
Company sale transaction expenses  -   32,459   3,717 
   198,494   241,786   36,618 
Operating income (loss)  8,629   (80,662)  (21,258)
             
Other income (expense)            
Interest expense  (63,031)  (53,649)  (275)
Other income (expense), net  12,366   3,881   294 
Total other income (expense)  (50,665)  (49,768)  19 
             
Income (loss) from continuing operations before income taxes  (42,036)  (130,430)  (21,239)
Provision (benefit) for income taxes  (17,298)  (36,389)  (6,831)
Income (loss) from continuing operations    (24,738)  (94,041)  (14,408)
             
Income (loss) from discontinued operations, net of taxes  -   (2,457)  (2,508)
             
Net income (loss) $(24,738) $(96,498) $(16,916)

See notes to unaudited condensed consolidated financial statements.

 
- 4 - -
 


Aeroflex Incorporated
and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)

 Nine Months Ended  August 15, 2007  July 1, 2007 
 March 31,  to March 31,  to August 14, 
 2009  2008  2007  Nine Months Ended March 31, 
 Successor Entity  Successor Entity  Predecessor Entity  2010  2009 
Cash flows from operating activities:               
Net income (loss) $(24,738) $(96,498) $(16,916) $(28,301) $(24,738)
Loss from discontinued operations, net of taxes  -   2,457   2,508 
Income (loss) from continuing operations (24,738) (94,041) (14,408)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                    
Depreciation and amortization 63,659  66,465  3,662   62,178   63,659 
Acquired in-process research and development costs 2,291  24,340  -   -   2,291 
Acquisition related adjustment to cost of sales -  38,968  - 
Acquisition related adjustment to sales 240  2,235  -   96   240 
Loss on liquidation of foreign subsidiary  7,696   - 
Deferred income taxes (27,851) (38,751) 5,284   (1,286)  (27,851)
Non - cash share based compensation 1,466  2,634  214 
Share-based compensation  1,563   1,466 
Amortization of deferred financing costs 3,579  2,812  217   3,579   3,579 
Paid in kind interest 11,913  7,605  -   13,377   11,913 
Excess tax benefits from share based compensation arrangements
 -  -  (12,542)
Other, net 729  651  (24)  908   729 
Change in operating assets and liabilities, net of effects from purchases of businesses:
                    
Decrease (increase) in accounts receivable 21,185  (30,689) 47,889   10,754   21,185 
Decrease (increase) in inventories (14,451) 8,008  (12,885)  4,450   (14,451)
Decrease (increase) in prepaid expenses and other assets
 2,253  24  (26,899)  (2,711)  2,253 
Increase (decrease) in accounts payable, accrued expenses and other liabilities
  (5,282)  (16,948)  21,246   (20,053)  (5,282)
                 
Net cash provided by (used in) continuing operations 34,993  (26,687) 11,754 
Net cash provided by (used in) discontinued operations
  -   (3,133)  (461)
Net cash provided by (used in) operating activities  34,993   (29,820)  11,293   52,250   34,993 
                    
Cash flows from investing activities:                    
Acquisition of Predecessor Entity, net of cash acquired -  (1,118,293) - 
Payments for purchase of businesses, net of cash acquired (7,832) 1,522  -   (4,000)  (7,832)
Capital expenditures (12,958) (8,528) (1,088)  (13,176)  (12,958)
Proceeds from sale of marketable securities  8,580   - 
Proceeds from the sale of property, plant and equipment 1,359  30  -   1,021   1,359 
Purchase of marketable securities -  (631,805) (53,828)
Proceeds from sale of marketable securities -  599,977  63,328 
Other  (4)  -   - 
Other, net  (12)  (4)
                 
Net cash provided by (used in) investing activities by continuing operations
 (19,435) (1,157,097) 8,412 
Net cash provided by (used in) discontinued operations  -   (32)  (6)
Net cash provided by (used in) investing activities  (19,435)  (1,157,129)  8,406   (7,587)  (19,435)
                 
Cash flows from financing activities:                    
Proceeds from issuance of common stock -  378,350  - 
Borrowings under debt agreements -  870,000  - 
Debt repayments (4,129) (4,453) (29)  (4,012)  (4,129)
Debt financing costs (340) (27,436) (477)  -   (340)
Excess tax benefits from share based compensation arrangements
 -  -  12,542 
Proceeds from the exercise of stock options and warrants -  -  583 
Amounts paid for withholding taxes on stock option exercises -  (14,142) (56)
Withholding taxes collected for stock option exercises  -   14,142   56 
Net cash provided by (used in) financing activities  (4,469)  1,216,461   12,619   (4,012)  (4,469)
Effect of exchange rate changes on cash and cash equivalents
  (11,307)  (2,305)  178   (2,051)  (11,307)
                 
Net increase (decrease) in cash and cash equivalents (218) 27,207  32,496   38,600   (218)
Cash and cash equivalents at beginning of period  54,149   -   13,000   57,748   54,149 
Cash and cash equivalents at end of period $53,931  $27,207  $45,496  $96,348  $53,931 

See notes to unaudited condensed consolidated financial statements.

 
- 5 - -
 

AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.Basis of Presentation

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

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

The Company and its Sale
We design, engineer and manufacture microelectronicsmicroelectronic products and test solution and measurement equipment that are sold primarily to the broadbandspace, avionics, defense, commercial wireless  communications, aerospacemedical and defenseother markets.  Our fiscal year ends on June 30.

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

Presentation and Use of Estimates

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

Theaccompanying unaudited condensed consolidated financial statements presentedinformation of Aeroflex Incorporated and subsidiaries (the “Company”, “we”, or “our”) has been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”), and reflects all adjustments, consisting only of normal recurring adjustments, which in management’s opinion are necessary to state fairly the Company’s financial position as of  March 31, 2009 and June 30, 2008, and2010, results of operations for the three monthsand nine  month periods ended March 31, 2010 and 2009 and 2008,cash flows for the nine monthsmonth periods ended March 31, 2010 and 2009. The June 30, 2009 and the periodbalance sheet information has been derived from August 15, 2007 to March 31, 2008 represent the Company subsequent to the Merger (the “Successor” or “Successor Entity”), whereas the condensed consolidatedaudited financial statements, for the period from July 1, 2007 to August 14, 2007 represent the Company prior to the Merger (the “Predecessor”but does not include all information or “Predecessor Entity”). The purchase method of accounting was applied effective August 15, 2007 in connection with the Merger. Therefore, our condensed consolidated financial statements for periods before August 15, 2007 are presented on a different basis than those for the periods after August 14, 2007 and, as such, are not comparable.disclosures required by U.S. GAAP.

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


- 6 - -

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

Cash and Cash Equivalents
All highly liquid investments having maturities of three months or less atThese condensed consolidated financial statements should be read in conjunction with the date of acquisition are considered to be cash equivalents.

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

At March 31, 2009, our marketable securities consisted of $17.5 million of auction rate securities, which is net of a $2.4 million valuation allowance. Auction rate securities represent long-term (generally maturities of ten years to thirty-five years from the date of issuance) variable rate bonds tied to short-term interest rates that are reset through an auction process, which occurs every seven to thirty-five days, and are classified as availableCompany’s Annual Report on Form 10-K for sale securities. All but one (with the one security having a carrying value of $1.6 million and an A rating) of our auction rate securities retain a triple-A rating by at least one nationally recognized statistical rating organization. In addition, certain of our auction rate securities are backed by student loans whose principal and interest are federally guaranteed by the Family Federal Education Loan Program. Through March 31, 2009, we have collected all interest payments on all our auction rate securities when due, and since early February 2008 (when auctions began to fail) have redeemed $26.5 million of auction rate securities at par.

At March 31, 2009, the par value of our auction rate securities was $19.9 million; however we have estimated that the fair value of our auction rate securities as of that date was $17.5 million.  Since many auctions are failing and given that there is currently no active secondary market for our investment in auction rate securities, the determination of fair value was based on the following factors:

·continuing illiquidity;
·lack of action by the issuers to establish different forms of financing to replace or redeem these securities; and
·the credit quality of the underlying securities.

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

Auction rate securities are classified as non-current assets in the accompanying March 31, 2009 andfiscal year ended June 30, 2008 consolidated balance sheets.

- 7 - -

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

Financial Instruments and Derivatives
Foreign currency contracts are used in certain circumstances to protect us from fluctuations in exchange rates. We enter into foreign currency contracts, which are not designated as hedges. Thus the change in fair value is included in income as it occurs, within other income (expense)2009 (the “Fiscal 2009 Form 10-K”).

Our interest rate swap derivativesResults of operations for interim periods are designated as cash flow hedges. As such, they are recorded onnot necessarily indicative of results to be expected for the balance sheet as assetsfull fiscal year or liabilities at their fair value, with changes in the fair value of such derivatives, net of taxes, recorded as a component of other comprehensive income.any future periods.

See Note 8 for more details.

Revenue Recognition

We recognize revenue, net of trade discounts and allowances, when (1) persuasive evidence of an arrangement exists, (2) delivery of the product has occurred or the services have been performed, (3) the selling price is fixed or determinable, and (4) collectability of the resulting receivable is reasonably assured.

Our product revenue is generated predominantly from the sales of various types of microelectronic products and test and measurement equipment. For arrangements other than certain long-term contracts, revenue (including shipping and handling fees) is recognized when products are shipped and title has passed to the customer. If title does not pass until the product reaches the customer’s delivery site, recognition of the revenue is deferred until that time. Certain of our sales are to distributors, which have a right to return some portion of product within up to eighteen months of sale.specified periods from delivery. We recognize revenue on these sales at the time of shipment to the distributor, as the returns under these arrangements have historically been insignificant and can be reasonably estimated. A provision for such estimated returns is recorded at the time salesrevenues are recognized. For transactions that include customer-specified acceptance criteria, including those where acceptance is required upon achievement of performance milestones, revenue is recognized after the acceptance criteria have been met.

- 6 - -

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

Revenue from sales of products whereWhere an arrangement includes only a software is other than incidental to their performance, including related software support and maintenance contracts is recognized in accordance with SOP 97-2, “Software Revenue Recognition.” Accordingly,license, revenue for software is recognized when the software is delivered if alland title has been transferred to the customer or, in the case of electronic delivery of software, when the customer is given access to the licensed software programs. We also evaluate whether persuasive evidence of an arrangement exists, collection of the above criteriareceivable is probable, the fee is fixed or determinable and whether any other undelivered elements of the arrangement exist for revenue recognition are met.

which a portion of the total fee would be allocated based on vendor-specific objective evidence of the fair value of the undelivered element. When a customer purchases software together with post contract support, we allocate a portion of the fee to the post contract support for its fair value based on the contractual renewal rate or the amount the support is sold for on a standalone basis.rate. Post contract support fees are deferred in Advance Payments by Customers and Deferred Revenue in the consolidated balance sheets, and recognized as revenue ratably over the term of the related contract.

Service revenue is derived from extended warranty, customer support and training. Service revenue is deferred and recognized over the contractual term or as services are rendered and accepted by the customer. For example, customer support contracts are recognized ratably over the contractual term, while training revenue is recognized as the training is provided to the customer. In addition, the four revenue recognition criteria described above must be met before service revenue is recognized.

We use vendor-specific objective evidence of selling price, verifiable objective evidence of selling price, such as third party selling prices, or estimated selling price, in that order,  to allocate revenue to elements in multiple element arrangements. Revenue is recognized on only those elements that meet the four criteria described above.

Effective July 1, 2009, we no longer use the residual method to determine the portion of the arrangement consideration to allocate to undelivered elements of a multiple element arrangement.

At March 31, 2010, we have $29.0 million in Advance Payments by Customers and Deferred Revenue, which is comprised of $14.2 million of customer advance payments primarily for the purchase of materials, $8.1 million of deferred service and software support revenue, $4.0 million of deferred warranty revenue and $2.7 million of revenue deferred due to software arrangements for which there is no vendor specific objective evidence of fair value of the undelivered elements of the arrangements, contingent revenue, billings for which the related product has not been delivered or product delivered to a customer that has not been accepted or is incomplete. We generally sell non-software service and extended warranty contracts on a standalone basis. The amount of deferred revenue at March 31, 2010 and revenue for the three and nine months ended March 31, 2010 derived from non-software multiple element arrangements was insignificant.

The adoption on July 1, 2009 of the guidance issued by the Financial Accounting Standards Board (“FASB”) in Accounting Standard Updates 2009-13 and 2009-14 did not have a material impact on our pattern or timing of revenue recognition and is not expected to have a material impact on revenues in future periods. We have one test equipment product line, which includes software that is more than incidental to the hardware component that, prior to July 1, 2009, was accounted for as a software product for revenue recognition purposes. Effective July 1, 2009, the new revenue recognition guidance provides that products such as these that contain software which is essential to overall product functionality are outside the scope of software revenue recognition guidance and are now accounted for under new rules pertaining to revenue arrangements with multiple deliverables.  Although this change had no impact on revenue recognized for the three and nine months ended March 31, 2010, if this product were delivered in a multiple element arrangement in the future, certain revenue recognition could be accelerated. We do not believe that this will result in a material impact on our revenues.

- 7 - -
2.Accounting Pronouncements

Recently Adopted Accounting Pronouncements
On July 1, 2009, we adopted the authoritative implementation guidance issued by the FASB for fair value measurement for non-financial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of this new guidance did not have a material impact on our consolidated financial statements.

On July 1, 2009, we adopted the authoritative guidance issued by the FASB on business combinations. The guidance retains the fundamental requirements that the acquisition method of accounting (previously referred to as the purchase method of accounting) be used for all business combinations, but requires a number of changes, including changes in the way assets and liabilities are recognized and measured as a result of business combinations. It also requires the fair value of contingent consideration to be recorded at the acquisition date, the capitalization of in-process research and development at fair value and the expensing of acquisition-related costs as incurred. The adoption of this new guidance, which is effective for acquisitions consummated by us after June 30, 2009, did not have an impact on our consolidated financial statements.

On July 1, 2009, we adopted the authoritative guidance issued by the FASB for the determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance also adds certain disclosures to those already prescribed.  The guidance for determining useful lives must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must also be applied prospectively to all intangible assets recognized as of the effective date.  The adoption of this new guidance did not have a material impact on our consolidated financial statements.

In September 2009, we adopted the authoritative guidance issued by the FASB which establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements in conformity with U.S. GAAP.  This guidance explicitly recognizes the rules and interpretive releases of the SEC under federal securities laws as authoritative GAAP for SEC registrants.  We have updated references to U.S. GAAP in our financial statements issued for the period ended March 31, 2010. The adoption of this new guidance did not have an impact on our consolidated financial statements.
In October 2009, the FASB issued authoritative guidance on revenue recognition that becomes effective for us commencing July 1, 2010.  However, earlier adoption was permitted. Under the new guidance on sales arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration and the use of the relative selling price method is required. The new guidance eliminated the residual method of allocating arrangement consideration to deliverables and includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We chose to early adopt such authoritative guidance on a prospective basis effective July 1, 2009 and, therefore, it has been applied to multiple deliverable revenue arrangements and arrangements for the sale of tangible products with software components entered into or materially modified on or after July 1, 2009.  The adoption of this new guidance did not have a material impact on our consolidated financial statements.

 
- 8 - -
 

Acquisition Accounting
We useIn December 2007, the purchase method to account for business combinations, wherebyFASB issued guidance which requires that the total costnon-controlling interests in consolidated subsidiaries be presented as a separate component of an acquisition is allocatedstockholders’ equity in the balance sheet, that the amount of consolidated net earnings attributable to the tangibleparent and intangiblethe non-controlling interest be separately presented in the statement of earnings, and that the amount of consolidated other comprehensive income attributable to the non-controlling interest be separately disclosed. The standard also requires gains or losses from the sale of stock of subsidiaries where control is maintained to be recognized as an equity transaction. The guidance was effective beginning with the first quarter of the fiscal year 2010 financial reporting.  In connection with the adoption of this guidance, we did not apply the presentation or disclosure provisions to our one non-controlling interest as the effect on our consolidated financial statements was insignificant.

In January 2010, the FASB issued authoritative guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets acquired and liabilities assumed based upon their respective fair values at the datebetween Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of acquisition. The allocation of the purchase price is dependent upon certain valuations and other studies, which contain estimates and assumptions.

Long-Lived Assets
We test goodwill annually for impairment and whenever events or circumstances indicate impairment might have occurred. We evaluate the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, which is used to identify potential impairments, the overall fair value for the reporting unit is compared to its carrying amount including goodwill. If the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a reporting unit is less thanroll forward of activities on purchases, sales, issuance, and settlements on a gross basis of the carrying amount, a second step is performed which compares the impliedassets and liabilities measured using significant unobservable inputs (Level 3 fair value of the reporting unit’s goodwill to the carrying amount of the goodwill. The implied fair value for the goodwill is determined based on the difference betweenmeasurements).  We adopted the fair value disclosures guidance on January 1, 2010, except for the gross presentation of the reporting unit and the fair value of its net identifiable assets. If the implied fair value of the goodwillLevel 3 roll forward, which is less than its carrying amount, the difference is recognized as an impairment.

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

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

Research and Development Costs
We charge all research and development costs to expense as incurred, except those of our software products for which costs incurred between the date of product technological feasibility and the date that the software is available for general release are capitalized. We use a working model of the software or a detailed program design to assess technological feasibility. There were software development costs capitalized of $0 and $437,000 for the three months ended March 31, 2009 and 2008, respectively, and $437,000 and $0 for the periods from August 15, 2007 to March 31, 2008 andadopted until July 1, 2007 to August 14, 2007, respectively.  Approximately $209,0002011.  The adoption of software development costs were capitalized during the nine months ended March 31, 2009.  Capitalized software development costs are amortized to cost of sales based on the higher of a) the percentage of revenue for units delivered to total anticipated revenue for the related product, or b) onthis new guidance did not have a straight-line basis.  Capitalized software development costs of $331,000 and $1.2 million were included in Other Assets at March 31, 2009 and June 30, 2008, respectively.

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

- 9 - -

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

Gains and losses resulting from the translation of financial statements of foreign subsidiaries are accumulated in other comprehensive income (loss) and presented as part of stockholder’s equity. Realized and unrealized foreign currency exchange gains (losses) from the settlement of foreign currency transactions are reflected in other income (expense) and amounted to $(669,000) and $820,000 for the three months ended March 31, 2009 and 2008, respectively, and $10.5 million, $1.8 million and $193,000 for the nine months ended March 31, 2009 and the periods from August 15, 2007 to March 31, 2008 and July 1, 2007 to August 14, 2007, respectively.

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

Recently Adopted Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements,” to clarify the definition of fair value, establish a framework for measuring fair value and expand the disclosures on fair value measurements.  SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  SFAS 157 also stipulates that, as a market-based measurement, fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability, and establishes a fair value hierarchy that distinguishes between (a) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (b) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.”  This FSP amends SFAS 157 to exclude certain leasing transactions accounted for under previously existing accounting guidance.  However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination, regardless of whether those assets and liabilities are related to leases.
In February 2008, the FASB issued FSP No. FAS 157-2, “Effective Date for FASB Statement No. 157.”  This FSP permits the delayed application of SFAS 157 for nonfinancial assets and nonfinancial liabilities, as defined in this FSP, except for those that are recognized or disclosed at fair value in the financial statements at least annually, until the beginning of our fiscal 2010.  As of July 1, 2008, we adopted SFAS 157 (see Note 9), with the exception of its application to nonfinancial assets and nonfinancial liabilities, which we will defer in accordance with FSP No. FAS 157-2.  We are currently evaluating thematerial impact on our consolidated financial statementsstatements.  We believe the adoption on July 1, 2011 of adopting SFAS 157 at the beginninggross presentation of fiscal 2010 for such nonfinancial assets and nonfinancial liabilities.

- 10 - -

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS 157 in a market that isLevel 3 roll forward will not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  The FSP was effective upon issuance, including prior periods for which financial statements were not issued.  Revisions resulting from a change in the valuation technique or its application will be accounted for as a change in accounting estimate following the guidance in SFAS 154, “Accounting Changes and Error Corrections.”  However, the disclosure provisions in SFAS 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application.  We adopted SFAS 157 and FSP FAS 157-3 beginning in our fiscal 2009 first quarter (see Note 9).  As of March 31, 2009, we have a $2.4 million valuation allowance against the value of our auction rate securities. 
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” to permit all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value.  An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred.  SFAS 159 became effective for us as of July 1, 2008.  As we did not elect the fair value option for our financial instruments (other than those already measured at fair value in accordance with SFAS No. 157), the adoption of this standard did not have anmaterial impact on our consolidated financial statements.

In March 2008,February 2010, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities—amended its authoritative guidance related to subsequent events to alleviate potential conflicts with current SEC guidance.  Effective immediately, these amendments remove the requirement that an amendmentSEC filer disclose the date through which it has evaluated subsequent events.  The adoption of FASB Statement No. 133.”  SFAS 161 requires qualitative disclosures aboutthis new guidance did not have a company’s objectives and strategies for using derivative instruments, quantitative disclosures of the fair values and gains and losses of these derivative instruments in a tabular format, as well as more information about liquidity by requiring disclosure of a derivative contract’s credit-risk-related contingent features.  SFAS 161 also requires cross-referencing within footnotes to enablematerial impact on our consolidated financial statement users to locate important information about derivative instruments.  We adopted this disclosure-only standard beginning in our fiscal 2009 third quarter.statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

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

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment2010. The new guidance requires revised evaluations of Accounting Research Bulletin No. 51.” SFAS 160 establishes accountingwhether entities represent variable interest entities, ongoing assessments of control over such entities, and reporting standardsadditional disclosures for ownership interests in subsidiaries held by parties other than the parent, the amountvariable interests. We believe adoption of consolidated net income attributable to the parent and to the noncontrolling interest, changes inthis new guidance will not have a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating thematerial impact if any, the provisions of SFAS 160 will have on our consolidated financial statements.

 
- 119 - -
 

In April 2008, the FASB issued FSP FAS No. 142-3, “Determination of the Useful Life of Intangible Assets.”  This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible Assets.” This FSP also adds certain disclosures to those already prescribed in SFAS 142.  FSP 142-3 becomes effective for the annual and interim periods within the year, beginning in our fiscal 2010. The guidance for determining useful lives must be applied prospectively to intangible assets acquired after the effective date. The disclosure requirements must be applied prospectively to all intangible assets recognized as of the effective date.
In November 2008, the FASB ratified the consensus reached on EITF Issue No. 08-6, “Accounting for Equity Method Investment Considerations.”  EITF No. 08-6 addresses questions about the potential effect of SFAS No. 141(R) and SFAS No. 160 on equity-method accounting.  The primary issues include how the initial carrying value of an equity method investment should be determined, how to account for any subsequent purchases and sales of additional ownership interests, and whether the investor must separately assess its underlying share of the investee’s indefinite-lived intangible assets for impairment.  The effective date of EITF No. 08-6 coincides with that of SFAS No. 141(R) and SFAS No. 160 and is to be applied on a prospective basis beginning in our fiscal 2010.  Early adoption is not permitted for entities that previously adopted an alternate accounting policy.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” principally to require publicly traded companies to provide disclosures about fair value of financial instruments in interim financial information.  The adoption of this disclosure-only guidance will not have an impact on our consolidated financial statements and is effective beginning with our fiscal 2009 interim period ending June 30, 2009.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably determined.  If the fair value of such assets or liabilities cannot be reasonably determined, then they would generally be recognized in accordance with SFAS No. 5, “Accounting for Contingencies” and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss – an interpretation of FASB Statement No. 5.”  This FSP also amends the subsequent accounting for assets and liabilities arising from contingencies in a business combination and certain other disclosure requirements.  This FSP is effective for the Company for assets or liabilities arising from contingencies in business combinations that are consummated on or after July 1, 2009.

In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157 when there has been a significant decrease in market activity for a financial asset or liability in relation to normal activity and circumstances that may indicate that a transaction is not orderly. An entity is required to base its conclusion about whether a transaction was distressed on the weight of the evidence presented.  This FSP also re-affirms that the objective of fair value, when the market for an asset is not active, is the price that would be received to sell the asset in an orderly market (as opposed to a distressed or forced transaction).  Additional enhanced disclosures are also required in accordance with this FSP.  FSP No. FAS 157-4 must be applied prospectively and is effective for interim and annual periods ending after June 15, 2009.  We are currently evaluating the impact, if any, the provisions of FSP No. FAS 157-4 will have on our consolidated financial statements.

- 12 - -

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP No. FAS 115-2”).  FSP No. FAS 115-2 provides additional guidance on the timing of impairment recognition and greater clarity about the credit and noncredit components of impaired debt securities that are not expected to be sold.  FSP No. FAS 115-2 also requires additional disclosures about impairments in interim and annual reporting periods.  FSP No. FAS 115-2 is effective for the Company for the quarter ending June 30, 2009.  We are currently evaluating the impact the provisions of FSP No. FAS 115-2 and FAS 124-2 will have on our consolidated financial statements.

2.3.Discontinued OperationsIntangible Assets

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

Net sales and income (loss) from discontinued operations (including impairment charges), which were solely related to Radar,The components of amortizable intangible assets were as follows:

  Three Months  August 15, 2007  July 1, 2007 
  Ended  to  to 
  March 31,  March 31,  August 14, 
  2008  2008  2007 
  Successor  Successor  Predecessor 
  (In thousands) 
          
Net sales $178  $756  $120 
             
Income (loss) from discontinued operations before income taxes $(1,190) $(3,021) $(3,861)
Income tax (benefit)  (222)  (564)  (1,353)
Income (loss) from discontinued operations $(968) $(2,457) $(2,508)

3. Company Sale Transaction

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

In connection with the Merger and Terminated Merger, for the three months ended March 31, 2008 and the periods from August 15, 2007 to March 31, 2008 and July 1, 2007 to August 14, 2007, we incurred Company sale transaction and related expenses that we expensed as incurred of $850,000, $32.5 million and $3.7 million, respectively, consisting primarily of merger-related severance and other change of control related payments, a merger termination fee and the related lawsuit settlement charge and legal and other professional fees (“Company Sale Transaction expenses”).

- 13 - -

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

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

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

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

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

  Period from 
  July 1, 2007 to 
  August 14, 2007 
  Predecessor 
  (In thousands) 
    
Net sales $38,178 
Net income (loss) $(27,554)

- 14 - -

In connection with the consummation of the Merger, we entered into amended employment agreements with all participants, excluding one retired participant, in our unfunded Supplemental Executive Retirement Plan (“the “SERP”) that provided for specified payments, plus, for certain participants, 6% interest per annum from August 15, 2007, in full satisfaction of the benefits payable under the SERP.  In accordance with the terms of those agreements, we made a payment of $16.6 million in December 2008 and a final payment of $3.2 million in January 2009.  The actuarially determined liability to the one remaining retired participant in the SERP, who will receive monthly payments through at least December 15, 2015, was $6.7 million at March 31, 2009, of which $628,000 and $6.0 million is included in Accrued Expenses and Defined Benefit Plan Obligations, respectively.

4.Acquisition of Businesses and Intangible Assets

Test Evolution Corporation

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

Gaisler Research AB

On June 30, 2008, we acquired the stock of Gaisler Research AB (“Gaisler”) for $12.3 million cash (net of $2.7 million cash acquired), plus up to another $15 million over the next three years provided specified EBITDA targets are achieved.  Located in Sweden, Gaisler provides integrated circuit software products and services to European space system suppliers, plus other U.S., Japanese and Russian space agencies. Gaisler is included in our Microelectronic Solutions segment.

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

  (In thousands) 
    
Current assets (excluding cash of $2.7 million) $987 
Property, plant and equipment  62 
Developed technology  7,550 
Customer related intangibles  1,030 
Non-compete arrangements  1,820 
Tradenames  1,190 
Goodwill  2,069 
In-process research and development  2,300 
Total assets acquired  17,008 
Current liabilities  (1,076)
Deferred taxes  (3,245)
Total liabilities assumed  (4,321)
Net assets acquired $12,687 

The customer related intangibles and developed technology are being amortized on a straight-line basis over a range of 1 to 8 years.

- 15 - -

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

VI Technology, Inc.

On March 4, 2009, we acquired 100% of the stock of VI Technology, Inc. (VI Tech).  We paid $5.0 million in cash for approximately 29% of the stock of VI Tech, and the remaining approximately 71% of VI Tech stock was acquired by a limited liability company (parent LLC), that is our ultimate parent, in exchange for Class A membership interests in parent LLC with a fair value of $12.7 million.  Immediately following the consummation of these transactions, parent LLC contributed the 71% of VI Tech stock to the Company, giving us 100% ownership in VI Tech.  VI Tech, located in Austin, Texas, designs and manufactures independent automated test systems.  VI Tech is included in our Test Solutions segment.

We preliminarily allocated the purchase price, including acquisition costs of approximately $348,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

  (In thousands) 
    
Current assets (excluding cash of $107,000) $2,015 
Property, plant and equipment  149 
Other assets  37 
Developed technology  3,752 
Customer related intangibles  3,252 
Tradenames  1,042 
Non-compete arrangements  834 
Goodwill  11,428 
In-process research and development  626 
Total assets acquired  23,135 
Current liabilities  (1,908)
Deferred taxes  (3,286)
Total liabilities assumed  (5,194)
Net assets acquired $17,941 

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

On a pro forma basis, had the VI Tech acquisition taken place as of the beginning of fiscal 2009, our results of operations would not have been materially affected.

Intangible Assets with Definite Lives
The components of amortizable intangible assets are as follows:

  March 31, 2009  June 30, 2008 
  (In thousands) 
  Gross     Gross    
  Carrying  Accumulated  Carrying  Accumulated 
  Amount  Amortization  Amount  Amortization 
             
Developed technology $195,085  $52,455  $198,420  $29,631 
Customer related intangibles  209,587   62,528   213,232   42,433 
Non-compete arrangements  9,247   2,142   6,290   1,012 
Tradenames  1,907   107   -   - 
Total $415,826  $117,232  $417,942  $73,076 

- 16 - -
  March 31, 2010  June 30, 2009 
  Gross     Gross    
  Carrying  Accumulated  Carrying  Accumulated 
  Amount  Amortization  Amount  Amortization 
  (In thousands) 
             
Developed technology $196,083  $86,570  $197,684  $62,021 
Customer related intangibles  215,733   88,326   216,956   69,339 
Non-compete arrangements  10,198   4,046   10,090   2,692 
Tradenames  2,176   569   2,105   230 
Total $424,190  $179,511  $426,835  $134,282 

The aggregate amortization expense for amortizable intangible assets was $15.0$15.4 million and $20.9$15.0 million for the three months ended March 31, 20092010 and 2008,2009, respectively, and $47.5 million, $52.3$46.5 million and $1.7$47.5 million for the nine months ended March 31, 20092010 and the periods August 15, 2007 to March 31, 2008 and July 1, 2007 to August 14, 2007,2009, respectively.

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

 (In thousands)  (In thousands) 
      
2010 $59,359 
2011 58,514  $60,548 
2012 58,313   60,200 
2013 54,495   56,072 
2014 35,241   35,749 
2015  18,362 

Goodwill

The carrying amount of goodwill, isby segment, was as follows:

  AMS  ATS  Total 
  (In thousands) 
          
Balance at June 30, 2007 (predecessor entity) $51,321  $130,641  $181,962 
Goodwill adjustment recorded in purchase accounting from allocation of purchase price (1)
  243,456   27,373   270,829 
Balance at August 15, 2007 (successor entity)  294,777   158,014   452,791 
Acquisition of Test Evolution Corporation  -   1,868   1,868 
Acquisition of Gaisler  8,261   -   8,261 
Impact of foreign currency translation  (268)  (1,497)  (1,765)
Balance at June 30, 2008 (successor entity)  302,770   158,385   461,155 
Final adjustment to goodwill related to the Merger  494   (529)  (35)
Adjustment to goodwill for acquisitions(2)
  (5,985)  11,428   5,443 
Impact of foreign currency translation  (1,102)  (11,209)  (12,311)
Balance at March 31, 2009 (successor entity) $296,177  $158,075  $454,252 
  Microelectronic  Test    
  Solutions  Solutions  Total 
  (In thousands) 
          
Balance at June 30, 2009 $266,813  $161,320  $428,133 
Adjustment to goodwill for acquisitions  314   455   769 
Impact of foreign currency translation  387   (2,405)  (2,018)
Balance at March 31, 2010 $267,514  $159,370  $426,884 

(1)  The predecessor entity goodwill has been written off in purchase accounting for the Merger.
(2)  Goodwill was adjusted primarily due to finalizing purchase accounting for the Gaisler acquisition in the amount of $(6.2) million and the VI Tech acquisition in the amount of $11.4 million.

5.Restructuring Charges

In fiscal 2008, we initiated actions to restructure our U.K. business units by further consolidating our manufacturing, research and development and selling, general and administrative activities. In addition, we initiated a restructuring in our Whippany, New Jersey, component manufacturing facility to address a slowdown in sales of its integrated products line.  These actions resulted in the termination of approximately 151 employees, which resulted in restructuring costs, principally severance, for the periods from August 15, 2007 to March 31, 2008 and July 1, 2007 to August 14, 2007 of $1.8 million ($486,000 in cost of sales, $498,000 in selling, general and administrative costs and $820,000 in research and development costs) and $3.8 million ($1.6 million in selling, general and administrative costs and $2.2 million in research and development costs), respectively. Substantially all of the workforce reduction costs were paid prior to June 30, 2008.  In May 2008, we incurred other restructuring charges including $2.6 million of accrued contractual commitments under operating leases for two facilities in the U.K. that we exited, which will be paid through December 2010. In addition, approximately $485,000 of fixed asset impairment charges were recorded in selling, general and administrative costs in the fourth quarter of fiscal 2008 for the write-off of leasehold improvements in the abandoned facilities.

 
- 1710 - -
 

For the nine months ended March 31, 2009, in connection with continued restructuring activities of certain manufacturing operations, we incurred $2.8 million of severance costs for an additional 61 employees terminated primarily in our U.K. business unit ($2.0 million in cost of sales, $463,000 in selling, general and administrative costs and $303,000 in research and development costs).
4.Restructuring Charges

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

  Balance           Balance 
  June 30,           March 31, 
  2009  Nine Months Ended March 31, 2010  2010 
           Effect of    
  Restructuring        foreign  Restructuring 
  Liability  Net Additions  Cash Payments  currency  Liability 
  (In thousands) 
Work force reduction $756  $330  $(1,076) $2  $12 
                     
Closure of facilities  1,722   26   (463)  (217)  1,068 
                     
Total $2,478  $356  $(1,539) $(215) $1,080 

5. Inventories

Inventories consisted of the following:
  Balance           Balance 
  June 30,           March 31, 
  2008  Nine Months Ended March 31, 2009  2009 
           Effect of    
  Restructuring        foreign  Restructuring 
  Liability  Net Additions  Cash Payments  currency  Liability 
     (In thousands)    
                
Work force reduction
 $12  $2,792  $(2,334) $(4) $466 
                     
Other  3,242   -   (902)  (863)  1,477 
                     
Total $3,254  $2,792  $(3,236) $(867) $1,943 
  March 31,  June 30, 
  2010  2009 
  (In thousands) 
       
Raw materials $62,205  $67,388 
Work in process  47,533   47,185 
Finished goods  18,703   21,030 
  $128,441  $135,603 

6.Inventories

Inventories consist of the following:

  March 31,  June 30, 
  2009  2008 
  (In thousands) 
       
Raw materials $64,421  $64,533 
Work in process  52,868   41,056 
Finished goods  20,565   29,302 
  $137,854  $134,891 

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

 
- 1811 - -
 

Activity related to our product warranty liability, which is reflected in accrued expensesAccrued Expenses and other current liabilitiesOther Current Liabilities in the accompanying consolidated balance sheets, was as follows:

 Nine Months  August 15, 2007  July 1, 2007 
 Ended  to  to  Nine months  Nine months 
 March 31,  March 31,  August 14,  Ended  Ended 
 2009  2008  2007  March 31,  March 31, 
 Successor  Successor  Predecessor  2010  2009 
 (In thousands)  (In thousands) 
               
Balance at beginning of period $2,944  $3,002  $2,929  $2,645  $2,944 
Provision for warranty obligations 2,028  2,136  469   1,696   2,028 
Cost of warranty obligations (2,147) (2,115) (394)  (1,622)  (2,147)
Foreign currency impact  (285)  7   (2)  (64)  (285)
Balance at end of period $2,540  $3,030  $3,002  $2,655  $2,540 

8.7.Derivative Financial Instruments

We adopted SFAS No. 161 as of January 1, 2009. The adoption did not have an impact on our consolidated financial statements as it is a disclosure-only standard. We address certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. We enter into interest rate swap derivatives to manage the effects of interest rate movements on portions of our debt. We also enter into foreign currency forward contracts, not designated as hedging instruments, to protect us from fluctuations in exchange rates.

The fair values of our derivative financial instruments included in the condensed consolidated balance sheetsheets as of March 31, 2010 and June 30, 2009 are presented as follows:

 Asset (Liability) Derivatives 
Asset Derivatives Liability Derivatives  March 31, 2010 June 30, 2009 
Balance Sheet   Balance Sheet    Balance Sheet   Balance Sheet   
(In thousands)Location 
Fair Value(1)
 Location 
Fair Value(1)
  Location 
Fair Value(1)
 Location 
Fair Value(1)
 
Derivatives designated as hedging instruments:
               
Interest rate swap contracts        Accrued expenses and other current liabilities $(10,323)Accrued expenses and other current liabilities $(615)
Interest rate swap contracts Other long-term liabilities  - Other long-term liabilities  (15,006)
Not applicable $- 
Other long-term liabilities
 $17,436            
Total derivatives designated as hedging instruments    (10,323)   (15,621)
                     
Derivatives not designated as hedging instruments:
                     
Foreign currency forward contracts           Prepaid expenses and other current assets  446 Accrued expenses and other current liabilities  (195)
Not applicable  - 
Accrued expenses and other current liabilities
  33            
          
Total Derivatives  $-   $17,469 
Total derivatives, net   $(9,877)  $(15,816)

(1)  See Note 98 for further information about how the fair values of derivative assets and liabilities are determined.

 
- 1912 - -
 

The amounts of the gains and losses related to our derivative financial instruments designated as hedging instruments are presentedfor the three and nine months ended March 31, 2010 and 2009 were as follows:

  Amount of Gain or (Loss) 
  Recognized on Derivatives in 
Derivatives in Cash Flow Other Comprehensive Income 
Hedging Relationships 
(Effective Portion) (1)
 
  Three Months  Three Months  Nine Months  Nine Months 
  Ended  Ended  Ended  Ended 
  March 31,  March 31,  March 31,  March 31, 
  2010  2009  2010  2009 
  (In thousands) 
                 
Interest rate swap contracts $(1,279) $(1,318) $(5,550) $(23,837)

      Location of Gain or (Loss) Amount of Gain or (Loss)
  Amount of Gain or (Loss) Reclassified from Reclassified from
  Recognized in OCI on Derivative Accumulated OCI into Accumulated OCI into
(In thousands) 
(Effective Portion) (1)
 Income (Effective Portion) Income (Effective Portion)
  Three Months Nine Months   Three Months Nine Months
Derivatives in Cash Flow Ended Ended   Ended Ended
Hedging Relationships March 31, 2009 March 31, 2009   March 31, 2009 March 31, 2009
           
Interest rate swap contracts $479 $(12,396 ) Interest expense $ (2,079) $(4,161)
Location of Gain or (Loss) Amount of Gain or (Loss) 
Reclassified from Accumulated Reclassified from 
Other Comprehensive Income Accumulated Other Comprehensive Income 
into Income (Effective Portion) 
into Income (Effective Portion) (1)
 
  Three Months  Three Months  Nine Months  Nine Months 
  Ended  Ended  Ended  Ended 
  March 31,  March 31,  March 31,  March 31, 
  2010  2009  2010  2009 
  (In thousands) 
                 
Interest expense $(3,666) $(2,079) $(10,848) $(4,161)

(1)See Note 1211 for additional information on changes to accumulated other accumulated comprehensive income (loss).

The amounts of the gains and losses related to our derivative financial instruments not designated as hedging instruments are presentedfor the three and nine months ended March 31, 2010 and 2009 were as follows:

    
 Location of Gain or (Loss) Amount of Gain or (Loss)
 Recognized in Earnings on Recognized in Earnings on
(In thousands)Derivative Derivative
   Three Months Nine Months
   Ended Ended
   March 31, 2009 March 31, 2009
      
Derivatives Not Designated as Hedging     
Instruments:     
Foreign currency forward contractsOther income (expense)  $759  $(46)
Derivatives Not Location of Gain or (Loss) Amount of Gain or (Loss) 
Designated as Recognized in Earnings on Recognized in Earnings on 
Hedging Instruments Derivative Derivative 
      Three Months  Three Months  Nine Months  Nine Months 
      Ended  Ended  Ended  Ended 
    March 31,  March 31,  March 31,  March 31, 
    2010  2009  2010  2009 
    (In thousands) 
                   
Foreign currency forward contracts Other income (expense) $410  $759  $641  $(46)

Interest Rate Swap Cash-Flow Hedges

We enter into interest rate swap contracts with counterparties that are rated investment grade to manage the effects of interest rate movements on portions of our debt. Such contracts effectively fix the borrowing rates on floating rate debt to limit the exposure against the risk of rising rates.  We do not enter into interest rate swap contracts for speculative purposes and we have entered into transactions with counterparties that are rated investment grade.purposes. Our interest rate swap contracts outstanding as of March 31, 2010, all of which were entered into in fiscal 2008 for an aggregate notional amount of $475$425 million, have varying maturities through February 2011.


Foreign Currency Contract Derivatives
- 13 - -
Foreign Currency Contract Derivatives

Foreign currency contracts are used to protect us from fluctuations in exchange rates. We enter into foreign currency contracts, which are not designated as hedges. Thus theThe change in fair value is included in other income (expense) as it occurs, within other income (expense).occurs.  As of March 31, 2009,2010, we had $10.7$43.4 million of notional value foreign currency forward contracts maturing through June 2009.April 30, 2010. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts.

9.8.Fair Value Measurements

We adopted the provisions of SFAS 157account for financialcertain assets and liabilities as of July 1, 2008 and, as of March 31, 2009, have recorded a $2.4 million valuation allowance against the cost of our auction rate securities.  SFAS 157 definesat fair value as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date.  SFAS 157 also establishes a fair valuevalue.  The hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

- 20 - -
SFAS 157 describesbelow lists three levels of fair value based on the extent to which inputs used in measuring the fair value are observable in the market.  We categorize each of our fair value measurements in one of these three levels based on the lowest level input that may be usedis significant to measurethe fair value:value measurement in its entirety.  These levels are:

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

The following table presents for each hierarchy level, financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2009:basis:

  Quoted Prices in          
   Active Markets  Significant Other  Significant    
   for Identical  Observable  Unobservable    
  Assets  Inputs  Inputs    
As of March 31, 2010 (Level 1)  (Level 2)  (Level 3)  Total 
  (In thousands) 
Assets:            
Non-current marketable securities $-  $-  $9,779  $9,779 
Foreign currency forward contracts  -   446   -   446 
Total Assets $-  $446  $9,779  $10,225 
                 
Liabilities:                
Interest rate swap contracts $-  $10,323  $-  $10,323 
- 14 - -

  Quoted Prices in          
   Active Markets  Significant Other  Significant    
   for Identical  Observable  Unobservable    
   Assets  Inputs  Inputs    
As of June 30, 2009 (Level 1)  (Level 2)  (Level 3)  Total 
  (In thousands) 
Assets:            
Non-current marketable securities $-  $-  $17,677  $17,677 
Liabilities:                
Foreign currency forward contracts $-  $195  $-  $195 
Interest rate swap contracts  -   15,621   -   15,621 
Total Liabilities $-  $15,816  $-  $15,816 
  Quoted Prices in          
  Active Markets  Significant Other  Significant    
  for Identical  Observable  Unobservable    
  Assets  Inputs  Inputs    
  (Level 1)  (Level 2)  (Level 3)  Total 
  (In thousands) 
Assets:            
Non-current marketable securities $-  $-  $17,523  $17,523 
Liabilities:                
Foreign currency forward                
    contracts $-  $33  $-  $33 
Interest rate swap contracts  -   17,436   -   17,436 
   Total Liabilities $-  $17,469  $-  $17,469 

The following table presents the changes in the carrying value of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), as defined in SFAS No. 157, for the nine months ended March 31, 2009:2010:

  Fair Value Measurements 
  Using Significant 
  Unobservable Inputs 
  (Level 3) 
  Auction 
  Rate 
  Securities 
  (In thousands) 
    
Balance at June 30, 2008 $- 
Transfers to Level 3  19,945 
Total unrealized losses in accumulated other comprehensive income (loss)
  (2,422)
Balance at March 31, 2009 $17,523 
  Fair Value Measurements 
  Using Significant 
  Unobservable Inputs 
  (Level 3) 
  Auction 
  Rate 
  Securities 
  (In thousands) 
    
Balance at June 30, 2009 $17,677 
Redeemed by the issuer  (8,900)
Total unrealized gain (loss) in accumulated other comprehensive income (loss)  1,002 
Balance at March 31, 2010 $9,779 

Non-Current Marketable Securities – Non-current marketable securities consist of auction rate securities that currently have no active market from which we could obtain pricing.  Since we adopted SFAS 157 on July 1, 2008,We have classified auction rate securities have been classified as Level 3 as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities.    Since February 2008, when auctions for these securities began to fail, we have redeemed $26.5 million of auction rate securities at par. To date, we have collected all interest payments on all of our auction rate securities when due. Furthermore, we have the intent and are able to hold these securities until the credit markets recover, or until maturity,their maturities, which range from 2037 through 2041, if necessary.   However, based on a discounted cash flow analysis, which considered, among other items, the collateral underlying the securities, the credit worthiness of the issuer, the timing of future cash flows and liquidity risks, at March 31, 2010 we have recorded a $2.4$1.3 million valuation allowance against the auction rate securities.

As fair values have continued to be below cost, we have considered various factors in determining that at March 31, 2010 a credit loss did not exist and there was no requirement to recognize an other than temporary impairment charge, including the length of time and the extent to which the fair value has been below the cost basis, the timely receipt of all interest payments, the rating of the security, the relatively low volatility of the security’s fair value, the current financial condition of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

During the nine months ended March 31, 2010 $8.9 million of our auction rate securities were redeemed by the issuer at an average of 96.4% of par. The resulting $320,000 realized loss was recorded in the statement of operations for the three and nine months ended March 31, 2010.

 
- 2115 - -
 

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

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

10.9.Long Term Debt and Credit Agreements

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

As of March 31, 2009, we are in compliance with all of the covenants contained in our loan agreements.

In connection with our credit facilities, we capitalized deferred financing costs of $340,000, $27.4 million and $477,000 for the nine months ended March 31, 2009 and the periods August 15, 2007 to March 31, 2008 and July 1, 2007 to August 14, 2007, respectively, primarily consisting of facility, legal and advisory fees.  We are amortizing these costs over the terms of the related facilities.  For the three months ended March 31, 2009 and 2008 we amortized $1.2 million and $1.6 million, respectively, to interest expense.  For the nine months ended March 31, 2009 and the periods August 15, 2007 to March 31, 2008 and July 1, 2007 to August 14, 2007, we amortized $3.6 million, $2.8 million and $217,000, respectively, to interest expense.

Interest paid was $44.1 million for the nine months ended March 31, 2009, $35.7 million for the period August 15, 2007 to March 31, 2008, and $57,000 for the period July 1, 2007 to August 14, 2007.

- 22 - -

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

 March 31, 2009  March 31, 2010 
 Carrying  Estimated  Carrying  Estimated 
 Amount  Fair Value  Amount  Fair Value 
 (In thousands)  (In thousands) 
            
Senior secured B-1 term loan $393,857  $248,130  $389,944  $370,446 
Senior secured B-2 term loan 123,080  60,309   121,857   114,546 
Senior unsecured loan 225,000  140,625 
Senior unsecured notes  225,000   236,250 
Senior subordinated unsecured term loan 143,253  75,208   160,827   140,724 
Other  1,406   1,406   1,085   1,085 
Total debt $886,596  $525,678  $898,713  $863,051 

The carrying value of debt of $878.8$889.3 million as of June 30, 20082009 had a fair value of $804.2$661.9 million.

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

As of March 31, 2010, we are in compliance with all of the covenants contained in our loan agreements.

Interest paid was $52.8 million and $44.1 million for the nine months ended March 31, 2010 and 2009, respectively. Accrued interest of $7.2 million and $14.0 million was included in accrued expenses and other current liabilities at March 31, 2010 and June 30, 2009, respectively.

11.10.Stockholder’s EquityLoss on Liquidation of Foreign Subsidiary

Share Based Compensation
Stock Options

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

Member Interests

On August 15, 2007 certain membersacquisition of one of our management were granted Class B member interestsWireless businesses in the U.K. in 2003, we set up a limited liability company (parent LLC) that isforeign partnership to finance the ultimate parent ofacquisition.  We invested $19.5 million in the Company,partnership and which owns all of the common stock of the Parent. The parent LLC is apartnership advanced those funds to our foreign holding company with no operations or employeesin the form of its own. The parent LLC has two classesa loan, the proceeds of membership interests, Class A and Class B. Our non-management equity investors, or their affiliates,which was used for the selling shareholders of VI Tech and Company employees that made equity investments to partially fundacquisition.
During the Merger are Class A members and Class B members consist of Company employees. Pursuantquarter ended September 30, 2009, the loan was fully repaid to the terms of the limited liability company operating agreement governing the parent LLC, the holders of Class B member interests are entitled to receive a percentage of all distributions, if any, made by the parent LLC after (x) the holders of the Class A members in the parent LLC havepartnership, with interest, and we received a return of their invested capital, plus a 12% per annum internal rate of return (compounded annually) on their invested capital and (y) certain membersdividends.  The partnership is substantially liquidated.
As a result of our management that received Class A interests for their capital contributionschanges in foreign currency rates, there was a cumulative translation adjustment of $7.7 million remaining after substantially all of the assets have received a special distributionbeen returned to us and substantially all of the liabilities have been satisfied.  In accordance with U.S. GAAP, this remaining cumulative translation adjustment has been expensed in the aggregate amountperiod during which the substantial liquidation of $3.2 million, together withthe partnership occurred and presented as a 12% per annum internal ratenon-cash loss on liquidation of return (compounded annually). The Class B member interests are non-transferable and vest ratably over five years, with any unvested interests reverting toforeign subsidiary in our Condensed Consolidated Statement of Operations for the holders of Class A interests in the event they are forfeited or repurchased.nine months ended March 31, 2010.  This loss is not deductible for income tax purposes.

 
- 2316 - -
 

Compensation expense attributable to share based compensation was $489,000 ($308,000 after tax) and $488,000 ($307,000 after tax) for the three months ended March 31, 2009 and 2008, respectively, $1.5 million ($924,000 after tax) for the nine months ended March 31, 2009, $2.6 million ($1.7 million after tax) for the period August 15, 2007 to March 31, 2008 and $214,000 ($135,000 after tax) for the period July 1, 2007 to August 14, 2007.

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

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

Cash received from stock option exercises was $583,000 for the period July 1, 2007 to August 14, 2007.  The tax benefit received from stock option exercises was $16.1 million for the period August 15, 2007 to March 31, 2008 and $41,000 for the period July 1, 2007 to August 14, 2007.

12.           
11.Comprehensive Income
 
The components of comprehensive income (loss) arewere as follows:

  Three Months  Three Months  Nine Months  Nine Months 
  Ended  Ended  Ended  Ended 
  March 31,  March 31,  March 31,  March 31, 
  2010  2009  2010  2009 
  (In thousands)
             
Net income (loss) $2,856  $(13,734) $(28,301) $(24,738)
Increase (decrease) in fair value of interest rate swap contracts, net of tax provision (benefit) of $927, $282, $2,013 and $(7,280)  1,460   479   3,285   (12,396)
Valuation allowance against non-current marketable securities  780   (219)  1,002   (2,422)
Foreign currency translation adjustment, net of tax benefit of $1,033, $0, $416 and $0  (7,890)  (4,467)  (1,877)  (60,447)
Total comprehensive income (loss) $(2,794) $(17,941) $(25,891) $(100,003)

Accumulated other comprehensive income (loss) was as follows:

  Three Months  Three Months  Nine Months  August 15, 2007  July 1, 2007 
  Ended  Ended  Ended  to  to 
  March 31,  March 31,  March 31,  March 31,  August 14, 
  2009  2008  2009  2008  2007 
  Successor  Successor  Successor  Successor  Predecessor 
  (In thousands) 
                
Net income (loss) $(13,734) $(16,405) $(24,738) $(96,498) $(16,916)
Unrealized gain (loss) on interest rate swap contracts, net of tax provision (benefit) of $282,000, ($1.5 million), ($7.3 million), ($2.9 million) and $0  479   (2,491)  (12,396)  (4,952)  - 
Valuation allowance against non-current marketable securities  (219)  -   (2,422)  -   - 
Foreign currency translation adjustment  (4,467)  (1,030)  (60,447)  (1,641)  (497)
Total comprehensive income (loss) $(17,941) $(19,926) $(100,003) $(103,091) $(17,413)

- 24 - -
  Unrealized             
   Gain (Loss)  Valuation  Minimum  Foreign    
   on Interest  Allowance Against  Pension  Currency    
   Rate Swap  Non-Current  Liability  Translation    
   Contracts  Marketable  Adjustment  Adjustment  Total 
   (net of tax)  Securities  (net of tax)  (net of tax)  (net of tax) 
  (In thousands) 
                
Balance, June 30, 2009 $(9,602) $(2,268) $(499) $(42,331) $(54,700)
Nine months' activity  3,285   1,002   -   (1,877)  2,410 
Balance, March 31, 2010 $(6,317) $(1,266) $(499) $(44,208) $(52,290)

Accumulated other comprehensive income (loss) is as follows:

  Unrealized             
  Gain (Loss)  Valuation  Minimum       
  on Interest  Allowance Against  Pension  Foreign    
  Rate Swap  Non-Current  Liability  Currency    
  Agreements  Marketable  Adjustment  Translation  Total 
  (net of tax)  Securities  (net of tax)  Adjustment  (net of tax) 
  (In thousands) 
                
Balance, June 30, 2008 $1,411  $-  $(6) $(998) $407 
Nine months' activity  (12,396)  (2,422)  -   (60,447)  (75,265)
Balance, March 31, 2009 $(10,985) $(2,422) $(6) $(61,445) $(74,858)

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

Prior to fiscal 2009, the foreign currency translation adjustments were not adjusted for income taxes as they related to indefinite investments in non-U.S. subsidiaries.  Deferred U.S. income taxes have been provided on undistributed foreign earnings for years subsequent to fiscal 2008 since we expect that substantially all of these earnings will be distributed to the U.S.  As of March 31, 2010, we have recorded a deferred U.S. income tax on the foreign currency translation adjustment created by the post-fiscal 2008 undistributed foreign earnings.

- 17 - -
13.12.Legal Matters

In March 2005, we sold the net assets of our shock and vibration control device manufacturing business, (“VMC”).which we refer to as VMC.  Under the terms of the sale agreements, we retained certain liabilities relating to adverse environmental conditions that existed at the premises occupied by VMC as of the date of sale.  We recorded a liability for the estimated remediation costs related to adverse environmental conditions that existed at the VMC premises when it was sold. The accrued environmental liability at March 31, 20092010 is $1.0$1.1 million, of which $322,000 is expected to be paid within one year.

During the quarter ended March 31, 2007, we became aware that certain RadHard bidirectional multipurpose transceivers sold by us since 1999 may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with the International Traffic in Arms Regulations, (“ITAR”).or   ITAR. Accordingly, we filed a Voluntary Disclosure with the Directorate of Defense Trade Controls, Department of State, describing the details of the possible inadvertent misclassification.misclassification and identifying certain unauthorized exports from the United States to end-users in a number of countries, including China and Russia. Simultaneously, we filed a Commodity Jurisdiction request providing detailed information and data supporting our contention that the product is not subject to ITAR and requesting a determination that such product is not ITAR controlled. By letter datedOn November 15, 2007, we were informed that the U.S. Department of State had determined in response to our Commodity Jurisdiction request that the product is subject to the licensing jurisdiction of the U.S. Department of State in accordance with the ITAR. We requested reconsideration of this determination. On February 7, 2008, we filed an addendum to the above referenced Voluntary Disclosure advising the Directorate of Defense Trade Controls that other products sold by us, similar in nature to the transceiver described above, may also be subject to the ITAR. The Directorate of Defense Trade Controls agreed to extend our time to file such addendum to the Voluntary Disclosure until a decision was rendered with respect to our request for reconsideration of the determination in connection with the above-referenced Commodity Jurisdiction request. On August 5, 2008, we received a letter from the Office of Defense Trade Controls Compliance, (“DTCC”)or DTCC, requesting that we provide documentation and/or information relating to our compliance initiatives after November 15, 2007 as well as the results of any product reviews conducted by us, and indicating that a civil penalty against us could be warranted in connection with this matter following the review of such materials. We have provided all of the materials and documentation requested by the DTCC.  Our request for reconsideration of the Commodity Jurisdiction request was denied by the Directorate of Defense Trade Controls on August 19, 2008 which determined that the product is subject to the licensing jurisdiction of the Department of State in accordance with the ITAR. Accordingly, on September 18, 2008, we filed an addendum to our Voluntary Disclosure identifying other products that may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with the ITAR but were inadvertently misclassified.misclassified and exported without a license.  At this time it is not possible to determine whether any fines or other penalties will be asserted against us or the materiality of any outcome.
We have also identified other ITAR noncompliance in our past business activities as well as in the pre-acquisition business activities of a recently acquired company. These include the inadvertent export of products without a required license and the disclosure of controlled technology to certain foreign national employees. These matters were formally disclosed to the U.S. Department of State in 2009 and 2010.

Compliance with the directives of the U.S. Department of State may result in substantial legal and other expenses and the diversion of management time. In the event that a determination is made that we or any entity we have acquired has violated ITAR with respect to any matters, we may be subject to substantial monetary penalties that we are unable to quantify at this time, and/or suspension or revocation of its export privileges and criminal sanctions, which may adversely affect our business, results of operations and financial condition.

 
- 2518 - -
 


During May 2008,On October 14, 2009, BAE Systems Information and Electronic Systems, or BAE, commenced an action against both us and one of our subsidiaries in the United States District Court for the District of Delaware.  BAE is alleging that under a subcontract it entered into with us in 2002, BAE provided to us certain proprietary information and know how relating to a high performance direct infrared countermeasure system for use in military aircraft and certain other platforms, known as the “DIRCM System”, which enabled us to fabricate for BAE an assembly component of the third generation of the DIRCM System.  BAE is alleging that, in violation of the provisions of the subcontract and a Proprietary Information Agreement, we becamefabricated or facilitated the fabrication of one or more items that were identical or substantially identical to items that we exclusively fabricated for BAE under the subcontract.  BAE further awareclaims that our actions ostensibly enabled a certain product soldcompetitor of BAE to build and market, in competition with BAE, an infrared countermeasure system that included an unlawful copy of the component.  Based on these allegations, BAE has asserted claims against us for patent infringement, trade secret misappropriation, breach of contract, conversion and unjust enrichment and has requested, by our KDI subsidiary mayway of relief, unspecified damages, injunctive relief and an accounting.  We have inadvertently been misclassified asevaluated BAE’s claims and believe that there is no basis for the allegations or claims made by BAE.  Nevertheless, there can be no assurance that we will prevail in the matter.  We do not ITAR controlled. On August 5, 2008, we filed a Voluntary Disclosure withbelieve that the Directorate of Defense Trade Controls, Department of State, describing the inadvertent misclassificationultimate resolution of this product. In January 2009 we identified another product that shouldmatter will have been included in the August 5, 2008 disclosure.  We filed an initial disclosure with the Departmenta material adverse effect on our business, results of State identifying this product, and the Department of State instructed us to file an amendment to the August 5, 2008 disclosure.  That amendment was filed in April 2009. At this time it is not possible to determine whether any finesoperations, financial position, liquidity or other penalties will be asserted against us with respect to the foregoing matters, or the materiality of any outcome.

During November 2008, we became aware that our Hauppauge facility had shipped two ITAR controlled products to a foreign customer, but inadvertently had noted on the requisite paperwork that only one ITAR controlled product was included in the shipment. We filed a voluntary disclosure in January 2009, and that disclosure has been closed by the State Department and no fine or penalty was assessed.
During January 2009, we became aware that a certain product sold by our Powell subsidiary, for which an ITAR marketing license had been properly issued by the U.S. Department of State, mistakenly was taken out of the country by an employee without first obtaining the required U.S. Customs signature upon departure.   We have filed an initial disclosure relating to this issue and will file a detailed disclosure by June 6, 2009.  At this time it is not possible to determine whether any fines or other penalties will be asserted against us, or the materiality of any outcome.

In the third quarter of fiscal 2009, we became aware that a product sold and licensed to Raytheon U.K. was actually forwarded to an end user in Saudi Arabia.  Aeroflex did not identify that end user on the initial license application, so the product in question was forwarded to Saudi Arabia when it was only authorized to travel as far as the U.K.  We filed an initial disclosure concerning this matter in April 2009.  At this time it is not possible to determine whether any fines or penalties will be asserted against us, or the materiality of any outcome.

In March 2009 we became aware that Aeroflex’s subsidiary, Micrometrics, had inadvertently misclassified a component and shipped it to a foreign customer in Italy under the jurisdiction of the Export Administration Regulations (“EAR”) when it should have been shipped under the jurisdiction of the ITAR.  We filed an initial voluntary disclosure concerning this matter in April 2009.  At this time it is not possible to determine whether any fines or penalties will be asserted against us, or the materiality of any outcome.

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

- 26 - -
capital resources.

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

14.13.Business Segments

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

Microelectronic Solutions (“AMS”)

 ·Microelectronic Components, Sub-assemblies and ModulesHi-Rel microelectronics/semiconductors
 ·Integrated CircuitsRF and microwave components
·Mixed-signal/digital ASICs
 ·Motion Control Systemscontrol products

Test Solutions (“ATS”)

 ·Instrument ProductsWireless test equipment
·Military and Test SystemsPrivate Mobile Radio, or PMR, test equipment
·Avionics test equipment
·Synthetic test equipment
·General purpose test equipment and other

We are a manufacturer of advanced technology systems and components for commercial industry, government and defense contractors.  Approximately 32% and 34% of our sales for the three months ended March 31, 2010 and 2009, and 33% and 35% of our sales for the nine months ended March 31, 2010 and 2009, 29% of our sales for the period August 15, 2007 to March 31, 2008 and 21% for the period July 1, 2007 to August 14, 2007respectively, were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. No one customer constituted more than 10% of sales during any of the periods presented. Inter-segment sales were not material and have been eliminated from the tables below.

The majority of our operations are located in the United States; however, we also have operations in Europe and Asia, with our most significant internationalforeign operations in the United Kingdom (“U.K.”).  Net sales from facilities located in the U.K. were approximately $32.2$33.6 million and $37.9$32.2 million for the three months ended March 31, 2010 and 2009 and 2008, respectively,$89.5 million and $100.0 million, $114.7 million and $11.7 million for the nine months ended March 31, 20092010 and the periods August 15, 2007 to March 31, 2008 and July 1, 2007 to August 14, 2007,2009, respectively.  Total assets of the U.K. operations were $167.3 million and $237.5$163.1 million as of March 31, 20092010 and $188.2 million as of June 30, 2008, respectively.2009.


- 19 - -
Net sales, based on the customers’ locations, attributed to the United States and other regions arewere as follows:

 Three Months  Three Months  Nine Months  August 15, 2007  July 1, 2007 
 Ended  Ended  Ended  to  to  Three Months  Three Months  Nine Months  Nine Months 
 March 31,  March 31,  March 31,  March 31,  August 14,  Ended  Ended  Ended  Ended 
 2009  2008  2009  2008  2007  March 31,  March 31,  March 31,  March 31, 
 (Successor)  (Successor)  (Successor)  (Successor)  (Predecessor)  2010  2009  2010  2009 
 (In thousands)  (In thousands)
                           
United States of America $79,397  $82,942  $251,454  $229,914  $21,183  $94,700  $79,397  $267,089  $251,454 
Europe and Middle East 43,583  36,318  103,481  97,604  10,357   40,975   43,583   103,684   103,481 
Asia and Australia 14,201  34,273  75,263  85,358  6,242   29,550   14,201   85,655   75,263 
Other regions  2,258   3,771   6,901   7,200   439   3,210   2,258   8,862   6,901 
 $139,439  $157,304  $437,099  $420,076  $38,221  $168,435  $139,439  $465,290  $437,099 


 
- 2720 - -
 

Selected financial data by segment iswas as follows:

           August 15,    
  Three Months  Three Months  Nine Months  2007    
  Ended  Ended  Ended  through  July 1, 2007 
  March 31,  March 31,  March 31,  March 31,  to August 14, 
  2009  2008  2009  2008  2007 
  (Successor)  (Successor)  (Successor)  (Successor)  (Predecessor) 
  (In thousands) 
    
Net sales:               
Microelectronic solutions ("AMS") $70,232  $77,380  $208,564  $197,279  $19,017 
Test solutions ("ATS")  69,207   79,924   228,535   222,797   19,204 
Net sales $139,439  $157,304  $437,099  $420,076  $38,221 
                     
Segment adjusted operating income:                 
- AMS $14,783  $19,143  $44,767  $51,363  $24 
- ATS  8,700   11,010   34,304   34,367   (7,582)
- General corporate expense  (2,854)  (2,088)  (9,421)  (5,497)  (2,347)
Adjusted operating income (loss)  20,629   28,065   69,650   80,233   (9,905)
                     
Amortization of acquired intangibles                    
- AMS  (8,829)  (12,621)  (27,968)  (31,464)  (279)
- ATS  (6,127)  (8,251)  (19,578)  (20,817)  (1,413)
Share based compensation                    
- AMS  -   -   -   -   (83)
- ATS  -   -   -   -   95 
- Corporate  (489)  (488)  (1,466)  (2,634)  (226)
Restructuring charges                    
- AMS  -   (402)  -   (402)  - 
- ATS  (582)  (355)  (2,792)  (1,400)  (3,778)
One-time lease termination costs                    
- ATS  -   -   -   -   (576)
Merger related expenses - Corporate  (815)  (534)  (3,621)  (3,249)  (1,319)
Acquired in-process R&D costs                    
- AMS  (1,665)  -   (1,665)  (15,700)  - 
- ATS  (626)  -   (626)  (8,640)  - 
Current period impact of acquisition related adjustments:                    
Inventory - AMS  -   (4,156)  -   (23,817)  (57)
Inventory - ATS  -   (1,495)  -   (15,151)  - 
Depreciation - AMS  (285)  (293)  (857)  (732)  - 
Depreciation - ATS  (629)  (823)  (2,043)  (2,058)  - 
Depreciation - Corporate  (55)  (55)  (165)  (137)  - 
Deferred revenue - ATS  (64)  (576)  (240)  (2,235)  - 
Company sale transaction expenses  -   (850)  -   (32,459)  (3,717)
Operating income (loss) (GAAP)  463   (2,834)  8,629   (80,662)  (21,258)
                     
Interest expense  (20,566)  (20,536)  (63,031)  (53,649)  (275)
Other income (expense), net  (47)  1,960   12,366   3,881   294 
Income (loss) from continuing operations before income taxes $(20,150) $(21,410) $(42,036) $(130,430) $(21,239)

- 28 - -
  Three Months  Three Months  Nine Months  Nine Months 
   Ended  Ended  Ended  Ended 
  March 31,  March 31,  March 31,  March 31, 
  2010  2009  2010  2009 
  (In thousands) 
 ��           
Net sales:            
Microelectronic solutions ("AMS") $83,418  $70,232  $229,939  $208,564 
Test solutions ("ATS")  85,017   69,207   235,351   228,535 
Net sales $168,435  $139,439  $465,290  $437,099 
                 
Segment adjusted operating income:                
- AMS $23,029  $14,783  $59,940  $44,767 
- ATS  19,005   8,700   47,156   34,304 
- General corporate expense  (2,189)  (2,854)  (7,378)  (9,421)
Adjusted operating income  39,845   20,629   99,718   69,650 
                 
Amortization of acquired intangibles                
- AMS  (8,733)  (8,829)  (26,312)  (27,968)
- ATS  (6,675)  (6,127)  (20,215)  (19,578)
Share-based compensation                
- Corporate  (518)  (489)  (1,563)  (1,466)
Restructuring charges                
- ATS  (105)  (582)  (356)  (2,792)
Merger related expenses - Corporate  (647)  (815)  (2,111)  (3,621)
Acquired in-process R&D costs                
- AMS  -   (1,665)  -   (1,665)
- ATS  -   (626)  -   (626)
Loss on liquidation of foreign subsidiary - ATS  -   -   (7,696)  - 
Current period impact of acquisition related adjustments:                
Inventory – AMS  -   -   (246)  - 
Depreciation - AMS  (251)  (285)  (791)  (857)
Depreciation – ATS  (172)  (629)  (989)  (2,043)
Depreciation - Corporate  (55)  (55)  (165)  (165)
Deferred revenue - ATS  (31)  (64)  (96)  (240)
Operating income (GAAP)  22,658   463   39,178   8,629 
                 
Interest expense  (20,815)  (20,566)  (63,272)  (63,031)
Other income (expense), net  222   (47)  701   12,366 
Income (loss) before income taxes $2,065  $(20,150) $(23,393) $(42,036)

Management evaluates the operating results of the two segments based upon adjusted operating income, which is pre-tax operating income, before costs related to restructuring, lease termination charges, amortization of acquired intangibles, share-based compensation, restructuring charges, merger related expenses, acquired in-process research and development costs, Company Sale Transaction expenses, merger related expensesloss on liquidation of foreign subsidiary and the impact of any acquisition related adjustments.  We have set out above our adjusted operating income (loss) by segment and in the aggregate, and have provided a reconciliation of operating income (loss) to adjusted operating income (loss) for the periods presented.


- 21 - -

15.14.Guarantor/Non-Guarantor Financial Information

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the balance sheets at March 31, 2010 and June 30, 2009, the statements of operations for the three and nine months ended March 31, 2010 and 2009 and the statements of operations,cash flows for the nine months ended March 31, 2010 and cash flows2009 for Aeroflex Incorporated (the “Parent Company”), the Guarantor Subsidiariesguarantor subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries.non-guarantor subsidiaries.  The supplemental condensed consolidating financial information reflects for all fiscal periods presented, the investments of the Parent Company in the Guarantor Subsidiariesguarantor subsidiaries as well as the investments of the Parent Company and the Guarantor Subsidiariesguarantor subsidiaries in the Non-Guarantor Subsidiaries,non-guarantor subsidiaries, in all cases using the equity method.  For purposes of this footnote, guarantor subsidiaries refer to the subsidiaries of the Parent Company that have guaranteed principal debt obligations of the Parent Company.  The Parent Company’s purchase price allocation adjustments, including applicable intangible assets, arising from business acquisitions have been pushed down to the applicable subsidiary columns (see Notes 3Note 3).

Each of the subsidiary guarantors is 100% owned by the Parent Company and 4).guarantees the debt on an unconditional and joint and several basis.  The Parent Company, as the registrant and issuer of the registered debt, files annual and quarterly financial statements with the Securities and Exchange Commission and includes, in a note to the financial statements, condensed consolidating financial information as described above.

Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2010
(In thousands)

     Guarantor  Non-Guarantor       
  Parent  Subsidiaries      Subsidiaries      Eliminations  Consolidated 
                
Net sales $-  $115,931  $54,171  $(1,667) $168,435 
Cost of sales  -   59,178   20,776   (1,816)  78,138 
Gross profit  -   56,753   33,395   149   90,297 
Selling, general and administrative costs  3,409   19,247   8,721   -   31,377 
Research and development costs  -   14,023   6,831   -   20,854 
Amortization of acquired intangibles  -   13,250   2,158   -   15,408 
Operating income (loss)  (3,409)  10,233   15,685   149   22,658 
                     
Other income (expense):                    
Interest expense  (20,797)  (17)  (1)  -   (20,815)
Other income (expense), net  138   213   (129)  -   222 
Intercompany charges  19,808   (19,317)  (491)  -   - 
Income (loss) before income taxes  (4,260)  (8,888)  15,064   149   2,065 
Provision (benefit) for income taxes  (774)  928   2,697   (3,642)  (791)
Equity income (loss) of subsidiaries  6,342   12,049   -   (18,391)  - 
Net income (loss) $2,856  $2,233  $12,367  $(14,600) $2,856 
- 22 - -

Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2009
(In thousands)

     Subsidiary  Subsidiary       
  Parent  Guarantors  Non-Guarantors  Eliminations  Consolidated 
                
Net sales $-  $100,972  $40,784  $(2,317) $139,439 
Cost of sales  -   52,418   22,170   (1,754)  72,834 
Gross profit  -   48,554   18,614   (563)  66,605 
Selling, general and administrative costs  4,214   18,790   7,950   -   30,954 
Research and development costs  -   11,980   5,961   -   17,941 
Amortization of acquired intangibles  -   12,706   2,250   -   14,956 
Acquired in-process R&D costs  -   626   1,665   -   2,291 
Operating income (loss)  (4,214)  4,452   788   (563)  463 
                     
Other income (expense):                    
Interest expense  (20,542)  (23)  (1)  -   (20,566)
Other income (expense), net  711   180   (938)  -   (47)
Intercompany charges  18,433   (18,115)  (318)  -   - 
Income (loss) from continuing operations before income taxes  (5,612)  (13,506)  (469)  (563)  (20,150)
Provision (benefit) for income taxes  (2,805)  (7,207)  3,436   160   (6,416)
Income (loss) from continuing operations  (2,807)  (6,299)  (3,905)  (723)  (13,734)
Equity income (loss) of subsidiaries  (10,927)  (3,439)  -   14,366   - 
Net income (loss) $(13,734) $(9,738) $(3,905) $13,643  $(13,734)


- 29 - -
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2008
(In thousands)

    Subsidiary  Subsidiary           Guarantor  Non-Guarantor       
 Parent  Guarantors  Non-Guarantors  Eliminations  Consolidated  Parent  Subsidiaries      Subsidiaries      Eliminations  Consolidated 
                              
Net sales $-  $116,183  $42,862  $(1,741) $157,304  $-  $100,972  $40,784  $(2,317) $139,439 
Cost of sales  -   65,434   24,295   (1,661)  88,068   -   52,418   22,170   (1,754)  72,834 
Gross profit -  50,749  18,567  (80) 69,236   -   48,554   18,614   (563)  66,605 
Selling, general and administrative costs 3,165  18,823  10,206  -  32,194   4,214   18,790   7,950   -   30,954 
Research and development costs -  11,069  7,085  -  18,154   -   11,980   5,961   -   17,941 
Amortization of acquired intangibles -  18,130  2,742  -  20,872   -   12,706   2,250   -   14,956 
Company sale transaction expenses  850   -   -   -   850 
Acquired in-process R&D costs  -   626   1,665   -   2,291 
Operating income (loss)  (4,015)  2,727   (1,466)  (80)  (2,834)  (4,214)  4,452   788   (563)  463 
                                        
Other income (expense):                                        
Interest expense (20,513) (27) 4  -  (20,536)  (20,542)  (23)  (1)  -   (20,566)
Other income (expense), net 706  27  1,227  -  1,960   711   180   (938)  -   (47)
Intercompany charges  10,122   (9,347)  (775)  -   -   18,433   (18,115)  (318)  -   - 
Income (loss) from continuing operations before income taxes (13,700) (6,620) (1,010) (80) (21,410)
Income (loss) before income taxes  (5,612)  (13,506)  (469)  (563)  (20,150)
Provision (benefit) for income taxes  (4,081)  (1,971)  250   (171)  (5,973)  (2,805)  (7,207)  3,436   160   (6,416)
Income (loss) from continuing operations (9,619) (4,649) (1,260) 91  (15,437)
Loss from discontinued operations, net of taxes -  (968) -  -  (968)
Equity income (loss) of subsidiaries  (6,786)  (1,110)  -   7,896   -   (10,927)  (3,439)  -   14,366   - 
Net income (loss) $(16,405) $(6,727) $(1,260) $7,987  $(16,405) $(13,734) $(9,738) $(3,905) $13,643  $(13,734)

 
- 3023 - -
 
 
Condensed Consolidating Statement of Operations
For the Nine Months Ended March 31, 20092010
(In thousands)

    Subsidiary  Subsidiary           Guarantor  Non-Guarantor       
 Parent  Guarantors  Non-Guarantors  Eliminations  Consolidated  Parent  Subsidiaries      Subsidiaries      Eliminations  Consolidated 
                              
Net sales $-  $308,770  $133,443  $(5,114) $437,099  $-  $333,946  $135,530  $(4,186) $465,290 
Cost of sales  -   161,170   73,410   (4,604)  229,976   -   170,892   56,743   (4,230)  223,405 
Gross profit -  147,600  60,033  (510) 207,123   -   163,054   78,787   44   241,885 
Selling, general and administrative costs 14,673  55,120  26,819  -  96,612   11,217   56,403   25,568   -   93,188 
Research and development costs -  34,422  17,623  -  52,045   -   36,169   19,127   -   55,296 
Amortization of acquired intangibles -  40,582  6,964  -  47,546   -   39,909   6,618   -   46,527 
Acquired in-process R&D costs  -   626   1,665   -   2,291 
Loss on liquidation of foreign subsidiary  -   7,696   -   -   7,696 
Operating income (loss)  (14,673)  16,850   6,962   (510)  8,629   (11,217)  22,877   27,474   44   39,178 
                                        
Other income (expense):                                        
Interest expense (62,952) (68) (11) -  (63,031)  (63,218)  (51)  (3)  -   (63,272)
Other income (expense), net 49  545  11,772  -  12,366   479   587   (365)  -   701 
Intercompany charges  55,345   (54,341)  (1,004)  -   -   59,399   (57,953)  (1,446)  -   - 
Income (loss) from continuing operations before income taxes (22,231) (37,014) 17,719  (510) (42,036)
Income (loss) before income taxes  (14,557)  (34,540)  25,660   44   (23,393)
Provision (benefit) for income taxes  (8,239)  (15,268)  6,139   70   (17,298)  (5,573)  436   4,962   5,083   4,908 
Income (loss) from continuing operations (13,992) (21,746) 11,580  (580) (24,738)
Equity income (loss) of subsidiaries  (10,746)  12,452   -   (1,706)  -   (19,317)  19,683   -   (366)  - 
Net income (loss) $(24,738) $(9,294) $11,580  $(2,286) $(24,738) $(28,301) $(15,293) $20,698  $(5,405) $(28,301)

 
- 3124 - -
 

Condensed Consolidating Statement of Operations
For the Period from August 15, 2007 toNine Months Ended March 31, 20082009
(In thousands)

     Subsidiary  Subsidiary       
  Parent  Guarantors  Non-Guarantors  Eliminations  Consolidated 
                
Net sales $-  $298,928  $124,676  $(3,528) $420,076 
Cost of sales  -   186,333   76,120   (3,501)  258,952 
Gross profit  -   112,595   48,556   (27)  161,124 
Selling, general and administrative costs  11,518   46,075   26,557   -   84,150 
Research and development costs  -   28,666   19,890   -   48,556 
Amortization of acquired intangibles  -   45,425   6,856   -   52,281 
Acquired in-process R&D costs  -   21,820   2,520   -   24,340 
Company sale transaction expenses  32,459   -   -   -   32,459 
Operating income (loss)  (43,977)  (29,391)  (7,267)  (27)  (80,662)
                     
Other income (expense):                    
Interest expense  (53,586)  (68)  5   -   (53,649)
Other income (expense), net  1,450   64   2,367   -   3,881 
Intercompany charges  27,322   (25,280)  (2,042)  -   - 
Income (loss) from continuing operations before income taxes  (68,791)  (54,675)  (6,937)  (27)  (130,430)
Provision (benefit) for income taxes  (20,486)  (16,281)  1,715   (1,337)  (36,389)
Income (loss) from continuing operations  (48,305)  (38,394)  (8,652)  1,310   (94,041)
Loss from discontinued operations, net of taxes  -   (2,457)  -   -   (2,457)
Equity income (loss) of subsidiaries  (48,193)  (8,394)  -   56,587   - 
Net income (loss) $(96,498) $(49,245) $(8,652) $57,897  $(96,498)

- 32 - -

Condensed Consolidating Statement of Operations
For the Period from July 1, 2007 to August 14, 2007
(In thousands)

    Subsidiary  Subsidiary           Guarantor  Non-Guarantor       
 Parent  Guarantors  Non-Guarantors  Eliminations  Consolidated  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
                              
Net sales $-  $25,858  $12,809  $(446) $38,221  $-  $308,770  $133,443  $(5,114) $437,099 
Cost of sales  -   15,066   8,074   (279)  22,861   -   161,170   73,410   (4,604)  229,976 
Gross profit -  10,792  4,735  (167) 15,360  -  147,600  60,033  (510) 207,123 
Selling, general and administrative costs 3,892  7,571  7,568  -  19,031  14,673  55,120  26,819  -  96,612 
Research and development costs -  5,526  6,652  -  12,178  -  34,422  17,623  -  52,045 
Amortization of acquired intangibles -  601  1,091  -  1,692  -  40,582  6,964  -  47,546 
Company sale transaction expenses  3,717   -   -   -   3,717 
Acquired in-process R&D costs  -   626   1,665   -   2,291 
Operating income (loss) (7,609) (2,906) (10,576) (167) (21,258)  (14,673)  16,850   6,962   (510)  8,629 
                                        
Other income (expense):                                        
Interest expense (261) (14) -  -  (275) (62,952) (68) (11) -  (63,031)
Other income (expense), net 157  27  110  -  294  49  545  11,772  -  12,366 
Intercompany charges  5,544   (5,109)  (435)  -   -   55,345   (54,341)  (1,004)  -   - 
Income (loss) from continuing operations before income taxes (2,169) (8,002) (10,901) (167) (21,239)
Income (loss) before income taxes (22,231) (37,014) 17,719  (510) (42,036)
Provision (benefit) for income taxes  (853)  (3,145)  (2,833)  -   (6,831) (8,239) (15,268) 6,139  70  (17,298)
Income (loss) from continuing operations (1,316) (4,857) (8,068) (167) (14,408)
Loss from discontinued operations, net of taxes -  (2,508) -  -  (2,508)
Equity income (loss) of subsidiaries  (15,600)  (7,814)  -   23,414   -   (10,746)  12,452   -   (1,706)  - 
Net income (loss) $(16,916) $(15,179) $(8,068) $23,247  $(16,916) $(24,738) $(9,294) $11,580  $(2,286) $(24,738)
 
 
- 3325 - -
 

Condensed Consolidating Balance Sheet
As of March 31, 20092010
(In thousands)

    Subsidiary  Subsidiary           Guarantor  Non-Guarantor       
 Parent  Guarantors  Non-Guarantors  Eliminations  Consolidated  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
Assets                              
Current assets:                              
Cash and cash equivalents $28,608  $(752) $26,075  $-  $53,931  $69,723  $(190) $26,815  $-  $96,348 
Accounts receivable, net  -   74,123   39,345   -   113,468  -  72,673  44,035  -  116,708 
Inventories  -   108,576   30,289   (1,011)  137,854  -  100,744  28,550  (853) 128,441 
Deferred income taxes  (2,352)  23,831   4,257   -   25,736  7,460  25,718  5,591  -  38,769 
Prepaid expenses and other current assets  2,189   3,730   4,978   -   10,897   2,828   3,672   3,318   -   9,818 
Total current assets  28,445   209,508   104,944   (1,011)  341,886  80,011  202,617  108,309  (853) 390,084 
                                        
Property, plant and equipment, net  12,893   65,840   19,440   -   98,173  12,379  65,749  18,780  -  96,908 
Non-current marketable securities  17,523   -   -   -   17,523 
Deferred financing costs  26,947   -   -   -   26,947 
Non-current marketable securities, net 9,779  -  -  -  9,779 
Deferred financing costs, net 22,176  -  -  -  22,176 
Other assets  12,691   2,298   622   -   15,611  13,270  4,325  285  -  17,880 
Intangible assets with definite lives, net  -   261,116   37,478   -   298,594  -  213,314  31,365  -  244,679 
Intangible assets with indefinite lives  -   90,229   23,436   -   113,665  -  85,404  24,887  -  110,291 
Goodwill  (10)  423,281   30,981   -   454,252   (10)  389,422   37,472   -   426,884 
Total assets $98,489  $1,052,272  $216,901  $(1,011) $1,366,651  $137,605  $960,831  $221,098  $(853) $1,318,681 
                                        
Liabilities and Stockholder's Equity                                        
Current liabilities:                                        
Current portion of long-term debt $5,063  $320  $-  $-  $5,383  $5,176  $340  $-  $-  $5,516 
Accounts payable  22   22,278   14,511   -   36,811  67  16,006  10,630  -  26,703 
Deferred revenue, including advance payments  -   18,624   14,107   -   32,731 
Advance payments by customers and deferred revenue  -   16,547   12,457   -   29,004 
Income taxes payable  -   2,647   8,726   -   11,373  (745) (96) 7,451  -  6,610 
Accrued payroll expense  1,360   18,011   1,608   -   20,979 
Accrued payroll expenses 1,620  16,317  1,553  -  19,490 
Accrued expenses and other current liabilities  15,249   9,976   9,134   -   34,359   24,868   9,937   11,163   -   45,968 
Total current liabilities  21,694   71,856   48,086   -   141,636  30,986  59,051  43,254  -  133,291 
                                        
Long-term debt  880,128   1,085   -   -   881,213  892,452  745  -  -  893,197 
Deferred income taxes  (26,677)  135,557   14,497   71   123,448  (10,969) 139,431  13,127  5,082  146,671 
Defined benefit plan obligations  6,043   -   -   -   6,043  5,942  -  -  -  5,942 
Other long-term liabilities  18,452   434   4,428   -   23,314  980  1,321  1,632  -  3,933 
Intercompany investment  (270,660)  30,964   239,696   -   -  (268,850) 46,154  222,696  -  - 
Intercompany receivable/payable  (859,390)  892,486   (32,613)  (483)  -   (834,765)  871,089   (35,840)  (484)  - 
Total liabilities  (230,410)  1,132,382   274,094   (412)  1,175,654  (184,224) 1,117,791  244,869  4,598  1,183,034 
                                        
Stockholder's equity  328,899   (80,110)  (57,193)  (599)  190,997   321,829   (156,960)  (23,771)  (5,451)  135,647 
Total liabilities and stockholder's equity $98,489  $1,052,272  $216,901  $(1,011) $1,366,651  $137,605  $960,831  $221,098  $(853) $1,318,681 

 
- 3426 - -
 

Condensed Consolidating Balance Sheet
As of June 30, 20082009
(In thousands)

    Subsidiary  Subsidiary           Guarantor  Non-Guarantor       
 Parent  Guarantors  Non-Guarantors  Eliminations  Consolidated  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
Assets                              
Current assets:                              
Cash and cash equivalents $39,285  $(2,379) $17,243  $-  $54,149  $31,221  $(15) $26,542  $-  $57,748 
Accounts receivable, net  -   90,343   57,640   -   147,983  -  86,530  43,899  -  130,429 
Inventories  -   91,856   43,537   (502)  134,891  -  103,674  32,827  (898) 135,603 
Deferred income taxes  (2,352)  23,539   5,852   -   27,039  3,452  25,681  6,031  -  35,164 
Prepaid expenses and other current assets  2,464   2,616   7,104   -   12,184   2,623   2,542   4,773   -   9,938 
Total current assets  39,397   205,975   131,376   (502)  376,246  37,296  218,412  114,072  (898) 368,882 
                                        
Property, plant and equipment, net  13,406   63,964   27,279   -   104,649  12,720  67,624  20,563  -  100,907 
Non-current marketable securities  19,960   -   -   -   19,960 
Deferred financing costs  30,185   -   -   -   30,185 
Non-current marketable securities, net 17,677  -  -  -  17,677 
Deferred financing costs, net 25,754  -  -  -  25,754 
Other assets  16,480   2,474   (394)  -   18,560  12,551  2,243  631  -  15,425 
Intangible assets with definite lives, net  -   297,408   47,458   -   344,866  -  253,225  39,328  -  292,553 
Intangible assets with indefinite lives  -   90,229   33,149   -   123,378  -  85,404  26,862  -  112,266 
Goodwill  -   435,570   25,101   484   461,155   (10)  388,913   39,230   -   428,133 
Total assets $119,428  $1,095,620  $263,969  $(18) $1,478,999  $105,988  $1,015,821  $240,686  $(898) $1,361,597 
                                        
Liabilities and Stockholder's Equity                                        
Current liabilities:                                        
Current portion of long-term debt $5,250  $324  $-  $-  $5,574  $5,250  $340  $-  $-  $5,590 
Accounts payable  554   19,882   18,946   -   39,382  285  20,553  15,736  -  36,574 
Deferred revenue, including advance payments  -   8,621   18,523   -   27,144 
Advance payments by customers and deferred revenue  -   17,433   15,985   -   33,418 
Income taxes payable  409   -   1,527   -   1,936  587  -  4,493  -  5,080 
Accrued payroll expense  2,106   18,200   4,219   -   24,525 
Accrued payroll expenses 1,600  15,148  2,128  -  18,876 
Accrued expenses and other current liabilities  31,205   12,272   13,353   -   56,830   25,418   11,079   11,441   -   47,938 
Total current liabilities  39,524   59,299   56,568   -   155,391  33,140  64,553  49,783  -  147,476 
                                        
Long-term debt  872,152   1,085   -   -   873,237  883,013  745  -  -  883,758 
Deferred income taxes  (12,254)  150,400   21,311   -   159,457  (11,453) 138,725  15,776  -  143,048 
Defined benefit plan obligations  6,263   -   -   -   6,263  6,079  -  -  -  6,079 
Other long-term liabilities  1,368   487   6,148   -   8,003  16,825  1,271  3,380  -  21,476 
Intercompany investment  (248,051)  2,944   245,107   -   -  (268,635) 41,022  227,613  -  - 
Intercompany receivable/payable  (895,004)  953,623   (58,619)  -   -   (880,752)  902,126   (20,891)  (483)  - 
Total liabilities  (236,002)  1,167,838   270,515   -   1,202,351  (221,783) 1,148,442  275,661  (483) 1,201,837 
                                        
Stockholder's equity  355,430   (72,218)  (6,546)  (18)  276,648   327,771   (132,621)  (34,975)  (415)  159,760 
Total liabilities and stockholder's equity $119,428  $1,095,620  $263,969  $(18) $1,478,999  $105,988  $1,015,821  $240,686  $(898) $1,361,597 

 
- 3527 - -

Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended March 31, 2010
(In thousands)

     Guarantor  Non-Guarantor       
  
Parent
  
Subsidiaries
  
Subsidiaries
  
Eliminations
  
Consolidated
 
                
Cash flows from operating activities:               
Net income (loss) $(28,301) $(15,293) $20,698  $(5,405) $(28,301)
Changes in operating assets and liabilities and non-cash items included in net income (loss)  66,418   23,792   (15,064)  5,405   80,551 
Net cash provided by (used in) operating activities  38,117   8,499   5,634   -   52,250 
Cash flows from investing activities:                    
Payment for purchase of business  (4,000)  -   -   -   (4,000)
Capital expenditures  (171)  (9,444)  (3,561)  -   (13,176)
Proceeds from sale of marketable securities  8,580   -   -   -   8,580 
Proceeds from the sale of property, plant and equipment  -   770   251   -   1,021 
Other, net  (12)  -   -   -   (12)
Net cash provided by (used in) investing activities  4,397   (8,674)  (3,310)  -   (7,587)
Cash flows from financing activities:                    
Debt repayments  (4,012)  -   -   -   (4,012)
Net cash provided by (used in) financing activities  (4,012)  -   -   -   (4,012)
Effect of exchange rate changes on cash and cash equivalents  -   -   (2,051)  -   (2,051)
Net increase (decrease) in cash and cash equivalents  38,502   (175)  273   -   38,600 
Cash and cash equivalents at beginning of period  31,221   (15)  26,542   -   57,748 
Cash and cash equivalents at end of period $69,723  $(190) $26,815  $-  $96,348 
- 28 - -
 

Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended March 31, 2009
(In thousands)

       Non-       
    Guarantor  Guarantor  Consolidating        Guarantor  Non-Guarantor       
 
Parent
  
Subsidiaries
  
Subsidiaries
  
Adjustments
  
Consolidated
  
Parent
  
Subsidiaries
  
Subsidiaries
  
Eliminations
  
Consolidated
 
                              
Cash flows from operating activities:                              
Net income (loss) $(24,738) $(9,294) $11,580  $(2,286) $(24,738) $(24,738) $(9,294) $11,580  $(2,286) $(24,738)
Changes in operating assets and liabilities and non-cash items, included in net earnings (loss)  26,373   18,186   12,886   2,286   59,731 
Changes in operating assets and liabilities and non-cash items included in net income (loss)  26,373   18,186   12,886   2,286   59,731 
Net cash provided by (used in) operating activities  1,635   8,892   24,466   -   34,993   1,635   8,892   24,466   -   34,993 
Cash flows from investing activities:                                        
Payment for purchase of businesses, net of cash acquired  (7,832)  -   -   -   (7,832)
Payment for purchase of businesses, net of                    
cash acquired (7,832) -  -  -  (7,832)
Capital expenditures  (11)  (8,406)  (4,541)  -   (12,958) (11) (8,406) (4,541) -  (12,958)
Proceeds from the sale of property, plant and equipment  -   1,145   214   -   1,359   -   1,145   214   -   1,359 
Other, net  (4)  -   -   -   (4)  (4)  -   -   -   (4)
Net cash provided by (used in) investing activities  (7,847)  (7,261)  (4,327)  -   (19,435)  (7,847)  (7,261)  (4,327)  -   (19,435)
Cash flows from financing activities:                                        
Debt repayments  (4,125)  (4)  -   -   (4,129) (4,125) (4) -  -  (4,129)
Debt financing costs  (340)  -   -   -   (340)  (340)  -   -   -   (340)
Net cash provided by (used in) financing activities  (4,465)  (4)  -   -   (4,469)  (4,465)  (4)  -   -   (4,469)
Effect of exchange rate changes on cash and cash equivalents  -   -   (11,307)  -   (11,307)  -   -   (11,307)  -   (11,307)
Net increase (decrease) in cash and cash equivalents  (10,677)  1,627   8,832   -   (218) (10,677) 1,627  8,832  -  (218)
Cash and cash equivalents at beginning of period  39,285   (2,379)  17,243   -   54,149   39,285   (2,379)  17,243   -   54,149 
Cash and cash equivalents at end of period $28,608  $(752) $26,075  $-  $53,931  $28,608  $(752) $26,075  $-  $53,931 

 
- 36 - -

Condensed Consolidating Statement of Cash Flows
For the Period from August 15, 2007 to March 31, 2008
(In thousands)

        Non-       
     Guarantor  Guarantor  Consolidating    
  
Parent
  
Subsidiaries
  
Subsidiaries
  
Adjustments
  
Consolidated
 
                
Cash flows from operating activities:               
Net income (loss) $(96,498) $(49,245) $(8,652) $57,897  $(96,498)
Loss from discontinued operations, net of tax  -   2,457   -   -   2,457 
Income (loss) from continuing operations  (96,498)  (46,788)  (8,652)  57,897   (94,041)
Changes in operating assets and liabilities and  non cash items, included in net income (loss)  45,362   57,304   22,585   (57,897)  67,354 
Net cash provided by (used in) continuing operations  (51,136)  10,516   13,933   -   (26,687)
Net cash provided by (used in) discontinued operations  -   (3,133)  -   -   (3,133)
Net cash provided by (used in) operating activities  (51,136)  7,383   13,933   -   (29,820)
Cash flows from investing activities:                    
Acquisition of predecessor entity, net of cash acquired  (1,128,915)  (2,593)  13,215   -   (1,118,293)
Payment for purchase of businesses, net of cash acquired  1,522   -   -   -   1,522 
Capital expenditures  (258)  (6,380)  (1,890)  -   (8,528)
Proceeds from the sale of property, plant and equipment  -   15   15   -   30 
Purchase of marketable securities  (631,805)  -   -   -   (631,805)
Proceeds from sale of marketable securities  599,977   -   -   -   599,977 
Net cash provided by (used in) investing activities of continuing operations  (1,159,479)  (8,958)  11,340   -   (1,157,097)
Net cash provided by (used in) discontinued operations  -   (32)  -   -   (32)
Net cash provided by (used in) investing activities  (1,159,479)  (8,990)  11,340   -   (1,157,129)
Cash flows from financing activities:                    
Proceeds from issuance of common stock  378,350   -   -   -   378,350 
Borrowings under debt agreements  870,000   -   -   -   870,000 
Debt repayments  (4,434)  (19)  -   -   (4,453)
Debt financing costs  (27,436)  -   -   -   (27,436)
Amounts paid for withholding taxes on stock option exercises
  (14,142)  -   -   -   (14,142)
Witholding taxes collected for stock option exercises  14,142   -   -   -   14,142 
Net cash provided by (used in) financing activities of continuing operations  1,216,480   (19)  -   -   1,216,461 
Effect of exchange rate changes on cash and cash equivalents  -   -   (2,305)�� -   (2,305)
Net increase (decrease) in cash and cash equivalents  5,865   (1,626)  22,968   -   27,207 
Cash and cash equivalents at beginning of period  -   -   -   -   - 
Cash and cash equivalents at end of period $5,865  $(1,626) $22,968  $-  $27,207 

- 37 - -

Condensed Consolidating Statement of Cash Flows
For the Period from July 1, 2007 to August 14, 2007
(In thousands)

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

- 3829 - -
 

ITEM 2  -15.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSubsequent Events

Registration Statement Filing

On April 6, 2010, our parent company, Aeroflex Holding Corp. (formerly known as AX Holding Corp.), filed a registration statement with the SEC relating to the proposed initial public offering of its common stock. The offered shares are expected to be sold by Aeroflex Holding Corp. and, as selling stockholder, VGG Holding LLC, the parent company of Aeroflex Holding Corp.
Acquisition of Willtek

On May 7, 2010, we acquired certain assets and assumed certain liabilities from Willtek Communications for $2.8 million, subject to a post closing, downward only, purchase price adjustment based on net assets.

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

Forward-Looking Statements

This Report contains "forward-looking statements." All statements other than statements of historical fact are forward-looking statements for purposes of the U.S. federal and state securities laws. These statements may be identified by the use of forward looking terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "should" or "will" or the negative thereof or other variations thereon or comparable terminology.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

adverse developments in the global economy;

our inability to make payments on our significant indebtedness;
our dependence on growth in our customers’ businesses;
our inability to remain competitive in the markets we serve;
our inability to continue to develop, manufacture and market innovative, customized products and services that meet customer requirements for performance and reliability;
any failure of our suppliers to provide us with raw materials and/or properly functioning component parts;
termination of our key contracts, including technology license agreements, or loss of our key customers;
our inability to protect our intellectual property;
- 30 - -
our failure to comply with regulations such as ITAR and any changes in regulations;
our exposure to auction rate securities and the impact this exposure has on our liquidity;
our failure to realize anticipated benefits from completed acquisitions, divestitures or restructurings, or the possibility that such acquisitions, divestitures or restructurings could adversely affect us;
the loss of key employees;
our exposure to foreign currency exchange rate risks;
• terrorist acts or acts of war; and

other risks and uncertainties, including those listed under the caption "Risk Factors" disclosed in our Fiscal 2009 Form 10-K.

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

Overview

We are a leading global provider of RF and microwave integrated circuits, components and systems used in the design, development and maintenance of technically demanding, high-performance wireless communication systems. Our solutions include highly specialized microelectronicsmicroelectronic components and test and measurement equipment primarily toused by companies in the global aerospacespace, avionics, defense, commercial wireless communications, medical and defense and broadband communicationsother markets. We also design application specific integrated circuits (“ASICs”) for CT scan equipment for the medical industry. Foundedhave targeted customers in these end markets because we believe our solutions address their technically demanding requirements. We were founded in 1937 weand have developed a substantial intellectual property portfolioproprietary technology that includes more than 150 patents,is based on extensive know-how yearsand a long history of collaborative research and development focused on specialized technologies, often in collaboration with our customers and a demonstrated history in space, validating the high quality performance of our products. We believe that the combination of our leading market positions, complementary portfolio of products, years of experience and engineering capabilities provides us with a competitive advantage and enables us to deliver high performance, high value products to our customers.

- 31 - -

The Acquisition

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

The acquisition was funded by:

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

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

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

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

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

Results of Operations

Refer to Notes 1 and 3 to our consolidated financial statements for details concerning the Company’s August 15, 2007 acquisition by affiliates of or funds managed by the Sponsors and certain members of our management and the basis upon which such consolidated financial statements are presented. For comparative purposes in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we combined the Predecessor period from July 1, 2007 to August 14, 2007 with the Successor period from August 15, 2007 to March 31, 2008 to form the nine months ended March 31, 2008. This combination is not a GAAP presentation. However, we believe this presentation is useful to the reader as a comparison to the Successor period for the nine months ended March 31, 2009.

- 39 - -

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

          Non-GAAP       
          combined       
          Predecessor       
 Successor  Successor  Successor  and Successor  Successor  Predecessor 
             Period  Period 
 Three  Three  Nine  Nine  August 15,  July 1, 
 Months  Months  Months  Months  2007  2007 
 Ended  Ended  Ended  Ended  through  through  Three Months  Three Months  Nine Months  Nine Months 
 March 31,  March 31,  March 31,  March 31,  March 31,  August 14,  Ended  Ended  Ended  Ended 
 2009  2008  2009  2008  2008  2007  March 31, 2010  March 31, 2009  March 31, 2010  March 31, 2009 
                              
Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of sales  52.2   56.0   52.6   61.5   61.6   59.8   46.4   52.2   48.0   52.6 
Gross profit  47.8   44.0   47.4   38.5   38.4   40.2   53.6   47.8   52.0   47.4 
                                        
Operating expenses:                                        
Selling, general and administrative costs 22.2  20.5  22.1  22.5  20.0  49.8  18.6  22.2  20.0  22.1 
Research and development costs 12.9  11.5  11.9  13.2  11.6  31.9  12.4  12.9  11.9  11.9 
Amortization of acquired intangibles 10.7  13.3  10.9  11.8  12.5  4.4  9.1  10.7  10.0  10.9 
Acquired in-process research and development costs 1.7  -  -  5.3  5.8  -   -   1.7   -   0.5 
Company sale transaction expenses  -   0.5   0.5   7.9   7.7   9.7 
Loss on liquidation of foreign subsidiary  -   -   1.7   - 
Total operating expenses  47.5   45.8   45.4   60.7   57.6   95.8   40.1   47.5   43.6   45.4 
                                        
Operating income (loss)  0.3   (1.8)  2.0   (22.2)  (19.2)  (55.6)
Operating income 13.5  0.3  8.4  2.0 
                                        
Interest expense (14.8) (13.1) (14.4) (11.8) (12.8) -  (12.4) (14.8) (13.6) (14.4)
Other income (expense), net  -   1.3   2.8   0.9   0.9   -   0.1   -   0.2   2.8 
  (14.8)  (11.8)  (11.6)  (10.9)  (11.9)  - 
Income (loss) from continuing operations before income taxes (14.5) (13.6) (9.6) (33.1) (31.1) (55.6)
Income (loss) before income taxes 1.2  (14.5) (5.0) (9.6)
Provision (benefit) for income taxes  (4.6)  (3.8)  (3.9)  (9.4)  (8.7)  (17.9)  (0.5)  (4.6)  1.1   (3.9)
                                        
Income (loss) from continuing operations (9.9) (9.8) (5.7) (23.7) (22.4) (37.7)
Discontinued operations  -   (0.6)  -   (1.1)  (0.6)  (6.6)
Net income (loss)  (9.9)%  (10.4)%  (5.7)%  (24.8)%  (23.0)%  (44.3)%  1.7%  (9.9) %  (6.1) %  (5.7) %

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

 
- 4032 - -
 

The following table sets forthStatements of Operations

Management evaluates the operating results of our net sales andtwo segments based upon adjusted operating income, which is pre-tax operating income, before costs related to amortization of acquired intangibles, share-based compensation, restructuring charges, merger related expenses, acquired in-process research and development costs, loss on liquidation of foreign subsidiary and the impact of any acquisition related adjustments. We have set out below our adjusted operating income (loss) by business segment and reconciles Adjusted Operating Income (Loss)in the aggregate, and have provided a reconciliation of operating income (loss) to Income (Loss) From Continuing Operations Before Income Taxesadjusted operating income (loss) for the periods indicated:presented.

          Non-GAAP       
          Combined       
          Predecessor       
 Successor  Successor  Successor  and Successor  Successor  Predecessor  Three Months  Three Months  Nine Months  Nine Months 
 Three Months  Three Months  Nine Months  Nine Months  August 15, 2007     Ended  Ended  Ended  Ended 
 Ended  Ended  Ended  Ended  through  July 1, 2007  March 31,  March 31,  March 31,  March 31, 
 March 31,  March 31,  March 31,  March 31,  March 31,  to August 14,  2010  2009  2010  2009 
 2009  2008  2009  2008  2008  2007  (In thousands) 
 (In thousands)             
Net sales:                              
Microelectronic solutions ("AMS") $70,232  $77,380  $208,564  $216,296  $197,279  $19,017  $83,418  $70,232  $229,939  $208,564 
Test solutions ("ATS")  69,207   79,924   228,535   242,001   222,797   19,204   85,017   69,207   235,351   228,535 
Net sales $139,439  $157,304  $437,099  $458,297  $420,076  $38,221  $168,435  $139,439  $465,290  $437,099 
                                        
Segment adjusted operating income:                                        
- AMS $14,783  $19,143  $44,767  $51,387  $51,363  $24  $23,029  $14,783  $59,940  $44,767 
- ATS 8,700  11,010  34,304  26,785  34,367  (7,582) 19,005  8,700  47,156  34,304 
- General corporate expense  (2,854)  (2,088)  (9,421)  (7,844)  (5,497)  (2,347)  (2,189)  (2,854)  (7,378)  (9,421)
Adjusted operating income (loss) 20,629  28,065  69,650  70,328  80,233  (9,905)
Adjusted operating income 39,845  20,629  99,718  69,650 
                                        
Amortization of acquired intangibles                                        
- AMS (8,829) (12,621) (27,968) (31,743) (31,464) (279) (8,733) (8,829) (26,312) (27,968)
- ATS (6,127) (8,251) (19,578) (22,230) (20,817) (1,413) (6,675) (6,127) (20,215) (19,578)
Share based compensation                        
- AMS -  -  -  (83) -  (83)
- ATS -  -  -  95  -  95 
Share-based compensation                
- Corporate (489) (488) (1,466) (2,860) (2,634) (226) (518) (489) (1,563) (1,466)
Restructuring charges                                        
- AMS -  (402) -  (402) (402) - 
- ATS (582) (355) (2,792) (5,178) (1,400) (3,778)
One-time lease termination costs                        
- ATS -  -  -  (576) -  (576) (105) (582) (356) (2,792)
Merger related expenses - Corporate (815) (534) (3,621) (4,568) (3,249) (1,319) (647) (815) (2,111) (3,621)
Acquired in-process R&D costs                                        
- AMS (1,665) -  (1,665) (15,700) (15,700) -  -  (1,665) -  (1,665)
- ATS (626) -  (626) (8,640) (8,640) -  -  (626) -  (626)
Loss on liquidation of foreign subsidiary - ATS  -   -   (7,696)  - 
Current period impact of acquisition related adjustments:                                        
Inventory - AMS -  (4,156) -  (23,874) (23,817) (57) -  -  (246) - 
Inventory - ATS -  (1,495) -  (15,151) (15,151) - 
Depreciation - AMS (285) (293) (857) (732) (732) -  (251) (285) (791) (857)
Depreciation - ATS (629) (823) (2,043) (2,058) (2,058) -  (172) (629) (989) (2,043)
Depreciation - Corporate (55) (55) (165) (137) (137) -  (55) (55) (165) (165)
Deferred revenue - ATS (64) (576) (240) (2,235) (2,235) -   (31)  (64)  (96)  (240)
Company sale transaction expenses  -   (850)  -   (36,176)  (32,459)  (3,717)
Operating income (loss) (GAAP) 463  (2,834) 8,629  (101,920) (80,662) (21,258)
Operating income (GAAP) 22,658  463  39,178  8,629 
                                        
Interest expense (20,566) (20,536) (63,031) (53,924) (53,649) (275) (20,815) (20,566) (63,272) (63,031)
Other income (expense), net  (47)  1,960   12,366   4,175   3,881   294   222   (47)  701   12,366 
Income (loss) from continuing operations before income taxes $(20,150) $(21,410) $(42,036) $(151,669) $(130,430) $(21,239)
Income (loss) before income taxes $2,065  $(20,150) $(23,393) $(42,036)

 
- 4133 - -
 

Three Months Ended March 31, 20092010 Compared to Three Months Ended March 31, 20082009

Net Sales. Net sales decreased 11%increased 21% to $168.4 million for the three months ended March 31, 2010 from $139.4 million for the three months ended March 31, 2009 from $157.32009.

Net sales in the AMS segment increased 19% to $83.4 million for the three months ended March 31, 2008.

Net sales in the microelectronic solutions (“AMS”) segment decreased 9% to2010 from $70.2 million for the three months ended March 31, 20092009. The increase in sales was primarily volume driven as a result of a general strengthening in the marketplace. Specific variances include a $4.7 million increase in sales of motion control products (of which $2.9 million was from $77.4Airflyte Electronics, acquired in June 2009); a $4.4 million increase in sales of microelectronic modules; a $2.9 million increase in sales of Integrated Circuits (“ICs”); and a $1.4 million increase in sales of components.
Net sales in the ATS segment increased 23% to $85.0 million for the three months ended March 31, 2008 primarily due to a reduction in sales of components due to a general slowdown in the market combined with a demand surge experienced in the prior year that was not repeated in the current year.  This reduction is partially offset by an increase in sales volume of integrated circuits combined with additional sales2010 from our acquisition of Gaisler in June 2008 ($2.0 million).  Net sales in the test solutions (“ATS”) segment decreased 13% to $69.2 million in 2009 from $79.9 million in 2008.  The change in foreign currency exchange rates has negatively impacted our U.K. sales by approximately $11 million.  Excluding the impact of foreign currency exchange rates, sales for the three months ended March 31, 2009 increased $300,000 as compared2009. The increase in sales was primarily due to the three months ended March 31, 2008.   Increasesa volume driven $13.1 million increase in sales of wireless products were offset by reductionstest products; a volume driven $3.0 million increase in sales of radio test sets and synthetic test products.  The period endedproducts; and a $2.5 million increase in sales from VI Technology, acquired in March 31, 2009 was impacted2009; partially offset by a purchase accounting adjustment to deferred revenue which reducedvolume driven $1.9 million decrease in sales by $64,000; while the period ended March 31, 2008, was impacted by a purchase accounting adjustment to deferred revenue which reduced sales by $576,000.of avionic products.

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

On a consolidated basis, gross marginprofit was 47.8%$90.3 million, or 53.6% of net sales, for the three months ended March 31, 20092010 and 44.0%$66.6 million, or 47.8% of net sales, for the three months ended March 31, 2008.  For2009. Both segments contributed to the three months ended March 31, 2008,increase in gross profits. The increase in gross margin was adversely affected by purchase accounting adjustments aggregating $6.8 million which (i) increased cost of salesmainly due to a shift in the 2008 period for themix of products and a substantial increase in the recorded valuegross margins of the Company’s Sale Transaction date inventories by $5.7 millionATS segment, principally attributable to eliminate manufacturing profits inherent inincreased sales of wireless products, which have margins higher than the inventories at that date; (ii) increased depreciation expense by $542,000 due to acquisition date fair value adjustments and (iii) reduced sales for the quarter by $576,000 related to eliminating selling profits inherent in certain deferred revenues.  In 2009, gross margin was adversely affected by (i) increased depreciation expense of $475,000 related to acquisition date fair value adjustments and (ii) reduced sales for the quarter of $64,000 related to eliminating selling profits inherent in certain acquisition date deferred revenues.  Ignoring the purchase accounting adjustments, gross margin was 48.1% for both the period ended March 31, 2009 and the period ended March 31, 2008.segment average.

 Gross Profit 
Three Months Gross Profit                   
Ended                      % of     % of     % of 
March 31,    % of     % of     % of  AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
(In thousands) AMS  sales  ATS  sales  Total  sales 
 (In thousands, except percentages) 
                                    
2009 $33,095   47.1% $33,510   48.4% $66,605   47.8% $33,095   47.1% $33,510   48.4% $66,605   47.8%
2008 $32,487   42.0% $36,749   46.0% $69,236   44.0%
2010 $42,286   50.7% $48,011   56.5% $90,297   53.6%

Gross margins in the AMS segment were 50.7% for the three months ended March 31, 2010 and 47.1% in 2009 and 42.0% in 2008.  Gross profit was negativelyfor the three months ended March 31, 2009. Margins were favorably impacted by purchase accounting adjustmentsincreased sales of $198,000 in 2009microelectronic modules and $4.4 million in 2008. IgnoringlCs, which have margins higher than the purchase accounting adjustments,segment average. In addition, gross margins were 47.4% in 2009improved for certain component products as a result of increased sales volume, a favorable sales mix, and 47.6% in 2008.cost savings measures.

Gross margins in the ATS segment were 56.5% for the three months ended March 31, 2010 and 48.4% in 2009 and 46.0% in 2008. Gross profit was negatively impacted by purchase accounting adjustments of $340,000 versus $2.4 million in 2008. Ignoringfor the purchase accounting adjustments,three months ended March 31, 2009. The increase in gross margins were 48.9% in 2009 and 48.6% in 2008.is principally attributable to increased sales of wireless products, which have margins higher than the segment average.

 
- 42 - -

Selling, General and Administrative CostsCosts. .  Selling, general and administrative (“SG&A”) costs, or SG&A, include sales, office and management salaries, fringe benefits, commissions, insurance and professional fees, as well as, merger related expenses.  fees.

- 34 - -

On a consolidated basis SG&A costs increased $423,000, or 1%, to $31.4 million. As a percentage of sales, SG&A costs decreased $1.2from 22.2% for the three months ended March 31, 2009 to 18.6% for the three months ended March 31, 2010.

  Selling, General and Administrative Costs 
Three Months                     
Ended    % of     % of        % of 
March 31, AMS  Net Sales  ATS  Net Sales  Corporate  Total  Net Sales 
  (In thousands, except percentages) 
                      
2009 $11,019   15.7% $15,721   22.7% $4,214  $30,954   22.2%
2010 $10,799   12.9% $17,169   20.2% $3,409  $31,377   18.6%

In the AMS segment, SG&A costs decreased $220,000, or 2%, to $10.8 million yetfor the three months ended March 31, 2010. As a percentage of sales, SG&A costs in the AMS segment decreased from 15.7% for the three months ended March 31, 2009 to 12.9% for the three months ended March 31, 2010. The components group reduced SG&A costs by $679,000, primarily due to cost savings initiatives. These savings in the AMS segment were partially offset by additional costs of $405,000 related to Airflyte Electronics, acquired in June 2009.

In the ATS segment, SG&A costs increased 170 basis points$1.4 million, or 9%, to $17.2 million for the three months ended March 31, 2010. As a percentage of sales, SG&A costs in the ATS segment decreased from 22.7% for the three months ended March 31, 2009 to 20.2% for the three months ended March 31, 2010. The decrease in SG&A, as a percentage of sales, fromwas primarily the quarter ended March 31, 2008result of our ability to the quarter ended March 31, 2009.  Excluding merger related expenses ($815,000 in 2009 and $534,000 in 2008), stock compensationcontrol costs ($489,000 in 2009 and $488,000 in 2008), acquisition related depreciation expense ($276,000 in 2009 and $364,000 in 2008) and restructuring costs ($107,000 in 2009 and $265,000 in 2008) SG&A was $29.3 million in 2009 and $30.5 million in 2008 and increased 170 basis points as a percentage of sales.while sales increased.

Three Months Selling, General and Administrative Costs 
Ended                     
March 31,    % of     % of        % of 
(In thousands) AMS  sales  ATS  sales  Corporate  Total  sales 
                      
2009 $11,019   15.7% $15,721   22.7% $4,214  $30,954   22.2%
2008 $10,650   13.8% $18,379   23.0% $3,165  $32,194   20.5%

Selling, general and administrative costs increased $369,000, or 3%, in the AMS segment.  Selling, general and administrative costs decreased $2.7 million, or 14%, in the ATS segment largely due to general cost savings and the benefits of restructuring activities and the related closing of the Burnham facility.

Corporate general and administrative expenses increased $1.0 milliondecreased $805,000, primarily due to increased professional fees related to acquisition investigations and SEC filings for debt refinancing.

Selling, general and administrative expenses increased 190 basis points, as a percentage of sales, for AMS and decreased 30 basis points for ATS. Corporate general and administrative expenses increased 100 basis points as a percentage of consolidated sales.  Excludingreductions in merger related expenses, Corporate SG&Aemployee related expenses increased 75 basis points.and professional fees.

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

On a consolidated basis, research and development expenses decreased $213,000, yetcosts increased 140 basis points as$2.9 million. As a percentage of sales.sales, research and development costs decreased from 12.9% for the three months ended March 31, 2009 to 12.4% for the three months ended March 31, 2010.

 Research and Development Costs 
Three Months Research and Development Costs                   
Ended                      % of     % of     % of 
March 31,    % of     % of     % of  AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
(In thousands) AMS  sales  ATS  sales  Total  sales 
 (In thousands, except percentages) 
                                    
2009 $7,579   10.8% $10,362   15.0% $17,941   12.9% $7,579   10.8% $10,362   15.0% $17,941   12.9%
2008 $7,544   9.7% $10,610   13.3% $18,154   11.5%
2010 $8,709   10.4% $12,145   14.3% $20,854   12.4%

AMS segment self-funded research and development costs increased $35,000, resulting from an increase in integrated circuit projects partially offset by a reduction in$1.1 million, or 15%, to $8.7 million for the three months ended March 31, 2010, primarily due to increased spending on microelectronic module projects.modules. As a percentage of sales, AMS segment research and development costs increased 110 basis points. Restructuring charges included in R&D were $35,000 in 2008.  There were no comparable charges in 2009.decreased from 10.8% to 10.4%.

ATS segment self-funded research and development costs increased $1.8 million, or 17%, to $12.1 million for the three months ended March 31, 2010, primarily due to the development of products within our radio test division and wireless products. As a percentage of sales, ATS research and development costs decreased $248,000, or 2%, as restructuring charges included in R&D were $80,000 in 2009 and $352,000 in 2008.from 15.0% to 14.3%.

 
- 4335 - -
 

Restructuring Costs.  The AMS segment incurred restructuring costs of $402,000 in the three months ended March 31, 2008 ($107,000 in cost of sales, $260,000 in SG&A and 35,000 in R&D) related to severance for personnel reductions within our Whippany, New Jersey components manufacturing facility.  The ATS segment incurred restructuring costs of $582,000 in 2009 ($395,000 in cost of sales, $107,000 in SG&A and 80,000 in R&D) related to further consolidation and reorganization efforts primarily in our U.K. operations and $355,000 in 2008 which was also related to consolidation and reorganization efforts in our U.K. operations, primarily in R&D.

Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $5.9 millionincreased $452,000 in 2009 largelythe three months ended March 31, 2010 primarily due to the impact of the change in foreign currency exchange rates, combined with the completion ofadditional amortization of $424,000 related to VI Technology, acquired backlog recorded in March 2009, and $290,000 related to Airflyte Electronics, acquired in June 2009, offset by various net reductions totaling $262,000. By segment, the Merger. Amortization foramortization decreased $95,000 in the AMS segment decreased $3.8 million and increased $547,000 in the ATS segment decreased $2.1 million.segment.

Other Incomeincome (Expense). Interest expense increased $30,000 towas $20.8 million for the three months ended March 31, 2010 and $20.6 million infor the three months ended March 31, 2009. Other income (expense) of $222,000 for the three months ended March 31, 2010 consisted of $329,000 of interest and miscellaneous income, partially offset by $107,000 of foreign currency transaction losses. Other income (expense) of $(47,000) for the three months ended March 31, 2009 consisted primarily of $(669,000)$669,000 of foreign currency transaction losses andpartially offset by $622,000 of interest and miscellaneous income.

Income taxes. Primarily due to interest expense associated with our debt, we currently project we will have a pre-tax loss in the U.S. for fiscal 2010, but project that we will generate taxable income from foreign operations. In the fourth quarter of fiscal 2009, we decided to no longer permanently reinvest post-fiscal 2008 foreign earnings in our foreign operations and other miscellaneousbegan to distribute a substantial portion of our foreign earnings to the U.S. to partially fund interest and principal payments on our debt. Accordingly, we have provided for foreign and U.S. income net. Othertaxes on fiscal 2009 and 2010 foreign taxable income. The benefit available for foreign tax credits against our U.S. income (expense)tax on foreign earnings has not been recognized, because it was not considered to be more likely than not that we would generate sufficient foreign source income, after allocation of $2.0 millionthe significant amount of our interest expense to the foreign source income, to allow us to utilize the credit. This significantly increased the effective tax rate for each of fiscal 2009 and fiscal 2010. If factors change that affect our assessment of the likelihood of whether we can generate sufficient foreign source income as a result of a reduced amount of allocated interest to the foreign source income, or otherwise, and we can conclude that it is more likely than not that we will be able to utilize our foreign tax credits, then we would recognize this benefit through the elimination of the valuation allowance we have set up against the foreign tax credits.

Our income tax benefit was $791,000 for the three months ended March 31, 2008 consisted primarily2010, on our consolidated pre-tax income of $820,000 of foreign currency transaction gains, $582,000 of interest income and $560,000 of other miscellaneous income.

Provision for Income Taxes.   The$2.1 million. We had an income tax benefit was $6.4 million for the three months ended March 31, 2009 an effective income tax rate of 31.8%.  We had an income tax benefit$6.4 million on a consolidated pre-tax loss of $6.0$20.1 million, an effective income tax rate of 27.9%31.9%. The net tax benefits are a combination of U.S. tax benefits on domestic losses and foreign taxes on foreign earnings and, for fiscal 2010, domestic taxes provided on foreign earnings, as we expect that substantially all these earnings will be distributed to the three months ended March 31, 2008.U.S. The effective income tax rate for the twoboth periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes and, for 2008, non-deductible merger expenses.  Wefiscal 2010, is impacted by the valuation allowance recorded for foreign tax credits, as discussed above.
In the three months ended March 31, 2010, we paid income taxes of $597,000 in$622,000 and received tax refunds of $0. In the three months ended March 31, 2009, we paid income taxes of $597,000 and $3.5received tax refunds of $1.3 million.

Net income (loss). Our net income was $2.9 million infor the three months ended March 31, 2008.

Income (loss) from Continuing Operations.  The2010 and our net loss from continuing operations was $13.7 million for the three months ended March 31, 20092009. The $16.6 million improvement is comprised of the following: an increase in sales of $29.0 million resulting in an increase of $23.7 million in gross profit, an elimination of an in-process research and $15.4development charge of $2.3 million, for the three months ended March 31, 2008.partially offset by an increase of $3.8 million in operating expenses and a decrease in our tax benefit of $5.6 million.

- 36 - -

Nine Months Ended March 31, 20092010 Compared to Nine Months Ended March 31, 20082009

Net Sales. Net sales decreased 5%increased 6% to $465.3 million for the nine months ended March 31, 2010 from $437.1 million for the nine months ended March 31, 2009 from $458.32009.

Net sales in the AMS segment increased 10% to $229.9 million for the nine months ended March 31, 2008.

Net sales in the microelectronic solutions (“AMS”) segment decreased 4% to2010 from $208.6 million for the nine months ended March 31, 20092009. The increase in sales was primarily volume driven. Specific variances include a $10.4 million increase in sales of microelectronic modules; a $9.3 million increase in sales of ICs; sales of $8.2 million from $216.3Airflyte Electronics, acquired in June 2009; partially offset by a $5.7 million decrease in sales of components, due to decreased sales volumes in the first half of the year, as well as certain price reductions created by industry competition.
Net sales in the ATS segment increased 3% to $235.4 million for the nine months ended March 31, 20082010 from $228.5 million for the nine months ended March 31, 2009. The increase in sales was primarily due to a reductionvolume driven $12.3 million increase in sales of wireless test products; a $9.8 million increase in sales from VI Technology, acquired in March 2009; a volume driven $6.2 million increase in sales of components and microelectronic modules,synthetic test products; partially offset by increasesa $9.2 million decrease in integrated circuits and motion control products combined with additional sales from our acquisition of Gaisler in June 2008 ($4.4 million).  Net salesradio test sets, due to a delay in the test solutions (“ATS”) segment decreased 6% to $228.5timing of shipments on a number of large orders; a volume driven $7.3 million decrease in 2009 from $242.0sales of avionic products; and a volume driven $3.5 million decrease in 2008.  The change in foreign currency exchange rates has negatively impacted U.K. sales by approximately $20 million.  Excluding the impact of foreign currency exchange rates,frequency synthesizers.

Gross Profit. On a consolidated basis, gross profit was $241.9 million, or 52.0% of net sales, for the nine months ended March 31, 2009 increased approximately $72010 and $207.1 million, as compared to the nine months ended March 31, 2008 primarily due to an increase inor 47.4% of net sales, volume of wireless products, offset by a reduction in sales of radio test and synthetic products.  The period ended March 31, 2009 was impacted by a purchase accounting adjustment to deferred revenue which reduced sales by $240,000; while the period ended March 31, 2008 was impacted by a purchase accounting adjustment to deferred revenue which reduced sales by $2.2 million.

- 44 - -

Gross Profit.  On a consolidated basis, gross margin was 47.4% for the nine months ended March 31, 2009 and 38.5% for2009. Both segments contributed to the nine months ended March 31, 2008.  In 2008,increase in gross profit. The increase in gross margin was adversely affected by purchase accounting adjustments aggregating $42.6 million which (i) increased cost of salesmainly due to a shift in the 2008 period for themix of products and a substantial increase in the recorded valuegross margins of the Company’s Sale Transaction date inventories by $39.0 millionATS segment, principally attributable to eliminate manufacturing profits inherent inincreased sales of wireless products, which have margins higher than the inventories at that date; (ii) increased depreciation expense by $1.4 million due to acquisition date fair value adjustments and (iii) reduced sales for the nine months by $2.2 million related to eliminating selling profits inherent in certain acquisition date deferred revenues.  In 2009, gross margin was adversely affected by (i) increased depreciation expense of $1.5 million related to acquisition date fair value adjustments and (ii) reduced sales for the nine months by $240,000 related to eliminating profits inherent in certain acquisition date deferred revenue.  Ignoring the purchase accounting adjustments, gross margin was 47.8% for the period ended March 31, 2009 and 47.6% for the period ended March 31, 2008.segment average.

 Gross Profit 
Nine Months Gross Profit                   
Ended                      % of     % of     % of 
March 31,    % of     % of     % of  AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
(In thousands) AMS  sales  ATS  sales  Total  sales 
 (In thousands, except percentages) 
                                    
2009 $98,191   47.1% $108,932   47.7% $207,123   47.4% $98,191   47.1% $108,932   47.7% $207,123   47.4%
2008 $80,547   37.2% $95,937   39.6% $176,484   38.5%
2010 $112,487   48.9% $129,398   55.0% $241,885   52.0%

Gross margins in the AMS segment were 48.9% for the nine months ended March 31, 2010 and 47.1% in 2009 and 37.2% in 2008.  Gross profit in 2009 included purchase accounting adjustments of $597,000 as compared to $24.4 million in 2008. Ignoringfor the purchase accounting adjustments, gross marginsnine months ended March 31, 2009. Margins were 47.4% in 2009 and 48.5% in 2008.  The decrease in gross margins is principally attributable to decreased sales of components that generate higher margins, partially offsetfavorably impacted by increased sales of integrated circuit products combined with a favorable product mix in microelectronic modules and lCs, which have margins higher than the acquisition of Gaisler in June 2008 ($3.0 million).segment average.

Gross margins in the ATS segment were 55.0% for the nine months ended March 31, 2010 and 47.7% in 2009 and 39.6% in 2008. Gross profit in 2009 was negatively impacted by purchase accounting adjustments of $1.1 million versus $18.2 million in 2008. Ignoringfor the purchase accounting adjustments,nine months ended March 31, 2009. The increase in gross margins were 48.1% in 2009 and 46.7% in 2008.  Gross margins increasedis principally dueattributable to increased sales and margins in ourof wireless products, and increasedwhich have margins in our synthetic test products due to product mix, and are partially offset by lower margins due to a reduction in sales of frequency synthesizer products.higher than the segment average.

- 37 - -
Selling, General and Administrative CostsCosts. .  On a consolidated basis SG&A costs decreased 40 basis points as$3.4 million, or 4%, to $93.2 million. As a percentage of sales, SG&A costs decreased from 22.1% for the nine months ended March 31, 20082009 to 20.0% for the nine months ended March 31, 2009.  Excluding merger related expenses ($3.6 million in 2009 and $4.6 million in 2008), stock compensation costs ($1.5 million in 2009 and $2.8 million in 2008), acquisition related depreciation expense ($884,000 in 2009 and $911,000 in 2008), restructuring costs ($463,000 in 2009 and $2.1 million in 2008) and a one-time lease termination cost ($576,000 in 2008), SG&A was $90.2 million in 2009 and $92.2 million in 2008.2010.

Nine Months Selling, General and Administrative Costs 
Ended                     
March 31,    % of     % of        % of 
(In thousands) AMS  sales  ATS  sales  Corporate  Total  sales 
                      
2009 $32,104   15.4% $49,835   21.8% $14,673  $96,612   22.1%
2008 $31,543   14.6% $56,229   23.2% $15,409  $103,181   22.5%

- 45 - -
  Selling, General and Administrative Costs 
Nine Months                     
Ended    % of     % of        % of 
March 31, AMS  Net Sales  ATS  Net Sales  Corporate  Total  Net Sales 
  (In thousands, except percentages) 
                      
2009 $32,104   15.4% $49,835   21.8% $14,673  $96,612   22.1%
2010 $31,382   13.6% $50,589   21.5% $11,217  $93,188   20.0%

In the AMS segment, selling, general and administrativeSG&A costs increased $561,000,decreased $722,000, or 2%., to $31.4 million for the nine months ended March 31, 2010. As a percentage of sales, selling, general and administrativeSG&A costs increased 80 basis pointsin the AMS segment decreased from 15.4% for AMS.  Excluding restructuringthe nine months ended March 31, 2009 to 13.6% for the nine months ended March 31, 2010. The components group reduced SG&A costs ($260,000by $2.3 million, primarily due to cost savings initiatives. These savings in 2008), stock compensationthe AMS segment were partially offset by additional costs ($56,000of $1.2 million related to Airflyte Electronics, acquired in 2008), acquisition related depreciation expense ($29,000 in 2009 and $30,000 in 2008), SG&A was $32.1 million in 2009 and $31.2 million in 2008, representing an increase of 100 basis points as a percentage of sales for AMS.June 2009.

In the ATS segment, selling, general and administrativeSG&A costs decreased $6.4increased $754,000, or 2%, to $50.6 million or 11%, largelyfor the nine months ended March 31, 2010 principally due to a $1.4the additional cost of $1.9 million reductionrelated to VI Technology, acquired in restructuring costs and one time lease termination feesMarch 2009, which was partially offset by various reductions in the other ATS business units. These reductions were primarily the result of $576,000 incurred in 2008 combined with cost savings relatedinitiatives and efforts to the closing ofconsolidate and reorganize our Burnham facility.various European locations. As a percentage of sales, selling, general and administrativeSG&A costs in the ATS segment decreased 140 basis pointsfrom 21.8% for ATS.  Excluding restructuringthe nine months ended March 31, 2009 to 21.5% for the nine months ended March 31, 2010, primarily the result of controlling costs ($463,000 in 2009 and $1.8 million in 2008), a one-time lease termination cost of $576,000 in 2008, stock compensation costs ($90,000 favorable impact in 2008), acquisition related depreciation expense ($690,000 in 2009 and $744,000 in 2008), SG&A was $48.7 million in 2009 and $53.2 million in 2008.while sales increased.

Corporate general and administrative expenses decreased $736,000$3.5 million, primarily due to a reductionreductions in stock-based compensation.  As a percentage of sales, corporate generalmerger related expenses, employee related expenses and administrative expenses remained relatively unchanged.professional fees.

Research and Development CostsCosts.. On a consolidated basis, research and development expenses decreased 140 basis points ascosts increased by $3.3 million. As a percentage of sales.sales, research and development costs was 11.9% for both the nine months ended March 31, 2009 and the nine months ended March 31, 2010.

 Research and Development Costs 
Nine Months Research and Development Costs                   
Ended                      % of     % of     % of 
March 31,    % of     % of     % of  AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
(In thousands) AMS  sales  ATS  sales  Total  sales 
 (In thousands, except percentages) 
                                    
2009 $22,178   10.6% $29,867   13.1% $52,045   11.9% $22,178   10.6% $29,867   13.1% $52,045   11.9%
2008 $22,708   10.5% $38,026   15.7% $60,734   13.3%
2010 $22,202   9.7% $33,094   14.1% $55,296   11.9%

AMS segment self-funded research and development costs decreased $530,000, or 2%, primarily dueincreased $24,000, to a reduction of$22.2 million for the nine months ended March 31, 2010. Increases in spending on microelectronic module projects, partiallymodules and ICs, were offset by increasesreductions in spending on components projects and costs related to our acquisition of Gaisler ($588,000).motion control products. As a percentage of sales, AMS segment research and development costs increased 10 basis points.decreased from 10.6% to 9.7%.

ATS segment self-funded research and development costs decreased $8.2increased $3.2 million, or 21%11%, primarily due to (i) a reduction of $8.4$33.1 million in our wireless business relating to cost savings related to the closing of our Burnham facility and a reduction of wireless related projects and (ii) a reduction of $2.7 million in restructuring costs primarily in our wireless business partially offset by increased costs in our radio test products of $3.5 million.

Acquired In-Process Research and Development Costs.  Duringfor the nine months ended March 31, 20082010, primarily due to the development of next generation products in our radio and in connection with the Company Sale Transaction, we recordedavionics test division and immediately expensed $24.3 million of acquired IPR&D costs ($15.7 million in the AMS segment and $8.6 million in the ATS segment).  In 2009, we recorded and expensed $1.7 million of costs related to our acquisition of Gaisler in June 2008 and $626,000 of costs related to our acquisition of VI Technology in March 2009.

Restructuring Costs.  The AMS segment incurred total restructuring costs of $402,000 ($107,000 in costwireless products. As a percentage of sales, $260,000 in SG&AATS research and $35,000 in R&D), in the nine months ended March 31, 2008 which relatedevelopment costs increased from 13.1% to severance for personnel reductions within our Whippany, New Jersey components manufacturing facility.14.1%.

- 4638 - -
The ATS segment incurred restructuring costs of $2.8 million in the nine months ended March 31, 2009 ($2.0 million in cost of sales, $463,000 in SG&A and $303,000 in R&D).  In comparison, in the nine months ended March 31, 2008, the ATS segment incurred restructuring costs of $5.2 million ($379,000 in cost of sales, $1.8 million in SG&A and $3.0 million in R&D).  In both periods, the costs related to consolidation and reorganization efforts in our U.K. operations.

Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $6.4 million in 2009 primarily due to the impact of the change in foreign currency exchange rates, combined with the completion of amortization of acquired backlog recorded in the Merger.  The amortization for the AMS segment decreased $3.8 million and the ATS segment decreased $2.6 million.

Company Sale Transaction Expenses.  In the nine months ended March 31, 2008, we incurred Company Sale Transaction expenses of $36.2 million, consisting primarily of merger related change of control, severance and other compensation payments, a break-up fee and its related lawsuit settlement charge and legal and other professional fees.  There were no comparable costs in the current period.

Other Income (Expense).  Interest expense was $63.0$1.0 million in the nine months ended March 31, 2010 primarily due to certain intangibles becoming fully amortized during the first quarter of fiscal 2009. The decrease is partially offset by additional amortization of $1.6 million related to VI Technology, acquired in March 2009, and $53.9$871,000 related to Airflyte Electronics, acquired in June 2009. By segment, the amortization decreased $1.7 million in the AMS segment and increased $637,000 in the ATS segment.

Loss on Liquidation of Foreign Subsidiary. During the nine months ended March 31, 2010, we recognized a non-cash $7.7 million loss on liquidation of a foreign subsidiary relating to the write-off of the foreign currency translation balance upon substantial dissolution. There was no similar charge recorded in the nine months ended March 31, 2008. The increase is due to2009.

Other income (Expense). Interest expense was $63.3 million for the additionnine months ended March 31, 2010 and $63.0 million for the nine months ended March 31, 2009. Other income (expense) of $870$701,000 for the nine months ended March 31, 2010 consisted of $1.4 million of debt to finance the purchaseinterest and miscellaneous income, partially offset by $692,000 of the Company on August 15, 2007 combined with refinancing of our $225.0 million Senior Subordinated Unsecured Credit Facility, which increased the interest rate on the facility to 11.75%.foreign currency transaction losses. Other income (expense) of $12.4 million for the nine months ended March 31, 2009 consisted primarily of $10.5 million of foreign currency transaction gains and $1.3$1.9 million of interest and miscellaneous income.

Income taxes. Primarily due to interest expense associated with our debt, we currently project we will have a pre-tax loss in the U.S. for fiscal 2010, but project that we will generate taxable income from foreign operations. In the fourth quarter of fiscal 2009, we decided to no longer permanently reinvest post-fiscal 2008 foreign earnings in our foreign operations and began to distribute a substantial portion of our foreign earnings to the U.S. to partially fund interest and principal payments on our debt. Accordingly, we have provided for foreign and U.S. income taxes on fiscal 2009 and 2010 foreign taxable income. OtherThe benefit available for foreign tax credits against our U.S. income (expense)tax on foreign earnings has not been recognized, because it was not considered to be more likely than not that we would generate sufficient foreign source income, after allocation of $4.2the significant amount of our interest expense to the foreign source income, to allow us to utilize the credit. This significantly increased the effective tax rate for each of fiscal 2009 and fiscal 2010. If factors change that affect our assessment of the likelihood of whether we can generate sufficient foreign source income as a result of a reduced amount of allocated interest to the foreign source income, or otherwise, and we can conclude that it is more likely than not that we will be able to utilize our foreign tax credits, then we would recognize this benefit through the elimination of the valuation allowance we have set up against the foreign tax credits.

Our provision for income taxes was $4.9 million for the nine months ended March 31, 2008 consisted primarily2010, on a consolidated pre-tax loss of $2.0 million of foreign currency transaction gains and $1.6 million of interest income.

Provision for Income Taxes.   The income tax benefit was $17.3 million for the nine months ended March 31, 2009, an effective income tax rate of 41.2%.$23.4 million. We had an income tax benefit for the nine months ended March 31, 20082009 of $43.2$17.3 million on a consolidated pre-tax loss of $42.0 million, an effective income tax rate of 28.5%41.2%. The provisions are a combination of U.S. tax benefits on domestic losses and foreign taxes on foreign earnings and, for fiscal 2010, domestic taxes provided on foreign earnings, as we expect that substantially all these earnings will be distributed to the U.S. The effective income tax rate for the twoboth periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes and, for 2008,fiscal 2010, is impacted by the valuation allowance recorded for foreign tax benefit was decreased forcredits, as discussed above.

In the impact of certain Company Sale Transaction expenses that were not deductible for tax purposes, as well as nondeductible IPR&D.  Wenine months ended March 31, 2010, we paid income taxes of $3.0$5.2 million inand received tax refunds of $627,000. In the nine months ended March 31, 2009, we paid income taxes of $3.0 million and $7.3received tax refunds of $2.0 million.

Net Loss. Our net loss was $28.3 million infor the nine months ended March 31, 2008.

Income (loss) from Continuing Operations.  The loss from continuing operations was2010 and $24.7 million for the nine months ended March 31, 2009 and $108.42009. The $3.6 million forincrease in net loss is comprised of the following: a non-cash loss on liquidation of a foreign subsidiary of $7.7 million in the nine months ended March 31, 2008.2010; an unfavorable variance in foreign currency gains/losses of $11.2 million; and an increase in income taxes of $22.2 million; offset by an increase in sales of $28.2 million, resulting in an increase of $34.8 million in gross profit; a reduction in in-process research and development of $2.3 million; and a reduction of $1.2 million of operating expenses.


- 39 - -
Liquidity and Capital Resources

As of March 31, 2009,2010, we had $53.9$96.3 million of cash and cash equivalents $200.3, $256.8 million in working capital and our current ratio was 2.42.9 to 1.  As of June 30, 2008, we had $54.1 million of cash and cash equivalents, $220.9 million in working capital and our current ratio was 2.4 to 1.

At March 31, 2009,In early February 2008, when auctions began to fail, our gross investment in marketable securities consisted of $17.5$46.5 million of auction rate securities, net of a $2.4 million valuation allowance, discussed below.securities. Auction rate securities represent long-term (generallyvariable rate bonds that generally carry maturities of ten years to thirty-five years from the date of issuance) variable rate bondsissuance, and whose rates are tied to short-term interest rates that are reset through an auction process which occurs every seven to thirty-five days, and are classified as available for sale securities. From early February 2008 to June 30, 2009, $26.5 million of auction rate securities were redeemed by the issuers or sold at par. During the nine months ended March 31, 2010, an additional $8.9 million of our auction rate securities were redeemed by the issuer at an average of 96.4% of par.  The resulting $320,000 realized loss was recorded in the statement of operations for the three and nine months ended March 31, 2010.  The $11.1 million of auction rate securities that we currently hold are partially offset by a valuation allowance of $1.3 million.

All but one (with the one security having a carrying value of $1.6$1.7 million and an A rating)a rating of A-) of our remaining auction rate securities retain a triple-A rating by at least one nationally recognized statistical rating organization. In addition, certain of our auction rate securities are backed by student loans whose principal and interest are federally guaranteed by the Family Federal Education Loan Program.  We have redeemed $26.5 million of auction rate securities at par since February 8, 2008.

- 47 - -

Given the high credit quality of our auction rate securities and our intent and ability to hold these securities until liquidity returns to the market or maturity, if necessary, we believe we will recover the full principal amount of $19.9 million, in the future. However, at March 31, 2009, we estimated that the fair value of our auction rate securities was $17.5 million. Since many auctions are failing and given that there is currently no active secondary market for our investment in auction rate securities, the determination of fair value was based on the following:

·continuing illiquidity;
·lack of action by the issuers to establish different forms of financing to replace or redeem these securities; and
·the credit quality of the underlying securities.

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

Auction rate securities are classified as non-current assets in the accompanying March 31, 2009 and June 30, 2008 consolidated balance sheets.

Our principal liquidity requirements are to service our debt and interest and meet our working capital and capital expenditure needs. As of March 31, 2009,2010, we had $886.6$898.7 million of debt outstanding (of which $881.2$893.2 million was long-term), including approximately $516.9$511.8 million under our senior secured credit facility, $225.0 million of unsecured senior notes and $143.3$160.8 million under our senior subordinated unsecured credit facility, including paid-in-kind interest.  Additionally, at March 31, 20092010 we were able to borrow an additionalhad $50.0 million of availability under the revolving portion of our senior secured credit facility.

The following is a summary of required principal repayments of long-termour debt for the next five years and thereafter as of March 31, 2009:2010:

Twelve months ended
March 31,
 (In thousands) 
2010 $5,383 
Twelve Months Ended
March 31,
 (In thousands) 
2011 5,590  $5,516 
2012 5,610   5,610 
2013 5,635   5,635 
2014 5,250   5,250 
2015  876,702 
Thereafter  859,128   - 
Total $886,596  $898,713 

- 40 - -

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

  Three Months ended March 31,  Nine Months Ended March 31, 
  2010  2009  2010  2009 
  (In thousands) 
             
Net income (loss) $2,856  $(13,734) $(28,301) $(24,738)
Interest expense  20,815   20,566   63,272   63,031 
Provision (benefit) for income taxes  (791)  (6,416)  4,908   (17,298)
Depreciation and amortization  20,404   20,008   62,178   63,659 
EBITDA  43,284   20,424   102,057   84,654 
                 
Non-cash purchase accounting adjustments  31   2,355   342   2,531 
Merger related expenses  647   815   2,111   3,621 
Restructuring costs and related pro forma savings  from such activities(a)
  105   4,457   356   6,667 
Share-based compensation (b)
  518   489   1,563   1,466 
Non-cash loss on liquidation of foreign subsidiary  -   2,250   7,696   2,250 
Other defined adjustments (c)
  (4)  (1,676)  (346)  5,299 
Adjusted EBITDA $44,581  $29,114  $113,779  $106,488 

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

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

(c)Reflects other adjustments required in calculating our debt covenant compliance. These other defined items include non-cash inventory adjustments for a discontinued product and pro forma EBITDA for periods prior to the acquisition dates for companies acquired during the periods presented.

Financial covenants in our senior secured credit facility include (i) a maximum leverage ratio of total debt (less up to $15.0 million of unrestricted cash) to Adjusted EBITDA, as defined in our senior secured credit facility, and (ii) maximum consolidated capital expenditures. The maximum leverage ratio permitted for the twelve months ended March 31, 2010 and 2009 was 7.10 and 8.00, respectively, whereas our actual leverage ratio was 5.79 and 6.08, respectively. At the end of fiscal years 2010 and 2011 the maximum leverage ratio permitted decreases to 6.80 and 5.90, respectively.

Our senior secured credit facility contains various additional customary affirmative and negative covenants (subject to materiality thresholds, baskets, and customary exceptions and qualifications), including, but not limited to, restrictions on the ability of the borrowers and its subsidiaries to (i) dispose of assets or stock; (ii) incur additional indebtedness and guarantee obligations; (iii) pay certain dividends; (iv) create liens on assets; (v) make investments, loans or advances; (vi) restrict distributions to the borrowers or guarantors from their subsidiaries; (vii) engage in mergers or consolidations; (viii) engage in certain transactions with affiliates; (ix) incur additional negative pledges; (x) incur capital expenditures; (xi) change our fiscal year or accounting practices or the lines of business in which we and our subsidiaries are involved; (xii) enter into sale-leaseback transactions; (xiii) prepay principal of, premium, or interest on, or redeem, purchase, retire, defease, or create a sinking fund or make a similar payment with respect to, any subordinated indebtedness and certain other debt; (xiv) change the conduct of business; (xv) conduct activities of any parent holding company; or (xvi) amend our organizational documents.

- 41 - -

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

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

- 48 - -

Cash Flows

For the nine months ended March 31, 2010, our cash flow provided by operations was $52.3 million. Our investing activities used cash of $7.6 million, primarily for capital expenditures of $13.2 million and a $4.0 million contingent consideration payment for the purchase of a business, partially offset by $8.6 million in proceeds from the sale of marketable securities and $1.0 million from the sale of property, plant and equipment. Our financing activities used cash of $4.0 million to repay indebtedness.

For the nine months ended March 31, 2009, our cash flow provided by continuing operations was $35.0 million. Our investing activities from continuing operations used cash of $19.4 million, primarily for $13.0 million offor capital expenditures and $7.8 million of payments for the purchase of businesses (net of cash acquired).businesses. Our financing activities used cash of $4.5 million, primarily to repay $4.1 million of debt.

For the nine months ended March 31, 2008, our cash flow used in continuing operations was $14.9 million.  Our investing activities from continuing operations used cash of $1.1 billion, primarily for payments of $1.1 billion to predecessor shareholders and option holders, net of cash acquired, $9.6 million of capital expenditures and the purchase (net of sales) of marketable securities of $22.3 million. Our financing activities provided cash of $1.2 billion, primarily from borrowings under our credit facilities of $870.0 million on August 15, 2007 and proceeds from the issuance of common stock of $378.4 million, also on August 15, 2007.indebtedness.

Capital Expenditures

Capital expenditures were $13.0$13.2 million and $9.6$13.0 million, for the nine months ended March 31, 2010 and 2009, and 2008, respectively.  The maximum consolidated capital expenditures permitted in our debt covenants for fiscal year 2010 is $25.0 million. Our capital expenditures primarily consist of equipment replacements.

- 42 - -

Contractual Obligations

The following table summarizes our obligations and commitments to make future payments under debt and other obligations as of March 31, 2009:2010:

Payments Due By Period (1)
Payments Due By Period (1)
 
Payments Due By Period (1)
 
 (In millions)  (In millions) 
    Less Than        After              Beyond 
 Total  1 Year  1 - 3 Years  4 - 5 Years  5 Years  Total  Year 1  Years 2 - 3  Years 4 - 5  5 Years 
               
Senior secured credit facility $516.9  $5.1  $10.5  $10.5  $490.8  $511.8  $5.2  $10.5  $496.1  $- 
Senior unsecured notes 225.0  -  -  -  225.0 
Senior notes  225.0   -   -   225.0   - 
Subordinated unsecured credit facility 143.3  -  -  -  143.3   160.8   -   -   160.8   - 
Other long-term debt 1.4  0.3  0.7  0.4  -   1.1   0.4   0.7   -   - 
Operating leases (2)
 19.6  6.0  8.4  3.6  1.6   19.3   6.6   8.0   3.0   1.7 
Employment agreements 9.2  3.7  4.5  1.0  -   7.1   3.8   3.0   0.3   - 
Advisory fee (3)
  10.2   2.2   4.3   3.7   -   7.4   2.2   4.4   0.8   - 
Total $925.6  $17.3  $28.4  $19.2  $860.7  $932.5  $18.2  $26.6  $886.0  $1.7 

(1)Amounts do not include interest payments.

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

(3)The annual advisory fee is payable to affiliates of our Sponsorssponsors – The Veritas Capital Fund III, L.P., Golden Gate Private Equity, Inc. and GS Direct, L.L.C. - throughout the term of an advisory agreement, which has an initial term expiring on December 31, 2013 and is automatically renewable for additional one year terms thereafter unless terminated. For purposes of this table we have assumed that such agreement terminates December 31, 2013. The annual fee will beis the greater of $2.2 million or 1.8% of adjustedAdjusted EBITDA (as defined in the agreement governing our senior secured credit facility) for the prior fiscal year, as defined in the agreement.year.

- 49 - -
We may be required to pay contingent consideration for business acquisitions up to the following amounts: (i) $5 million on October 31, 2010 and $6 million on October 31, 2011 in connection with our acquisition of Gaisler if certain financial targets are achieved for fiscal 2010 and fiscal 2011, respectively; (ii) $3 million on October 31, 2010 in connection with our acquisition of Airflyte Electronics if certain financial targets are achieved for fiscal 2010; and (iii) an aggregate of $2.0 million over the next five years in connection with our acquisition of Hi-Rel Components if certain financial targets are achieved through fiscal 2014.

In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. None of these obligations are individually significant. We do not expect that these commitments, as of March 31, 2009,2010, will have a material adverse affect on our liquidity.

Off-Balance Sheet Arrangements

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

Seasonality

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

- 43 - -

Critical Accounting Policies and Estimates

Accounting Policies Involving Significant EstimatesThis discussion and analysis of the Company’s financial condition and results of operations is based upon the unaudited condensed consolidated financial statements included in this Quarterly Report, which have been prepared in accordance with U.S. GAAP and applicable SEC regulations for preparation of interim financial statements.

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted inU.S. GAAP requires that management of the United StatesCompany make a number of America requires us to make estimates and assumptions that affectrelating to the reported amountsreporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period reported. The followingreporting period. Among the more significant estimates included in our consolidated financial statements are revenue and cost recognition under long-term contracts; the valuation of accounts receivable, inventories, investments and deferred tax assets; the depreciable lives of fixed assets and useful lives of amortizable intangible assets; the valuation of assets acquired and liabilities assumed in business combinations; the recoverability of long-lived amortizable intangible assets, tradenames and goodwill; share-based compensation; restructuring charges; asset retirement obligations; fair value measurement of financial assets and liabilities and certain accrued expenses and contingencies.

We are subject to uncertainties such as the impact of future events, economic, environmental and political factors and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating contingent liabilities, the low end of the range is accrued. Accordingly, the accounting policies require us to make estimates in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and assumptions based on theas our operating environment changes. Changes in estimates are made when circumstances information availablewarrant them. Such changes and our experience and judgment. These estimates and assumptionsrefinements in estimation methodologies are reviewed periodically andreflected in reported results of operations; if material, the effects of revisionschanges in estimates are reflecteddisclosed in the periodnotes to the condensed consolidated financial statements.

We believe that theythe critical accounting policies involving significant estimates listed below are determinedimportant to be necessary. If actual results differ significantly from our estimates,the portrayal of our financial statements could be materially impacted.condition, results of operations and cash flows, and require critical management judgments and estimates about matters that are inherently uncertain.

Revenues and Cost Recognition.  We recognize revenue when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, and collectability of the resulting receivable is reasonably assured.
·Revenue Recognition
·Acquisition Accounting
·Long-Lived Assets
·Income Taxes
·Foreign Currency Translations
·Financial Instruments and Derivatives

For arrangements other than certain long-term contracts, revenue (including shippingFurther information regarding these policies appears within the “Management’s Discussion and handling fees) is recognized when products are shippedAnalysis of Financial Condition and title has passedResults of Operations” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009.  During the nine month period ended March 31, 2010, there were no significant changes to any critical accounting policies or to the customer. If title does not pass untilrelated estimates and judgments involved in applying those policies, except that effective July 1, 2009 we adopted new authoritative revenue recognition principles, the product reaches the customer’s delivery site, recognitioneffect of the revenuewhich was immaterial.  This is deferred until that time. Certain of our sales are to distributors which have a right to return some portion of product within up to eighteen months of sale. We recognize revenue on these sales at the time of shipmentfurther discussed in Note 1 to the distributor as the returns under these arrangements have been insignificant and can be reasonably estimated. A provision for such estimated returns is recorded at the time sales are recognized.

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

Revenue from sales of products where software is other than incidental to their performance, including related software support and maintenance contracts is recognized in accordance with SOP-97-2, “Software Revenue Recognition.” Accordingly, revenue for software is recognized when the software is delivered, provided the requisite criteria for revenue recognition are met.this Form 10-Q.

 
- 5044 - -
 

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

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

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

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

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

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

- 51 - -

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

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

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

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

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

Recently Adopted Accounting Pronouncements

See Note 12 of the notes to the unaudited condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

See Note 12 of the notes to the unaudited condensed consolidated financial statements.

- 52 - -

Forward-Looking Statements

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

ITEM 3 –3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk.  We are subject to interest rate risk in connection with borrowings under our senior secured credit facility.  Although we currently have interest rate swap agreements hedging portions of this debt, these will expire before the borrowings are fully repaid. As of March 31, 2009,2010, we have $517$511.8 million outstanding under the term-loan portion of our senior secured credit facility, somethe un-hedged portion of which is subject to variable interest rates. Each change of 0.125%1% in interest rates would result in a $58,000$1.7 million change in our annual interest expense on the un-hedged portion of the term-loan borrowings and a $63,000$507,000 change in our annual interest expense on the revolving loan borrowings, assuming the entire $50.0 million was outstanding.  Any debt we incur in the future may also bear interest at floating rates.

Foreign Currency Risk.  Foreign currency contracts are used in certain circumstances to protect us from fluctuationsexchange rate fluctuation from the time customers are invoiced in exchange rates.local currency until such currency is exchanged for U.S. dollars. We periodically enter into foreign currency contracts, which are not designated as hedges. Thushedges, and the change in the fair value is included in income as it occurs,currently within other income (expense). As of March 31, 2009,2010, we had $10.7$43.4 million of notional value foreign currency forward contracts maturing through June 2009.April 30, 2010. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The fair value of these contracts was a $33,000 liability at March 31, 2009 and a $13,0002010 was an asset at June 30, 2008.of $446,000.  If foreign currency exchange rates (primarily the British pound and the Euro) change by 10% from the levels at March 31, 2009,2010, the effect on our comprehensive income would be approximately $20.5$20.7 million.

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

ITEM 4T –4T.   CONTROLS AND PROCEDURES

Our disclosure controls and procedures under the Securities Exchange Act of 1934, as amended, are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. The Principal Executive Officer and the Principal Financial Officer, with the assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of March 31, 20092010 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 20092010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
- 5345 - -
 

PART II – OTHER INFORMATION

Item 11..    Legal Proceedings

In March 2005, we sold the net assetsOn October 14, 2009, BAE Systems Information and Electronic Systems (“BAE”) commenced an action against both us and one of our shocksubsidiaries in the United States District Court for the District of Delaware.  BAE essentially is alleging that under a subcontract it entered into with us in 2002, BAE provided to us certain proprietary information and vibration control device manufacturing businessknow how relating to a high performance direct infrared countermeasure system for use in military aircraft and certain other platforms (“VMC”DIRCM System”).  Under the terms, which enabled us to fabricate for BAE an assembly component of the sale agreements, we retained certain liabilities relating to adverse environmental conditions that existed at the premises occupied by VMC asthird generation of the dateDIRCM System.  BAE is alleging that, in violation of sale.the provisions of the subcontract and a Proprietary Information Agreement, we fabricated or facilitated the fabrication of one or more items that were identical or substantially identical to items that we exclusively fabricated for BAE under the subcontract.  BAE further claims that our actions ostensibly enabled a prime competitor of BAE to build and market, in competition with BAE, an infrared countermeasure system that included an unlawful copy of the component.  Based on these allegations, BAE has asserted claims against us for patent infringement, trade secret misappropriation, breach of contract, conversion and unjust enrichment and has requested, by way of relief, unspecified damages, injunctive relief and an accounting.  We recorded a liabilityhave evaluated BAE’s claims and believe that there is no basis for the estimated remediation costs related to adverse environmental conditions that existed at the VMC premises when it was sold.  The accrued environmental liability at March 31, 2009 is $1.0 million, of which $322,000 is expected toallegations or claims made by BAE.  Nevertheless, there can be paid within one year.

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

During May 2008, we became further aware that a certain product sold by our KDI subsidiary may have inadvertently been misclassified as not ITAR controlled. On August 5, 2008, we filed a Voluntary Disclosure with the Directorate of Defense Trade Controls, Department of State, describing the inadvertent misclassification of this product.  In January 2009 we identified another product that should have been includedprevail in the August 5, 2008 disclosure.  We filed an initial disclosure with the Department of State identifying this product, and the Department of State instructed us to file an amendment to the August 5, 2008 disclosure.  That amendment was filed in April 2009.  At this time it is not possible to determine whether any fines or other penalties will be asserted against us with respect to the foregoing matters, or the materiality of any outcome.

During November 2008, we became aware that our Hauppauge facility had shipped two ITAR controlled products to a foreign customer, but inadvertently had noted on the requisite paperwork that only one ITAR controlled product was included in the shipment.  We filed a voluntary disclosure in January 2009, and that disclosure has been closed by the State Department and no fine or penalty was assessed.
- 54 - -
During January 2009, we became aware that a certain product sold by our Powell subsidiary, for which an ITAR marketing license had been properly issued by the U.S. Department of State, mistakenly was taken out of the country by an employee without first obtaining the required U.S. Customs signature upon departure.   We have filed an initial disclosure relating to this issue and will file a detailed disclosure by June 6, 2009.  At this time it is not possible to determine whether any fines or other penalties will be asserted against us, or the materiality of any outcome.

In the third quarter of fiscal 2009, we became aware that a product sold and licensed to Raytheon U.K. was actually forwarded to an end user in Saudi Arabia.  Aeroflex did not identify that end user on the initial license application, so the product in question was forwarded to Saudi Arabia when it was only authorized to travel as far as the U.K.  We filed an initial disclosure concerning this matter in April 2009.  At this time it is not possible to determine whether any fines or penalties will be asserted against us, or the materiality of any outcome.

In March 2009 we became aware that Aeroflex’s subsidiary, Micrometrics, had inadvertently misclassified a component and shipped it to a foreign customer in Italy under the jurisdiction of the Export Administration Regulations ("EAR") when it should have been shipped under the jurisdiction of the ITAR.  We filed an initial voluntary disclosure concerning this matter in April 2009.  At this time it is not possible to determine whether any fines or penalties will be asserted against us, or the materiality of any outcome.

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

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

Reference is made to Item 3 of our Fiscal 2009 Form 10-K for information as to other legal matters and proceedings.

Item 1A.  Risk Factors

There have been no material changes in our risk factors from the risk factors disclosed in the Registration Statement onour Fiscal 2009 Form S-1 filed on February 2, 2009, and which became effective on February 11, 2009.10-K.

Item 22..     Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 33..     Defaults upon Senior Securities

None

Item 44..  Submission of Matters to a Vote of Security Holders    [Removed and Reserved]

 None

Item 5.   Other Information

None

 
- 5546 - -
 

Item 56..  Other Information

None

Item 6.   Exhibits

Exhibit No.
No.		 Exhibit Description
   
31.1 Certification pursuant to Rules 13a-14(a)/15d-14a15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer)
   
31.2 Certification pursuant to Rules 13a-14(a)/15d-14a15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer)
   
31.3 Certification pursuant to Rules 13a-14(a)/15d-14a15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal Accounting Officer)
   
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer)
   
32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer)

 
- 5647 - -
 


SIGNATURESSIGNATURE

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

 AEROFLEX INCORPORATED
 (REGISTRANT)
  
May 14, 200912, 2010
 
/s/ John Adamovich, Jr.
 John Adamovich, Jr.
 Sr.Senior Vice President and
 Chief Financial Officer

 
- 5748 - -
 


EXHIBIT INDEX

Exhibit No.
 Exhibit Description
   
31.1 Certification pursuant to Rules 13a-14(a)/15d-14a15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer)
   
31.2 Certification pursuant to Rules 13a-14(a)/15d-14a15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  (Chief Financial Officer)
   
31.3 Certification pursuant to Rules 13a-14(a)/15d-14a15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Principal Accounting Officer)
   
32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer)
   
32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer)

 
- 5849 - -