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 endedDecember 31, 2009
Commission File Number 033-88878September 30, 2010

Commission File Number 033-88878
__________________________

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 x    No o

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

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

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

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

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

February  11,November 9, 2010
1,000
(Date)(Number of Shares)


AEROFLEX INCORPORATED
AND SUBSIDIARIES

INDEX

 PAGE
PART 1:I:        FINANCIAL INFORMATIONPAGE
   
Item 1UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS2
         December 31, 2009September 30, 2010 and June 30, 200920102
   
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS3 – 4
 Three Months Ended December 31,September 30, 2010 and 2009 and 2008
      Six Months Ended December 31, 2009 and 20083
   
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS5
       SixThree Months Ended December 31,September 30, 2010 and 2009 and 20084
   
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 65 – 2924
   
Item 2MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS 
    RESULTS OF OPERATIONS29 – 40
Three and Six Months Ended December 31,September 30, 2010 and 2009 and 200824 – 36
   
Item 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK40 – 4136
   
Item 4T4CONTROLS AND PROCEDURES4136
   
 PART II:          OTHER INFORMATION 
   
Item 1LEGAL PROCEEDINGS4137
   
Item 1ARISK FACTORS4237
   
Item 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS4237
   
Item 3DEFAULTS UPON SENIOR SECURITIES4237
   
Item 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS[REMOVED AND RESERVED]4237
   
Item 5OTHER INFORMATION4237
   
Item 6EXHIBITS4237
   
SIGNATURESSIGNATURE4338
  
EXHIBIT INDEX4439
  
CERTIFICATIONS45 – 4940-44

- 1 - -

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

  September 30,  June 30, 
Assets 2010  2010 
Current assets:      
Cash and cash equivalents $65,130  $100,663 
Accounts receivable, less allowance for doubtful accounts of $2,185 and $1,821
  129,306   141,595 
Inventories  142,553   126,568 
Deferred income taxes  26,938   28,018 
Prepaid expenses and other current assets  13,681   10,983 
Total current assets  377,608   407,827 
         
Property, plant and equipment, net  103,398   101,662 
Non-current marketable securities, net  9,806   9,769 
Deferred financing costs, net  19,790   20,983 
Other assets  22,888   21,818 
Intangible assets with definite lives, net  230,302   238,313 
Intangible assets with indefinite lives  114,168   109,894 
Goodwill  459,494   445,874 
         
Total assets $1,337,454  $1,356,140 
         
Liabilities and Stockholder's Equity        
Current liabilities:        
Current portion of long-term debt $360  $21,817 
Accounts payable  37,851   28,803 
Advance payments by customers and deferred revenue  30,218   30,741 
Income taxes payable  2,475   4,615 
Accrued payroll expenses  22,590   23,082 
Accrued expenses and other current liabilities  53,774   58,817 
Total current liabilities  147,268   167,875 
         
Long-term debt  882,463   880,030 
Deferred income taxes  130,782   138,849 
Defined benefit plan obligations  5,684   5,763 
Other long-term liabilities  14,103   12,639 
Total liabilities  1,180,300   1,205,156 
         
Stockholder's equity:        
Common stock, par value $.10 per share; authorized 1,000 shares; issued and outstanding 1,000 shares
  -   - 
Additional paid-in capital  399,116   398,941 
Accumulated other comprehensive income (loss)  (41,763)  (53,575)
Accumulated deficit  (200,199)  (194,382)
Total stockholder's equity  157,154   150,984 
         
Total liabilities and stockholder's equity $1,337,454  $1,356,140 

  December 31,  June 30, 
  
2009
  
2009
 
Assets
      
Current assets:      
Cash and cash equivalents $68,799  $57,748 
Accounts receivable, less allowance for doubtful accounts of $3,027 and $2,250  117,281   130,429 
Inventories  134,901   135,603 
Deferred income taxes  37,022   35,164 
Prepaid expenses and other current assets  11,563   9,938 
Total current assets  369,566   368,882 
         
Property, plant and equipment, net  98,203   100,907 
Non-current marketable securities, net  16,899   17,677 
Deferred financing costs, net  23,369   25,754 
Other assets  18,011   15,425 
Intangible assets with definite lives, net  261,701   292,553 
Intangible assets with indefinite lives  111,894   112,266 
Goodwill  428,886   428,133 
         
Total assets $1,328,529  $1,361,597 
         
Liabilities and Stockholder's Equity
        
Current liabilities:        
Current portion of long-term debt $4,203  $5,590 
Accounts payable  27,138   36,574 
Advance payments by customers and deferred revenue  32,490   33,418 
Income taxes payable  4,135   5,080 
Accrued payroll expenses  16,016   18,876 
Accrued expenses and other current liabilities  50,005   47,938 
Total current liabilities  133,987   147,476 
         
Long-term debt  889,990   883,758 
Deferred income taxes  149,133   143,048 
Defined benefit plan obligations  5,988   6,079 
Other long-term liabilities  11,582   21,476 
Total liabilities  1,190,680   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  397,759   396,573 
Accumulated other comprehensive income (loss)  (46,640)  (54,700)
Accumulated deficit  (213,270)  (182,113)
Total stockholder's equity  137,849   159,760 
         
Total liabilities and stockholder's equity $1,328,529  $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 September 30, 
       
  2010  2009 
       
Net sales $155,931  $130,116 
Cost of sales  76,514   65,122 
Gross profit  79,417   64,994 
         
Selling, general and administrative costs  37,509   30,238 
Research and development costs  22,742   17,181 
Amortization of acquired intangibles  15,963   15,605 
Loss on liquidation of foreign subsidiary  -   7,696 
   76,214   70,720 
Operating income (loss)  3,203   (5,726)
         
Other income (expense):        
Interest expense  (21,238)  (21,039)
Other income (expense), net  (29)  57 
Total other income (expense)  (21,267)  (20,982)
         
Loss before income taxes  (18,064)  (26,708)
Provision (benefit) for income taxes  (12,247)  (6,165)
         
Net loss $(5,817) $(20,543)
  Three Months Ended December 31, 
  2009  2008 
       
Net sales $166,739  $156,815 
Cost of sales  80,145   83,656 
Gross profit  86,594   73,159 
         
Selling, general and administrative costs  31,573   34,174 
Research and development costs  17,261   17,075 
Amortization of acquired intangibles  15,514   14,622 
   64,348   65,871 
Operating income  22,246   7,288 
         
Other income (expense)        
Interest expense  (21,418)  (21,250)
Other income (expense), net  422   9,327 
Total other income (expense)  (20,996)  (11,923)
         
Income (loss) before income taxes  1,250   (4,635)
Provision (benefit) for income taxes  11,864   (528)
         
Net income (loss) $(10,614) $(4,107)

See notes to unaudited condensed consolidated financial statements.
 
- 3 - -

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

  
Six Months Ended December 31,
 
  
2009
  
2008
 
       
Net sales $296,855  $297,660 
Cost of sales  145,267   157,142 
Gross profit  151,588   140,518 
         
Selling, general and administrative costs  61,811   65,658 
Research and development costs  34,442   34,104 
Amortization of acquired intangibles  31,119   32,590 
Loss on liquidation of foreign subsidiary (Note 10)  7,696   - 
   135,068   132,352 
Operating income  16,520   8,166 
         
Other income (expense)        
Interest expense  (42,457)  (42,465)
Other income (expense), net  479   12,413 
Total other income (expense)  (41,978)  (30,052)
         
Income (loss) before income taxes  (25,458)  (21,886)
Provision (benefit) for income taxes  5,699   (10,882)
         
Net income (loss) $(31,157) $(11,004)

See notes to unaudited condensed consolidated financial statements.

- 4 - -

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

  Six Months Ended December 31, 
  2009  2008 
Cash flows from operating activities:      
Net income (loss) $(31,157) $(11,004)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:        
Depreciation and amortization  41,774   43,651 
Loss on liquidation of foreign subsidiary  7,696   - 
Deferred income taxes  2,437   (18,808)
Share based compensation  1,045   977 
Amortization of deferred financing costs  2,386   2,399 
Paid in kind interest  8,857   7,889 
Other, net  646   96 
Change in operating assets and liabilities, net of effects from purchases of businesses:        
Decrease (increase) in accounts receivable  12,136   12,687 
Decrease (increase) in inventories  (358)  (4,698)
Decrease (increase) in prepaid expenses and other assets  (4,319)  1,224 
Increase (decrease) in accounts payable, accrued expenses and other liabilities  (19,030)  7,247 
         
Net cash provided by (used in) operating activities  22,113   41,660 
         
Cash flows from investing activities:        
Capital expenditures  (8,401)  (8,353)
Proceeds from sale of marketable securities  1,000   - 
Proceeds from the sale of property, plant and equipment  845   866 
Other, net  (11)  (12)
         
Net cash provided by (used in) investing activities  (6,567)  (7,499)
         
Cash flows from financing activities:        
Debt repayments  (4,012)  (4,129)
Debt financing costs  -   (340)
Net cash provided by (used in) financing activities  (4,012)  (4,469)
Effect of exchange rate changes on cash and cash equivalents  (483)  (10,177)
         
Net increase (decrease) in cash and cash equivalents  11,051   19,515 
Cash and cash equivalents at beginning of period  57,748   54,149 
Cash and cash equivalents at end of period $68,799  $73,664 
 
  Three Months Ended September 30, 
       
  2010  2009 
       
Cash flows from operating activities:      
Net income (loss) $(5,817) $(20,543)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
        
Depreciation and amortization  20,886   21,246 
Loss on liquidation of foreign subsidiary  -   7,696 
Deferred income taxes  (13,305)  (6,656)
Share-based compensation  513   489 
Amortization of deferred financing costs  1,193   1,193 
Paid in kind interest  2,434   4,363 
Other, net  905   572 
Change in operating assets and liabilities, net of effects from purchases of businesses:
        
    Decrease (increase) in accounts receivable  16,607   40,066 
    Decrease (increase) in inventories  (11,964)  (3,729)
Decrease (increase) in prepaid expenses and other assets  (3,165)  (2,872)
Increase (decrease) in accounts payable, accrued expenses and other liabilities
  (855)  (28,605)
         
Net cash provided by (used in) operating activities  7,432   13,220 
         
Cash flows from investing activities:        
Payment for purchase of business, net of cash acquired  (19,185)  - 
Capital expenditures  (4,708)  (3,224)
Proceeds from sale of marketable securities  -   1,000 
Other, net  438   (236)
         
Net cash provided by (used in) investing activities  (23,455)  (2,460)
         
Cash flows from financing activities:        
Debt repayments  (21,458)  (1,313)
         
Net cash provided by (used in) financing activities  (21,458)  (1,313)
Effect of exchange rate changes on cash and cash equivalents
  1,948   (191)
         
Net increase (decrease) in cash and cash equivalents  (35,533)  9,256 
Cash and cash equivalents at beginning of period  100,663   57,748 
Cash and cash equivalents at end of period $65,130  $67,004 

See notes to unaudited condensed consolidated financial statements.

- 54 - -

AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1. Basis of Presentation

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

The accompanying unaudited condensed consolidated financial information of Aeroflex Incorporated and subsidiaries (the “Company”, “we”, or “our”) has been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”), and reflects all adjustments, consisting only of normal recurring adjustments, which in management’s opinion are necessary to state fairly the Company’s financial position as of December 31, 2009,September 30, 2010, results of operations for the three and six  month periods ended December  31,September 30, 2010 and 2009 and 2008 and cash flows for the sixthree month periods ended December 31, 2009September 30, 2010 and 2008.2009. The June 30, 20092010 balance sheet information has been derived from audited financial statements, but does not include all information or disclosures required by U.S. GAAP.

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

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 20092010 (the “Fiscal 20092010 Form 10-K”).

During the three months ended September 30, 2010, we identified an overstatement of deferred income tax liabilities established in the fourth quarter of fiscal 2009 and throughout fiscal 2010 related to U.S. income taxes provided on foreign source income. After consideration of both quantitative and qualitative factors, we determined the amounts were not material to any of those prior period financial statements or the fiscal 2011 estimated results and thus corrected the balance in the three months ended September 30, 2010.  Accordingly, the consolidated balance sheet at September 30, 2010 presented in this Form 10-Q has been adjusted to reduce deferred income tax liabilities by $3.7 million, with a corresponding increase in income tax benefit in the statement of operations for the three months ended September 30, 2010.  The adjustment did not impact the statement of cash flows.

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

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 eighteen months of sale. We recognize revenue on these sales at the time of shipment to the distributor, as the returns under these arrangements have historically been insignificant and can be reasonably estimated. A provision for such estimated returns is recorded at the time revenues 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 by determining estimated contract profit rates and use of the percentage-of-completion method to recognize revenues and associated costs as work 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 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.

Where an arrangement includes only a software license, revenue is recognized when the software is delivered and 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 receivable is probable, the fee is fixed or determinable and whether any other undelivered elements of the arrangement exist for 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. 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 December 31, 2009, we have $32.5 million in Advance Payments by Customers and Deferred Revenue, which is comprised of $15.3 million of customer advance payments primarily for the purchase of materials, $7.4 million of deferred service and software support revenue, $3.6 million of deferred warranty revenue and $6.2 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 December 31, 2009 and revenue for the three and six months ended December 31, 2009 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 six months ended December 31, 2009, 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 nonfinancial 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). Adoption of the new guidance did not have a material impact on our financial statements.

On July 1, 2009,2010, we adopted the authoritative guidance issued by the FASB on business combinations.the consolidation of variable interest entities. 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 on the acquisition date, the capitalization of in-process research and development at fair value and the expensing of acquisition-related costs as incurred. Adoption of the new guidance which is effectiverequires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures 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.variable interests. 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.  The Company has updated references to U.S. GAAP in its financial statements issued for the period ended December 31, 2009. The adoption 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 financial statements.

- 8 - -
In December 2007, the FASB issued guidance which requires that the non-controlling interests in consolidated subsidiaries be presented as a separate component of stockholders’ equity in the balance sheet, that the amount of consolidated net earnings attributable to the parent and the 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 financial statements was insignificant.

Recently Issued Accounting Pronouncements Not Yet Adopted

In January 2010, the FASB issued authoritative guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements.  The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements on a gross basis of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance will become effective for us beginning withWe believe the third quarteradoption on July 1, 2011 of the fiscal year 2010 financial reporting, except forgross presentation of the disclosure on the roll forward activities for Level 3 fair value measurements, which will become effective for us beginning with the third quarter of the fiscal year 2011 financial reporting. The adoption of this new guidanceroll forward will not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which is effective for us beginning July 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of control over such entities, and additional disclosures for variable interests. We believe adoption of this new guidance will not have a material impact on our financial statements.

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3.Acquisition of Businesses and Intangible Assets

Test Evolution Corporation

On October 1, 2007, we purchased 40% of the outstanding stock of Test Evolution Corporation, or TEC, for $4.0 million. TEC, located in Massachusetts, develops and manufactures digital, analog and RF semiconductor automated test equipment. We have determined that we have control of this company and have consolidated TEC’s assets and liabilities and results of operations, all of which were insignificant, into our financial statements commencing October 1, 2007. On August 5, 2010, we invested another $2.0 million in TEC. At September 30, 2010, as a result of this and other capital transactions, our ownership interest increased to 51%. The amounts attributable to the non-controlling interest in TEC’s equity and results of operations are not material to our consolidated financial statements and have been included in other long-term liabilities and other income (expense), respectively.

Advanced Control Components

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

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

(In thousands)   
    
Current assets (excluding cash of $15) $4,961 
Property, plant and equipment  1,156 
Other assets  60 
Customer related intangibles  5,680 
Non-compete arrangements  30 
Tradenames  3,010 
Goodwill  10,608 
Total assets acquired  25,505 
Current liabilities  (2,744)
Deferred taxes  (3,576)
Total liabilities assumed  (6,320)
Net assets acquired $19,185 
The customer related intangibles and non-compete arrangements are being amortized on a straight-line basis over a range of 1 to 9 years.  The tradenames have an indefinite life.  The goodwill is not deductible for tax purposes.

On a pro forma basis, had the ACC acquisition taken place as of the beginning of the periods presented, our results of operations for those periods would not have been materially affected.
- 6 - -
Intangible Assets with Definite Lives

The components of amortizable intangible assets arewere as follows:

 December 31, 2009  June 30, 2009  September 30, 2010  June 30, 2010 
 (In thousands)  (In thousands) 
                        
 Gross     Gross     Gross     Gross    
 Carrying  Accumulated  Carrying  Accumulated  Carrying  Accumulated  Carrying  Accumulated 
 Amount  Amortization  Amount  Amortization  Amount  Amortization  Amount  Amortization 
                        
Developed technology $197,803  $78,950  $197,684  $62,021  $199,759  $104,251  $197,422  $94,672 
Customer related intangibles  216,784   82,251   216,956   69,339   228,805   101,821   222,026   94,656 
Non-compete arrangements  10,212   3,621   10,090   2,692   10,335   4,995   10,087   4,420 
Tradenames  2,185   461   2,105   230   3,326   856   3,184   658 
Total $426,984  $165,283  $426,835  $134,282  $442,225  $211,923  $432,719  $194,406 

The aggregate amortization expense for amortizable intangible assets was $15.5$16.0 million and $14.6$15.6 million for the three months ended December 31,September 30, 2010 and 2009, and 2008, respectively, and $31.1 million and $32.6 million for the six months ended December 31, 2009 and 2008, respectively.

The estimated aggregate amortization expense for each of the twelve month periods ending December 31,September 30, is as follows:
  (In thousands) 
    
2011 $63,194 
2012  61,470 
2013  52,315 
2014  24,730 
2015  17,191 
    
  (In thousands) 
    
2010 $61,277 
2011  60,720 
2012  57,938 
2013  43,348 
2014  20,300 

Goodwill

The carrying amount of goodwill, by segment, iswas as follows:

  Microelectronic  Test    
  Solutions  Solutions  Total 
  (In thousands) 
          
Balance at June 30, 2010 $287,136  $158,738  $445,874 
Goodwill recorded for acquisition of ACC  10,608   -   10,608 
Other  (40)  -   (40)
Impact of foreign currency translation  1,513   1,539   3,052 
Balance at September 30, 2010 $299,217  $160,277  $459,494 
  Microelectronic  Test    
  Solutions  Solutions  Total 
     (In thousands)    
          
Balance at June 30, 2009 $266,813  $161,320  $428,133 
Adjustment to goodwill for acquisitions  313   455   768 
Impact of foreign currency translation  437   (452)  (15)
Balance at December 31, 2009 $267,563  $161,323  $428,886 

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4.Restructuring Charges

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

                
  Balance           Balance 
  June 30,           September 30, 
  2010  Three Months Ended September 30, 2010  2010 
           Effect of    
  Restructuring        foreign  Restructuring 
  Liability  Net Additions  Cash Payments  currency  Liability 
     (In thousands)       
Work force reduction
 $172  $1,219  $(327) $25  $1,089 
                     
Closure of facilities
  632   580   (533)  35   714 
                     
Total $804  $1,799  $(860) $60  $1,803 
  Balance           Balance 
   June 30,           December 31, 
   2009  Six Months Ended December 31, 2009  2009 
            Effect of    
   Restructuring        foreign  Restructuring 
   Liability  Net Additions  Cash Payments  currency  Liability 
     (In thousands)    
Work force reduction $756  $225  $(970) $2  $13 
                     
Closure of facilities  1,722   26   (302)  (24)  1,422 
                     
Total $2,478  $251  $(1,272) $(22) $1,435 
For the three months ended September 30, 2010, we recorded a $1.8 million charge in connection with continued restructuring activities of certain manufacturing operations, which consisted of $1.2 million of severance and other related costs related to consolidation and reorganization efforts in our U.K. operations and one of our components facilities in connection with the ACC acquisition and $580,000 of facility closure costs in our U.K. operations.

5. Inventories

Inventories consistconsisted of the following:

  September 30,  June 30, 
  2010  2010 
  (In thousands) 
       
Raw materials $68,320  $61,278 
Work in process  50,865   44,022 
Finished goods  23,368   21,268 
  $142,553  $126,568 
  December 31,  June 30, 
  2009  2009 
  (In thousands) 
       
Raw materials $64,142  $67,388 
Work in process  47,824   47,185 
Finished goods  22,935   21,030 
  $134,901  $135,603 

6.Product Warranty

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

- 8 - -
Activity for the three months ended September 30, 2010 related to our product warranty liability, which is reflected in Accrued Expenses and Other Current Liabilities in the accompanying consolidated balance sheets, was as follows:

(In thousands)   
    
Balance at June 30, 2010 $2,762 
Provision for warranty obligations  681 
Cost of warranty obligations  (627)
Foreign currency impact  66 
Balance at September 30, 2010 $2,882 
  Six Months  Six Months 
   Ended  Ended 
   December 31,  December 31, 
   2009  2008 
  (In thousands) 
       
Balance at beginning of period $2,645  $2,944 
Provision for warranty obligations  968   1,256 
Cost of warranty obligations  (1,083)  (1,446)
Foreign currency impact  (10)  (244)
Balance at end of period $2,520  $2,510 

 
- 11 - -

7.Derivative Financial Instruments

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

The fair values of our derivative financial instruments included in the consolidated balance sheets as of December 31, 2009September 30, 2010 and June 30, 20092010 are presented as follows:

  Asset (Liability) Derivatives 
  September 30, 2010 June 30, 2010 
  Balance Sheet   Balance Sheet   
(In thousands) Location 
Fair Value(1)
 Location 
Fair Value(1)
 
Derivatives not designated as hedging instruments:
         
Interest rate swap contracts Accrued expenses and   Accrued expenses and   
  other current liabilities $(3,747)other current liabilities $(6,613)
            
Derivatives not designated as hedging instruments:
           
Foreign currency forward contracts Accrued expenses and    Accrued expenses and    
  other current liabilities  (333)other current liabilities  (293)
            
Total derivatives, net   $(4,080)  $(6,906)
(1)  See Note 8 for further information about how the fair values of derivative assets and liabilities are determined.
 
   Asset (Liability) Derivatives 
   December 31, 2009 June 30, 2009 
   Balance Sheet   Balance Sheet   
(In thousands) Location 
Fair Value(1)
 Location 
Fair Value(1)
 
Derivatives designated as hedging         
   instruments:         
   Interest rate swap contracts Accrued expenses and   Accrued expenses and   
     other current liabilities $(4,925)   other current liabilities $(615)
   Interest rate swap contracts Other long-term    Other long-term    
     liabilities  (7,785)   liabilities  (15,006)
            
     Total derivatives designated as           
        hedging instruments    (12,710)   (15,621)
            
Derivatives not designated as           
   hedging instruments:           
   Foreign currency forward contracts Prepaid expenses and    Accrued expenses and    
     other current assets  36    other current liabilities  (195)
            
          Total derivatives, net   $(12,674)  $(15,816)
- 9 - -
 
 (1)See Note 8 for further information about how the fair values of derivative assets and liabilities are determined.

The amounts of the gains and losses related to our derivative financial instruments designated as hedging instruments for the three and six months ended December 31,September 30, 2010 and 2009 and 2008 arewere 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   Six Months   Six Months 
   Ended   Ended   Ended   Ended 
    December 31,   December 31,    December 31,   December 31, 
  2009   2008   2009   2008 
  (In thousands) 
                
Interest rate swap contracts$ (1,191)  $(18,724)  $ (4,271)  $(22,519) 

- 12 - -
Derivatives in Cash Flow
Hedging Relationships
 
Amount of Gain or (Loss)
Recognized on Derivatives in
Other Comprehensive Income
(Effective Portion) (1)
 
    
  Three Months Ended September 30 
  2010  2009 
  (In thousands) 
    
Interest rate swap contracts $(575) $(3,081)
 

Location of Gain or (Loss)
Reclassified from
Accumulated Other Comprehensive Income
into Income (Effective Portion)
 
Amount of Gain or (Loss)
Reclassified from
Accumulated Other Comprehensive Income
into Income (Effective Portion) (1)
 
    
  Three Months Ended September 30 
  2010  2009 
  (In thousands) 
    
Interest expense $(3,441) $(3,401)
(1) See Note 11 for additional information on changes to accumulated other comprehensive income (loss).
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    Six Months   Six Months 
    Ended    Ended    Ended   Ended 
     December 31,     December 31,     December 31,    December 31, 
   2009   2008   2009  2008 
   (In thousands) 
                
Interest expense $ (3,781)  $ (1,192)  $            (7,182) $ (2,082) 

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

The amounts of the gains and losses related to our derivative financial instruments not designated as hedging instruments for the three and six months ended December 31,September 30, 2010 and 2009 and 2008 arewere as follows:

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   Six Months   Six Months 
       Ended   Ended   Ended   Ended 
        December 31,    December 31,    December 31,    December 31, 
     2009  2008  2009  2008 
     (In thousands) 
Foreign currency 
forward contracts
 Other income (expense) $                  (87) $ (639) $ 231 $ (804) 
  Location of Gain or (Loss)  Amount of Gain or (Loss) 
Derivatives Not Designated Recognized in Earnings on  Recognized in Earnings on 
as Hedging Instruments Derivative  Derivative 
          
     Three Months Ended September 30, 
     2010  2009 
     (In thousands) 
          
Foreign currency forward contracts
 Other income (expense)  $(40) $318 

Interest Rate Swap Cash-Flow Hedges

We enter into interest rate swap contracts with counterparties that are rated investment grade to manage the effects of interest rate movements on portions of our debt. Such contracts effectively fix the borrowing rates on floating rate debt to limit the exposure against the risk of rising rates.  We do not enter into interest rate swap contracts for speculative purposes and we have entered into transactions with counterparties that are rated investment grade.purposes. Our interest rate swap contracts outstanding as of September 30, 2010, all of which were entered into in fiscal 2008 for an aggregate notional amount of $475$422.7 million, have varying maturities through February 2011.

Foreign Currency Contract Derivatives

Foreign currency contracts are used to protect us from fluctuations in exchange rates. We enter into foreign currency contracts, which are not designated as hedges. The change in fair value is included in other income (expense) as it occurs, within other income (expense).occurs. As of December 31, 2009,September 30, 2010, we had $26.7$47.2 million of notional value foreign currency forward contracts maturing through JanuaryOctober 29, 2010. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts.

- 1310 - -

8.Fair Value Measurements

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

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

The following table presents for each hierarchy level, financial assets and liabilities measured at fair value on a recurring basis:
             
  Quoted Prices in          
  Active Markets  Significant Other  Significant    
  for Identical  Observable  Unobservable    
  Assets  Inputs  Inputs    
As of September 30, 2010 (Level 1)  (Level 2)  (Level 3)  Total 
  (In thousands)       
Assets:            
Non-current marketable securities $-  $-  $9,806  $9,806 
                 
Liabilities:                
Foreign currency forward contracts $-  $333  $-  $333 
Interest rate swap contracts  -   3,747   -   3,747 
Total Liabilities $-  $4,080  $-  $4,080 

  Quoted Prices in          
  Active Markets  Significant Other  Significant    
  for Identical  Observable  Unobservable    
  Assets  Inputs  Inputs    
As of June 30, 2010 (Level 1)  (Level 2)  (Level 3)  Total 
  (In thousands)       
Assets:            
Non-current marketable securities $-  $-  $9,769  $9,769 
Liabilities:                
Foreign currency forward contracts $-  $293  $-  $293 
Interest rate swap contracts  -   6,613   -   6,613 
Total Liabilities $-  $6,906  $-  $6,906 
  Quoted Prices in          
   Active Markets  Significant Other  Significant    
   for Identical  Observable  Unobservable    
   Assets  Inputs  Inputs    
As of December 31, 2009 (Level 1)  (Level 2)  (Level 3)  Total 
  (In thousands) 
Assets:            
Non-current marketable securities $-  $-  $16,899  $16,899 
Foreign currency forward contracts  -   36   -   36 
   Total Assets $-  $36  $16,899  $16,935 
                 
Liabilities:                
Interest rate swap contracts $-  $12,710  $-  $12,710 

  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 

- 1411 - -

The following table presents the changes in the carrying value of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the sixthree months ended December 31, 2009:September 30, 2010:
  
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
Auction
Rate
Securities
(In thousands)
 
    
Balance at June 30, 2010 $9,769 
Unrealized gain (loss) in accumulated other comprehensive income (loss)  37 
Balance at September 30, 2010 $9,806 
  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 at par  (1,000)
Total unrealized gain (loss) in accumulated    
   other comprehensive income (loss)  222 
Balance at December 31, 2009 $16,899 

Non-Current Marketable Securities – Non-current marketable securities consist of auction rate securities that currently have no active market from which we could obtain pricing.  We have classified auction rate securities as Level 3 as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities.  To date, we have collected all interest payments on all of our auction rate securities when due. Furthermore, we have the intent and are able to hold these securities until the credit markets recover, or until their maturities, which range from 20292037 through 2042,2041, 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 December 31, 2009September 30, 2010, we havehad a $2.0$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 December 31, 2009September 30, 2010 a credit loss did not exist and there was no requirement to recognize an other than temporary impairment charge, including the length of time and the extent to which the fair value has been below the cost basis, the timely receipt of all interest payments, the rating of the security, the relatively low volatility of the security’s fair value, the current financial condition of the issuer and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

In July 2009, $1.0 million of our auction rate securities were redeemed by the issuer at par. In January 2010, an additional $4.0 million of our auction rate securities were redeemed by the issuer at 92% of par. The resulting $320,000 realized loss will be recorded in the statement of operations in the third quarter of fiscal 2010. The $4.0 million of auction rate securities redeemed in January 2010 are classified as non-current marketable securities as of December 31, 2009, as we were not aware at the balance sheet date that these auction rate securities would be redeemed.

Foreign Currency Forward Contracts – The fair value of our foreign currency forward contracts were valueddetermined 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.

- 1512 - -

9.Long Term Debt and Credit Agreements

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

  September 30, 2010 
  Carrying  Estimated 
  Amount  Fair Value 
  (In thousands) 
       
Senior secured B-1 term loan $372,651  $361,472 
Senior secured B-2 term loan  116,454   112,960 
Senior unsecured notes  225,000   244,125 
Senior subordinated unsecured term loan  167,973   145,297 
Other  745   745 
Total debt $882,823  $864,599 
  December 31, 2009 
  Carrying  Estimated 
  Amount  Fair Value 
  (In thousands) 
       
Senior secured B-1 term loan $389,943  $352,899 
Senior secured B-2 term loan  121,857   105,407 
Senior unsecured notes  225,000   228,375 
Senior subordinated unsecured term loan  156,308   133,643 
Other  1,085   1,085 
     Total debt $894,193  $821,409 

TheAs of June 30, 2010, our total debt had a carrying value of debt of $889.3$901.8 million as of June 30, 2009 hadand a fair value of $661.9$877.7 million.

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

As of December 31, 2009,September 30, 2010, we are in compliance with all of the covenants contained in our loan agreements.

Interest paid was $30.6$21.6 million and $21.1$22.0 million for the sixthree months ended December 31,September 30, 2010 and 2009, and 2008, respectively. Accrued interest of $14.2$9.8 million and $14.0$13.9 million was included in accrued expenses and other current liabilities at December 31, 2009September 30, 2010 and June 30, 2009,2010, respectively.

10.Loss on Liquidation of Foreign Subsidiary

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

During the quarter ended September 30, 2009, the loan was fully repaid to the partnership, with interest, and we received a return of capital and dividends.  The partnership ishas been substantially liquidated.

As a result of changes in foreign currency rates, there was a cumulative translation adjustment of $7.7 million remaining after substantially all of the assets have been returned to us and substantially all of the liabilities have been satisfied.  In accordance with U.S. GAAP, this remaining cumulative translation adjustment has been expensed in the period during which the substantial liquidation of the partnership occurred and presented as a non-cash loss on liquidation of foreign subsidiary in our Condensed Consolidated Statement of Operations for the six monthsquarter ended December 31,September 30, 2009.  This loss is not deductible for income tax purposes.

- 1613 - -

11.Comprehensive Income

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

  Three Months Ended September 30, 
  2010  2009 
(In thousands)      
       
Net income (loss) $(5,817) $(20,543)
Increase (decrease) in fair value of interest rate swap contracts, net of tax provision (benefit) of $1,113 and $124
  1,753   196 
Valuation allowance against non-current marketable securities
  37   269 
Foreign currency translation adjustment, net of tax of $680 and $0
  10,022   5,884 
Total comprehensive income (loss) $5,995  $(14,194)
  Three Months  Three Months  Six Months  Six Months 
  Ended  Ended  Ended  Ended 
  December 31,  December 31,  December 31,  December 31, 
  2009  2008  2009  2008 
  (In thousands) 
             
Net income (loss) $(10,614) $(4,107) $(31,157) $(11,004)
Increase (decrease) in fair value of                
interest rate swap contracts, net of tax                
provision (benefit) of $961, $(6,487),                
$1,086 and $(7,562)  1,629   (11,045)  1,825   (12,875)
Valuation allowance against                
non-current marketable securities  (47)  (1,005)  222   (2,203)
Foreign currency translation adjustment,                
net of tax provision of $617, $0,                
$617 and $0  129   (34,199)  6,013   (55,981)
Total comprehensive income (loss) $(8,903) $(50,356) $(23,097) $(82,063)

 Accumulated other comprehensive income (loss) iswas as follows:

  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, 2010 $(4,046) $(1,276) $(773) $(47,480) $(53,575)
Three months' activity  1,753   37   -   10,022   11,812 
Balance, September 30, 2010 $(2,293) $(1,239) $(773) $(37,458) $(41,763)
  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)
Six months' activity  1,825   222   -   6,013   8,060 
Balance, December 31, 2009 $(7,777) $(2,046) $(499) $(36,318) $(46,640)

The valuation allowance for non-current marketable securities is not adjusted for income taxes as it would create a capital loss carryforward upon realization for which we would record a valuation allowance against the related deferred tax asset.

Prior to fiscal 2009, the foreign currency translation adjustments were not adjusted for income taxes as they related to indefinite investments in non-U.S. subsidiaries.  Deferred U.S. income taxes have been provided on certain undistributed foreign earnings for years subsequent to fiscal 2008 since we expect that substantially all of these earnings will be distributed to the U.S.  As of December 31, 2009,September 30, 2010, we have recorded a deferred U.S. income tax on the foreign currency translation adjustment created by the post-fiscal 2008 undistributed foreign earnings.

- 17 - -

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 andsale. We recorded a liability for the estimated remediation costs.costs related to adverse environmental conditions that existed at the VMC premises when it was sold. The accrued environmental liability at December 31, 2009 is $1.1September 30, 2010 was $1.6 million, of which $322,000 iswas expected to be paid within one year.

During the quarter ended March 31,
- 14 - -
In fiscal 2007, we became aware that certain RadHard bidirectional multipurpose transceivers sold by us since 1999 may have been subject to the licensing jurisdiction of the U.S. Department of State in accordance with the International Traffic in Arms Regulations  (“ITAR”).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. On November 15, 2007, we were informed that the U.S. Department of State had determined in response to our Commodity Jurisdiction request that the product is subject to the licensing jurisdiction of the U.S. Department of State in accordance with the ITAR. We requested reconsideration of this determination. On February 7, 2008, we filed an addendum to the above referenced Voluntary Disclosure advising the Directorate of Defense Trade Controls that other products sold by us, similar in nature to the transceiver described above, may also be subject to the ITAR. The Directorate of Defense Trade Controls agreed to extend our time to file such addendum to the Voluntary Disclosure until a decision was rendered with respect to our request for reconsideration of the determination in connection with the above-referenced Commodity Jurisdiction request. On August 5, 2008, we received a letter from the Office of Defense Trade Controls Compliance, (“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 are involved in varioushave also identified other ITAR relatednoncompliance in our past business activities as well as in the pre-acquisition business activities of certain recently acquired companies. These include the inadvertent export of products without a required license and the disclosure of controlled technology to certain foreign national employees. These matters including some recently identified with the prior practices of a newly acquired business, which have beenwere formally disclosed to the U.S. Department of State.  Although we are in the process of addressing these matters, we cannot provide assurance that we will be able to adequately correct all possible ITAR violations.State during 2009 and 2010. At this time it is not possible to determine whether any fines or other penalties will be asserted against us related to these other ITAR matters, or the materiality of any outcome.

On October 14, 2009, BAE Systems Information and Electronic Systems (“BAE”) commenced an action against both us and one of our subsidiaries 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 know how relating to a high performance direct infrared countermeasure system for use in military aircraft and certain other platforms (“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 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 have evaluated 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 believe that the ultimate resolution of this matter will have a material adverse effect on our financial position, results of operations, liquidity or capital resources.

- 18 - -

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.

13.Business Segments

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

Microelectronic Solutions

·Microelectronic Components, Sub-assemblies and Modules
·Integrated Circuits
·Motion Control Systems

Test Solutions

·Instrument Products and Test Systems

We are a manufacturerglobal provider of advanced technologyradio frequency, or RF, and microwave integrated circuits, components and systems used in the design, development and maintenance of technically demanding, high-performance wireless communication systems. Our solutions include highly specialized microelectronic components forand test and measurement equipment used by companies in the space, avionics, defense, commercial industry, governmentwireless communications, medical and defense contractors.other markets. Approximately 32% and 39%31% of our sales for the three months ended December 31, 2009 and 2008, and 34%September 30, 2010 and 36% of our sales for the sixthree months ended December 31,September 30, 2009 and 2008, respectively, were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. No customer constituted more than 10% of sales during any of the periods presented. Inter-segment sales were not material and have been eliminated from the tables below.

- 15 - -
The majority of our operations are located in the United States; however, weStates. We also have operations in Europe and Asia, with our most significant foreign operations in the United Kingdom (���(“U.K.”).  Net sales from facilities located in the U.K. were approximately $29.6 million and $33.4$23.1 million for the three months ended December 31, 2009September 30, 2010 and 2008 and $55.9 million and $67.8$26.3 million for the sixthree months ended December 31, 2009 and 2008, respectively.September 30, 2009.  Total assets of the U.K. operations were $167.9$171.0 million as of December 31, 2009September 30, 2010 and $188.2$159.9 million as of June 30, 2009.2010.

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

  Three Months Ended September 30, 
  2010  2009 
  (In thousands) 
       
United States of America $88,520  $80,185 
Europe and Middle East  30,302   28,467 
Asia and Australia  33,111   19,515 
Other regions  3,998   1,949 
  $155,931  $130,116 
             
  Three Months  Three Months  Six Months  Six Months 
  Ended  Ended  Ended  Ended 
  December 31,  December 31,  December 31,  December 31, 
  2009  2008  2009  2008 
  (In thousands) 
             
United States of America $92,204  $97,042  $172,389  $172,057 
Europe and Middle East  34,242   22,777   62,709   59,898 
Asia and Australia  36,590   34,176   56,105   61,062 
Other regions  3,703   2,820   5,652   4,643 
  $166,739  $156,815  $296,855  $297,660 

- 1916 - -

Selected financial data by segment is as follows:

 Three Months  Three Months  Six Months  Six Months  Three Months Ended September 30, 
 Ended  Ended  Ended  Ended  2010  2009 
 December 31,  December 31,  December 31,  December 31,  (In thousands) 
 2009  2008  2009  2008       
 (In thousands) 
            
Net sales:            
Net sales      
Microelectronic solutions ("AMS") $79,160  $70,752  $146,521  $138,332  $77,305  $67,361 
Test solutions ("ATS")  87,579   86,063   150,334   159,328   78,626   62,755 
Net sales $166,739  $156,815  $296,855  $297,660  $155,931  $130,116 
                        
Segment adjusted operating income:                
Segment adjusted operating income        
- AMS $21,887  $15,371  $36,911  $29,984  $18,887  $15,024 
- ATS  20,186   15,974   28,151   25,604   6,857   7,965 
- General corporate expense  (2,258)  (3,870)  (5,189)  (6,567)
General corporate expense  (2,414)  (2,931)
Adjusted operating income  39,815   27,475   59,873   49,021   23,330   20,058 
                        
Amortization of acquired intangibles                        
- AMS  (8,743)  (8,462)  (17,579)  (19,139)  (9,260)  (8,836)
- ATS  (6,771)  (6,160)  (13,540)  (13,451)  (6,703)  (6,769)
Share based compensation                
Business acquisition costs        
- Corporate  (190)  - 
Share-based compensation        
- Corporate  (556)  (489)  (1,045)  (977)  (513)  (489)
Restructuring charges                        
- AMS  (576)  - 
- ATS  (64)  (1,808)  (251)  (2,210)  (1,223)  (187)
Merger related expenses - Corporate  (771)  (2,172)  (1,464)  (2,806)  (715)  (693)
Loss on liquidation of foreign                
subsidiary - ATS  -   -   (7,696)  - 
Current period impact of acquisition                
related adjustments:                
Loss on liquidation of foreign subsidiary - ATS  -   (7,696)
Current period impact of acquisition related adjustments:
        
Inventory - AMS  -   -   (246)  -   (183)  (246)
Inventory - ATS  (447)  - 
Depreciation - AMS  (265)  (286)  (540)  (572)  (117)  (275)
Depreciation - ATS  (311)  (676)  (817)  (1,414)  (120)  (506)
Depreciation - Corporate  (55)  (55)  (110)  (110)  (55)  (55)
Deferred revenue - ATS  (33)  (79)  (65)  (176)  (25)  (32)
Operating income (GAAP)  22,246   7,288   16,520   8,166 
Operating income (loss) (GAAP)  3,203   (5,726)
                        
Interest expense  (21,418)  (21,250)  (42,457)  (42,465)  (21,238)  (21,039)
Other income (expense), net  422   9,327   479   12,413   (29)  57 
Income (loss) before income taxes $1,250  $(4,635) $(25,458) $(21,886) $(18,064) $(26,708)

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

- 2017 - -

14.Guarantor/Non-Guarantor Financial Information

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the balance sheets at December 31, 2009September 30, 2010 and June 30, 2009,2010 and the statements of operations for the three and six months ended December 31, 2009 and 2008 and the statements of cash flows for the sixthree months ended December 31,September 30, 2010 and 2009 and 2008 for Aeroflex Incorporated (the “Parent Company”(”Parent”), 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 subsidiariesnote, Guarantor Subsidiaries refer to the subsidiaries of the Parent Company that have guaranteed principal debt obligations of the Parent Company.Parent.  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 Note 3).

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

     Guarantor  Non-Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
                
Net sales $-  $120,120  $47,969  $(1,350) $166,739 
Cost of sales  -   60,394   20,974   (1,223)  80,145 
Gross profit  -   59,726   26,995   (127)  86,594 
Selling, general and administrative costs  3,640   18,942   8,991   -   31,573 
Research and development costs  -   11,460   5,801   -   17,261 
Amortization of acquired intangibles  -   13,276   2,238   -   15,514 
Operating income (loss)  (3,640)  16,048   9,965   (127)  22,246 
                     
Other income (expense):                    
Interest expense  (21,399)  (17)  (2)  -   (21,418)
Other income (expense), net  (40)  480   (18)  -   422 
Intercompany charges  19,797   (19,318)  (479)  -   - 
Income (loss) before income taxes  (5,282)  (2,807)  9,466   (127)  1,250 
Provision (benefit) for income taxes  (364)  2,199   2,046   7,983   11,864 
Equity income (loss) of subsidiaries  (5,696)  6,932   -   (1,236)  - 
Net income (loss) $(10,614) $1,926  $7,420  $(9,346) $(10,614)

- 21 - -
Guarantor Subsidiaries is 100% owned by the Parent Company and guarantees the debt on an unconditional and joint and several basis.
 

Condensed Consolidating Statement of Operations
For the Three Months Ended December 31, 2008September 30, 2010
(In thousands)
     Guarantor  Non-Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
                
Net sales $-  $109,597  $47,935  $(1,601) $155,931 
Cost of sales  -   55,723   22,448   (1,657)  76,514 
Gross profit  -   53,874   25,487   56   79,417 
Selling, general and administrative costs  3,887   21,737   11,885   -   37,509 
Research and development costs  -   13,647   9,095   -   22,742 
Amortization of acquired intangibles  -   13,685   2,278   -   15,963 
Operating income (loss)  (3,887)  4,805   2,229   56   3,203 
                     
Other income (expense):                    
Interest expense  (21,226)  (12)  -   -   (21,238)
Other income (expense), net  7   98   (134)  -   (29)
Intercompany charges  19,878   (19,279)  (599)  -   - 
Income (loss) before income taxes  (5,228)  (14,388)  1,496   56   (18,064)
Provision (benefit) for income taxes  (237)  (2,954)  372   (9,428)  (12,247)
Equity income (loss) of subsidiaries  (826)  1,199   -   (373)  - 
Net income (loss) $(5,817) $(10,235) $1,124  $9,111  $(5,817)
- 18 - -

Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2009
(In thousands)
                
     Guarantor  Non-Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
                
Net sales $-  $97,895  $33,390  $(1,169) $130,116 
Cost of sales  -   51,320   14,993   (1,191)  65,122 
Gross profit  -   46,575   18,397   22   64,994 
Selling, general and administrative costs  4,169   18,213   7,856   -   30,238 
Research and development costs  -   10,686   6,495   -   17,181 
Amortization of acquired intangibles  -   13,383   2,222   -   15,605 
Loss on liquidation of foreign subsidiary  -   7,696   -   -   7,696 
Operating income (loss)  (4,169)  (3,403)  1,824   22   (5,726)
                     
Other income (expense):                    
Interest expense  (21,022)  (17)  -   -   (21,039)
Other income (expense), net  381   (106)  (218)  -   57 
Intercompany charges  19,794   (19,318)  (476)  -   - 
Income (loss) before income taxes  (5,016)  (22,844)  1,130   22   (26,708)
Provision (benefit) for income taxes  (4,436)  (2,690)  219   742   (6,165)
Equity income (loss) of subsidiaries  (19,963)  702   -   19,261   - 
Net income (loss) $(20,543) $(19,452) $911  $18,541  $(20,543)
- 19 - -
     Guarantor  Non-Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
                
Net sales $-  $112,157  $45,852  $(1,194) $156,815 
Cost of sales  -   58,298   26,554   (1,196)  83,656 
Gross profit  -   53,859   19,298   2   73,159 
Selling, general and administrative costs  6,586   18,345   9,243   -   34,174 
Research and development costs  -   11,275   5,800   -   17,075 
Amortization of acquired intangibles  -   12,563   2,059   -   14,622 
Operating income (loss)  (6,586)  11,676   2,196   2   7,288 
                     
Other income (expense):                    
Interest expense  (21,227)  (23)  -   -   (21,250)
Other income (expense), net  (725)  123   9,929   -   9,327 
Intercompany charges  14,726   (14,653)  (73)  -   - 
Income (loss) before income taxes  (13,812)  (2,877)  12,052   2   (4,635)
Provision (benefit) for income taxes  (4,387)  (218)  1,507   2,570   (528)
Equity income (loss) of subsidiaries  5,318   10,663   -   (15,981)  - 
Net income (loss) $(4,107) $8,004  $10,545  $(18,549) $(4,107)
Condensed Consolidating Balance Sheet
As of September 30, 2010
(In thousands)
                
     Guarantor  Non-Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
Assets               
Current assets:               
Cash and cash equivalents $29,289  $(2,109) $37,950  $-  $65,130 
Accounts receivable, net  -   75,810   53,496   -   129,306 
Inventories  -   103,767   40,039   (1,253)  142,553 
Deferred income taxes  3,827   23,114   (3)  -   26,938 
Prepaid expenses and other current assets  3,672   5,368   4,641   -   13,681 
Total current assets  36,788   205,950   136,123   (1,253)  377,608 
                     
Property, plant and equipment, net  12,417   69,483   21,498   -   103,398 
Non-current marketable securities, net  9,806   -   -   -   9,806 
Deferred financing costs, net  19,790   -   -   -   19,790 
Other assets  13,935   6,645   2,308   -   22,888 
Intangible assets with definite lives, net  -   199,874   30,428   -   230,302 
Intangible assets with indefinite lives  -   88,414   25,754   -   114,168 
Goodwill  (10)  415,200   44,304   -   459,494 
Total assets $92,726  $985,566  $260,415  $(1,253) $1,337,454 
                     
Liabilities and Stockholder's Equity                    
Current liabilities:                    
Current portion of long-term debt $-  $360  $-  $-  $360 
Accounts payable  4   18,817   19,030   -   37,851 
Advance payments by customers and deferred revenue
  -   17,910   12,308   -   30,218 
Income taxes payable  528   259   1,688   -   2,475 
Accrued payroll expenses  2,758   17,778   2,054   -   22,590 
Accrued expenses and other current liabilities  25,940   13,308   14,526   -   53,774 
Total current liabilities  29,230   68,432   49,606   -   147,268 
                     
Long-term debt  882,078   385   -   -   882,463 
Deferred income taxes  15,598   110,083   14,529   (9,428)  130,782 
Defined benefit plan obligations  5,684   -   -   -   5,684 
Other long-term liabilities  1,537   8,281   4,285   -   14,103 
Intercompany investment  (308,715)  79,354   229,361   -   - 
Intercompany receivable/payable  (839,214)  873,971   (34,273)  (484)  - 
Total liabilities  (213,802)  1,140,506   263,508   (9,912)  1,180,300 
                     
Stockholder's equity  306,528   (154,940)  (3,093)  8,659   157,154 
Total liabilities and stockholder's equity $92,726  $985,566  $260,415  $(1,253) $1,337,454 

- 20 - -

Condensed Consolidating Balance Sheet
As of June 30, 2010
(In thousands)
                
     Guarantor  Non-Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
Assets               
Current assets:               
Cash and cash equivalents $75,187  $(3,821) $29,297  $-  $100,663 
Accounts receivable, net  -   88,051   53,544   -   141,595 
Inventories  -   94,669   33,209   (1,310)  126,568 
Deferred income taxes  4,939   23,224   (145)  -   28,018 
Prepaid expenses and other current assets  3,046   2,840   5,097   -   10,983 
Total current assets  83,172   204,963   121,002   (1,310)  407,827 
                     
Property, plant and equipment, net  12,491   69,150   20,021   -   101,662 
Non-current marketable securities, net  9,769   -   -   -   9,769 
Deferred financing costs, net  20,983   -   -   -   20,983 
Other assets  13,634   6,385   1,799   -   21,818 
Intangible assets with definite lives, net  -   207,849   30,464   -   238,313 
Intangible assets with indefinite lives  -   85,404   24,490   -   109,894 
Goodwill  (10)  404,632   41,252   -   445,874 
Total assets $140,039  $978,383  $239,028  $(1,310) $1,356,140 
                     
Liabilities and Stockholder's Equity                    
Current liabilities:                    
Current portion of long-term debt $21,457  $360  $-  $-  $21,817 
Accounts payable  4   14,376   14,423   -   28,803 
Advanced payments by customers and deferred revenue
  -   19,091   11,650   -   30,741 
Income taxes payable  969   43   3,603   -   4,615 
Accrued payroll expenses  2,198   18,834   2,050   -   23,082 
Accrued expenses and other current liabilities  33,904   12,598   12,315   -   58,817 
Total current liabilities  58,532   65,302   44,041   -   167,875 
                     
Long-term debt  879,645   385   -   -   880,030 
Deferred income taxes  15,835   109,570   13,444   -   138,849 
Defined benefit plan obligations  5,763   -   -   -   5,763 
Other long-term liabilities  1,595   8,303   2,741   -   12,639 
Intercompany investment  (287,515)  60,154   227,361   -   - 
Intercompany receivable/payable  (842,950)  878,174   (34,740)  (484)  - 
Total liabilities  (169,095)  1,121,888   252,847   (484)  1,205,156 
                     
Stockholder's equity:  309,134   (143,505)  (13,819)  (826)  150,984 
Total liabilities and stockholder's equity $140,039  $978,383  $239,028  $(1,310) $1,356,140 
- 21 - -

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended September 30, 2010
(In thousands)
                
        Non-       
     Guarantor  Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
                
Cash flows from operating activities:               
Net income (loss) $(5,817) $(10,235) $1,124  $9,111  $(5,817)
Changes in operating assets and liabilities and non-cash items included in net income (loss)
  (18,514)  33,651   7,223   (9,111)  13,249 
Net cash provided by (used in) operating activities  (24,331)  23,416   8,347   -   7,432 
Cash flows from investing activities:                    
Payment for purchase of business, net of cash acquired  -   (19,185)  -   -   (19,185)
Capital expenditures  (109)  (2,746)  (1,853)  -   (4,708)
Other, net  -   227   211   -   438 
Net cash provided by (used in) investing activities  (109)  (21,704)  (1,642)  -   (23,455)
Cash flows from financing activities:                    
Debt repayments  (21,458)  -   -   -   (21,458)
Net cash provided by (used in) financing activities  (21,458)  -   -   -   (21,458)
Effect of exchange rate changes on cash and cash equivalents
  -   -   1,948   -   1,948 
Net increase (decrease) in cash and cash equivalents  (45,898)  1,712   8,653   -   (35,533)
Cash and cash equivalents at beginning of period  75,187   (3,821)  29,297   -   100,663 
Cash and cash equivalents at end of period $29,289  $(2,109) $37,950  $-  $65,130 
- 22 - -
 

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

     Guarantor  Non-Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
                
Net sales $-  $218,015  $81,359  $(2,519) $296,855 
Cost of sales  -   111,714   35,967   (2,414)  145,267 
Gross profit  -   106,301   45,392   (105)  151,588 
Selling, general and administrative costs  7,808   37,156   16,847   -   61,811 
Research and development costs  -   22,146   12,296   -   34,442 
Amortization of acquired intangibles  -   26,659   4,460   -   31,119 
Loss on liquidation of foreign subsidiary  -   7,696   -   -   7,696 
Operating income (loss)  (7,808)  12,644   11,789   (105)  16,520 
                     
Other income (expense):                    
Interest expense  (42,421)  (34)  (2)  -   (42,457)
Other income (expense), net  341   374   (236)  -   479 
Intercompany charges  39,591   (38,636)  (955)  -   - 
Income (loss) before income taxes  (10,297)  (25,652)  10,596   (105)  (25,458)
Provision (benefit) for income taxes  (4,799)  (492)  2,265   8,725   5,699 
Equity income (loss) of subsidiaries  (25,659)  7,634   -   18,025   - 
Net income (loss) $(31,157) $(17,526) $8,331  $9,195  $(31,157)

- 23 - -

Condensed Consolidating Statement of Operations
For the Six Months Ended December 31, 2008
(In thousands)

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

- 24 - -

Condensed Consolidating Balance Sheet
As of December 31, 2009
(In thousands)

     Guarantor  Non-Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
Assets
               
Current assets:               
Cash and cash equivalents $53,071  $(640) $16,368  $-  $68,799 
Accounts receivable, net  -   74,068   43,213   -   117,281 
Inventories  -   101,847   34,057   (1,003)  134,901 
Deferred income taxes  5,365   25,706   5,951   -   37,022 
Prepaid expenses and other current assets  2,742   5,285   3,536   -   11,563 
Total current assets  61,178   206,266   103,125   (1,003)  369,566 
                     
Property, plant and equipment, net  12,561   66,118   19,524   -   98,203 
Non-current marketable securities, net  16,899   -   -   -   16,899 
Deferred financing costs, net  23,369   -   -   -   23,369 
Other assets  13,256   4,417   338   -   18,011 
Intangible assets with definite lives, net  -   226,566   35,135   -   261,701 
Intangible assets with indefinite lives  -   85,404   26,490   -   111,894 
Goodwill  (10)  389,422   39,474   -   428,886 
Total assets $127,253  $978,193  $224,086  $(1,003) $1,328,529 
                     
Liabilities and Stockholder's Equity
                    
Current liabilities:                    
Current portion of long-term debt $3,863  $340  $-  $-  $4,203 
Accounts payable  32   13,877   13,229   -   27,138 
Advance payments by customers and deferred revenue
  -   17,110   15,380   -   32,490 
Income taxes payable  (591)  (98)  4,824   -   4,135 
Accrued payroll expenses  958   13,716   1,342   -   16,016 
Accrued expenses and other current liabilities  25,885   11,176   12,944   -   50,005 
Total current liabilities  30,147   56,121   47,719   -   133,987 
                     
Long-term debt  889,245   745   -   -   889,990 
Deferred income taxes  (13,219)  138,492   15,135   8,725   149,133 
Defined benefit plan obligations  5,988   -   -   -   5,988 
Other long-term liabilities  8,776   1,300   1,506   -   11,582 
Intercompany investment  (268,858)  46,154   222,704   -   - 
Intercompany receivable/payable  (847,317)  882,523   (34,723)  (483)  - 
Total liabilities  (195,238)  1,125,335   252,341   8,242   1,190,680 
                     
Stockholder's equity  322,491   (147,142)  (28,255)  (9,245)  137,849 
Total liabilities and stockholder's equity $127,253  $978,193  $224,086  $(1,003) $1,328,529 

- 25 - -

Condensed Consolidating Balance Sheet
As of June 30, 2009
(In thousands)

     Guarantor  Non-Guarantor       
  Parent  Subsidiaries  Subsidiaries  Eliminations  Consolidated 
Assets
               
Current assets:               
Cash and cash equivalents $31,221  $(15) $26,542  $-  $57,748 
Accounts receivable, net  -   86,530   43,899   -   130,429 
Inventories  -   103,674   32,827   (898)  135,603 
Deferred income taxes  3,452   25,681   6,031   -   35,164 
Prepaid expenses and other current assets  2,623   2,542   4,773   -   9,938 
Total current assets  37,296   218,412   114,072   (898)  368,882 
                     
Property, plant and equipment, net  12,720   67,624   20,563   -   100,907 
Non-current marketable securities, net  17,677   -   -   -   17,677 
Deferred financing costs, net  25,754   -   -   -   25,754 
Other assets  12,551   2,243   631   -   15,425 
Intangible assets with definite lives, net  -   253,225   39,328   -   292,553 
Intangible assets with indefinite lives  -   85,404   26,862   -   112,266 
Goodwill  (10)  388,913   39,230   -   428,133 
Total assets $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  $340  $-  $-  $5,590 
Accounts payable  285   20,553   15,736   -   36,574 
Advance payments by customers and deferred revenue
  -   17,433   15,985   -   33,418 
Income taxes payable  587   -   4,493   -   5,080 
Accrued payroll expenses  1,600   15,148   2,128   -   18,876 
Accrued expenses and other current liabilities  25,418   11,079   11,441   -   47,938 
Total current liabilities  33,140   64,553   49,783   -   147,476 
                     
Long-term debt  883,013   745   -   -   883,758 
Deferred income taxes  (11,453)  138,725   15,776   -   143,048 
Defined benefit plan obligations  6,079   -   -   -   6,079 
Other long-term liabilities  16,825   1,271   3,380   -   21,476 
Intercompany investment  (268,635)  41,022   227,613   -   - 
Intercompany receivable/payable  (880,752)  902,126   (20,891)  (483)  - 
Total liabilities  (221,783)  1,148,442   275,661   (483)  1,201,837 
                     
Stockholder's equity  327,771   (132,621)  (34,975)  (415)  159,760 
Total liabilities and stockholder's equity $105,988  $1,015,821  $240,686  $(898) $1,361,597 

- 26 - -

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

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

- 27 - -

Condensed Consolidating Statement of Cash Flows
For the Six Months Ended December 31, 2008
(In thousands)

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

- 28 - -

15.Subsequent Events

The Company evaluated all events or transactions that occurred after December 31, 2009 up through February 11,Registration Statement Filing

On November 5, 2010, our parent corporation, Aeroflex Holding Corp., filed an amended registration statement with the dateSEC relating to the proposed initial public offering of its common stock.  Aeroflex Holding Corp. is offering to sell 17,250,000 shares at a price per share between $13.50 and $15.50.

Debt Tender Offer

In connection with the initial public offering, a portion of the net proceeds will be used to make a capital contribution to the Company issued these consolidated financial statements.  Basedto enable us to, among other things, tender for a portion of our senior notes and offer to purchase a portion of our senior subordinated unsecured term loans.  On November 5, 2010 we commenced the tender offer, which is conditional upon, among other things, the closing of Aeroflex Holding Corp.’s initial public offering of its common stock.  We expect to purchase an aggregate of approximately $175 million of senior notes and term loans at a premium to face value, which is anticipated to result in a loss on that evaluation,partial extinguishment of debt and the write-off of the related deferred financing costs.

Amendment to Senior Secured Credit Agreement

On November 4, 2010, we have determined no material events or transactions occurred after December 31, 2009 up through February 11, 2010 that would affectentered into an agreement with the December 31, 2009 consolidated financial statements.lenders of our senior secured credit facility, for which we paid a $3.3 million fee, to amend our credit agreement to, among other things:

·increase the amount of cash we can spend for acquisitions of businesses from $20 million per year and a $100 million aggregate amount, to $200 million in the aggregate, from the effective date of the amendment to the credit facility maturity date, August 15, 2014, with no annual cap;
·permit us to pay, upon the completion of the Aeroflex Holding Corp. initial public offering, a $2.5 million transaction fee and a $16.9 million termination fee for the termination of the Advisory Agreement, in lieu of future advisory fees, and;
·set our interest rate margin, based on our current credit rating. Our current credit rating would increase our interest rate margin by 75 basis points for all tranches of debt within the secured credit facility.

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

Forward-Looking Statements

This Report contains "forward-looking statements." All statements other than statements of historical fact are forward-looking"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 general business, economic and political conditions domestically or internationally;

- 24 - -
our ability to make payments on our significant indebtedness;
our ability to remain competitive in the markets we serve;
our failure to comply with regulations such as ITAR and any changes in regulations;
our inability to continue to develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability;
our exposure to foreign currency exchange rate risks;
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;
 
• ·adverse developments in the global economy;
·our inability to make payments on our significant indebtedness;
·our dependence on growth in our customers' businesses;
·our inability to remain competitive in the markets we serve;
·our inability to continue to develop, manufacture and market innovative, customized products and services that meet customer requirements for performance and reliability;
·any failure of our suppliers to provide us with raw materials and/or properly functioning component parts;
·termination of our key contracts, including technology license agreements, or loss of our key customers;
·our inability to protect our intellectual property;
·our failure to comply with regulations such as ITAR and any changes in regulations;
·our exposure to auction rate securities and the impact this exposure has on our liquidity;
·our failure to realize anticipated benefits from completed acquisitions, divestitures or restructurings, or the possibility that such acquisitions, divestitures or restructurings could adversely affect us;
·the loss of key employees;
·our exposure to foreign currency exchange rate risks;
·terrorist acts or acts of war; and
·other risks and uncertainties, including those listed under the caption "Risk Factors" disclosed in our Fiscal 2010 Form 10-K.

otherGiven these risks and uncertainties, including those listed underyou 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 caption "Risk Factors" discloseddate hereof.  We undertake no obligation to update or revise any forward-looking statements, either to reflect new developments, or for any other reason, except as required by law.

Overview

We are a leading global provider of RF and microwave integrated circuits, components and systems used in the design, development and maintenance of technically demanding, high-performance wireless communication systems.  Our solutions include highly specialized microelectronic components and test and measurement equipment used by companies in the space, avionics, defense, commercial wireless communications, medical and other markets.  We have targeted customers in these end markets because we believe our Fiscal 2009 Form 10-K.
solutions address their technically demanding requirements.  We were founded in 1937 and have proprietary technology that is based on extensive know-how and a long history of research and development focused on specialized technologies, often in collaboration with our customers.

- 2925 - -
Overview

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

Results of Operations

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

  Three Months Ended September 30, 
  2010  2009 
       
Net sales  100.0%  100.0%
Costs of sales  49.1   50.0 
Gross profit  50.9   50.0 
         
Operating expenses:        
Selling, general and administrative costs  24.1   23.3 
Research and development costs  14.6   13.2 
Amortization of acquired intangibles  10.2   12.0 
Loss on liquidation of foreign subsidiary  -   5.9 
Total operating expenses  48.9   54.4 
         
Operating income (loss)  2.0   (4.4)
         
Interest expense  (13.6)  (16.1)
Other income (expense), net  -   - 
Income (loss) before income taxes  (11.6)  (20.5)
Provision (benefit) for income taxes  (7.9)  (4.7)
         
Net income (loss)  (3.7) %  (15.8)%
  Three Months  Three Months  Six Months  Six Months 
  Ended  Ended  Ended  Ended 
  December 31, 2009  December 31, 2008  December 31, 2009  December 31, 2008 
             
Net sales  100.0%  100.0%  100.0%  100.0%
Costs of sales  48.1   53.3   48.9   52.8 
Gross profit  51.9   46.7   51.1   47.2 
                 
Operating expenses:                
Selling, general and administrative costs  18.9   21.8   20.8   22.0 
Research and development costs  10.4   10.9   11.6   11.5 
Amortization of acquired intangibles  9.3   9.3   10.5   11.0 
Loss on liquidation of foreign subsidiary  -   -   2.6   - 
Total operating expenses  38.6   42.0   45.5   44.5 
                 
Operating income (loss)  13.3   4.7   5.6   2.7 
                 
Interest expense  (12.9)  (13.6)  (14.3)  (14.3)
Other income (expense), net  0.3   6.0   0.1   4.2 
Income (loss) before income taxes  0.7   (2.9)  (8.6)  (7.4)
Provision (benefit) for income taxes  7.1   (0.3)  1.9   (3.7)
                 
Net income (loss)  (6.4)%  (2.6)%  (10.5)%  (3.7)%

- 3026 - -

Statements of Operations

Management evaluates the operating results of the Company’sour two segments based upon adjusted operating income, which is pre-tax operating income before costs related to restructuring, amortization of acquired intangibles, share-based compensation, restructuring expenses, business acquisition and merger related expenses, loss on liquidation of foreign subsidiary merger related expenses and the impact of any acquisition related adjustments.
We have set out below our adjusted operating income by segment and in the aggregate, and have provided a reconciliation of adjusted operating income to operating income (loss) on a GAAP basis and income (loss) before income taxes for the periods presented.
  Three Months Ended September 30, 
  2010  2009 
  (In thousands) 
       
Net sales      
Microelectronic solutions ("AMS") $77,305  $67,361 
Test solutions ("ATS")  78,626   62,755 
Net sales $155,931  $130,116 
         
Segment adjusted operating income        
- AMS $18,887  $15,024 
- ATS  6,857   7,965 
General corporate expense  (2,414)  (2,931)
Adjusted operating income  23,330   20,058 
         
Amortization of acquired intangibles        
- AMS  (9,260)  (8,836)
- ATS  (6,703)  (6,769)
Business acquisition costs        
- Corporate  (190)  - 
Share-based compensation        
- Corporate  (513)  (489)
Restructuring charges        
- AMS  (576)  - 
- ATS  (1,223)  (187)
Merger related expenses - Corporate  (715)  (693)
Loss on liquidation of foreign subsidiary - ATS  -   (7,696)
Current period impact of acquisition related adjustments:
        
Inventory - AMS  (183)  (246)
Inventory - ATS  (447)  - 
Depreciation - AMS  (117)  (275)
Depreciation - ATS  (120)  (506)
Depreciation - Corporate  (55)  (55)
Deferred revenue - ATS  (25)  (32)
Operating income (loss) (GAAP)  3,203   (5,726)
         
Interest expense  (21,238)  (21,039)
Other income (expense), net  (29)  57 
Income (loss) before income taxes $(18,064) $(26,708)
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  Three Months  Three Months  Six Months  Six Months 
  Ended  Ended  Ended  Ended 
  December 31,  December 31,  December 31,  December 31, 
  2009  2008  2009  2008 
  (In thousands) 
             
Net sales:            
Microelectronic solutions ("AMS") $79,160  $70,752  $146,521  $138,332 
Test solutions ("ATS")  87,579   86,063   150,334   159,328 
Net sales $166,739  $156,815  $296,855  $297,660 
                 
Segment adjusted operating income:                
- AMS $21,887  $15,371  $36,911  $29,984 
- ATS  20,186   15,974   28,151   25,604 
- General corporate expense  (2,258)  (3,870)  (5,189)  (6,567)
Adjusted operating income  39,815   27,475   59,873   49,021 
                 
Amortization of acquired intangibles                
- AMS  (8,743)  (8,462)  (17,579)  (19,139)
- ATS  (6,771)  (6,160)  (13,540)  (13,451)
Share based compensation                
- Corporate  (556)  (489)  (1,045)  (977)
Restructuring charges                
- ATS  (64)  (1,808)  (251)  (2,210)
Merger related expenses - Corporate  (771)  (2,172)  (1,464)  (2,806)
Loss on liquidation of foreign                
subsidiary - ATS  -   -   (7,696)  - 
Current period impact of acquisition                
related adjustments:                
Inventory - AMS  -   -   (246)  - 
Depreciation - AMS  (265)  (286)  (540)  (572)
Depreciation - ATS  (311)  (676)  (817)  (1,414)
Depreciation - Corporate  (55)  (55)  (110)  (110)
Deferred revenue - ATS  (33)  (79)  (65)  (176)
Operating income (GAAP)  22,246   7,288   16,520   8,166 
                 
Interest expense  (21,418)  (21,250)  (42,457)  (42,465)
Other income (expense), net  422   9,327   479   12,413 
Income (loss) before income taxes $1,250  $(4,635) $(25,458) $(21,886)

Three Months Ended December 31, 2009September 30, 2010 Compared to Three Months Ended December 31, 2008September 30, 2009

Net Sales.  Net sales increased 6%$25.8 million, or 20%, to $166.7$155.9 million for the three months ended December 31, 2009September 30, 2010 from $156.8$130.1 million for the three months ended December 31, 2008.September 30, 2009.  Businesses acquired since September 30, 2009 contributed $6.9 million to sales, or 5% in the current quarter.

Net sales in the microelectronic solutions (“AMS”)AMS segment increased 12%15% to $79.2$77.3 million for the three months ended December 31, 2009September 30, 2010 from $70.8$67.4 million for the three months ended December 31, 2008.  Increases in sales volumes of integrated circuits ($4.0 million) and microelectronic modules ($3.8 million),  combined with sales of $2.7September 30, 2009.  Specific variances include a volume driven $5.9 million from Airflyte Electronics, acquired in June 2009, were offset by the reduction of $2.0 millionincrease in sales of components, due to decreasedincluding $1.5 million from ACC, acquired in August 2010, a volume driven $4.1 million increase in sales volumesof integrated circuits; and price concessions createdadditional sales of $1.3 million from Radiation Assured Devices, Inc., or RAD, acquired in June 2010.  The increases in sales were partially offset by industry competition.volume driven reductions of $913,000 in sales of motion control products and $399,000 in sales of microelectronics modules.
 
Net sales in the test solutions (“ATS”)ATS segment increased 2%25% to $87.6$78.6 million for the three months ended December 31, 2009September 30, 2010 from $86.1$62.8 million for the three months ended December 31, 2008.  TheSeptember 30, 2009.  Specific variances include a volume driven $7.9 million increase was primarily due to additionalin sales of wireless products of $7.4test products; a volume driven $3.2 million combined withincrease in sales from avionic products; and a volume driven $3.0 million increase in sales of $3.8radio test sets. In addition, there were additional wireless test products sales of $4.0 million from VI Technology,Willtek Communications, or Willtek, acquired in March 2009, and was largelyMay 2010.  The increases in net sales were partially offset by a volume driven reduction of $2.2 million in sales of PXI and othergeneral purpose test equipment products.
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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 51.9%$79.4 million, or 50.9% of net sales, for the three months ended December 31, 2009September 30, 2010 and 46.7%$65.0 million, or 50.0% of net sales, for the three months ended December 31, 2008.  Gross margin was adversely affected by purchase accounting adjustments aggregating $402,000 in 2009 and $572,000 in 2008.September 30, 2009.

 Gross Profit  Gross Profit 
Three Months                                    
Ended    % of     % of     % of     % of     % of     % of 
December 31, AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
September 30, AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
 (In thousands, except percentages)  (In thousands, except percentages) 
                                    
2009 $39,202   49.5% $47,392   54.1% $86,594   51.9% $30,999   46.0% $33,995   54.2% $64,994   50.0%
2008 $33,076   46.7% $40,083   46.6% $73,159   46.7%
2010 $38,321   49.6% $41,096   52.3% $79,417   50.9%

Gross margins in the AMS segment were 49.5% in 200949.6% for the three months ended September 30, 2010 and 46.7% in 2008.46.0% for the three months ended September 30, 2009.  The increase in gross margins is principally attributable to (i) favorable product mix and volume efficiencies in components; and (ii) favorable product mix and increased sales of integrated circuits, and microelectronics modulescombined with the additional sales of RAD services, acquired in June 2010 (which have margins higher than the segment average) and decreased sales of components and motion control products (which have margins lower than the segment average).

Gross margins in the ATS segment were 54.1% in 200952.3% for the three months ended September 30, 2010 and 46.6% in 2008.54.2% for the three months ended September 30, 2009.  The increasedecrease in gross margins iswas principally attributable to increasedwireless product sales, ofwhich included more hardware products than software products as compared to the prior year.  While wireless testhardware products which have higher gross margins higher than the segment average.average, they are not as high as the gross margins of wireless software products. Despite the reduction in margins, gross profit increased $7.1 million for the three months ended September 30, 2010 as compared to the three months ended September 30, 2009 due to increased sales.

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

On a consolidated basis SG&A costs decreased $2.6 million.increased $7.3 million, or 24%, to $37.5 million for the three months ended September 30, 2010.  As a percentage of sales, SG&A costs decreased 290 basis pointsincreased from 23.2% to 24.1% from the three months ended December 31, 2008September 30, 2009 to the three months ended December 31, 2009.September 30, 2010.   The SG&A of the acquired businesses increased SG&A by $2.0 million.

 Selling, General and Administrative Costs  Selling, General and Administrative Costs 
Three Months                                          
Ended    % of     % of        % of     % of     % of        % of 
December 31, AMS  Net Sales  ATS  Net Sales  Corporate  Total  Net Sales 
September 30, AMS  Net Sales  ATS  Net Sales  Corporate  Total  Net Sales 
 (In thousands, except percentages)  (In thousands, except percentages)             
                                          
2009 $10,595   13.4% $17,338   19.8% $3,640  $31,573   18.9% $9,988   14.8% $16,082   25.6% $4,168  $30,238   23.3%
2008 $10,723   15.2% $16,865   19.6% $6,586  $34,174   21.8%
2010 $12,562   16.2% $21,060   26.8% $3,887  $37,509   24.1%

In the AMS segment, SG&A costs decreased $128,000increased $2.6 million, or 1%.  As26%, to $12.6 million for the three months ended September 30, 2010. This increase is primarily due to additional costs of $859,000 related to RAD, acquired in June 2010, and ACC, acquired in August 2010; general increases in our existing businesses, primarily due to increased employee related expenses of $714,000 and commissions of $271,000; and increased restructuring costs of $178,000.  SG&A costs in the AMS segment increased from 14.8% to 16.2%, as a percentage of sales, SG&A costs decreased 180 basis points for AMS. The components product group reduced SG&A costs by $799,000, as comparedfrom the three months ended September 30, 2009 to the prior year, primarily due to cost savings initiatives.  These savings, in the AMS segment, are partially offset by additional costs of $408,000 related to Airflyte Electronics, acquired in June 2009.three months ended September 30, 2010.

In the ATS segment, SG&A costs increased $473,000$5.0 million, or 3%.31%, to $21.1 million for the three months ended September 30, 2010, primarily due to increased commissions of $2.2 million, due to the increase in sales volume and a change in product mix; increased employee related expenses of $1.2 million; additional costs of $1.1 million related to Willtek, acquired in May 2010; and a net increase in restructuring costs of $520,000.  As a percentage of sales, SG&A costs in the ATS segment increased 20 basis points for ATS.  The increase primarily relatesfrom 25.6% to additional costs of $684,000 related26.8% from the three months ended September 30, 2009 to VI Technology, acquired in March 2009.the three months ended September 30, 2010.
- 32 - -

Corporate general and administrative expensescosts decreased $2.9 million, primarily due to reductions in merger related expenses ($1.4 million) and various other expenses including professional fees and employee related expenses.$282,000.

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

On a consolidated basis, research and development costs decreased 50 basis points as a percentage of sales.

  Research and Development Costs 
Three Months                  
Ended    % of     % of     % of 
December 31, AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
  (In thousands, except percentages) 
                   
2009 $6,986   8.8% $10,275   11.7% $17,261   10.4%
2008 $7,268   10.3% $9,807   11.4% $17,075   10.9%

AMS segment self-funded research and development costs decreased $282,000,increased by $5.6 million, or 4%32%, primarily due to lower spending on components.  As a percentage of sales, research and development costs decreased 150 basis points.

ATS segment self-funded research and development costs increased $468,000, or 5%, primarily due to efforts aimed at enhancing existing next generation radio test products.$22.7 million for the three months ended September 30, 2010. As a percentage of sales, research and development costs increased from 13.2% to 14.6% from the three months ended September 30, basis points.2009 to the three months ended September 30, 2010.

  Research and Development Costs 
Three Months                  
Ended    % of     % of     % of 
September 30, AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
  (In thousands, except percentages)          
                   
2009 $6,508   9.7% $10,673   17.0% $17,181   13.2%
2010 $7,747   10.0% $14,995   19.1% $22,742   14.6%

AMS segment self-funded research and development costs increased $1.2 million, or 19%, to $7.7 million for the three months ended September 30, 2010 primarily due to the increased efforts in the development of next generation component products and additional spending on projects within integrated circuits.  As a percentage of sales, AMS segment research and development costs increased from 9.7% for the three months ended September 30, 2009 to 10.0% for the three months ended September 30, 2010.
- 29 - -
ATS segment self-funded research and development costs increased $4.3 million, or 40%, to $15.0 million for the three months ended September 30, 2010 primarily due to increases in our radio test and avionics divisions, for the development of a common platform technology, and additional costs of $871,000 related to Willtek, acquired in May 2010.

Restructuring Costs.  The AMS segment incurred total restructuring costs of $576,000 ($398,000 in cost of sales and $178,000 in SG&A), for the three months ended September 30, 2010 which primarily relate to consolidation and reorganization efforts in one of our components facilities in connection with the ACC acquisition.  There were no comparable charges for the three months ended September 30, 2009.

The ATS segment incurred restructuring costs of $1.2 million for the three months ended September 30, 2010 ($10,000 in cost of sales, $628,000 in SG&A and $585,000 in R&D).  In comparison, for the three months ended September 30, 2009, the ATS segment incurred restructuring costs of $187,000 ($79,000 in cost of sales and $108,000 in SG&A). In both periods, the costs related to consolidation and reorganization efforts in our U.K. operations.

Amortization of Acquired Intangibles.  Amortization of acquired intangibles increased $892,000 in$358,000 for the three months ended December 31, 2009 primarily due to increases for recently acquired businesses.  By segment, amortization increased $281,000 in the AMS segmentSeptember 30, 2010 primarily due to additional amortization of $290,000 for Airflyte Electronics, acquiredrelated to various acquisitions; Willtek, in May 2010; RAD, in June 2009.  Amortization2010; and ACC, in August 2010.  The increases in amortization were partially offset by certain intangibles becoming fully amortized during fiscal 2010.  By segment, the amortization increased $611,000$424,000 in the AMS segment and decreased $66,000 in the ATS segment, primarily due to additional amortizationsegment.

Loss on Liquidation of $594,000Foreign Subsidiary. During the three months ended September 30, 2009, we recognized a $7.7 million non-cash loss on liquidation of a foreign subsidiary.  There was no similar charge recorded for VI Technology, acquired in March 2009.the three months ended September 30, 2010.

Other Income (Expense).  Interest expense was $21.4$21.2 million in 2009 and $21.3 million in 2008. Other income (expense) of $422,000 for the three months ended December 31,September 30, 2010 and $21.0 million for the three months ended September 30, 2009. Other income (expense) of ($29,000) for the three months ended September 30, 2010 consisted primarily of ($202,000) of foreign currency transaction losses, offset by $173,000 of interest and miscellaneous income.  Other income (expense) of $57,000 for the three months ended September 30, 2009 consisted primarily of $768,000$296,000 of interest and miscellaneous income, offset by $346,000($239,000) of foreign currency transaction losses.  Other income (expense) of $9.3 million for the three months ended December 31, 2008 consisted primarily of $8.8 million of foreign currency transaction gains and $506,000 of interest and miscellaneous income.

Provision for Income Taxes.   The income tax provisionbenefit was $11.9$12.2 million for the three months ended December 31, 2009 on pre-taxSeptember 30, 2010, an effective income tax rate of $1.3 million.67.8%.  We had an income tax benefit for the three months ended December 31, 2008September 30, 2009 of $528,000,$6.2 million, an effective income tax rate of 11.4%23.1%. The effective income tax rate for both periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes.  The combinationtaxes, including U.S. income tax on certain foreign net income, since we anticipate that we will be repatriating these earnings to the U.S.  During the three months ended September 30, 2010, we identified an overstatement of deferred income tax liabilities established in the fourth quarter of fiscal 2009 and throughout fiscal 2010 related to U.S. tax benefits on domestic losses and foreign and domesticincome taxes provided on foreign earnings (assource income. After consideration of both quantitative and qualitative factors, we expect that substantially all these earnings will be distributeddetermined the amounts were not material to any of those prior period financial statements or the U.S.) distortsfiscal 2011 estimated results and thus corrected the balance in the three months ended September 30, 2010.  Accordingly, the consolidated balance sheet at September 30, 2010 presented in this Form 10-Q has been adjusted to reduce deferred income tax liabilities by $3.7 million, with a corresponding increase in income tax benefit in the statement of operations for the three months ended September 30, 2010.  The adjustment did not impact the statement of cash flows.  The tax benefit of $6.2 million for the three months ended September 30, 2009 was also affected by the unfavorable impact of a $7.7 million nondeductible loss on the liquidation of a foreign subsidiary, and the favorable impact of a $10.3 million loss for tax purposes on the write off of our investment in a foreign subsidiary in fiscal 2009.  For financial statement purposes, the loss had been recognized in the prior periods, however, for tax purposes the loss was recognized at the time of divesture, effective tax rate.September 2009.

- 30 - -
In the three months ended December 31, 2009,September 30, 2010, we paid income taxes of $1.5$3.7 million and received tax refunds of $29,000$20,000 related to federal, state and foreign income taxes.  In the three months ended December 31, 2008,September 30, 2009, we paid income taxes of $372,000.$3.1 million and received refunds of $603,000.

Net income (loss).  The net loss was $10.6$5.8 million for the three months ended December 31, 2009September 30, 2010 and $4.1$20.5 million for the three months ended December 31, 2008.

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Six Months Ended December 31, 2009 Compared to Six Months Ended December 31, 2008

Net Sales.  Net sales were $296.9 million for the six months ended December 31, 2009 and $297.7 million for the six months ended December 31, 2008.

Net sales in the AMS segment increased 6% to $146.5 million for the six months ended December 31, 2009 from $138.3 million for the six months ended December 31, 2008.  Increases in sales volumes of $6.4 million of integrated circuits and $6.0 million of microelectronic modules, combined with sales of $5.3 million from Airflyte Electronics, acquired in June 2009, were partially offset by a reduction of $7.1 million in sales of components, due to decreased sales volumes and price concessions created by industry competition, and a $2.6 million reduction in motion control products.

Net sales in the ATS segment decreased 6% to $150.3 million for the six months ended December 31, 2009 from $159.3 million for the six months ended December 31, 2008.  Increases in wireless test products, synthetic test products and additional sales of $7.3 million from VI Technology, acquired in March 2009, were more than offset by the decrease in sales volumes of PXI and other test equipment products.

Gross Profit.  On a consolidated basis, gross margin was 51.1% for the six months ended December 31, 2009 and 47.2% for the six months ended December 31, 2008.

  Gross Profit 
Six Months                  
Ended    % of     % of     % of 
December 31, AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
  (In thousands, except percentages) 
                   
2009 $70,201   47.9% $81,387   54.1% $151,588   51.1%
2008 $65,096   47.1% $75,422   47.3% $140,518   47.2%

Gross margins in the AMS segment were 47.9% in 2009 and 47.1% in 2008.  Margins were favorably impacted by increased sales of microelectronic modules and integrated circuits (which have margins higher than the segment average), offset by unfavorable product mix and sale price reductions for certain products in components.

Gross margins in the ATS segment were 54.1% in 2009 and 47.3% in 2008.  The increase in gross margins is principally attributable to increased sales of wireless products, which have margins higher than the segment average.

Selling, General and Administrative Costs.  On a consolidated basis SG&A costs decreased $3.8 million.  As a percentage of sales, SG&A costs decreased 120 basis points from the six months ended December 31, 2008 to the six months ended December 31,September 30, 2009.

  Selling, General and Administrative Costs 
Six Months                     
Ended    % of     % of        % of 
December 31, AMS  Net Sales  ATS  Net Sales  Corporate  Total  Net Sales 
  (In thousands, except percentages) 
                      
2009 $20,583   14.0% $33,420   22.2% $7,808  $61,811   20.8%
2008 $21,085   15.2% $34,114   21.4% $10,459  $65,658   22.0%

In the AMS segment, SG&A costs decreased $502,000, or 2%.  As a percentage of sales, SG&A costs decreased 120 basis points for AMS.  The components group reduced SG&A costs by $1.6 million, primarily due to cost savings initiatives.  These savings, in the AMS segment, are partially offset by additional costs of $779,000 related to Airflyte Electronics, acquired in June 2009.

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In the ATS segment, SG&A costs decreased $694,000, or 2%.  This was primarily the result of a decrease of $1.7 million due to cost savings initiatives and efforts to consolidate and reorganize our various European locations, partially offset by additional costs of $1.4 million related to VI Technology, acquired in March 2009.  As a percentage of sales, SG&A costs increased 80 basis points for ATS.

Corporate general and administrative expenses decreased $2.7 million, primarily due to reductions in merger related expenses and other professional fees.

Research and Development Costs.  On a consolidated basis, research and development costs increased 10 basis points as a percentage of sales.
    
  Research and Development Costs 
Six Months                  
Ended    % of     % of     % of 
December 31, AMS  Net Sales  ATS  Net Sales  Total  Net Sales 
  (In thousands, except percentages) 
                   
2009 $13,493   9.2% $20,949   13.9% $34,442   11.6%
2008 $14,599   10.6% $19,505   12.2% $34,104   11.5%

AMS segment self-funded research and development costs decreased $1.1 million, or 8%, primarily due to lower spending on microelectronic modules and components.  As a percentage of sales, research and development costs decreased 140 basis points.

ATS segment self-funded research and development costs increased $1.4 million, or 7%, primarily due to the development of products within our radio and avionics test division and PXI-related products in wireless.  As a percentage of sales, research and development costs increased 170 basis points.

Amortization of Acquired Intangibles.  Amortization of acquired intangibles decreased $1.5 million in the six months ended December 31, 2009 primarily due to certain intangibles becoming fully amortized during the first quarter of fiscal 2009. The decrease is offset by additional amortization related to VI Technology, acquired in March 2009, of $1.2 million and Airflyte, acquired in June 2009, of $581,000. By segment, the amortization decreased $1.6 million in the AMS segment and increased $89,000 in the ATS segment.

Loss on Liquidation of Foreign Subsidiary. During the six months ended December 31, 2009, we recognized a $7.7 million non-cash loss on liquidation of a foreign subsidiary.  There was no similar charge recorded in the six months ended December 31, 2008.

Other Income (Expense).  Interest expense was $42.5 million in both 2009 and 2008. Other income (expense) was $479,000 for the six months ended December 31, 2009 consisting primarily of $1.1 million of interest and miscellaneous income, offset by $584,000 of foreign currency transaction losses.  Other income (expense) of $12.4 million for the six months ended December 31, 2008 consisted primarily of $11.2 million of foreign currency transaction gains and $1.2 million of interest and miscellaneous income.

Provision for Income Taxes.   The income tax provision was $5.7 million for the six months ended December 31, 2009, on pre-tax loss of $25.5 million.  We had an income tax benefit for the six months ended December 31, 2008 of $10.9 million, an effective income tax rate of 49.7%. The effective income tax rate for both periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes.  The provisions are a combination of U.S. tax benefits on domestic losses and foreign and domestic taxes provided on foreign earnings as we expect that substantially all these earnings will be distributed to the U.S. The projected provision of U.S. taxes on foreign source income for fiscal 2010 in relation to the fiscal 2010 pre-tax projected amounts resulted in a negative effective tax rate for fiscal 2010, which when applied to the pre-tax loss for the six months ended December 31, 2009, resulted in a tax expense of $5.7 million.

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In the six months ended December 31, 2009, we paid income taxes of $4.5 million and received tax refunds of $631,000 related to federal, state and foreign income taxes.  In the six months ended December 31, 2008, we paid income taxes of $2.4 million.

Net income (loss).  The net loss was $31.2 million for the six months ended December 31, 2009 and $11.0 million for the six months ended December 31, 2008.

Liquidity and Capital Resources

As of December 31, 2009,September 30, 2010, we had $68.8$65.1 million of cash and cash equivalents, $235.6230.3 million in working capital and our current ratio was 2.8 to 1.  As of June 30, 2009, we had $57.7 million of cash and cash equivalents, $221.4 million in working capital and our current ratio was 2.52.56 to 1.

At December 31, 2009,In early February 2008, when auctions for auction rate securities began to fail, our gross investment in marketable securities consisted of $18.9$46.5 million of auction rate 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 every seven to thirty-five days, and are classified as available for sale securities. From early February 2008 to September 2010, $35.4 million of our auction rate securities were redeemed by the issuers of the auction rate securities at an average of 99.1% of par. The $11.1 million of auction rate securities that we currently hold are partially offset by a valuation allowance of $1.3 million.
All but one (with the one security having a carrying value of $1.7 million and 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.

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.

In July 2009, $1.0 million of our auction rate securities were redeemed by the issuer at par.  In January 2010, an additional $4.0 million of our auction rate securities were redeemed by the issuer at 92% of par.  The resulting $320,000 realized loss will be recorded in the statement of operations in the third quarter of fiscal 2010.  Since February 2008, when auctions began to fail, through February 2010, $31.5 million of auction rate securities were redeemed at par, except for the January 2010 redemption discussed above. 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, we believe we will recover the full remaining principal amount in the future. However, at December 31, 2009, we concluded that the fair value of our auction rate securities was $16.9 million, which reflects a $2.0 million valuation allowance.

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

Our principal liquidity requirements are to service our debt and interest and meet our working capital and capital expenditure needs. As of December 31, 2009,September 30, 2010, we had $894.2$882.8 million of debt outstanding (of which $890.0$882.5 million was long-term), including approximately $511.8$489.1 million under our senior secured credit facility, $225.0 million of senior unsecured notes and $156.3$168.0 million under our senior subordinated unsecured credit facility, including paid-in-kind interest. Additionally, at December 31, 2009September 30, 2010 we were able to borrow an additional $50.0 million under the revolving portion of our senior secured credit facility.

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The following is a summary of required principal repayments of our debt for the next five years and thereafter as of December 31, 2009:
September 30, 2010:
Twelve Months Ended
September 30,
 (In thousands) 
2011 $360 
2012  385 
2013  - 
2014  489,105 
2015  392,973 
Thereafter  - 
Total $882,823 
 
As of December 31, 2009,September 30, 2010, we areand our subsidiaries were in compliance with all of the covenants contained in our loan agreements. Certain loan covenants are based on Adjusted EBITDA. Adjusted EBITDA is defined as EBITDA (net income (loss), before interest expense, income taxes, depreciation and amortization), adjusted to add back certain non-cash, non-recurring and other items, as required by various covenants in our debt agreements.  Our use of the term Adjusted EBITDA may vary from others in our industry.  EBITDA and Adjusted EBITDA are not measures of operating income (loss), performance or liquidity under U.S. GAAP and are subject to important limitations.  A reconciliation of net income (loss), which is a U.S. GAAP measure of our operating results, to Adjusted EBITDA, as defined in our debt agreements, is as follows:

  Three Months Ended September 30, 
  2010  2009 
  (In thousands) 
       
Net income (loss) $(5,817) $(20,543)
Interest expense  21,238   21,039 
Provision (benefit) for income taxes  (12,247)  (6,165)
Depreciation and amortization  20,886   21,246 
EBITDA  24,060   15,577 
         
Non-cash purchase accounting adjustments  655   278 
Merger related expenses  715   693 
Restructuring costs (a)
  1,799   187 
Share-based compensation (b)
  513   489 
Business acquisition expenses  190   - 
Non-cash loss on liquidation of foreign subsidiary  -   7,696 
Other defined items (c)
  479   (374)
Adjusted EBITDA $28,411  $24,546 
  Three Months ended December 31,  Six Months Ended December 31, 
  2009  2008  2009  2008 
  (In thousands) 
             
Net income (loss) $(10,614) $(4,107) $(31,157) $(11,004)
Interest expense  21,418   21,250   42,457   42,465 
Provision (benefit) for income taxes  11,864   (528)  5,699   (10,882)
Depreciation and amortization  20,528   20,154   41,774   43,651 
EBITDA  43,196   36,769   58,773   64,230 
                 
Non-cash purchase accounting adjustments  33   79   311   176 
Merger related expenses  771   2,172   1,464   2,806 
Restructuring costs (a)
  64   1,808   251   2,210 
Share based compensation (b)
  556   489   1,045   977 
Non-cash loss on liquidation of foreign subsidiary  -   -   7,696   - 
Other defined items (c)
  32   5,278   (342)  6,975 
Adjusted EBITDA $44,652  $46,595  $69,198  $77,374 

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

(c)Reflects other adjustments required in calculating our debt covenant compliance such ascompliance. These other defined items include pro forma Adjusted EBITDA for periods prior to the acquisition date,dates for companies acquired during the year and other non-cash charges.periods presented.

Financial covenants in theour senior secured credit facility include (i) a maximum leverage ratio of total debt (less up to $15$15.0 million of unrestricted cash) to Adjusted EBITDA, as defined in the agreement,our senior secured credit facility, and (ii) maximum consolidated capital expenditures. The maximum leverage ratio permitted for the twelve months ended December 31, 2009 and 2008September 30, 2010 was 7.30 and 8.20, respectively,5.90, whereas our actual leverage ratio was 6.41 and 5.75, respectively.  For fiscal 2010 and 2011 the5.14. The maximum leverage ratio permittedremains at 5.90 until September 30, 2011, when it decreases to 6.805.20.

Our senior secured credit facility, our senior subordinated unsecured credit facility and 5.90, respectively.the indenture governing the senior notes contain restrictions on our activities, including but not limited to covenants that restrict us and our restricted subsidiaries, as defined in our senior subordinated unsecured credit facility, from:
·incurring additional indebtedness and issuing disqualified stock or preferred stock;

·making certain investments or other restricted payments;

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

·selling or otherwise disposing of our assets;

·under certain circumstances, issuing or selling equity interests;
·creating liens on our assets;

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

·entering into certain transactions with our affiliates.
If for any reason we fail to comply with the covenants in our senior secured credit facility, we would be in default under the terms of our agreements governing our outstanding debt. If such 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 amounts 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 thatthose future borrowings will be available to us under our senior secured credit facility in an amount sufficient to enable us to repay our indebtedness or to fund other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before the maturity thereof. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Cash Flows

For the sixthree months ended December 31,September 30, 2010, our cash flow provided by operations was $7.4 million.  Our investing activities used cash of $23.5 million, primarily for payments for the purchase of business of $19.2 million and for capital expenditures of $4.7 million. Our financing activities used cash of $21.5 million to repay indebtedness.

For the three months ended September 30, 2009, our cash flow provided by operations was $22.1$13.2 million. Our investing activities used cash of $6.6$2.5 million, primarily for capital expenditures of $8.4$3.2 million, partially offset by proceeds from the sale of marketable securities ($1.0 million) combined with the sale of property, plant and equipment ($845,000).$1.0 million.  Our financing activities used cash of $4.0$1.3 million to repay indebtedness.

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

Capital Expenditures

Capital expenditures were $8.4$4.7 million and $3.2 million for both the sixthree months ended December 31,September 30, 2010 and 2009, and 2008.respectively.  Our capital expenditures primarily consist of equipment replacements.

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Contractual Obligations

The following table summarizes our obligations and commitments to make future payments under debt and other obligations as of December 31, 2009:September 30, 2010:
Payments Due By Period (1)
 
  (In millions) 
              Beyond 
  Total  Year 1  Years 2 - 3  Years 4 - 5  5 Years 
                
Senior secured credit facility $489.1  $-  $-  $489.1  $- 
Senior notes  225.0   -   -   225.0   - 
Subordinated unsecured credit facility  168.0   -   -   168.0   - 
Other long-term debt  0.8   0.4   0.4   -   - 
Operating leases (2)
  23.0   7.3   9.1   3.2   3.4 
Employment agreements  8.4   5.1   3.2   0.1   - 
Advisory fee (3)
  5.8   2.9   2.9   -   - 
Contingent consideration for acquired companies(4)
  28.1   5.6   9.8   7.3   5.4 
Total $948.2  $21.3  $25.4  $892.7  $8.8 

Payments Due By Period (1)
 
  (In millions) 
              Beyond 
  Total  Year 1  Years 2 - 3  Years 4 - 5  5 Years 
Senior secured credit facility $511.8  $3.9  $10.5  $497.4  $- 
Senior unsecured notes  225.0   -   -   -   225.0 
Subordinated unsecured credit facility  156.3   -   -   -   156.3 
Other long-term debt  1.1   0.3   0.8   -   - 
Operating leases (2)
  20.6   6.8   8.5   3.2   2.1 
Employment agreements  8.1   4.3   3.5   0.3   - 
Advisory fee (3)
  7.4   2.2   4.4   0.8   - 
Total $930.3  $17.5  $27.7  $501.7  $383.4 

(1)Amounts do not include interest payments.

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

(3)The annual advisory fee is payable to our Sponsors - The Veritas Capital Fund III, L.P., Golden Gate Private Equity, Inc. and GS Direct, L.L.C. - throughout the term of an advisory agreement, which has an initial term expiring on December 31, 2013 and is automatically renewable for additional one year terms thereafter unless terminated. For purposes of this table we have assumed that such agreement terminates December 31, 2013. The annual fee will beis calculated as the greater of $2.2$2.1 million or 1.8% of Adjustedadjusted EBITDA (as defined in the agreement governing our senior secured credit facility) for the prior fiscal year.  See Note 15 – “Subsequent Events – Amendment to Senior Secured Credit Agreement,” for a discussion of a potential termination of this agreement.

(4)Represents contingent consideration for business acquisitions based upon the achievement of certain financial targets for the following amounts: (i) $4.6 million on October 31, 2010 earned in connection with our acquisition of Gaisler Research AB, or Gaisler, and (ii) $1.0 million on October 31, 2010 earned in connection with our acquisition of Airflyte Electronics Company. We may also be required to pay additional contingent consideration for business acquisitions up to the following amounts: (i) $6.0 million on October 31, 2011 in connection with our acquisition of Gaisler; (ii) an aggregate of $1.8 million over the four year period of fiscal 2011 to fiscal 2014 in connection with our acquisition of Hi-Rel Components; and (iii) in connection with our acquisition of RAD, 50% of adjusted EBITDA, as defined in the agreement.purchase agreement, generated by its business over the five year period of fiscal 2011 to fiscal 2015.

   
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In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. None of these obligations are individually significant. We do not expect that these commitments, as of December 31, 2009,September 30, 2010, will have a material adverse affect on our liquidity.

Off-Balance Sheet Arrangements

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

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

Critical Accounting Policies and Estimates

This discussion and analysis of the Company’s financial condition and results of operations is based upon the unaudited condensed consolidated financial statements included in this Quarterly Report, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)GAAP and applicable SEC regulations for preparation of interim financial statements.

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

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

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We believe that the critical accounting policies involving significant estimates listed below are important to the portrayal of our financial condition, results of operations and cash flows, and require critical management judgments and estimates about matters that are inherently uncertain.
·Cash and Cash Equivalents
·Marketable Securities
·Inventories

 ·Financial Instruments and Derivatives

 ·Revenue Recognition

 ·Acquisition Accounting

 ·Long-Lived Assets
·Research and Development Costs

 ·Income Taxes
·Share Based Compensation

 ·Foreign Currency Translations

Further information regarding these policies appears within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009.2010.  During the sixthree month period ended December 31, 2009,September 30, 2010, there were no significant changes to any critical accounting policies or to the related estimates and judgments involved in applying those policies, except that effective July 1, 2009 we adopted new authoritative revenue recognition principles, the effect of which was immaterial.  This is further discussed in Note 1 to the unaudited financial statements contained elsewhere in this Form 10-Q.policies.

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Recently Adopted Accounting Pronouncements

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

Recently Issued Accounting Pronouncements Not Yet Adopted

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

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

Interest Rate Risk.  We are subject to interest rate risk in connection with borrowings under our senior secured credit facility.  Although we currently have interest rate swap agreements hedging portions of this debt, thesethey will expire within the next year before the borrowings are fully repaid.repaid and we currently do not anticipate renewing them. As of December 31, 2009,September 30, 2010, we have $511.8$489.1 million outstanding under the term-loan portion of our senior secured credit facility, the un-hedged portion of which is subject to variable interest rates. Each change of 1% in interest rates would result in a $806,000$3.7 million change in our annual interest expense over the next year on the un-hedged portion of the term-loan borrowings and a $507,000 change in our annual interest expense on the revolving loan borrowings, assuming the entire $50.0 million was outstanding.  Any debt we incur in the future may also bear interest at floating rates.

Foreign Currency Risk.   Foreign currency contracts are used to protect us from exchange rate fluctuation from the time customers are invoiced in local currency until such currency is exchanged for U.S. dollars. We periodically enter into foreign currency contracts, which are not designated as hedges, and the change in the fair value is included in income currently within other income (expense). As of December 31, 2009,September 30, 2010, we had $26.7$47.2 million of notional value foreign currency forward contracts maturing through JanuaryOctober 29, 2010. As of December 31, 2008, we had $8.1 million of notional value foreign currency forward contracts maturing through March 12, 2009. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The fair value of these contracts at December 31, 2009 and 2008September 30, 2010 was immaterial.a liability of $333,000.  If foreign currency exchange rates (primarily the British pound and the Euro) change by 10% from the levels at December 31, 2009,September 30, 2010, the effect on our comprehensive income would be approximately $19.5$22.6 million.

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

ITEM 4. 
ITEM 4T.  CONTROLS AND PROCEDURES

Our disclosure controls and procedures under the Securities Exchange Act of 1934, as amended, are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure. The Principal Executive Officer and the Principal Financial Officer, with the assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of December 31, 2009September 30, 2010 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

There have been no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2009September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.    Legal Proceedings
Item 1.Legal Proceedings

On October 14, 2009, BAE Systems Information and Electronic Systems (“BAE”) commenced an action against both us and one ofThere have been no material changes in our subsidiarieslegal proceedings disclosed 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 know how relating to a high performance direct infrared countermeasure system for use in military aircraft and certain other platforms (“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 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 have evaluated 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 believe that the ultimate resolution of this 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 2009fiscal 2010 Form 10-K for information as to other legal matters and proceedings.10-K.

 
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Item 1A.  Risk Factors
Item 1A.Risk Factors

There have been no material changes in our risk factors disclosed in the fiscal 20092010 Form 10-K.

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

None

Item 3.  Defaults upon Senior Securities
Item 3.Defaults upon Senior Securities

None

Item 4.  Submission of Matters to a Vote of Security Holders
Item 4.[Removed and Reserved]

None
Item 5.Other Information

Item 5.   Other InformationNone

None
Item 6.Exhibits

Item 6.   Exhibits

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

- 4237 - -

SIGNATURE


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

  
AEROFLEX INCORPORATED
(REGISTRANT)
 
(REGISTRANT)
February 11,November 9, 2010 /s/ John Adamovich, Jr. 
  John Adamovich, Jr. 
  Senior Vice President and 
  Chief Financial Officer 
 
- 4338 - -

EXHIBIT INDEX

Exhibit No.
No.Exhibit Description
  
31.1
Certification pursuant to Rules 13a-14(a)/15d-14(a)15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(Chief Executive Officer)
31.2
Certification pursuant to Rules 13a-14(a)/15d-14(a)15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(Chief Financial Officer)
31.3
Certification pursuant to Rules 13a-14(a)/15d-14(a)15d-14a as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(Principal Accounting Officer)
32.1
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Executive Officer)
32.2Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Chief Financial Officer)
 
- 4439 - -