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 quarter ended December 31, 2005

Commission File Number 000-02324

AEROFLEX INCORPORATED

(Exact name of Registrant as specified in its Charter)

DELAWARE		11-1974412
(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, and (2) has been subject to such filing requirements for the past 90 days.

Yes

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

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

Yes

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

		February 8, 2006		74,911,662
		(Date)		(Number of Shares)

Aeroflex Incorporated

and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(In thousands)

	December 31, 2005		June 30, 2005
Assets

Current assets:
Cash and cash equivalents	$	15,511	$	12,974
Marketable securities	7,003		—
Accounts receivable, less allowance for doubtful accounts of $1,327 and $1,210	103,031		101,317
Inventories	126,275		118,906
Deferred income taxes	18,339		18,499
Prepaid expenses and other current assets	12,785		11,107

Total current assets	282,944		262,803

Property, plant and equipment, net	76,539		78,195
Other assets	13,249		13,537
Intangible assets with definite lives, net	59,257		67,266
Goodwill	165,403		168,048

Total assets	$	597,392	$	589,849

See notes to unaudited condensed consolidated financial statements.

Aeroflex Incorporated

and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

(continued)

(In thousands, except per share data)

	December 31, 2005		June 30, 2005
Liabilities and Stockholders’ Equity

Current liabilities:
Current portion of long-term debt	$	628	$	634
Accounts payable	26,754		35,907
Advance payments by customers	24,793		15,183
Income taxes payable	4,864		3,657
Accrued payroll expenses	15,057		15,222
Accrued expenses and other current liabilities	31,302		30,451
Total current liabilities	103,398		101,054

Long-term debt	4,004		4,190
Deferred income taxes	12,734		17,146
Other long-term liabilities	20,459		23,479
Total liabilities	140,595		145,869

Stockholders’ equity:
Preferred stock, par value $.10 per share; authorized 1,000 shares Series A Junior Participating Preferred Stock, par value $.10 per share, authorized 110; none issued	—		—
Common stock, par value $.10 per share; authorized 110,000 shares; issued 74,875 and 74,618 shares	7,488		7,462
Additional paid-in capital	378,137		372,666
Accumulated other comprehensive income	4,024		9,020
Retained earnings	67,148		54,846
	456,797		443,994

Less: Treasury stock, at cost (4 shares)	—		14

Total stockholders’ equity	456,797		443,980

Total liabilities and stockholders’ equity	$	597,392	$	589,849

See notes to unaudited condensed consolidated financial statements.

Aeroflex Incorporated

and Subsidiaries

Unaudited Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

	Three Months Ended December 31,
	2005			2004

Net sales	$	135,156		$	112,469
Cost of sales	70,602			58,988
Gross profit	64,554			53,481

Selling, general and administrative costs	30,556			26,719
Research and development costs	18,290			15,199
Amortization of acquired intangibles	3,433			2,042
	52,279			43,960
Operating income	12,275			9,521

Other income (expense)
Interest expense	(147		)	(162		)
Other income (expense)	661			541
Total other income (expense)	514			379

Income from continuing operations before income taxes	12,789			9,900
Provision for income taxes	5,015			3,758
Income from continuing operations	7,774			6,142

Discontinued operations
Income (loss) from discontinued operations, net of tax provision (benefit) of $0 and $(457)	—			(892		)
Income (loss) on disposal of operations, net of tax provision (benefit) of $0 and $0	—			73
Income (loss) from discontinued operations, net of tax	—			(819		)

Net income	$	7,774		$	5,323

Income (loss) per common share:
Basic
Continuing operations	$	0.10		$	0.08
Discontinued operations	—			(0.01		)
Net income	$	0.10		$	0.07

Diluted
Continuing operations	$	0.10		$	0.08
Discontinued operations	—			(0.01		)
Net income	$	0.10		$	0.07

Weighted average number of common shares outstanding:
Basic	74,875			74,625
Diluted	75,990			76,310

See notes to unaudited condensed consolidated financial statements.

Aeroflex Incorporated and Subsidiaries

Unaudited Condensed Consolidated Statements of Earnings

(In thousands, except per share data)

	Six Months Ended December 31,
	2005			2004

Net sales	$	260,804		$	221,651
Cost of sales	137,324			116,839
Gross profit	123,480			104,812

Selling, general and administrative costs	60,808			51,486
Research and development costs	36,254			29,743
Amortization of acquired intangibles	6,889			4,101
	103,951			85,330
Operating income	19,529			19,482

Other income (expense)
Interest expense	(307		)	(422		)
Other income (expense)	752			965
Total other income (expense)	445			543

Income from continuing operations before income taxes	19,974			20,025
Provision for income taxes	7,672			7,484
Income from continuing operations	12,302			12,541

Discontinued operations
Income (loss) from discontinued operations, net of tax provision (benefit) of $0 and $(253)	—			(542		)
Income (loss) on disposal of operations, net of tax provision (benefit) of $0 and $0	—			(1,060		)
Income (loss) from discontinued operations, net of tax	—			(1,602		)

Net income	$	12,302		$	10,939

Income (loss) per common share:
Basic
Continuing operations	$	0.16		$	0.17
Discontinued operations	—			(0.02		)
Net income	$	0.16		$	0.15

Diluted
Continuing operations	$	0.16		$	0.16
Discontinued operations	—			(0.02		)
Net income	$	0.16		$	0.14

Weighted average number of common shares outstanding:
Basic	74,816			74,536
Diluted	75,845			76,149

See notes to unaudited condensed consolidated financial statements.

AEROFLEX INCORPORATED

AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six Months Ended December 31,
	2005			2004

Cash flows from operating activities:
Net income	$	12,302		$	10,939
Loss from discontinued operations	—			1,602
Income from continuing operations	12,302			12,541
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization	15,197			11,842
Deferred income taxes	(3,837		)	(967		)
Non - cash stock based compensation	3,458			—
Excess tax benefits from stock based compensation arrangements	(401		)	—
Other, net	204			11
Change in operating assets and liabilities, net of effects from purchases of businesses:
Decrease (increase) in accounts receivable	(2,952		)	5,629
Decrease (increase) in inventories	(7,805		)	(10,588		)
Decrease (increase) in prepaid expenses and other assets	(1,639		)	(2,183		)
Increase (decrease) in accounts payable, accrued expenses and other liabilities	311			(48		)

Net cash provided by (used in) continuing operations	14,838			16,237
Net cash provided by (used in) discontinued operations	—			(1,353		)
Net cash provided by operating activities	14,838			14,884

Cash flows from investing activities:
Capital expenditures	(7,504		)	(8,030		)
Purchase of marketable securities	(74,555		)	(394,284		)
Sale of marketable securities	67,552			296,618
Other, net	96			—

Net cash provided by (used in) continuing operations	(14,411		)	(105,696		)
Net cash provided by (used in) discontinued operations	—			6,277
Net cash provided by (used in) investing activities	(14,411		)	(99,419		)

Cash flows from financing activities:
Purchase of treasury stock	(153		)	—
Borrowings under debt agreements	—			38
Debt repayments	(192		)	(4,944		)
Excess tax benefits from stock based compensation arrangements	401			—
Proceeds from the exercise of stock options	1,805			1,506
Withholding taxes paid for stock options	(145		)	(220		)
Withholding taxes collected for stock options	145			220
Net cash provided by (used in) financing activities	1,861			(3,400		)
Effect of exchange rate changes on cash and cash equivalents	249			991

Net increase (decrease) in cash and cash equivalents	2,537			(86,944		)
Cash and cash equivalents at beginning of period	12,974			98,502
Cash and cash equivalents at end of period	$	15,511		$	11,558

See notes to unaudited condensed consolidated financial statements

AEROFLEX INCORPORATED

AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The condensed consolidated financial statements of Aeroflex Incorporated and Subsidiaries (the “Company”) presented herein have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at December 31, 2005 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in the Company’s June 30, 2005 annual report to shareholders.

Results of operations for the three and six month periods are not necessarily indicative of results of operations for the corresponding full fiscal years.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered (except as described below), the selling price is fixed or determinable and collectibility of the resulting receivable is reasonably assured.

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, then recognition of the revenue is deferred until that time. Revenues associated with certain long-term contracts are recognized in accordance with Statement of Position No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”). Under SOP 81-1, the Company uses the percentage-of-completion method, whereby revenues and associated costs are recognized as work on a contract progresses. The Company measures the extent of progress toward completion generally based upon one of the following methods (based upon an assessment of which method most closely aligns to the underlying earnings process): (i) the units-of-delivery method, (ii) the cost-to-cost method, using the ratio of contract costs incurred as a percentage of total estimated costs at contract completion (based upon engineering and production estimates), or (iii) the achievement of contractual milestones. Provisions for anticipated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such anticipated losses or revisions become evident. Revenue from sales of products where software is other than incidental to their performance, including related software support and maintenance contracts is recognized in accordance with SOP-97-2, “Software Revenue Recognition.”

Certain of the Company’s sales are to distributors which have a right to return some portion of product within eighteen months of sale. The Company recognizes revenue on these sales at the time of shipment to the distributor as these sales meet all of the criteria of Statement of Financial Accounting Standards (“SFAS”) No. 48, “Revenue Recognition When Right of Return Exists.” Historically, the returns under these arrangements have been insignificant and can be reasonably estimated. An estimate of such returns is recorded at the time sales are recognized.

Financial Instruments and Derivatives

Foreign currency contracts are used to protect the Company from fluctuations in exchange rates. The Company entered into foreign currency contracts, which are not designated as hedges, and the change in fair value is included in income currently, within other income (expense). As of December 31, 2005, the Company had $2.1 million of notional value foreign currency forward contracts maturing through March 2006. 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, 2005 was $34,000 less than the notional value.

The Company accounts for its interest rate swap derivatives in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities.” This statement requires companies to record derivatives on the balance sheet as assets or liabilities at their fair value. The Company’s derivatives are designated as cash flow hedges under SFAS No. 133, with changes in the fair value of such derivatives being recorded as components of other comprehensive income. For derivatives that are deemed ineffective, the changes are recorded as gains or losses in other income (expense).

Marketable Securities

Marketable securities are classified as available-for-sale and are recorded at fair market value with unrealized gains and losses, net of taxes, reported as a separate component of shareholders’ equity. Realized gains and losses and declines in market value judged to be other than temporary, of which there were none, are included in other income. Interest and dividends are also included in other income. Marketable securities consist solely of auction rate bonds.

Accounting for Stock Based Compensation

Prior to fiscal 2006, the Company applied the intrinsic value method as outlined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations in accounting for stock options granted. Under the intrinsic value method, no compensation expense was recognized if the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost was recognized in the accompanying consolidated statements of earnings prior to fiscal year 2006 on stock options granted to employees, since all options granted under the Company’s share incentive programs had an exercise price equal to the market value of the underlying common stock on the date of grant.

Effective July 1, 2005, the Company adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). This statement replaces SFAS No. 123, “Accounting for Stock-based Compensation” and supersedes APB No. 25. SFAS No. 123(R) requires that all stock based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. This statement was adopted using the modified prospective method of application, which requires us to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share based awards, expense is also recognized to reflect the remaining service period of outstanding awards that had been included in pro forma disclosures in prior periods. SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. The adoption of this pronouncement resulted in compensation expense of $1.4 million and $3.5 million for the three and six months ended December 31, 2005, respectively, as well as cash flows from financing activities of $401,000 which reduced cash flows from operating activities by the same amount.

SFAS 123(R) required options to be classified as liabilities if the issuer could be required under any circumstances to settle the option in cash. In February 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 123(R)-4 “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event” which amends FASB 123(R) by stipulating that if a cash settlement feature can be exercised only upon the occurrence of a contingent event that is outside the employee’s control then it should be treated as an equity award until it becomes probable that the event will occur. The Company has applied the principles set forth in this FSP since its adoption of FASB 123(R) on July 1, 2005.

In November 2005, the FASB published FSP No. FAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards,” to provide an alternative transition method for accounting for the tax effects of share-based payment awards to employees. The FASB learned, subsequent to adoption of SFAS No. 123(R), that a number of constituents did not have the information necessary to comply with the transition requirements of SFAS No. 123(R), and has provided an elective alternative transition method in FSP No. FAS 123(R)-3. Entities can choose to follow either the transition guidance of SFAS No. 123(R) or the alternative transition method described in FSP No. FAS 123(R)-3. The guidance in FSP No. FAS 123(R)-3 became effective upon publication. The Company has applied the principles originally set forth in SFAS No. 123(R). Therefore the guidance set forth in this FSP is not applicable to the Company.

In October 2005, the FASB issued FSP No. FAS 123(R)-2, “Practical Accommodation to the Application of the Grant Date as Defined in FASB Statement No. 123(R),” to provide guidance on determining the grant date for an award as defined in SFAS No. 123(R). This FSP stipulates that assuming all other criteria in the grant date definition are met, a mutual understanding of the key terms and conditions of an award to an individual employee is presumed to exist upon the award’s approval in accordance with the relevant corporate governance requirements, provided that the key terms and conditions of an award (a) cannot be negotiated by the recipient with the employer because the award is a unilateral grant, and (b) are expected to be communicated to an individual recipient within a relatively short time period from the date of approval. The Company has applied the principles set forth in this FSP upon its adoption of SFAS No. 123(R).

Reclassifications

Certain reclassifications have been made to the 2005 consolidated financial statements to conform to the 2006 presentation.

Recently Issued Accounting Standards Not Yet Adopted

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” (“SFAS No. 154”) which establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The statement provides guidance for determining whether retrospective application of a change in accounting principle is impracticable. The statement also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have any effect on the Company’s consolidated financial statements.

In April 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143.” FIN 47 clarifies the terms of FASB Statement No. 143 and requires an entity to recognize a liability for a conditional asset retirement obligation if the entity has sufficient information to reasonably estimate its fair value. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently evaluating the impact of this standard on its consolidated financial statements.

On December 31, 2004, the FASB issued FASB Staff Position FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” (“FSP No. 109-1”), and FASB Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” (“FSP No. 109-2”). These staff positions provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (“AJCA”) that was signed into law on October 22, 2004. FSP No. 109-1 states that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a “special deduction” instead of a tax rate reduction. FSP No. 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company is investigating the repatriation provision to determine whether it might repatriate extraordinary dividends, as defined in the AJCA.

2. Acquisition of Businesses and Intangible Assets

JcAIR Test Systems

On April 19, 2005, the Company acquired all of the outstanding stock of JcAIR Test Systems (“JcAIR”) for cash of $35 million. JcAIR provides customized avionics test solutions in all areas of manual and automatic test equipment for manufacturing, repair and ground support operation. The addition of JcAIR has enhanced the Company’s avionics product portfolio and provides more complete testing solutions for the avionics system test market.

The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company preliminarily allocated the purchase price, including the acquisition costs of approximately $445,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

	In thousands

Current assets (excluding cash of $568,000)	$	9,897
Property, plant and equipment	1,525
Developed technology	12,000
Customer related intangibles	1,100
Goodwill	20,561
In-process research and development	200
Total assets acquired	45,283
Current liabilities	(6,037		)
Deferred taxes	(4,369		)
Total liabilities assumed	(10,406		)
Net assets acquired	$	34,877

As of December 31, 2005, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized upon the receipt and completion of additional information and analysis during fiscal 2006.

The developed technology and customer related intangibles are being amortized on a straight-line basis over a range of 3 to 15 years. The goodwill is not deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. Therefore, in accordance with accounting principles generally accepted in the United States of America, the value of such was expensed at the time of the acquisition in operating costs. The allocation to in-process research and development represents the estimated fair value of such incomplete research and development, at the acquisition date, based on future cash flows that have been adjusted by the respective projects’ completion percentage. As of the acquisition date, cash flows from these projects were expected to commence in fiscal 2006. A 24% risk adjusted discount rate was applied to the projects’ cash flows in determining fair value. At the acquisition date, JcAIR was conducting development activities associated with the completion of the Mode 5 General Avionic Test Equipment sets.

SPG Division of UbiNetics Holdings Limited

On May 23, 2005, the Company acquired all of the stock of UbiNetics Limited, as well as certain assets located in India, Japan and Hong Kong, all of which constituted UbiNetics Holdings Limited’s SPG test and measurement business (“SPG”) for cash of $84 million and a deferred payment of up to approximately $4 million depending on SPG achieving certain performance goals for the year ending June 30, 2006. The Company did not include this contingent consideration in its initial purchase price allocation as the payment of this consideration was not considered to be certain beyond a reasonable doubt at the date of acquisition. As a result, the Company will adjust goodwill for any contingent consideration in the future if and when it is earned. SPG develops, manufactures and integrates wireless test and measurement solutions specific to commercial wireless product development organizations and service operators. The addition of SPG’s wireless test and measurement products and technologies has enhanced the Company’s wireless product portfolio and enabled the Company to provide more complete testing solutions for the development, manufacturing and service markets.

The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company preliminarily allocated the purchase price, including the acquisition costs of approximately $3.0 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

	In thousands

Current assets (excluding cash of $4.0 million)	$	5,320
Property, plant and equipment	2,300
Developed technology	21,000
Customer related intangibles	750
Goodwill	64,058
In-process research and development	2,800
Total assets acquired	96,228
Current liabilities	(5,786		)
Deferred taxes	(7,026		)
Other long term liabilities	(468		)
Total liabilities assumed	(13,280		)
Net assets acquired	$	82,948

The developed technology and customer related intangibles are being amortized on a straight-line basis over a range of 1 to 5 years. The goodwill is not deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. Therefore, in accordance with accounting principles generally accepted in the United States of America, the value of such was expensed at the time of the acquisition in operating costs. The allocation to in-process research and development represents the estimated fair value of such incomplete research and development, at the acquisition date, based on future cash flows that have been adjusted by the respective projects’ completion percentage. As of the acquisition date, cash flows from these projects were expected to commence in fiscal year 2006. As of the acquisition date, cash flows were expected under two scenarios — base case (assumes the contingent payment is not earned) and earnout case (assumes the contingent payment is earned). In determining fair value, a 24% risk adjusted discount rate was applied to the projects’ cash flows under the base case, and a 40% risk adjusted discount rate was applied to the projects’ cash flows under the earnout case. At the acquisition date, SPG was conducting development activities associated with the completion of test mobile products used to test evolving 3G (third-generation) mobile communications networks and equipment that tests the functionality and performance of Wide-Band-Code-Division-Multiple-Access technology.

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

Summarized below are the unaudited pro forma results of operations of the Company as if JcAIR and SPG had been acquired at the beginning of the six month period presented. The in-process research and development write-offs for JcAIR and SPG have been excluded from the December 31, 2004 pro forma income in order to provide comparability to the respective historical period.

	Pro Forma Six Months Ended December 31, 2004
	(In thousands, except per share data)

Net sales	$	254,468
Net income	$	19,131
Net income per share
Basic	$	0.26
Diluted	$	0.25

The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions taken place at the beginning of the six month period presented or of future operating results of the combined companies.

Intangibles with Definite Lives

The components of amortizable intangible assets are as follows:

	December 31, 2005
	(In thousands)
	Gross Carrying Amount		Accumulated Amortization		Net Book Value

Existing technology	$	80,742	$	26,212	$	54,530
Tradenames	2,314		1,724		590
Customer related Intangibles	6,156		2,019		4,137
Total	$	89,212	$	29,955	$	59,257

The aggregate amortization expense for amortized intangible assets was $3.4 million and $2.0 million for the three months ended December 31, 2005 and 2004, respectively, and $6.9 million and $4.1 million for the six months ended December 31, 2005 and 2004, respectively.

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

	(In thousands)
2006	$	12,771
2007	11,811
2008	9,838
2009	8,343
2010	5,361

Goodwill

The carrying amount of goodwill is as follows:

	Balance as of July 1, 2005		Effect of Foreign Currency			Balance as of December 31, 2005
			(In thousands)

Microelectronic solutions segment	$	46,688	$	—		$	46,688
Test solutions segment	121,360		(2,645		)	118,715
Total	$	168,048	$	(2,645	)	$	165,403

3. Discontinued Operations

As a result of continued operating losses, in February 2004, the Board of Directors of the Company approved a formal plan to divest the Company’s thin film interconnect manufacturing operation (“MIC”) and to seek a strategic buyer. This operation had previously been included in the Microelectronic Solutions segment. As a result of this decision, the Company recorded a $9.1 million ($6.2 million, net of tax) loss on disposal in the quarter ended December 31, 2003. This charge included a cash requirement of $2.6 million primarily for existing equipment leases, and a non-cash charge of $6.5 million for the write down of goodwill, other intangibles and owned equipment.

In September 2004, the Company sold the stock of MIC for $8.8 million and recorded an additional net loss on disposal of $1.3 million ($1.3 million, net of tax). Since the sale of the stock created a capital loss for tax purposes and the Company has no current capital gains to offset it, the Company recorded a full valuation allowance against the tax benefit. Under the terms of the sale agreements, the Company has retained certain liabilities relating to potential adverse environmental conditions that may exist as of the date of sale, litigation pending against MIC as of the date of sale and product defects in products designed, developed, manufactured or sold by MIC prior to the sale date which result in a recall, withdrawal or market suspension of the product or result in injury to persons or property. Management believes these contingencies will not have a material adverse effect on the Company’s consolidated financial statements.

In June 2004, the Board of Directors of the Company approved a formal plan to divest the Company’s shock and vibration control device manufacturing business (“VMC”) and to seek a strategic buyer. This operation had previously comprised the Isolator Products segment. In March 2005, the Company sold the net assets of VMC for $8.4 million in cash. The Company recorded an $860,000 ($505,000 net of tax) gain on disposition. Under the terms of the sale agreements, the Company has retained certain liabilities relating to adverse environmental conditions that currently exist at the premises occupied by VMC, litigation pending against VMC as of the date of sale, and to the extent covered by insurance, for product liability for products sold prior to the closing date. The Company has recorded a reserve for the estimated remediation costs related to adverse environmental conditions that currently exist at the VMC premises which was sold.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, these business units and TriLink (which was discontinued in December 2002) have been reported as discontinued operations and, accordingly, income and losses from operations and the net loss on disposal have been reported separately from continuing operations. Net sales and income (loss) from discontinued operations (including the net loss on disposal) for the six months ended December 31, 2004:

	Six Months Ended December 31, 2004
	(In thousands)

Net Sales
MIC	$	3,313
VMC	9,093
TriLink	—
	$	12,406

Income (Loss) From Discontinued Operations
MIC	$	(884	)
VMC	(732		)
TriLink	14
	$	(1,602	)

4. Earnings Per Share

In accordance with SFAS No. 128, “Earnings Per Share,” net income per common share (“Basic EPS”) is computed by dividing net income by the weighted average common shares outstanding. Net income per common share, assuming dilution (“Diluted EPS”) is computed by dividing net income by the weighted average common shares outstanding plus potential dilution from the exercise of stock options and restricted stock. As of July 1, 2005, the Company adopted SFAS 123(R) and did not restate prior periods (see note 1 “Accounting for Stock-based Compensation”). A reconciliation of the denominators of the Basic EPS and Diluted EPS calculations for continuing operations is as follows:

	Three Months Ended December 31,		Six Months Ended December 31,
	2005	2004	2005	2004
	(In thousands)
Computation of Adjusted Weighted Average Shares Outstanding:
Weighted average shares outstanding	74,875	74,625	74,816	74,536
Add: Effect of dilutive options	1,115	1,685	1,029	1,613
Weighted average shares and common share equivalents used for computation of diluted earnings per common share	75,990	76,310	75,845	76,149

Options to purchase 10.1 million shares at exercise prices ranging between $8.16 and $34.41 per share were not included in the computation of diluted EPS as their effect would have been anti-dilutive, as per the provisions of SFAS 128.

5. Comprehensive Income

The components of comprehensive income are as follows:

	Three Months Ended December 31,					Six Months Ended December 31,
	2005			2004		2005			2004
	(In thousands)

Net income	$	7,774		$	5,323	$	12,302		$	10,939

Accrued pension liability, net of tax	—			—		16			—

Unrealized gain (loss) on interest rate swap agreements, net of tax	13			23		37			21

Foreign currency translation adjustment	(2,795		)	5,610		(5,049		)	7,064

Total comprehensive income	$	4,992		$	10,956	$	7,306		$	18,024

Accumulated other comprehensive income (loss) is as follows:

	Minimum Pension Liability Adjustment (net of tax)			Gain (Loss) on Interest Rate Swap Agreements (net of tax)			Foreign Currency Translation Adjustment			Total (net of tax)
	(In thousands)

Balance, July 1, 2005	$	(3,632	)	$	(75	)	$	12,727		$	9,020
Six months activity	16			37			(5,049		)	(4,996		)
Balance, December 31, 2005	$	(3,616	)	$	(38	)	$	7,678		$	4,024

6. Inventories

Inventories consist of the following:

	December 31, 2005		June 30, 2005
	(In thousands)

Raw materials	$	47,469	$	43,158
Work in process	56,321		53,115
Finished goods	22,485		22,633
	$	126,275	$	118,906

7. Product Warranty

The Company warrants its 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 when revenue is recognized and is included in cost of goods sold.

Activity related to the Company’s product warranty liability was as follows:

	Six Months Ended December 31,
	2005			2004
	(In thousands)

Balance at beginning of period	$	2,056		$	1,702
Provision for warranty obligations	1,780			1,234
Charges incurred	(1,379		)	(1,061		)
Acquired warranty obligations	—			(194		)
Foreign currency impact	(19		)	43

Balance at end of period	$	2,438		$	1,724

8. Defined Benefit Pension Plans

Effective January 1, 1994, the Company established a Supplemental Executive Retirement Plan (the “SERP”) which provides retirement, death and disability benefits to certain of its officers. On September 3, 2003, the Company acquired MCE, including its defined benefit pension plan (the “MCE Plan”). The MCE Plan has been frozen since December 31, 1993.

Components of Net Periodic Benefit Cost

	Six Months Ended December 31,
	2005				2004
	(In thousands)

Service cost	$	257		$		268
Interest cost	495			340
Expected return on plan assets	(73		)	(62			)
Amortization of net transition (asset) obligation	19			19
Recognized actuarial (gain) loss	225			100
Net periodic benefit cost	$	923		$		665

The Company previously disclosed in its financial statements for the year ended June 30, 2005, that it expected to contribute $164,000 to its pension plan in the fiscal year ended June 30, 2006. As of December 31, 2005, $100,000 of the contributions had been made.

Due to the retirement of one of its officers, the Company is required to make payments of $267,000 in the fiscal year ended June 30, 2006, $674,000 in fiscal year ended June 30, 2007 and $628,000 each fiscal year thereafter pursuant to the SERP. Payments shall cease December 31, 2015 or upon death, whichever is later.

9. Stock Options and Warrants

The Company has several stock option plans that are described under the caption “Stock Option Plans” in footnote 9 to the consolidated financial statements included in the Company’s June 30, 2005 Securities and Exchange Commission Form 10K. In November 2005, the shareholders approved an amendment to the 2002 Directors’ Plan to increase the number of shares covered to 1.1 million shares. Options under all plans shall expire not later than ten years from the date of grant. As of December 31, 2005, 3.2 million shares of the Company’s Common Stock were reserved and available to be granted pursuant to these plans.

Stock based compensation expense is attributable to the granting, and the remaining requisite service periods, of stock options. Compensation expense attributable to stock based compensation in the three and six months ended December 31, 2005 was $1.4 million ($860,000 after tax), or $.01 for both basic and diluted earnings per share, and $3.5 million ($2.1 million after tax), or $.03 for both basic and diluted earnings per share, respectively. As of December 31, 2005, the total unrecognized compensation cost related to nonvested stock awards was $8.0 million and the related weighted average period over which it is expected to be recognized is approximately 2.7 years.

Prior to the Company’s adoption of SFAS No. 123(R), SFAS No. 123 required that the Company provide pro forma information regarding net earnings and net earnings per common share as if compensation cost for the Company’s stock based awards had been determined in accordance with the fair value method prescribed therein. The Company had previously adopted the disclosure portion of SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure,” requiring quarterly SFAS No. 123 pro forma disclosure. The pro forma charge for compensation cost related to stock based awards granted was recognized over the service period. For stock options, the service period represents the period of time between the date of grant and the date each option becomes exercisable without consideration of certain acceleration provisions (e.g., change of control).

The following table illustrates the effect on the net earnings per common share as if the fair value method had been applied to all outstanding awards for the three and six months ended December 31, 2004:

	Three Months Ended December 31, 2004			Six Months Ended December 31, 2004
	(In thousands)

Net income, as reported	$	5,323		$	10,939
Deduct: Total stock based compensation expense determined under fair value method for all awards, net of related tax effects	(3,189		)	(6,475		)

Pro forma net income	$	2,134		$	4,464
Net income per share:
Basic, as reported	$	0.07		$	0.15

Basic, pro forma	$	0.03		$	0.06

Diluted, as reported	$	0.07		$	0.14

Diluted, pro forma	$	0.03		$	0.06

A summary of the Company’s stock option plans as of December 31, 2005 and changes during the six month period then ended, is presented below:

	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Weighted-Average Contractual Life Remaining in Years
	(In thousands)				(In thousands)

Outstanding at July 1, 2005	15,384		$	11.72
Granted at fair value	313		10.48
Exercised	(276	)	6.53
Expired	—		—
Forfeited	(284	)	11.72

Outstanding at December 31, 2005	15,137		$	11.79	$	23,153	5.8

Exercisable at December 31, 2005	13,593		$	12.04	$	21,148	5.5

(1) The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option.

The exercise period for all stock options does not exceed ten years from the date of grant. Stock option grants to individuals generally become exercisable in substantively equal tranches over a service period of up to five years.

The weighted average grant date fair value of stock options granted for the three months ended December 31, 2005 and 2004 was $8.49 and $6.19, respectively. The weighted average grant date fair value of stock options granted for the six months ended December 31, 2005 and 2004 was $8.30 and $5.91, respectively. The total intrinsic value of stock options exercised for the three months ended December 31, 2005 and 2004 was $707,000 and $882,000, respectively. The total intrinsic value of stock options exercised for the six months ended December 31, 2005 and 2004 was $1.1 million and $1.9 million, respectively.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Three Months Ended December 31,				Six Months Ended December 31,
	2005		2004		2005		2004

Weighted average expected stock price volatility	94	%	77	%	94	%	79	%
Weighted average expected option life	6.2 years		3 years		6.2 years		3 years
Average risk free interest rate	4.6	%	3.1	%	4.5	%	3.0	%
Average dividend yield	—		—		—		—

Cash received from share option exercises for the three months ended December 31, 2005 and 2004 was $1.5 million and $710,000, respectively. The cash received from share option exercises for the six months ended December 31, 2005 and 2004 was $1.8 million and $1.5 million, respectively.

The Company recorded credits to additional paid-in capital during the three months ended December 31, 2005 and 2004 of $262,000 and $322,000, respectively, and for the six months ended December 31, 2005 and 2004 of $401,000 and $688,000, respectively, in connection with the actual tax benefit related to compensation deductions on the exercise of stock options in excess of related deferred tax assets.

10. Stock Repurchase Program

During fiscal 2005, the Company’s Board of Directors authorized a stock repurchase program of up to 3.0 million shares of its Common Stock, subject to certain limitations imposed by the Company’s lending banks. Purchases will be made from time to time, depending upon market conditions at prices deemed appropriate by management. During the six months of fiscal 2006, a total of 15,000 shares were repurchased and retired for $153,000. As of December 31, 2005, 65,000 shares have been repurchased and retired since the inception of this program for $569,000.

11. Contingencies

In fiscal 2005, the Company learned that it inadvertently may have violated certain International Traffic in Arms Regulations (ITAR) by exporting certain products and services without licenses. These violations resulted from an error in classifying the products and services as commercial rather than military. The Company has prepared and filed a voluntary disclosure with the State Department in which the details of the exports and erroneous classifications are described. At this time, it is not possible to determine whether any fines or other penalties will be asserted against the Company, or the materiality of any outcome.

On July 31, 2003, the Company acquired the Racal Instruments Wireless Solutions Group (“RIWS”) for cash of $38 million and a deferred payment of up to $16.5 million in either cash or Aeroflex common stock, at the Company’s option, depending on RIWS achieving certain performance goals for the year ending July 31, 2004. Although the Company believes that the performance goals have not been met, the determination is not final.

We are involved in various other legal matters. We believe the outcome of these other legal matters will not have a material effect upon us.

12. Business Segments

The Company’s business segments and major products included in each segment, are as follows:

Microelectronic Solutions (“AMS”)

a) Microelectronic Components, Sub-assemblies and Modules

b) Integrated Circuits

c) Motion Control Systems

Test Solutions (“ATS”)

a) Instrument Products and Test Systems

The Company is a manufacturer of advanced technology systems and components for commercial industry, government and defense contractors. Approximately 30% and 33% of the Company’s sales for the three months ended December 31, 2005 and 2004, and 28% and 33% for the six months ended December 31, 2005 and 2004, respectively, were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. No one customer constituted more than 10% of the Company’s sales during any of the periods presented. Inter-segment sales were not material and have been eliminated from the tables below.

Most of the Company’s operations are located in the United States, however, it also has operations in Europe and Asia. Each of Aeroflex International Limited, which was acquired in May 2002, RIWS, which was acquired in July 2003, and SPG, which was acquired in May 2005, have significant operations in the United Kingdom. Specifically, net sales from facilities located in the United Kingdom were approximately $71 million for the six months ended December 31, 2005. Total assets of the United Kingdom operations were $241 million as of December 31, 2005.

Revenues, based on the customers’ locations, attributed to the United States and other regions are as follows:

	For the Three Months Ended December 31,
	2005		2004
	(In thousands)

United States of America	$	82,593	$	67,410
Europe and Middle East	31,080		32,118
Asia and Australia	20,216		11,250
Other regions	1,267		1,691
	$	135,156	$	112,469

	For the Six Months Ended December 31,
	2005		2004
	(In thousands)

United States of America	$	158,859	$	135,357
Europe and Middle East	60,967		59,341
Asia and Australia	38,495		24,112
Other regions	2,483		2,841
	$	260,804	$	221,651

Selected financial data by segment is as follows:

	For the Three Months Ended December 31,						For the Six Months Ended December 31,
	2005			2004			2005			2004
	(In thousands)
				(Restated)(1)						(Restated)(2)
Net sales:
Microelectronic solutions	$	58,869		$	48,954		$	113,692		$	100,137
Test solutions	76,287			63,515			147,112			121,514
Net sales	$	135,156		$	112,469		$	260,804		$	221,651

Segment adjusted operating income (3):
Microelectronic solutions	$	15,395		$	9,724		$	28,924		$	20,592
Test solutions	5,900			6,207			10,152			10,899
General corporate expense	(4,145		)	(4,368		)	(8,112		)	(7,908		)
	17,150			11,563			30,964			23,583

Amortization of acquired intangibles
• AMS	(533		)	(534		)	(1,067		)	(1,088		)
• ATS	(2,900		)	(1,508		)	(5,822		)	(3,013		)
Stock based compensation
• AMS	(373		)	—			(726		)	—
• ATS	(377		)	—			(811		)	—
• Corporate	(692		)	—			(1,921		)	—
Current period impact of acquisition related adjustment to inventory - ATS	—			—			(1,088		)	—
Operating income (GAAP)	12,275			9,521			19,529			19,482
Interest expense	(147		)	(162		)	(307		)	(422		)
Other income (expense), net	661			541			752			965
Income from continuing operations before income taxes	$	12,789		$	9,900		$	19,974		$	20,025

(1) Restated for the transfer of the Motion Control Systems business from ATS to AMS. Sales and operating income (loss) for the Motion Control Systems business was $3.7 million and $256,000, respectively for the three months ended December 31, 2004.

(2) Restated for the transfer of the Motion Control Systems business from ATS to AMS. Sales and operating income (loss) for the Motion Control Systems business was $7.5 million and and $18,000, respectively for the six months ended December 31, 2004.

(3) Management evaluates the operating results of the two segments based upon pre-tax operating income, before costs related to amortization of acquired intangibles, stock based compensation and the impact of any acquisition related adjustments to inventory.

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

Overview

We use our advanced design, engineering and manufacturing capabilities to produce microelectronic and test solutions that we sell primarily into the broadband communications, aerospace and defense markets. We also design and manufacture motion control systems which are used for industrial and defense applications.

Microelectronic Solutions

We have been a designer and supplier of microelectronics for more than 20 years. Our products include (i) custom and standard integrated circuits, such as databuses, transceivers, microcontrollers, microprocessors and memories and (ii) components, sub-assemblies and modules for military and commercial communication systems. We also design, develop and produce motion control systems including stabilization and tracking devices, magnetic motors and scanning devices.

Test Solutions

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

• Wireless Test Equipment

• Frequency Synthesizers

• Radio Test Equipment

• Synthetic Test Systems

• Avionics Test Equipment

• Other General Purpose Test Equipment

Our operating strategy is based on the following key objectives:

• to strengthen and expand our portfolio of proprietary technologies;

• to broaden the applications and target markets for our existing products;

• to expand the scope of our content in our customers’ products;

• to increase our operating efficiencies;

• to maintain a conservative capital structure; and

• to opportunistically pursue strategic acquisitions.

In April 2005, we acquired JcAIR Test Systems, which manufactures customized avionics test solutions, both manual and automated, for manufacturing, repair and ground support operations.

In May 2005, we acquired the SPG division of UbiNetics Holdings Limited, which is a developer, manufacturer and integrator of wireless test and measurement solutions specific to commercial wireless development organizations and service operators.

Our product development efforts primarily involve engineering and design relating to:

• developing new products

• improving existing products

• adapting existing products to new applications

• developing prototype components to bid on specific programs

Some of our development efforts are reimbursed under contractual arrangements. Product development and similar costs which are not reimbursed under contractual arrangements are expensed in the period incurred.

Three Months ended December 31, 2005 Compared to Three Months Ended December 31, 2004

Net Sales. Net sales increased 20% to $135.2 million for the three months ended December 31, 2005 from $112.5 million for the three months ended December 31, 2004. Net sales in the microelectronic solutions (“AMS”) segment increased 20% to $58.9 million for the three months ended December 31, 2005 from $49.0 million for the three months ended December 31, 2004 primarily as a result of increased sales volume of our integrated circuits, microelectronic modules and components businesses. Net sales in the test solutions (“ATS”) segment increased 20% to $76.3 million for the three months ended December 31, 2005 from $63.5 million for the three months ended December 31, 2004 as a result of the addition of sales from our fiscal 2005 acquisitions of JcAIR and SPG and increased sales volume of frequency synthesizers offset, in part, by reduced sales of wireless test solutions.

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

Three Months Ended December 31,	AMS		% of sales		ATS		% of sales		Total		% of sales
(In thousands, except percentages)
2005	$	30,202	51.3	%	$	34,352	45.0	%	$	64,554	47.8	%
2004	23,791		48.6	%	29,690		46.7	%	53,481		47.6	%

Gross profit increased $6.4 million, or 27%, in the AMS segment primarily due to the increased sales volume and increased margin percentages. Margin percentages increased 2.7% to 51.3% primarily due to operating efficiencies realized on higher volume in our integrated circuits and microelectronic module businesses.

Gross profit increased $4.7 million, or 16%, in the ATS segment primarily as a result of the increased sales volume offset, in part, by reduced margin percentages. Margin percentages decreased 1.7% to 45.0% primarily due to the lower margin of JcAIR’s avionics products and decreased margins in wireless test solutions, as fixed costs were spread over lower sales, partially offset by the higher SPG margins.

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

Three Months Ended December 31,	AMS		% of sales		ATS		% of sales		Corporate		Total		% of sales
(In thousands, except percentages)
2005	$	9,633	16.4	%	$	16,086	21.1	%	$	4,837	$	30,556	22.6	%
2004	8,146		16.6	%	14,205		22.4	%	4,368		26,719		23.8	%

Selling, general and administrative costs increased by $1.5 million, or 18%, in the AMS segment primarily due to general increases in expenses related to the increase in sales and the recognition of stock based compensation of $345,000. Stock based compensation was initially recognized as an expense as of July 1, 2005 pursuant to SFAS 123(R). Selling, general and administrative costs increased by $1.9 million, or 13%, in the ATS segment primarily as a result of our fiscal 2005 fourth quarter acquisitions of JcAIR and SPG and stock based compensation of $222,000. Corporate selling, general and administrative expenses increased by $469,000 primarily due to stock based compensation.

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

Three Months Ended December 31,	AMS		% of sales		ATS		% of sales		Total		% of sales
(In thousands, except percentages)
2005	$	5,546	9.4	%	$	12,744	16.7	%	$	18,290	13.5	%
2004	5,921		12.1	%	9,278		14.6	%	15,199		13.5	%

Self funded research and development costs decreased $375,000, or 6%, in the AMS segment primarily due to the timing of available resources allocated to support increased revenue. Research and development costs increased $3.5 million, or 37%, in the ATS segment mainly due to the acquisition of SPG which spent $2.4 million in the quarter ended December 31, 2005 and a $1.0 million increase in our radar systems business primarily for the development of a radar tracking system. We expect the development of the radar tracking system to be substantially complete in fiscal year 2006.

Amortization of Acquired Intangibles. Amortization increased $1.4 million, or 68%, primarily due to the acquisitions of JcAIR and SPG.

Other Income (Expense). Interest expense decreased $15,000 to $147,000 for the three months ended December 31, 2005 from $162,000 for the three months ended December 31, 2004 due to lower outstanding debt. Other income of $661,000 for the three months ended December 31, 2005 consisted primarily of a favorable building lease termination gain of $459,000 and interest income of $249,000. Other income of $541,000 for the three months ended December 31, 2004 consisted primarily of interest income of $470,000. The decline in interest income was due to the lower balances in cash, cash equivalents and marketable securities due to our fourth quarter 2005 acquisitions.

Provision for Income Taxes. The income tax provision was $5.0 million (an effective income tax rate of 39.2%) for the three months ended December 31, 2005 and $3.8 million (an effective income tax rate of 38.0%) for the three months ended December 31, 2004. The effective income tax rate for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes, and, for the three months ended December 31, 2005, a state rate change and a tax audit adjustment, both of which were fully reflected in the current quarter. We anticipate the rate to be 37% for the balance of the year.

Income from Continuing Operations. The income from continuing operations for the three months ended December 31, 2005 was $7.8 million, or 5.8% of sales, versus $6.1 million, or 5.5% of sales, for the three months ended December 31, 2004. The three months ended December 31, 2005, reflect additional intangible amortization expense of $1.4 million due to our fourth quarter 2005 acquisitions and stock based compensation expense of $1.4 million not required to be recognized in the prior year.

Six Months ended December 31, 2005 Compared to Six Months Ended December 31, 2004

Net Sales. Net sales increased 18% to $260.8 million for the six months ended December 31, 2005 from $221.7 million for the six months ended December 31, 2004. Net sales in the AMS segment increased 14% to $113.7 million for the six months ended December 31, 2005 from $100.1 million for the six months ended December 30, 2004 as a result of increased sales volume of our integrated circuits, microelectronic modules and components businesses. Net sales in the ATS segment increased 21% to $147.1 million for the six months ended December 31, 2005 from $121.5 million for the six months ended December 31, 2004 as a result of the addition of sales from our fiscal 2005 acquisitions of JcAIR and SPG and increased sales volume of communication test products offset, in part, by reduced sales of wireless test solutions.

Gross Profit.

Six Months Ended December 31,	AMS		% of sales		ATS		% of sales		Total		% of sales
(In thousands, except percentages)
2005	$	58,203	51.2	%	$	65,277	44.4	%	$	123,480	47.3	%
2004	48,209		48.1	%	56,603		46.6	%	104,812		47.3	%

AMS gross profit increased approximately $10 million, or 21%, due to the increased sales volume and increased margin percentages. Margin percentages increased 3.1% to 51.2% largely due to operating efficiencies realized on higher volume and a favorable product mix in our integrated circuits and microelectronic modules businesses.

ATS gross profit increased $8.7 million, or 15%, due to the increased sales volume offset, in part, by reduced margins. Margin percentages decreased 2.2% to 44.4% primarily due to the lower margins on JcAIR’s avionics products and decreased margins in wireless test solutions, as fixed costs were spread over lower sales, partially offset by higher SPG margin percentages.

Selling, General and Administrative Costs.

Six Months Ended December 31,	AMS		% of sales		ATS		% of sales		Corporate		Total		% of sales
(In thousands, except percentages)
2005	$	18,385	16.2	%	$	32,390	22.0	%	$	10,033	$	60,808	23.3	%
2004	16,585		16.6	%	26,993		22.2	%	7,908		51,486		23.2	%

Selling, general and administrative costs increased by $1.8 million, or 11%, in the AMS segment primarily due to general increases in expenses related to the increase in sales and the recognition of stock based compensation of $669,000. Selling, general and administrative costs increased by $5.4 million, or 20% in the ATS segment primarily as a result of our fiscal 2005 fourth quarter acquisitions of JcAIR and SPG and stock based compensation of $497,000. Corporate selling, general and administrative expenses increased by $2.1 million primarily due to stock based compensation.

Research and Development Costs.

Six Months Ended December 31,	AMS		% of sales		ATS		% of sales		Total		% of sales
(In thousands, except percentages)
2005	$	11,620	10.2	%	$	24,634	16.7	%	$	36,254	13.9	%
2004	11,032		11.0	%	18,711		15.4	%	29,743		13.4	%

Self funded research and development costs increased $588,000, or 5%, in the AMS segment primarily due to development of integrated circuit products. Research and development increased $5.9 million, or 32%, in the ATS segment primarily due to the addition of the expense of SPG of $5.3 million and a $1.4 million increase in our radar systems business, primarily for the development of a radar tracking system, partially offset by reduced development expenses relating to wireless test solutions of $945.000.

Amortization of Acquired Intangibles. Amortization increased $2.8 million, or 68%, primarily due to the acquisitions of JcAIR and SPG in the fourth quarter of fiscal 2005.

Other Income (Expense). Interest expense decreased to $307,000 for the six months ended December 31, 2005 from $422,000 for the six months ended December 31, 2004 due to lower outstanding debt. Other income of $752,000 for the six months ended December 31, 2005 consisted primarily of interest income of $337,000 and a favorable building lease termination gain of $459,000. Other income of $965,000 for the six months ended December 31, 2004 consisted primarily of interest income of $819,000. The decline in interest income was due to the lower balances in cash, cash equivalents and marketable securities due to our fourth quarter fiscal 2005 acquisitions.

Provision for Income Taxes. The income tax provision was $7.7 million (an effective income tax rate of 38.4%) for the six months ended December 31, 2005 and $7.5 million (an effective income tax rate of 37.4%) for the six months ended December 31, 2004. The effective income tax rate for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes, and, for the six months ended December 31, 2005, a state rate change and a tax audit adjustment, both of which were fully reflected in the current period. We anticipate the rate to be 37% for the balance of the year.

Income from Continuing Operations. The income from continuing operations for the six months ended December 31, 2005 was $12.3 million, or 4.7% of sales, versus $12.5 million, or 5.7% of sales, for the six months ended December 31, 2004. The decline in income as a percentage of sales reflects the additional intangible amortization expense of $2.8 million due to our fourth quarter fiscal 2005 acquisitions and stock based compensation expense of $3.5 million, not required to be recognized in the prior year.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements other than letters of credit totaling $10.4 million to guarantee our performance under certain government contracts.

Liquidity and Capital Resources

As of December 31, 2005, we had $180 million in working capital and our current ratio was 2.7 to 1. The Company’s available unused line of credit under a $50 million revolving credit facility that expires February 2007 is approximately $39.6 million at December 31, 2005, after consideration of letters of credit. The facility continued the mortgage on our Plainview property for $2.3 million and is secured by the pledge of the stock of certain of our subsidiaries. The interest rate on revolving credit borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to LIBOR plus 1% (5.4% at December 31, 2005). The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. We have entered into interest rate swap agreements for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings. The fair market value of the interest rate swap agreements was $60,000 as of December 31, 2005 in favor of the banks. If this mortgage was prepaid, although the Company has no intention of doing so, the $60,000 would be charged to the statement of operations at that time.

The terms of the loan agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on indebtedness and prohibition of the payment of cash dividends. We are currently in full compliance with all of the covenants contained in our loan agreement, as amended to date. We expect to be in compliance with all covenants for the foreseeable future.

In January 2006, we entered into a non binding commitment to replace our existing $50 million revolving credit facility with a new five year, $100 million revolving credit facility that includes a $50 million expansion feature. While we anticipate that the new loan will close in March 2006, there can be no assurances it will.

On July 31, 2003, we acquired the Racal Instruments Wireless Solutions Group (“RIWS”) for cash of $38 million and a deferred payment of up to $16.5 million in either cash or Aeroflex common stock, at our option, depending on RIWS achieving certain performance goals for the year ending July 31, 2004. Although we believe that the performance goals have not been met, the determination is not final.

On May 23, 2005, we acquired SPG for $84 million in cash and a contingent payment of up to $4 million in cash depending on SPG achieving certain performance goals for the year ending June 30, 2006.

For the six months ended December 31, 2005, our operations provided cash from continuing operations of $14.8 million, our investing activities used cash of $14.4 million, primarily for capital expenditures and the purchase of marketable securities, (net of sales) and our financing activities provided cash of $1.9 million, primarily due to the proceeds from stock option exercises.

We believe our cash, cash equivalents and marketable securities coupled with internally generated funds and available lines of credit will be sufficient for our working capital requirements, capital expenditure needs and the servicing of our debt for the foreseeable future. One of our pension plans currently is unfunded, but is expected to be funded from the cash surrender value of life insurance policies that are being held in a rabbi trust. We do not believe that the amount of the pension obligations remaining after application of such policy proceeds will be material. Our cash, cash equivalents and marketable securities coupled with our available lines of credit, are available to fund acquisitions and other potential large cash needs that may arise.

The following table summarizes, as of December 31, 2005, our obligations and commitments to make future payments under debt, operating lease and employment agreements:

	Payments due by period
	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
	(In thousands)

Long-term debt	$	4,632	$	628	$	2,593	$	666	$	745
Operating leases	34,832		8,009		10,616		5,233		10,974
Employment consulting and contracts	7,696		3,053		3,456		1,187		—
Total	$	47,160	$	11,690	$	16,665	$	7,086	$	11,719

The operating lease commitments shown in the above table have not been reduced by future minimum sub-lease rentals of $15.0 million.

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, 2005, will have a material adverse affect on our liquidity.

Accounting Policies Involving Significant Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the recognition of revenue and expenses during the period reported. The following accounting policies require us to make estimates and assumptions based on the circumstances, information available and our experience and judgment. These estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. If actual results differ significantly from our estimates, our financial statements could be materially impacted.

Revenue and Cost Recognition Under Long-Term Contracts

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered (except as described below), the selling price is fixed or determinable and collectibility of the resulting receivable is reasonably assured.

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, then recognition of the revenue is deferred until that time. Revenues associated with certain long-term contracts are recognized in accordance with Statement of Position No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”). Under SOP 81-1, we use the percentage-of-completion method, whereby revenues and associated costs are recognized as work on a contract 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. Revenue from sales of products where software is other than incidental to their performance, including related software support and maintenance contracts is recognized in accordance with SOP-97-2, “Software Revenue Recognition.”

Inventories

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

Recoverability of Long-Lived and Intangible Assets

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

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

SFAS No. 142 requires that we perform an assessment of whether there is an indication that goodwill is impaired on an annual basis unless events or circumstances warrant a more frequent assessment. The impairment assessment involves, among other things, an estimation of the fair value of each of our reporting units (as defined in SFAS No. 142). Such estimates are inherently subjective, and subject to change in future periods.

If the impairment review of goodwill, intangible assets and other long-lived assets differ significantly from actual results, it could have a material effect on our results of operations and financial condition.

Income Taxes

The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable income in certain tax jurisdictions. If this assumption changes in the future, we may be required to record additional valuation allowances against our deferred tax assets resulting in additional income tax expense in our consolidated statement of operations. We evaluate the realizability of the deferred tax assets and assess the adequacy of the valuation allowance quarterly.

Stock Based Compensation

With the adoption of SFAS No. 123(R) on July 1, 2005, we are required to record the fair value of stock based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company utilizes the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock price volatility and option life assumptions require a greater level of judgment which makes them critical accounting estimates.

Recently Issued Accounting Standards Not Yet Adopted

In May 2005, the Financial Accounting Standard Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections,” (“SFAS No. 154”) which establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The statement provides guidance for determining whether retrospective application of a change in accounting principle is impracticable. The statement also addresses the reporting of a correction of an error by restating previously issued financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have any effect on our consolidated financial statements.

In April 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations – An Interpretation of FASB Statement No. 143.” FIN 47 clarifies the terms of FASB Statement No. 143 and requires an entity to recognize a liability for a conditional asset retirement obligation if the entity has sufficient information to reasonably estimate its fair value. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We are currently evaluating the impact of this standard on our consolidated financial statements.

On December 31, 2004, the FASB issued FASB Staff Position FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” (“FSP No. 109-1”), and FASB Staff Position No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” (“FSP No. 109-2”). These staff positions provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (“AJCA”) that was signed into law on October 22, 2004. FSP No. 109-1 states that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a “special deduction” instead of a tax rate reduction. FSP No. 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. We are investigating the repatriation provision to determine whether we might repatriate extraordinary dividends, as defined in the AJCA.

Risks Relating to our Business

General economic conditions could adversely affect our revenues, gross margins and expenses.

Our revenues and gross margins will depend significantly on the overall demand for microelectronic products and testing solutions, particularly in the product and service segments in which we compete. Weaker demand for our products and services caused by economic weakness may result in decreased revenues, earnings levels or growth rates and problems with the saleability of inventory and realizability of customer receivables. In the past, we have observed effects of the global economic downturn in many areas of our business. Delays or reductions in spending for our products could have a material adverse effect on our business, results of operations and financial condition.

Our operating results may fluctuate significantly on a quarterly basis.

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

• the timing, cancellation or rescheduling of customer estimates, orders and shipments;

• the pricing and mix of products sold;

• new product introductions;

• our ability to obtain components and subassemblies from contract manufacturers and suppliers; and

• variations in manufacturing efficiencies.

Many of these factors are beyond our control. Our performance in any one fiscal quarter is not necessarily indicative of any financial trends or future performance.

In the event that certain of our customers encounter financial difficulties and fail to pay us, it could adversely affect our results of operations and financial condition.

We manufacture products to customer specifications and purchase products in response to customer orders. In addition, we may commit significant amounts to maintain inventory in anticipation of customer orders. In the event that any customer, for whom we maintain inventory, experiences financial difficulties, we may be unable to sell such inventory at its current profit margin, if at all. In such an event, our gross margins would decline. In addition, if the financial condition of any customer deteriorates, resulting in an impairment of that customer’s ability to pay us amounts owed in respect of a significant amount of outstanding receivables, our financial condition would be adversely affected.

If we cannot continue to develop, manufacture and market innovative products and services rapidly that meet customer requirements for performance and reliability, we may lose market share and our revenues may suffer.

The process of developing new high technology products and services is complex and uncertain, and failure to anticipate customers’ changing needs and emerging technological trends accurately and to develop or obtain appropriate intellectual property could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will eventually result in products that the market will accept. We must accurately forecast volumes, mix of products and configurations that meet customer requirements, and we may not succeed.

Due to the international nature of our business, political or economic changes could harm our future revenues, costs and expenses and financial condition.

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

• changes in a country’s or region’s political or economic conditions;

• longer accounts receivable cycles;

• trade protection measures;

• unexpected changes in regulatory requirements;

• differing technology standards and/or customer requirements; and

• import or export licensing requirements, which could affect our ability to obtain favorable terms for components or lead to penalties or restrictions.

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

We are exposed to foreign currency exchange rate risks that could adversely affect our business, results of operations and financial condition.

We are exposed to foreign currency exchange rate risks that are inherent in our sales commitments, anticipated sales, and assets and liabilities that are denominated in currencies other than the United States dollar. Failure to sufficiently hedge or otherwise manage foreign currency risks properly could adversely affect our business, results of operations and financial condition.

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

As part of our business strategy, we engage in discussions with third parties regarding, and enter into agreements relating to, possible acquisitions, strategic alliances, ventures and divestitures in order to manage our product and technology portfolios and further our strategic objectives. In order to pursue this strategy successfully, we must identify suitable acquisition, alliance or divestiture candidates, complete these transactions, some of which may be large and complex, and integrate acquired companies. Integration and other risks of acquisitions and strategic alliances can be more pronounced for larger and more complicated transactions, or if multiple acquisitions are pursued simultaneously.

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

Acquisitions and strategic alliances may require us to integrate with a different company culture, management team and business infrastructure and otherwise manage integration risks. Even if an acquisition or alliance is successfully integrated, we may not receive the expected benefits of the transaction. Managing acquisitions, alliances and divestitures requires varying levels of management resources, which may divert management’s attention from the other business operations. Acquisitions, including abandoned acquisitions, also may result in significant costs and expenses and charges to earnings. As a result, any completed, pending or future transactions may contribute to our financial results differing from the investment community’s expectations in a given quarter.

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

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

Terrorist acts or acts of war may seriously harm our business, results of operations and financial condition.

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

Our stock price has historically fluctuated and may continue to fluctuate.

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

• the announcement of new products, services or technological innovations by us or our competitors;

• quarterly increases or decreases in our revenue or earnings;

• changes in quarterly revenue or earnings estimates by the investment community; and

• speculation in the press or investment community about our strategic position, financial condition, results of operations, business or significant transactions.

General market conditions and domestic or international macroeconomic and geopolitical factors unrelated to our performance may also affect our stock price. In addition, following periods of volatility in a Registrant’s securities, securities class action litigation against a Registrant is sometimes instituted. This type of litigation could result in substantial costs and the diversion of management time and resources.

Forward-Looking Statements

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

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates and to foreign currency exchange rates. Most of our debt is at fixed rates of interest or at a variable rate with an interest rate swap agreement which effectively converts the variable rate debt into fixed rate debt. Therefore, if market interest rates increase by 10% from levels at December 31, 2005, the effect on our net income as well as the fair value of our swap would be insignificant. Most of our invested cash, cash equivalents and marketable securities are at variable rates of interest. If market interest rates decrease by 10 percent from levels at December 31, 2005, the effect on our net income would be insignificant. If foreign currency exchange rates (primarily the British Pound and the Euro) change by 10% from levels at December 31, 2005, the effect on our other comprehensive income would be approximately $17.9 million. Foreign currency contracts are used to protect us from short-term fluctuations in exchange rates principally related to outstanding trade receivables. We periodically enter into foreign currency contracts, which are not designated as hedges, and the change in fair value is included in income currently, within other income (expense). As of December 31, 2005, we had $2.1 million of notional value foreign currency forward contracts maturing through March 2006. Notional amounts do not quantify risk or represent assets or liabilities, but are used in the calculation of cash settlements under the contracts. The fair value of these contracts at December 31, 2005 was $34,000 less than the notional value.

ITEM 4 – CONTROLS AND PROCEDURES

Based on their evaluation as of the end of the period covered by this Form 10-Q, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the six months ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective at the “reasonable assurance” level.

AEROFLEX INCORPORATED

AND SUBSIDIARIES

PART II – OTHER INFORMATION

Item 1 Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Not applicable.

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

Issuer purchases of equity securities (1)
				Total Number of Shares Purchased as Part of	Maximum Number of Shares that May Yet be
Period	Total Number of Shares Purchased (2)	Average Price Paid Per Share		Publicly Announced Plans or Programs	Purchased under the Plans or Programs

October 2005	0	—		55,000	2,945,000
November 2005	5,000	$	10.69	60,000	2,940,000
December 2005	5,000	$	10.90	65,000	2,935,000

(1) For description of plans, see Note 10 to the Unaudited Condensed Consolidated Financial Statements.

(2) All purchases were made in open market transactions. Our 3.0 million share stock buyback program has been in effect since May 23, 2005. There is no time limit on the repurchases to be made under the Plan.

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

Item 4.		Submission of Matters to a Vote of Security Holders

(a)		The Registrant held its Annual Meeting of Stockholders on November 10, 2005.

(b)		Not applicable.

(c)

(1)

Three directors were elected at the Annual Meeting to serve until the Annual Meeting of Stockholders in 2008. The names of these directors and votes cast in favor of their election and shares withheld are as follows:

Name	Votes For	Votes Withheld

John F. Benedik	54,610,326	4,263,248

Ernest E. Courchene	53,601,223	5,272,351

Barton D. Strong	56,216,685	2,656,889

(2)

The Stockholders approved to amend the 2002 Outside Directors’ Stock Option Plan to increase the number of shares available for grant from 500,000 to 1,100,000.

Votes for: 46,512,860;

Votes against: 12,197,119;

Abstentions: 163,595

Item 5. Other Information

None

Item 6. Exhibits

Exhibits

10.1		Employment Agreement between Aeroflex Incorporated and John Adamovich, Jr., dated November 9, 2005 (incorporated by reference on Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 15, 2005).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.3		Certification of Chief Operating Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.4		Certification of Principal Accounting Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.



	PART I:		FINANCIAL INFORMATION

Item 1 -		UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
		December 31, 2005 and June 30, 2005

		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
		Three Months Ended December 31, 2005 and 2004

		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
		Six Months Ended December 31, 2005 and 2004

		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		Six Months Ended December 31, 2005 and 2004

		NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 2 -		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
		CONDITION AND RESULTS OF OPERATIONS
		Three and Six Months Ended December 31, 2005 and 2004

Item 3 -		QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 4 -		CONTROLS AND PROCEDURES

	PART II: OTHER INFORMATION

Item 1 -		LEGAL PROCEEDINGS

Item 1A-		RISK FACTORS

Item 2 -		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Item 3 -		DEFAULTS UPON SENIOR SECURITIES

Item 4 -		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 5 -		OTHER INFORMATION

Item 6 -		EXHIBITS

SIGNATURES

EXHIBIT INDEX

CERTIFICATIONS

	AEROFLEX INCORPORATED
	(REGISTRANT)


February 9, 2006	By:	/s/John Adamovich, Jr.
		John Adamovich, Jr.
		Sr. Vice President and
		Chief Financial Officer

Date:	February 8, 2006	/s/ Harvey R. Blau
		Harvey R. Blau, Chairman of the Board
		and Chief Executive Officer

Date:	February 8, 2006	/s/ Leonard Borow
		Leonard Borow
		Chief Operating Officer

Date:	February 8, 2006	/s/ Charles Badlato
		Charles Badlato
		Principal Accounting Officer

Date:	February 8, 2006	/s/ John Adamovich, Jr.
		John Adamovich, Jr.
		Sr. Vice President and
		Chief Financial Officer

		/s/ Harvey R. Blau

		Name: Harvey R. Blau

		Date: February 8, 2006

		/s/ John Adamovich, Jr.

		Name: John Adamovich, Jr.

		Date: February 8, 2006