UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

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

For the quarter ended September 30, 2004

Commission File Number 000-02324

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AEROFLEX INCORPORATED(Exact name of Registrant as specified in its Charter)

|DELAWARE(State or other jurisdiction
of incorporation or organization)                      |  | 11-1974412(I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|35 South Service Road
P.O. Box 6022
Plainview, N.Y.(Address of principal executive offices) |  | 11803-0622(Zip Code)                          
|(516) 694-6700(Registrant's telephone number, including area code)                         

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*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  ý                        No  o

*Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý                        No  o

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

|November 9, 2004 |  | 74,489,027 shares (excluding |  | 4,388 shares held in treasury)
|---------------- |  | ---------------------------- |  | ------------------------------
|                
|(Date)           |  | (Number of Shares)          

NOTE:  THIS IS PAGE 1 OF A DOCUMENT CONSISTING OF 37 PAGES.



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AEROFLEX INCORPORATED  AND SUBSIDIARIESINDEX

|               |  |                               |  |                                                             |  | PAGE 
|-------------- |  | ----------------------------- |  | ----------------------------------------------------------- |  | -----
|               |  | PART I: FINANCIAL INFORMATION |  |                                                            
|Item 1         |  |                              |  | CONSOLIDATED BALANCE SHEETS                                 |  | 3-4  
|               |  |                               |  | September 30, 2004 (Unaudited) and June 30, 2004            |  |      
|               |  |                               |  | CONSOLIDATED STATEMENTS OF OPERATIONS                       |  | 5    
|               |  |                               |  | Three Months Ended September 30, 2004 and 2003 (Unaudited)  |  |      
|               |  |                               |  | CONSOLIDATED STATEMENTS OF CASH FLOWS                       |  | 6    
|               |  |                               |  | Three Months Ended September 30, 2004 and 2003 (Unaudited)  |  |      
|               |  |                               |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  |  | 7-20 
|Item 2         |  |                              |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION |  |      
|               |  |                               |  | AND RESULTS OF OPERATIONS                                   |  | 21-30
|               |  |                               |  | Three Months Ended September 30, 2004 and 2003              |  |      
|Item 3         |  |                              |  | QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    |  | 30-31
|Item 4         |  |                              |  | CONTROLS AND PROCEDURES                                     |  | 31   
|               |  | PART II: OTHER INFORMATION    |  |                                                            
|Item 1         |  |                              |  | LEGAL PROCEEDINGS                                           |  | 32   
|Item 6         |  |                              |  | EXHIBITS AND REPORTS ON FORM 8-K                            |  | 32   
|SIGNATURES     |  | 33                           
|CERTIFICATIONS |  | 34-37                        

2

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AEROFLEX INCORPORATED  AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS  (In thousands, except per share amounts)

|                                           |                                                                                | September 30,
2004   |        | June 30,
2004
|------------------------------------------ | ------------------------------------------------------------------------------ | -------------------- | ------ | -------------
|
|ASSETS                                     |                                                                                |                      |        |              
|Current assets:                            |                                                                                |                      |        |              
|                                           | Cash and cash equivalents                                                      |                      | $      | 108,890      
|                                           | Accounts receivable, less allowance for doubtful accounts of $1,572 and $1,618 |                      |        | 91,741       
|                                           | Inventories                                                                    |                      |        | 97,884       
|                                           | Deferred income taxes                                                          |                      |        | 16,638       
|                                           | Assets of discontinued operations                                              |                      |        | 6,065        
|                                           | Prepaid expenses and other current assets                                      |                      |        | 10,976       
|                                           |                                                                                |                      |        |              
|                                           |                                                                                | Total current assets |        |              
|Property, plant and equipment, net         |                                                                                |                      | 75,080 |              
|Assets of discontinued operations          |                                                                                |                      | 3,196  |              
|Other assets                               |                                                                                |                      | 14,202 |              
|Intangible assets with definite lives, net |                                                                                |                      | 39,666 |              
|Goodwill                                   |                                                                                |                      | 84,666 |              
|                                           |                                                                                |                      |        |              
|                                           |                                                                                | Total assets         |        | $            
|                                           |                                                                                |                      |        |              

See
notes to consolidated financial statements.

3

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|                                           |                                                                     | September 30,
2004                                                                                   |         | June 30,
2004
|------------------------------------------ | ------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------- | -------------
|
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                     |                                                                                                      |         |              
|Current liabilities:                       |                                                                     |                                                                                                      |         |              
|                                           | Current portion of long-term debt                                   |                                                                                                      | $       | 3,396        
|                                           | Accounts payable                                                    |                                                                                                      |         | 25,380       
|                                           | Advance payments by customers                                       |                                                                                                      |         | 11,202       
|                                           | Income taxes payable                                                |                                                                                                      |         | 4,677        
|                                           | Liabilities of discontinued operations                              |                                                                                                      |         | 1,837        
|                                           | Accrued payroll expenses                                            |                                                                                                      |         | 13,858       
|                                           | Accrued expenses and other current liabilities                      |                                                                                                      |         | 23,108       
|                                           |                                                                     |                                                                                                      |         |              
|                                           |                                                                     | Total current liabilities                                                                            |         |              
|Long-term debt                             |                                                                     |                                                                                                      | 4,783   |              
|Deferred income taxes                      |                                                                     |                                                                                                      | 8,799   |              
|Liabilities of discontinued operations     |                                                                     |                                                                                                      |        |              
|Other long-term liabilities                |                                                                     |                                                                                                      | 16,637  |              
|                                           |                                                                     |                                                                                                      |         |              
|                                           |                                                                     | Total liabilities                                                                                    |         |              
|                                           |                                                                     |                                                                                                      |         |              
|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 74,456 and 74,282 shares   |         |              
|                                           |                                                                     | Additional paid-in capital                                                                           |         |              
|                                           |                                                                     | Accumulated other comprehensive income                                                               |         |              
|                                           |                                                                     | Retained earnings                                                                                    |         |              
|                                           |                                                                     |                                                                                                      |         |              
|                                           |                                                                     |                                                                                                      | 435,341 |              
|Less: Treasury stock, at cost (4 shares)   |                                                                     |                                                                                                      | 14      |              
|                                           |                                                                     |                                                                                                      |         |              
|Total stockholders' equity                 |                                                                     |                                                                                                      | 435,327 |              
|                                           |                                                                     |                                                                                                      |         |              
|Total liabilities and stockholders' equity |                                                                     | $                                                                                                    | 549,004 |              
|                                           |                                                                     |                                                                                                      |         |              

See
notes to consolidated financial statements.

4

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AEROFLEX INCORPORATED  AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)

|                                                            |                                                                                               | Three Months Ended
September 30, |        
|----------------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------- | -------
|
|
|
|Net sales                                                   |                                                                                               | $                                | 109,183
|Cost of sales                                               |                                                                                               |                                  | 57,851 
|                                                            |                                                                                               |                                  |        
|                                                            | Gross profit                                                                                  |                                  |        
|                                                            |                                                                                               |                                  |        
|Selling, general and administrative costs                   |                                                                                               |                                  | 24,767 
|Research and development costs                              |                                                                                               |                                  | 14,544 
|Amortization of acquired intangibles                        |                                                                                               |                                  | 2,060  
|Acquired in-process research and development costs (Note 2) |                                                                                               |                                  |       
|                                                            |                                                                                               |                                  |        
|                                                            |                                                                                               |                                  | 41,371 
|                                                            |                                                                                               |                                  |        
|                                                            | Operating income                                                                              |                                  |        
|                                                            |                                                                                               |                                  |        
|Other expense (income)                                      |                                                                                               |                                  |        
|                                                            | Interest expense                                                                              |                                  |        
|                                                            | Other expense (income), net                                                                   |                                  |        
|                                                            |                                                                                               |                                  |        
|                                                            |                                                                                               | Total other expense (income)     |        
|                                                            |                                                                                               |                                  |        
|Income from continuing operations before income taxes       |                                                                                               |                                  | 10,125 
|Provision for income taxes                                  |                                                                                               |                                  | 3,725  
|                                                            |                                                                                               |                                  |        
|Income from continuing operations                           |                                                                                               |                                  | 6,400  
|                                                            |                                                                                               |                                  |        
|Discontinued operations                                     |                                                                                               |                                  |        
|                                                            | Income (loss) from discontinued operations, net of tax provision (benefit) of $204 and $(298) |                                  |        
|                                                            | Loss on disposal of operations, net of tax benefit of $0 and $0                               |                                  |        
|                                                            |                                                                                               |                                  |        
|                                                            | Loss from discontinued operations, net of tax                                                 |                                  |        
|                                                            |                                                                                               |                                  |        
|Net income                                                  |                                                                                               | $                                | 5,617  
|                                                            |                                                                                               |                                  |        
|Income (loss) per common share:                             |                                                                                               |                                  |        
|Basic                                                       |                                                                                               |                                  |        
|                                                            | Continuing operations                                                                         |                                  | $      
|                                                            | Discontinued operations                                                                       |                                  |        
|                                                            |                                                                                               |                                  |        
|                                                            | Net income                                                                                    |                                  | $      
|                                                            |                                                                                               |                                  |        
|Diluted                                                     |                                                                                               |                                  |        
|                                                            | Continuing operations                                                                         |                                  | $      
|                                                            | Discontinued operations                                                                       |                                  |        
|                                                            |                                                                                               |                                  |        
|                                                            | Net income                                                                                    |                                  | $      
|                                                            |                                                                                               |                                  |        
|Weighted average number of common shares outstanding:       |                                                                                               |                                  |        
|                                                            | Basic                                                                                         |                                  |        
|                                                            |                                                                                               |                                  |        
|                                                            | Diluted                                                                                       |                                  |        
|                                                            |                                                                                               |                                  |        

See notes to consolidated financial statements.

5

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AEROFLEX INCORPORATED  AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)

|                                                                                                                   |                                                                                          | Three Months Ended
September 30,                                                |        
|------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------
|
|
|
|Cash Flows From Operating Activities:                                                                              |                                                                                          |                                                                                 |        
|                                                                                                                   | Net income                                                                               |                                                                                 | $      
|                                                                                                                   | Loss from discontinued operations                                                        |                                                                                 |        
|                                                                                                                   |                                                                                          |                                                                                 |        
|                                                                                                                   | Income from continuing operations                                                        |                                                                                 |        
|Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: |                                                                                          |                                                                                 |        
|                                                                                                                   |                                                                                          | Acquired in-process research and development                                    |        
|                                                                                                                   |                                                                                          | Depreciation and amortization                                                   |        
|                                                                                                                   |                                                                                          | Deferred income taxes                                                           |        
|                                                                                                                   |                                                                                          | Other, net                                                                      |        
|                                                                                                                   | Change in operating assets and liabilities, net of effects from purchases of businesses: |                                                                                 |        
|                                                                                                                   |                                                                                          | Decrease (increase) in accounts receivable                                      |        
|                                                                                                                   |                                                                                          | Decrease (increase) in inventories                                              |        
|                                                                                                                   |                                                                                          | Decrease (increase) in prepaid expenses and other assets                        |        
|                                                                                                                   |                                                                                          | Increase (decrease) in accounts payable, accrued expenses and other liabilities |        
|                                                                                                                   |                                                                                          |                                                                                 |        
|Net Cash Provided By (Used In) Continuing Operations                                                               |                                                                                          |                                                                                 | 11,008 
|Net Cash Provided By (Used In) Discontinued Operations                                                             |                                                                                          |                                                                                 | (1,046 
|                                                                                                                   |                                                                                          |                                                                                 |        
|                                                                                                                   | Net Cash Provided By Operating Activities                                                |                                                                                 |        
|                                                                                                                   |                                                                                          |                                                                                 |        
|                                                                                                                   | Cash Flows From Investing Activities:                                                    |                                                                                 |        
|                                                                                                                   |                                                                                          | Payment for purchase of businesses, net of cash acquired                        |        
|                                                                                                                   |                                                                                          | Capital expenditures                                                            |        
|                                                                                                                   |                                                                                          | Other, net                                                                      |        
|                                                                                                                   |                                                                                          |                                                                                 |        
|Net Cash Provided By (Used In) Continuing Operations                                                               |                                                                                          |                                                                                 | (4,630 
|Net Cash Provided By (Used In) Discontinued Operations                                                             |                                                                                          |                                                                                 | 6,280  
|                                                                                                                   |                                                                                          |                                                                                 |        
|                                                                                                                   |                                                                                          | Net Cash Provided by (Used In) Investing Activities                             |        
|                                                                                                                   |                                                                                          |                                                                                 |        
|Cash Flows From Financing Activities:                                                                              |                                                                                          |                                                                                 |        
|                                                                                                                   | Borrowings under debt agreements                                                         |                                                                                 |        
|                                                                                                                   | Debt repayments                                                                          |                                                                                 |        
|                                                                                                                   | Proceeds from the exercise of stock options                                              |                                                                                 |        
|                                                                                                                   |                                                                                          |                                                                                 |        
|                                                                                                                   |                                                                                          | Net Cash Provided By (Used In) Financing Activities                             |        
|                                                                                                                   |                                                                                          |                                                                                 |        
|Effect of Exchange Rate Changes on Cash and Cash Equivalents                                                       |                                                                                          |                                                                                 | 76     
|                                                                                                                   |                                                                                          |                                                                                 |        
|Net Increase (Decrease) In Cash And Cash Equivalents                                                               |                                                                                          |                                                                                 | 10,388 
|Cash And Cash Equivalents At Beginning Of Period                                                                   |                                                                                          |                                                                                 | 98,502 
|                                                                                                                   |                                                                                          |                                                                                 |        
|Cash And Cash Equivalents At End Of Period                                                                         |                                                                                          | $                                                                               | 108,890
|                                                                                                                   |                                                                                          |                                                                                 |        

See notes to consolidated financial statements.

6

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AEROFLEX INCORPORATED  AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

1.Basis of Presentation

The
consolidated balance sheet of Aeroflex Incorporated and Subsidiaries ("the Company") as of September 30, 2004, the related consolidated statements of operations for the three
months ended September 30, 2004 and 2003, and the consolidated statements of cash flows for the three months ended September 30, 2004 and 2003 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
September 30, 2004 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 consolidated financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's June 30, 2004 annual report to shareholders. There have been no changes of significant accounting policies since June 30, 2004.

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



The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, 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 (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 software support and maintenance contracts is recognized ratably over the term of the contract 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.

7

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Financial Instruments

Foreign currency contracts are used to protect us from fluctuations in exchange rates. We have 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 or expense. As of September 30, 2004, we had $5.6 million of notional value foreign currency
forward contracts maturing through December 2004. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements
under the contracts. The fair value of these contracts at September 30, 2004 was $12,000 in our favor.

The
Company accounts for derivatives in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement requires companies
to record derivatives on the balance sheet as assets or liabilities at their fair value. For derivatives designated and qualifying as effective cash flow hedges under SFAS No. 133, changes in
the fair value of such derivatives are recorded as components of other comprehensive income. For derivatives that are deemed ineffective, the changes are recorded as gains or losses in other income or
expense.

Accounting for Stock-Based Compensation

The Company records compensation expense for employee and director stock options only if the current market price of the underlying stock exceeds the exercise
price on the date of the grant. The Company has chosen not to implement the fair value based accounting method for employee and director stock options, but has elected to disclose the pro forma income
and income per share as if such method had been used to account for stock-based compensation costs as described in SFAS No. 123.

The
per share weighted average fair value of stock options granted during the three months ended September 30, 2004 was $4.23 on the date of grant. The fair value was determined
using the Black Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk free interest rate of 4.3%, expected volatility of 58%, and an
expected life of 3.0 years. The per share weighted average fair value of stock options granted during the three months ended September 30, 2003 was $6.11 on the date of grant. The fair
value was determined using the Black Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk free interest rate of 4.4%, expected volatility
of 108% and an expected life of 3.6 years. The

8

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Company's
net income (loss) and net income (loss) per share using the pro forma fair value compensation cost method would have been:

Three Months Ended
September 30,2004

2003(In thousands, except per share data)Income from continuing operations

$
6,400

$
962Deduct: Total stock-based employee compensation expense determined under fair value based method for all grants, net of tax


(3,286
)

(2,348
)Pro forma income (loss) from continuing operations

$
3,114

$
(1,386
)Earnings (loss) per share:Basic  as reported

$
.09

$
.02Basicpro forma

$
.04

$
(.02
)Dilutedas reported

$
.08

$
.02Dilutedpro forma

$
.04


*


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2.Acquisition of Businesses and Intangible Assets

Acquisition of Racal Instruments Wireless Solutions Group

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. The Company
did not include this contingent consideration in the purchase price allocation as the payment of this consideration was not considered to be certain beyond a reasonable doubt at the date of
acquisition. The Company believes that the performance goals have not been met.

RIWS
develops, manufactures and integrates digital wireless testing and measurement solutions. The addition of RIWS testing solutions products and technologies is expected to enable the
Company to provide a full spectrum of wireless testing solutions from development to production and services primarily for infrastructure testing and mobile handset testing.

The
Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company allocated the purchase price,
including acquisition

9

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costs
of approximately $2.6 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

(In thousands)Current assets (excluding cash of $5.9 million)

$
21,321Property, plant and equipment


8,672Developed technology


15,600Customer related intangibles


1,700Tradenames


200Goodwill


17,674In-process research and development


2,700Total assets acquired


67,867Current liabilities


(27,924
)Deferred taxes


(5,250
)Total liabilities assumed


(33,174
)Net assets acquired

$
34,693


The
developed technology, tradenames and customer related intangibles are being amortized on a straight-line basis over a range of 1 to 8 years. Approximately
$5.4 million of the goodwill is 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 has been
expensed in the quarter ended September 30, 2003 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 calendar year 2004. A 35% risk adjusted discount rate was applied to the projects' cash flows in determining fair value. At the acquisition date, RIWS was
conducting design, development, engineering and testing activities associated with the completion of new 2.5G and 3G protocol and conformance testers.

Acquisition of MCE Technologies, Inc.

On September 3, 2003, the Company acquired all of the outstanding stock of MCE Technologies, Inc. ("MCE") for approximately 5.8 million
shares of Aeroflex common stock with a fair value of approximately $43.5 million. In addition, the Company discharged $22.8 million of MCE outstanding bank debt, other indebtedness and
preferred stock. Further, the Company issued fully vested stock options for 315,000 shares of Aeroflex common stock with exercise prices ranging from $2.88 to $9.59 in exchange for fully vested
outstanding options of MCE. The fair value of these options was approximately $2.4 million utilizing the Black-Scholes option pricing model. MCE designs, manufactures and markets a broad range
of microelectronic devices, components and multi-function modules servicing wireless, broadband infrastructure, satellite communications and defense markets. These product offerings complement the
existing product lines of the Company.

10

---



The
Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company allocated the purchase price,
including acquisition costs of approximately $2.0 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

(In thousands)Current assets (excluding cash of $1.8 million)

$
19,020Property, plant and equipment


12,517Developed technology


8,850Tradenames


1,100Customer related intangibles


2,520Goodwill


42,638In-process research and development


420Other


459Total assets acquired


87,524Current liabilities


(12,551
)Long-term debt


(89
)Deferred taxes


(5,963
)Other long-term liabilities


(11
)Total liabilities assumed


(18,614
)Net assets acquired

$
68,910


The
developed technology, customer related intangibles, and tradenames are being amortized on a straight-line basis over a range of 1 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 has been expensed in the quarter ended September 30, 2003 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 2004. A 30% risk
adjusted discount rate was applied to the projects' cash flows in determining fair value. At the acquisition date, MCE was conducting development activities associated with the completion of certain
high frequency component technology.

Acquisition of the Business of Celerity Systems Inc. (CA)

On October 31, 2003, the Company acquired the business of Celerity Systems Inc. (CA) ("Celerity") for $4.0 million of cash, 428,000 shares of
Aeroflex common stock with a fair market value of approximately $4.2 million and a release of certain liabilities totaling $1.8 million. Celerity designs, develops and manufactures
modular digital test and measurement solutions for the communications, satellite, wireless and broadband test markets, including broadband signal generators. Celerity's technology enhances the
Company's automatic systems capability.

11

---



The
Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company allocated the purchase price,
including acquisition costs of approximately $106,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

In thousandsCurrent assets

$
2,137Property, plant and equipment


737Developed technology


3,405Goodwill


2,270In-process research and development


1,100Total assets acquired


9,649Current liabilities assumed


(1,341
)Net assets acquired

$
8,308


As
of September 30, 2004, 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 the second quarter.

The
developed technology is being amortized on a straight-line basis over 7 years. The goodwill is fully 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 has been expensed in the quarter ended December 31, 2003 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 2005. A 35% risk adjusted discount rate
was applied to the projects' cash flows in determining fair value. At the acquisition date, Celerity was conducting development activities associated with the completion of its next generation modular
technology.

Pro Forma Results of OperationsRIWS, MCE and Celerity

Summarized below are the unaudited pro forma results of operations of the Company as if RIWS, MCE and Celerity had been acquired at the beginning of the fiscal
period presented. The $3.1 million

12

---



write-off
of in-process research and development has been included in the September 30, 2003 pro forma loss in order to provide comparability to the respective
historical period.

Pro forma
Three Months Ended
September 30,
2003(In thousands)Net sales

$
88,994Income from continuing operations


(2,491
)Income from continuing operations per shareBasic

$
(.04
)Diluted

$
*


---

13

---



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 period presented or of future operating results of the combined companies. The operating results of RIWS, MCE and Celerity have been included in the consolidated statement of
operations from their respective acquisition dates. RIWS and Celerity are included in the Test Solutions segment and MCE is included in the Microelectronic Solutions segment.

Intangibles with Definite Lives

The components of amortizable intangible assets are as follows:

|                             |       | As of September 30, 2004
|---------------------------- | ----- | ------------------------
|
|
|Existing technology          |       | $                       
|Tradenames                   |       |                         
|Customer related intangibles |       |                         
|                             |       |                         
|                             | Total |                         
|                             |       |                         

The
aggregate amortization expense for the amortized intangible assets was $2.1 million and $1.3 million for the three months ended September 30, 2004 and 2003,
respectively.

The
estimated aggregate amortization expense for each of the twelve-month periods ending September 30, is as follows:

(In thousands)2005

$
7,9362006


7,7582007


6,8692008


5,7232009


3,887


Goodwill

The carrying amount of goodwill is as follows:

|                                  |       | Balance
as of
July 1,
2004 |        | Adjustment
(Note a) |   | Adjustment
(Note b) |        | Adjustment
(Note c) |        | Balance
as of
September 30,
2004
|--------------------------------- | ----- | -------------------------- | ------ | ------------------- | - | ------------------- | ------ | ------------------- | ------ | --------------------------------
|
|Microelectronic solutions segment |       | $                          | 46,371 |                     | $ | 317                 |        | $                   |       |                                 
|Test solutions segment            |       |                            | 41,917 |                     |   | (2,008              | )      |                     | (1,912 | )                               
|                                  |       |                            |        |                     |   |                     |        |                     |        |                                 
|                                  | Total |                            | $      | 88,288              |   | $                   | (1,691 | )                   | $      | (1,912                          
|                                  |       |                            |        |                     |   |                     |        |                     |        |                                 

---

14

---



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 ($5.9 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 a loss on disposal of $1.1 million. Since the sale of the stock creates 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. The Company has not recorded a loss on disposal as management believes VMC can be sold for a price in excess of its carrying value. This operation had previously comprised the
Isolator Products segment. Until such time, if any, as there is a definitive agreement with respect to the sale of VMC, the Company is unable to determine whether it will retain any material
liabilities notwithstanding the disposal of VMC's business.

In
accordance with SFAS No. 144, 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 losses on disposal have been reported separately from continuing operations. Net sales and income (loss) from discontinued operations (including loss on
disposal) for the three months ended September 30, 2004 and 2003 were as follows:

|                                           |         | Three Months Ended September 30, |      
|------------------------------------------ | ------- | -------------------------------- | -----
|
|
|Net sales                                  |         |                                  |      
|                                           | MIC     |                                  | $    
|                                           | VMC     |                                  |      
|                                           | TriLink |                                  |      
|                                           |         |                                  |      
|                                           |         | $                                | 7,576
|                                           |         |                                  |      
|Income (loss) from discontinued operations |         |                                  |      
|                                           | MIC     |                                  | $    
|                                           | VMC     |                                  |      
|                                           | TriLink |                                  |      
|                                           |         |                                  |      
|                                           |         | $                                | (783 
|                                           |         |                                  |      

15

---



To
conform with this presentation, all prior periods have been restated. As a result, the assets and liabilities of the discontinued operations have been reclassified on the balance
sheet from the historical classifications and presented under the captions "assets of discontinued operations" and "liabilities of discontinued operations," respectively. As of September 30,
2004 and June 30, 2004, the net assets of the discontinued operations consisted of the following:

|                                  |                       | September 30,
2004 |       | June 30,
2004
|--------------------------------- | --------------------- | ------------------ | ----- | -------------
|
|Accounts receivable               |                       | $                  | 2,739 |              
|Inventory                         |                       |                    | 2,504 |              
|Prepaid and other current assets  |                       |                    | 822   |              
|                                  |                       |                    |       |              
|                                  | Current assets        |                    |       | 6,065        
|                                  |                       |                    |       |              
|Property, plant, & equipment, net |                       |                    | 1,775 |              
|Intangibles                       |                       |                    | 789   |              
|Other assets                      |                       |                    | 632   |              
|                                  |                       |                    |       |              
|                                  | Non-current assets    |                    |       | 3,196        
|                                  |                       |                    |       |              
|Total assets                      |                       |                    | 9,261 |              
|                                  |                       |                    |       |              
|Accounts payable                  |                       |                    | 792   |              
|Accrued expenses                  |                       |                    | 1,045 |              
|                                  |                       |                    |       |              
|                                  | Current liabilities   |                    |       | 1,837        
|                                  |                       |                    |       |              
|Long term debt                    |                       |                    |      |              
|Other long term liabilities       |                       |                    |      |              
|                                  |                       |                    |       |              
|                                  | Long term liabilities |                    |       |             
|                                  |                       |                    |       |              
|Total liabilities                 |                       |                    | 1,837 |              
|                                  |                       |                    |       |              
|                                  | Net assets            |                    | $     | 7,424        
|                                  |                       |                    |       |              

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

16

---



options.
A reconciliation of the numerators and denominators of the Basic EPS and Diluted EPS calculations is as follows:

|                                                                                                               |          | Three Months
Ended September 30,
|-------------------------------------------------------------------------------------------------------------- | -------- | --------------------------------
|
|
|Income from continuing operations                                                                              |          | $                               
|                                                                                                               |          |                                 
|Computation of adjusted weighted average shares outstanding:                                                   |          |                                 
|Weighted average shares outstanding                                                                            |          |                                 
|Add: Effect of dilutive options outstanding                                                                    |          |                                 
|                                                                                                               |          |                                 
|Weighted average shares and common share equivalents used for computation of diluted earnings per common share |          |                                 
|                                                                                                               |          |                                 
|Income from continuing operations per share:                                                                   |          |                                 
|                                                                                                               | Basic   |                                 
|                                                                                                               |          |                                 
|                                                                                                               | Diluted |                                 
|                                                                                                               |          |                                 

Options
to purchase 9.0 million shares at exercise prices ranging between $11.32 and $34.41 per share were outstanding as of September 30, 2004 but were not included in the
computation of diluted EPS because the exercise prices of these options were greater than the average market price of the common shares.

5.Comprehensive Income

The
components of comprehensive income are as follows:

|                                                                    |  | Three Months Ended
September 30,
|------------------------------------------------------------------- |  | --------------------------------
|
|
|Net income                                                          |  | $                               
|Unrealized gain (loss) on interest rate swap agreements, net of tax |  |                                 
|Foreign currency translation adjustment                             |  |                                 
|                                                                    |  |                                 
|Total comprehensive income                                          |  | $                               
|                                                                    |  |                                 

Accumulated
other comprehensive income (loss) is as follows:

|                            |  | Unrealized
Gain (Loss)
on Interest
Rate Swap
Agreements
(net of tax) |      | Minimum
Pension
Liability
Adjustment
(net of tax) |   | Foreign
Currency
Translation
Adjustment |   | Total
(net of tax)
|--------------------------- |  | -------------------------------------------------------------------- | ---- | ------------------------------------------------- | - | --------------------------------------- | - | ------------------
|
|Balance, July 1, 2004       |  | $                                                                    | (129 | )                                                 | $ | (2,208                                  | ) | $                 
|Three months activity       |  |                                                                      | (2   | )                                                 |   |                                        |   |                   
|                            |  |                                                                      |      |                                                   |   |                                         |   |                   
|Balance, September 30, 2004 |  | $                                                                    | (131 | )                                                 | $ | (2,208                                  | ) | $                 
|                            |  |                                                                      |      |                                                   |   |                                         |   |                   

17

---



6.Bank Loan Agreements

On
February 14, 2003, the Company executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and
restated loan agreement increased the line of credit to $50 million through February 2007, continued the mortgage on the Company's Plainview property for $2.7 million and is
secured by the pledge of the stock of certain of the Company's 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 prime (4.75% at September 30, 2004). The Company paid a facility fee of $125,000 and is required to pay a commitment fee of .25% per
annum of the average unused portion of the credit line. At September 30, 2004, the Company's available unused line of credit was approximately $44.4 million after consideration of
letters of credit. 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. The Company has
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 $210,000 as of September 30, 2004 in favor of the banks. If this mortgage was prepaid, although the Company has no
intention of doing so, the $210,000 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. The Company is currently in full compliance with all of the covenants contained in the loan agreement.

7.Inventories

Inventories
consist of the following:

September 30,
2004

June 30,
2004(In thousands)Raw materials

$
34,852

$
35,228Work in process


43,295


40,248Finished goods


19,737


19,141$
97,884

$
94,617


8.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 recorded and is included in cost of goods sold.

18

---



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

|                                   |  | Three Months Ended
September 30, |      
|---------------------------------- |  | -------------------------------- | -----
|
|
|Balance at beginning of period     |  | $                                | 1,702
|Provision for warranty obligations |  |                                  | 480  
|Charges incurred                   |  |                                  | (261 
|Acquired warranty obligations      |  |                                  | (195 
|                                   |  |                                  |      
|Balance at end of period           |  | $                                | 1,726
|                                   |  |                                  |      

9.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.



Three Months Ended
September 30,2004

2003(In thousands)Service cost

$
134

$
104Interest cost


170


144Expected return on plan assets


(31
)

(10
)Amortization of net transition (asset) obligation


9


9Amortization of prior service cost





Recognized actuarial (gain) loss


50


50Net periodic benefit cost

$
332

$
297


The
Company previously disclosed in its financial statements for the year ended June 30, 2004, that it expected to contribute $253,000 to its pension plan in the fiscal year ended
June 30, 2005. As of September 30, 2004, $112,000 of the contributions has been made. The Company presently anticipates increasing its total contributions to $338,000 in the fiscal year
ending June 30, 2005.

10.Income Taxes

The
Company recorded credits of $366,000 and $61,000 to additional paid-in capital during the three months ended September 30, 2004 and 2003, respectively, in
connection with the tax benefit related to compensation deductions on the exercise of stock options.

11.Contingencies

The
Company is involved in various routine legal matters. Management believes the outcome of these matters will not have a materially adverse effect on the Company's consolidated
financial statements.

19

---



12.Business Segments

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

Microelectronic Solutions:

Test Solutions:a)Microelectronic Modules and Components

a)Instrument Productsb)Integrated Circuits

b)Motion Control Systems


|                                      |                                                       | For The Three Months Ended
September 30, |      
|------------------------------------- | ----------------------------------------------------- | ---------------------------------------- | -----
|
|
|Business Segment Data:                |                                                       |                                          |      
|Net sales:                            |                                                       |                                          |      
|                                      | Microelectronic solutions                             |                                          | $    
|                                      | Test solutions                                        |                                          |      
|                                      |                                                       |                                          |      
|                                      |                                                       | Net sales                                |      
|                                      |                                                       |                                          |      
|Segment adjusted operating income(1): |                                                       |                                          |      
|                                      | Microelectronic solutions                             |                                          | $    
|                                      | Test solutions                                        |                                          |      
|                                      | General corporate expenses                            |                                          |      
|                                      |                                                       |                                          |      
|                                      |                                                       |                                          | 9,961
|                                      | Acquired in-process research and development(2)       |                                          |      
|                                      | Interest expense                                      |                                          |      
|                                      | Other income (expense), net                           |                                          |      
|                                      |                                                       |                                          |      
|                                      | Income from continuing operations before income taxes |                                          | $    
|                                      |                                                       |                                          |      

---

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

|                         |  | For the Three Months Ended
September 30,
|------------------------ |  | ----------------------------------------
|
|
|United States of America |  | $                                       
|Europe and Middle East   |  |                                         
|Asia and Australia       |  |                                         
|Rest of World            |  |                                         
|                         |  |                                         
|                         |  | $                                       
|                         |  |                                         

20

---



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.

In
September 2003, we acquired MCE Technologies, Inc. MCE designs, manufactures and markets a broad range of devices, components and subsystems that are used in wireless
broadband access, cable head-end systems, fiber optic networking and satellite applications.

Test Solutions

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



We
recently acquired two businesses in this segment:



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

Our
operating strategy is based on the following key objectives:



21

---





As
a result of continued operating losses, in February 2004, our Board of Directors approved a plan to divest our thin film interconnect manufacturing operation ("MIC") and to
seek a strategic buyer. As a result of this decision, we recorded a $9.1 million ($5.9 million, net of tax) loss on disposal in December 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 accordance with SFAS 144, we have reported the loss on disposal and the results of operations of this business as income (loss) from discontinued operations and all prior periods
have been restated in order to conform to this presentation. MIC designs, develops, manufactures and markets microelectronic products in the form of passive thin film circuits and interconnects. In
September 2004, the Company sold the stock of MIC for $8.8 million and recorded an additional loss on disposal of $1.1 million. Under the terms of the sale agreements, we have
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. We believe these contingencies will not have a material adverse effect on our consolidated financial statements.

In
June 2004, our Board of Directors approved a formal plan to divest our shock and vibration control device manufacturing business ("VMC"), and to seek a strategic buyer. We have
not recorded a loss on disposal as we believe VMC can be sold for a price in excess of its carrying value. This operation had previously comprised the Isolator Products segment. In accordance with
SFAS 144, we have reported the results of operations of this business as income (loss) from discontinued operations and all prior periods have been restated in order to conform to this
presentation. Until such time, if any, as there is a definitive agreement with respect to the sale of VMC, we are unable to determine whether we will retain any material liabilities notwithstanding
the disposal of VMC's business.

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



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 September 30, 2004 Compared to Three Months Ended September 30, 2003

Net Sales.Net sales increased 43% to $109.2 million for the three months ended September 30, 2004 from
$76.1 million for the three months ended September 30, 2003. Net sales in the microelectronic solutions ("AMS") segment increased 75% to $47.4 million for the three months ended
September 30, 2004 from $27.0 million for the three months ended September 30, 2003 due primarily to the acquisition of MCE in September 2003 and also as a result of
increased sales of our microelectronic modules and integrated circuits. Net sales in the test solutions ("ATS") segment increased 26% to $61.8 million for the three months ended
September 30, 2004 from $49.1 million for the three months ended September 30, 2003 due primarily to the acquisition of RIWS in July 2003 and also as a result of increased
sales of our communication test products business, frequency synthesizers and scanning devices.

22

---



Gross Profit.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 September 30, |  | AMS |        | % of
sales |      | ATS |   | % of
sales |  | Total |   | % of
sales |       
|-------------------------------- |  | --- | ------ | ---------- | ---- | --- | - | ---------- |  | ----- | - | ---------- | ------
|
|2004                             |  | $   | 23,681 |            | 50.0 | %   | $ | 27,651     |  | 44.8  | % | $          | 51,332
|2003                             |  |     | 13,181 |            | 48.8 | %   |   | 20,611     |  | 42.0  | % |            | 33,792

Gross
profit increased $10.5 million, or 80%, in the AMS segment primarily as a result of the effect of the acquisition of MCE in September 2003 and
increased sales and margins in our integrated circuits and microelectronic modules businesses due to improved factory utilization. Gross profit increased $7.0 million, or 34%, in the ATS
segment primarily as a result of the effect of the acquisition of RIWS in July 2003 and increased sales and margins in our communications test products business due to improved factory
utilization and a favorable sales mix.

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

|Three Months Ended September 30, |  | AMS |       | % of
sales |      | ATS |   | % of
sales |  | Corporate |   | Total |       | % of
sales |  
|-------------------------------- |  | --- | ----- | ---------- | ---- | --- | - | ---------- |  | --------- | - | ----- | ----- | ---------- | -
|
|2004                             |  | $   | 7,654 |            | 16.1 | %   | $ | 13,559     |  | 21.9      | % | $     | 3,554 |            | $
|2003                             |  |     | 4,305 |            | 15.9 | %   |   | 11,807     |  | 24.1      | % |       | 1,800 |            |  

Selling,
general and administrative costs increased $3.3 million, or 78%, in the AMS segment due primarily to the addition of the expenses of MCE. Selling, general
and administrative costs increased $1.8 million, or 15% in the ATS segment due primarily to the addition of the expenses of RIWS. Corporate selling, general and administrative expenses
increased $1.8 million due primarily to increased compensation expense ($906,000), professional fees ($295,000) and insurance expense ($333,000).

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

|Three Months Ended September 30, |  | AMS |       | % of
sales |      | ATS |   | % of
sales |  | Total |   | % of
sales |       
|-------------------------------- |  | --- | ----- | ---------- | ---- | --- | - | ---------- |  | ----- | - | ---------- | ------
|
|2004                             |  | $   | 4,899 |            | 10.3 | %   | $ | 9,645      |  | 15.6  | % | $          | 14,544
|2003                             |  |     | 2,749 |            | 10.2 | %   |   | 7,116      |  | 14.5  | % |            | 9,865 

Self-funded
research and development costs increased $2.2 million, or 78%, in the AMS segment primarily due to the addition of the expenses of MCE.
Research and development costs increased $2.5 million, or 36%, in the ATS segment primarily due to the addition of the expenses of RIWS, which historically had, and is expected to continue to
have, a higher percentage of research and development costs.

Amortization of Acquired Intangibles.Amortization increased $720,000, or 54%, due to the acquisitions of MCE, RIWS and
Celerity.

Acquired In-Process Research and Development.In connection with the acquisition of RIWS, we allocated
$2.7 million of the purchase price to incomplete research and development projects. In connection with the acquisition of MCE, we allocated $420,000 of the purchase price to incomplete research
and development projects. These allocations represent the estimated fair value of such incomplete research and development based on future cash flows that have been adjusted by the respective
projects' completion percentage. At the respective acquisition dates, the development of these projects had not yet reached technological feasibility and the research and development in progress had
no alternative future uses. Accordingly, we expensed these costs as of the respective acquisition dates in accordance with accounting principles generally accepted in the United States of America.

23

---



Other Expense (Income).Interest expense was $260,000 for the three months ended September 30, 2004 and $320,000 for
the three months ended September 30, 2003. Other income of $424,000 for the three months ended September 30, 2004 consisted primarily of interest income of $349,000 and foreign currency
transaction gains of $252,000, partially offset by $133,000 of loss on investments. Other income of $245,000 for the three months ended September 30, 2003 consisted of $40,000 of interest
income, gains on our investments of $98,000 and a $75,000 favorable change in the fair value of our interest rate swap agreements. Interest income increased primarily due to higher average levels of
cash and cash equivalents and higher market interest rates.

Provision for Income Taxes.The income tax provision was $3.7 million (an effective income tax rate of 36.8%) for the
three months ended September 30, 2004 and the income tax provision was $518,000 (an effective income tax rate of 35%) for the three months ended September 30, 2003. 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
research and development credits.

Income From Continuing Operations.The income from continuing operations for the three months ended September 30, 2004
was $6.4 million, or $.08 per diluted share, versus income from continuing operations of $962,000, or $.02 per diluted share, for the three months ended September 30, 2003.

Discontinued Operations.Discontinued operations includes the results of operations of MIC, VMC and TriLink. In
September 2004, we sold the stock of MIC for $8.8 million and recorded a loss on disposal of $1.1 million. We are currently seeking a strategic buyer for VMC but have not entered
into a binding contract.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements other than letters of credit totaling $5.6 million to guarantee our performance under
certain government contracts.

Liquidity and Capital Resources

As of September 30, 2004, we had $249 million in working capital. Our current ratio was 4.0 to 1 at September 30, 2004. On
February 14, 2003, we executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and restated loan agreement
increased the line of credit to $50 million through February 2007, continued the mortgage on our Plainview property for $2.7 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 prime (4.75% at September 30, 2004). 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
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.

On
July 31, 2003, we acquired RIWS for cash of $38 million and a deferred payment of up to $16.5 million depending on RIWS achieving certain performance goals for
the year ending July 31, 2004. The Company believes that the performance goals have not been met.

24

---



On
September 3, 2003, we acquired MCE for approximately 5.8 million shares of Aeroflex common stock. In addition, we discharged $22.8 million of MCE outstanding bank
debt, other indebtedness and preferred stock and issued stock options for 315,000 shares of Aeroflex common stock with exercise prices ranging from $2.88 to $9.59 in exchange for outstanding options
of MCE.

On
October 31, 2003, we acquired the business of Celerity for approximately $4.0 million in cash, 428,000 shares of Aeroflex common stock and release of certain liabilities
totaling $1.8 million.

On
March 10, 2004, we completed the sale of 7,000,000 shares of our common stock at $13.75 per share. We received $91.2 million, net of commission and expenses. These net
proceeds are intended to be used for working capital and other general corporate purposes including research and development and potential acquisitions.

For
the three months ended September 30, 2004, our operations provided cash from continuing operations of $11.0 million. For the three months ended September 30,
2004, our investing activities used cash of $4.6 million, primarily for capital expenditures. In addition, the sale of the stock of our thin film interconnect manufacturing operation resulted
in net cash provided by discontinued operations of $6.3 million consisting of $8.1 million of proceeds, net of expenses, offset by $1.8 million of capital expenditures. For the
three months ended September 30, 2004, our financing activities used cash of $1.3 million, including debt repayments of $2.1 million offset by stock option exercise proceeds of
$796,000.

We
believe that existing cash and cash equivalents 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 and cash
equivalents, coupled with our available lines of credit, are available to fund acquisitions and other potential large cash needs that may arise. At September 30, 2004, our available unused line
of credit was $44.4 million after consideration of letters of credit.

The
following table summarizes, as of September 30, 2004, our obligations and commitments to make future payments under debt and operating lease agreements:

|                 |  | Payments due by period
|---------------- |  | ----------------------
|
|
|Long-term debt   |  | $                     
|Operating leases |  |                       
|                 |  |                       
|Total            |  | $                     
|                 |  |                       

The
operating lease commitments shown in the above table have not been reduced by future minimum sub-lease rentals of $16.9 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 September 30, 2004, 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

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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, 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 is 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 (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 software support and maintenance contracts is recognized ratably over the term of the contract in accordance
with SOP-97-2, "Software Revenue Recognition."

Certain
of our sales are to distributors which have a right to return some portion of product within eighteen months of sale. We recognize revenue on these sales at the time of shipment
to the distributor as 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.

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 expectations, 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.

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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 estimations 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.

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:



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.

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In the event that any of our customers encounter financial difficulties and fails to pay us, it could adversely effect 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 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 to us
amounts owed in respect of a significant amount of outstanding receivables, our financial condition would be adversely effected.

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:



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.

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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 our recent acquisitions of the Racal Instruments Wireless Solutions Group and MCE Technologies, Inc. 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 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 and 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 terrorist attacks that took place in the United States on September 11, 2001 were unprecedented
events that have created many economic and political uncertainties. 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 and acts of war.

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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:



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 company's securities, securities class action litigation against a company 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 Report on Form 10-Q, including without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our financial position, business outlook, business strategy and plans and objectives of our management
for future operations, are forward-looking statements. When used in this Report on Form 10-Q, 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, competitive factors and pricing pressures, the divestiture of the shock and vibration control device manufacturing business, changes in legal and regulatory requirements,
technological change or difficulties, product development risks, commercialization difficulties and general economic conditions. 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 operations, growth strategy and liquidity. We undertake no obligation to update
such forward-looking statements which are made as of the date of this Report.

ITEM 3QUANTITIVE 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 percent from levels at
September 30, 2004, the effect on our net income would be insignificant. Most of our invested cash and cash equivalents are at variable rates of interest. If market interest rates decrease by
10 percent from levels at September 30, 2004, the effect on our net income would be a decrease of approximately $148,000 per year.

We
operate businesses that are located outside of the United States, which exposes us to the fluctuation of foreign currency exchange rates (primarily the British Pound and the Euro). If
foreign currency exchange rates change by 10% from levels at September 30, 2004, the effect on our other comprehensive income would be approximately $9.5 million. We periodically enter
into foreign currency forward contracts to protect us from fluctuations in exchange rates. As of September 30, 2004, we had

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$5.6 million
of notional value foreign currency forward contracts maturing through December 2004. Notional amounts do not quantify risk or represent assets or liabilities of the Company,
but are used in the calculation of cash settlements under the contracts. The fair value of these contracts at September 30, 2004 was $12,000 in our favor.

ITEM 4CONTROLS AND PROCEDURES

Based
on their evaluation as of a date within 90 days of the filing of 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 required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported with the time periods specified by the SEC's rules and forms.

Changes in Internal Controls

Following the end of the fiscal quarter ended June 30, 2004, in connection with the audit of our financial results for the fiscal year ended
June 30, 2004, certain internal control issues were identified which management believed required improvement. These internal control issues were, in large part, the result of our recent
acquisitions. Because we understand the critical importance of the effectiveness of internal controls over financial reporting, during the quarter ended September 30, 2004, we made improvements
in our internal controls over financial reporting as a result of the identification of these control issues and will continue to do so. These improvements include the strengthening of controls over
the accounting for non-routine transactions and certain accounting estimates, improved segregation of duties at certain subsidiaries, establishment of additional monitoring controls,
further training and education of financial personnel, increased secondary monitoring and review of financial information, and formal documentation of accounting policies and procedures.

Except
for the foregoing, there were no significant changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2004 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.

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AEROFLEX INCORPORATED  AND SUBSIDIARIES  PART IIOTHER INFORMATION

|Item 1. | Legal Proceedings                                                                                                               
|------- | --------------------------------------------------------------------------------------------------------------------------------
|        | We are involved in various routine legal matters. We believe the outcome of these matters will not have a material effect on us.
|Item 2. | Unregistered Sales of Securities and Use of Proceeds                                                                            
|        | None                                                                                                                            
|Item 3. | Defaults upon Senior Securities                                                                                                 
|        | None                                                                                                                            
|Item 4. | Submission of Matters to a Vote of Security Holders                                                                             
|        | None                                                                                                                            
|Item 5. | Other Information                                                                                                               
|        | None                                                                                                                            
|Item 6. | Exhibits and Reports on Form 8-K                                                                                                
|        | (a)                                                                                                                             
|        |                                                                                                                                 
|        |                                                                                                                                 
|        |                                                                                                                                 
|        |                                                                                                                                 
|        | (b)                                                                                                                             
|        |                                                                                                                                 

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SIGNATURES

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

|                 |  | AEROFLEX INCORPORATED(REGISTRANT)
|---------------- |  | ---------------------------------
|November 9, 2004 |  | By:                              

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