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

---

FORM 10-Q

---

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

For the quarter endedMarch 31, 2004

Commission File Number 000-02324

---

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)                         

---

*  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.

|May 17, 2004
(Date) |  | 74,209,528 shares (excluding 4,388 shares held in treasury)
(Number of Shares)
|------------------- |  | ------------------------------------------------------------------------------



---





AEROFLEX INCORPORATED  AND SUBSIDIARIES    INDEX

|               |  |                                                                                                                                               |  | Page 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|               |  | PART I: FINANCIAL INFORMATION                                                                                                                 |  |      
|Item 1        |  | CONSOLIDATED BALANCE SHEETS
    March 31, 2004 (Unaudited) and June 30, 2003                                                                  |  | 3-4  
|               |  | CONSOLIDATED STATEMENTS OF OPERATIONS
    Nine and Three Months Ended March 31, 2004 and 2003 (Unaudited)                                     |  | 5-6  
|               |  | CONSOLIDATED STATEMENTS OF CASH FLOWS
    Nine Months Ended March 31, 2004 and 2003 (Unaudited)                                               |  | 7    
|               |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                    |  | 8-19 
|Item 2        |  | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    Nine and Three Months Ended March 31, 2004 and 2003 |  | 20-28
|Item 3        |  | QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                      |  | 28   
|Item 4        |  | CONTROLS AND PROCEDURES                                                                                                                       |  | 28   
|               |  | PART II: OTHER INFORMATION                                                                                                                    |  |      
|Item 1        |  | LEGAL PROCEEDINGS                                                                                                                             |  | 29   
|Item 6        |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                                              |  | 29   
|SIGNATURES     |  | 30                                                                                                                                           
|CERTIFICATIONS |  |                                                                                                                                              

2

---



AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                        | March 31,
2004       |        | June 30,
2003
|------------------------------------------ | -------------------------------------------------------------------------------------- | -------------------- | ------ | -------------
|
|
|ASSETS                                     |                                                                                        |                      |        |              
|Current assets:                            |                                                                                        |                      |        |              
|                                           | Cash and cash equivalents                                                              |                      | $      | 93,808       
|                                           | Accounts receivable, less allowance for doubtful accounts of $1,088,000 and $1,095,000 |                      |        | 87,163       
|                                           | Inventories                                                                            |                      |        | 101,152      
|                                           | Deferred income taxes                                                                  |                      |        | 21,307       
|                                           | Assets of discontinued operations                                                      |                      |        | 5,167        
|                                           | Prepaid expenses and other current assets                                              |                      |        | 9,622        
|                                           |                                                                                        |                      |        |              
|                                           |                                                                                        | Total current assets |        |              
|Property, plant and equipment, net         |                                                                                        |                      | 73,489 |              
|Intangible assets with definite lives, net |                                                                                        |                      | 43,127 |              
|Goodwill                                   |                                                                                        |                      | 94,208 |              
|Deferred income taxes                      |                                                                                        |                      |       |              
|Assets of discontinued operations          |                                                                                        |                      | 4,946  |              
|Other assets                               |                                                                                        |                      | 12,497 |              
|                                           |                                                                                        |                      |        |              
|                                           |                                                                                        | Total assets         |        | $            
|                                           |                                                                                        |                      |        |              

See
notes to consolidated financial statements.

3

---



AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(continued)

|                                             |                                                                                                                | March 31,
2004            |                                                                                                          | June 30,
2003
|-------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------------------------- | -------------------------------------------------------------------------------------------------------- | -------------
|
|
|LIABILITIES AND STOCKHOLDERS' EQUITY         |                                                                                                                |                           |                                                                                                          |              
|Current liabilities:                         |                                                                                                                |                           |                                                                                                          |              
|                                             | Current portion of long-term debt                                                                              |                           | $                                                                                                        | 4,776        
|                                             | Accounts payable                                                                                               |                           |                                                                                                          | 27,202       
|                                             | Advance payments by customers                                                                                  |                           |                                                                                                          | 9,777        
|                                             | Income taxes payable                                                                                           |                           |                                                                                                          | 1,933        
|                                             | Liabilities of discontinued operations                                                                         |                           |                                                                                                          | 2,849        
|                                             | Accrued payroll expenses                                                                                       |                           |                                                                                                          | 9,349        
|                                             | Accrued expenses and other current liabilities                                                                 |                           |                                                                                                          | 33,321       
|                                             |                                                                                                                |                           |                                                                                                          |              
|                                             |                                                                                                                | Total current liabilities |                                                                                                          |              
|Long-term debt                               |                                                                                                                |                           | 6,198                                                                                                    |              
|Deferred income taxes                        |                                                                                                                |                           | 13,638                                                                                                   |              
|Liabilities of discontinued operations       |                                                                                                                |                           | 3,632                                                                                                    |              
|Other long-term liabilities                  |                                                                                                                |                           | 14,077                                                                                                   |              
|                                             |                                                                                                                |                           |                                                                                                          |              
|                                             |                                                                                                                | Total liabilities         |                                                                                                          |              
|                                             |                                                                                                                |                           |                                                                                                          |              
|Stockholders' equity:                        |                                                                                                                |                           |                                                                                                          |              
|                                             | Preferred Stock, par value $.10 per share; authorized 1,000,000 shares:                                        |                           |                                                                                                          |              
|                                             |                                                                                                                |                           | Series A Junior Participating Preferred Stock, par value $.10 per share, authorized 110,000; none issued |              
|                                             | Common Stock, par value $.10 per share; authorized 110,000,000 shares; issued 74,206,000 and 60,122,000 shares |                           |                                                                                                          | 7,421        
|Additional paid-in capital                   |                                                                                                                |                           | 369,580                                                                                                  |              
|Accumulated other comprehensive income       |                                                                                                                |                           | 13,220                                                                                                   |              
|Retained earnings                            |                                                                                                                |                           | 29,527                                                                                                   |              
|                                             |                                                                                                                |                           |                                                                                                          |              
|                                             |                                                                                                                |                           | 419,748                                                                                                  |              
|Less: Treasury stock, at cost (4,000 shares) |                                                                                                                |                           | 14                                                                                                       |              
|                                             |                                                                                                                |                           |                                                                                                          |              
|                                             | Total stockholders' equity                                                                                     |                           |                                                                                                          | 419,734      
|                                             |                                                                                                                |                           |                                                                                                          |              
|                                             | Total liabilities and stockholders' equity                                                                     |                           | $                                                                                                        | 546,486      
|                                             |                                                                                                                |                           |                                                                                                          |              

See
notes to consolidated financial statements.

4

---



AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

|                                                      |                                               | Nine Months Ended
March 31,  |        
|----------------------------------------------------- | --------------------------------------------- | ---------------------------- | -------
|
|
|
|Net sales                                             |                                               | $                            | 300,183
|Cost of sales                                         |                                               |                              | 164,489
|                                                      |                                               |                              |        
|                                                      | Gross profit                                  |                              |        
|                                                      |                                               |                              |        
|Selling, general and administrative costs             |                                               |                              | 69,349 
|Research and development costs                        |                                               |                              | 34,987 
|Amortization of acquired intangibles                  |                                               |                              | 5,448  
|Acquired in-process research and development (Note 2) |                                               |                              | 4,220  
|                                                      |                                               |                              |        
|                                                      |                                               |                              | 114,004
|                                                      |                                               |                              |        
|Operating income                                      |                                               |                              | 21,690 
|                                                      |                                               |                              |        
|Other expense (income)                                |                                               |                              |        
|                                                      | Interest expense                              |                              |        
|                                                      | Other expense (income), net                   |                              |        
|                                                      |                                               |                              |        
|                                                      |                                               | Total other expense (income) |        
|                                                      |                                               |                              |        
|Income from continuing operations before income taxes |                                               |                              | 18,507 
|Provision for income taxes                            |                                               |                              | 6,723  
|                                                      |                                               |                              |        
|Income from continuing operations                     |                                               |                              | 11,784 
|                                                      |                                               |                              |        
|Discontinued operations                               |                                               |                              |        
|                                                      | Loss from discontinued operations             |                              |        
|                                                      | Loss on disposal of operations                |                              |        
|                                                      |                                               |                              |        
|                                                      | Loss from discontinued operations, net of tax |                              |        
|                                                      |                                               |                              |        
|Net income                                            |                                               | $                            | 3,869  
|                                                      |                                               |                              |        
|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

---



AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

|                                                      |                             | Three Months Ended
March 31, |        
|----------------------------------------------------- | --------------------------- | ---------------------------- | -------
|
|
|
|Net sales                                             |                             | $                            | 116,846
|Cost of sales                                         |                             |                              | 62,722 
|                                                      |                             |                              |        
|                                                      | Gross profit                |                              |        
|                                                      |                             |                              |        
|Selling, general and administrative costs             |                             |                              | 25,999 
|Research and development costs                        |                             |                              | 13,342 
|Amortization of acquired intangibles                  |                             |                              | 2,132  
|                                                      |                             |                              |        
|                                                      |                             |                              | 41,473 
|                                                      |                             |                              |        
|                                                      | Operating income            |                              |        
|                                                      |                             |                              |        
|Other expense (income)                                |                             |                              |        
|                                                      | Interest expense            |                              |        
|                                                      | Other expense (income), net |                              |        
|                                                      |                             |                              |        
|                                                      |                             | Total other expense (income) |        
|                                                      |                             |                              |        
|Income from continuing operations before income taxes |                             |                              | 10,402 
|Provision for income taxes                            |                             |                              | 3,805  
|                                                      |                             |                              |        
|Income from continuing operations                     |                             |                              | 6,597  
|Loss from discontinued operations, net of tax         |                             |                              | 732    
|                                                      |                             |                              |        
|Net income                                            |                             | $                            | 5,865  
|                                                      |                             |                              |        
|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.

6

---



AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

|                                                             |                                                                                                                    | Nine Months Ended
March 31,                                                     |        
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------- | -------
|
|
|
|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         |                                                                                                                    |                                                                                 | 16,020 
|Net Cash Provided By (Used In) Discontinued Operations       |                                                                                                                    |                                                                                 | 1,721  
|                                                             |                                                                                                                    |                                                                                 |        
|Net Cash Provided By Operating Activities                    |                                                                                                                    |                                                                                 | 17,741 
|                                                             |                                                                                                                    |                                                                                 |        
|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         |                                                                                                                    |                                                                                 | (68,989
|Net Cash Provided By (Used In) Discontinued Operations       |                                                                                                                    |                                                                                 |       
|                                                             |                                                                                                                    |                                                                                 |        
|Net Cash Used In Investing Activities                        |                                                                                                                    |                                                                                 | (68,989
|                                                             |                                                                                                                    |                                                                                 |        
|Cash Flows From Financing Activities:                        |                                                                                                                    |                                                                                 |        
|                                                             | Net proceeds from issuance of common stock                                                                         |                                                                                 |        
|                                                             | Borrowings under debt agreements                                                                                   |                                                                                 |        
|                                                             | Debt repayments                                                                                                    |                                                                                 |        
|                                                             | Proceeds from the exercise of stock options                                                                        |                                                                                 |        
|                                                             |                                                                                                                    |                                                                                 |        
|Net Cash Provided By (Used In) Financing Activities          |                                                                                                                    |                                                                                 | 94,418 
|                                                             |                                                                                                                    |                                                                                 |        
|Effect of Exchange Rate Changes on Cash and Cash Equivalents |                                                                                                                    |                                                                                 | (669   
|                                                             |                                                                                                                    |                                                                                 |        
|Net Increase (Decrease) In Cash And Cash Equivalents         |                                                                                                                    |                                                                                 | 42,501 
|Cash And Cash Equivalents At Beginning Of Period             |                                                                                                                    |                                                                                 | 51,307 
|                                                             |                                                                                                                    |                                                                                 |        
|Cash And Cash Equivalents At End Of Period                   |                                                                                                                    | $                                                                               | 93,808 
|                                                             |                                                                                                                    |                                                                                 |        

See
notes to consolidated financial statements.

7

---



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 March 31, 2004, the related consolidated statements of
operations for the nine and three months ended March 31, 2004 and 2003, and the consolidated statements of cash flows for the nine months ended March 31, 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 March 31, 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, 2003 annual report to shareholders. There have been no changes of significant accounting policies since June 30, 2003.
Certain reclassifications have been made to previously reported financial statements to conform to current classifications and properly reflect discontinued operations (see Note 3).

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

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
has not included this contingent consideration in its initial purchase price allocation as the payment of this consideration is not considered to be certain beyond a reasonable doubt. As a result, the
Company will adjust goodwill for any contingent consideration in the future if and when it is earned. 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 preliminarily allocated the purchase
price, including

8

---



acquisition
costs of approximately $2.5 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)

$
15,769Property, plant and equipment


8,672Developed technology


15,600Customer related intangibles


1,700Tradenames


200Goodwill


20,766In-process research and development


2,700Total assets acquired


65,407Current liabilities


(25,524
)Deferred taxes


(5,250
)Total liabilities assumed


(30,774
)Net assets acquired

$
34,633


As
of March 31, 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 fourth quarter.

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
$5.7 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. 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.



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 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. 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.

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

9

---



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)

$
18,481Property, plant and equipment


9,761Developed technology


8,850Tradenames


1,100Customer related intangibles


2,520Goodwill


47,957In-process research and development


420Other


543Total assets acquired


89,632Current liabilities


(8,203
)Long-term debt


(2,895
)Deferred taxes


(7,811
)Other long-term liabilities


(1,835
)Total liabilities assumed


(20,744
)Net assets acquired

$
68,888


As
of March 31, 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 fourth quarter.

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. At the acquisition date, MCE was conducting development activities associated with the completion of certain high frequency component technology.



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.

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

10

---



acquisition
costs of approximately $101,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

(In thousands)Current assets

$
3,959Property, plant and equipment


729Developed technology


3,400Goodwill


2,174In-process research and development


1,100Other


49Total assets acquired


11,411Current liabilities assumed


(1,296
)Net assets acquired

$
10,115


As
of March 31, 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 fourth 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. At the acquisition date, Celerity
was conducting development activities associated with the completion of its next generation modular technology.



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
periods presented. The $4.2 million write-off of in-process research and development has been included in the March 31, 2004 pro forma loss, but not the
March 31, 2003 pro forma income in order to provide comparability to the respective historical periods.

Pro forma
Nine Months Ended
March 31,2004

2003(In thousands)Net sales

$
313,529

$
292,663Income from continuing operations


8,678


5,576Income from continuing operations per shareBasic

$
.13

$
.08Diluted

$
.13

$
.08


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 periods 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.

11

---





The components of amortizable intangible assets are as follows:

As of March 31, 2004Gross Carrying
Amount

Accumulated
Amortization

Net Book
Value(In thousands)Existing technology

$
48,735

$
11,024

$
37,711Tradenames


2,327


776


1,551Customer related intangibles


4,452


587


3,865Total

$
55,514

$
12,387

$
43,127


The
aggregate amortization expense for the amortized intangible assets was $5.5 million and $2.0 million for the nine months ended March 31, 2004 and 2003,
respectively.

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

(In thousands)2005

$
7,9872006


7,7362007


7,0612008


6,4642009


4,482




The carrying amount of goodwill is as follows:

Balance
as of
July 1,
2003

Adjustment
(Note a)

Adjustment
(Note b)

Balance
as of
March 31,
2004(In thousands)Microelectronic solutions segment

$
4,050

$
47,957

$


$
52,007Test solutions segment


16,294


22,940


2,178


41,412Isolator products segment


789








789Total

$
21,133

$
70,897

$
2,178

$
94,208


---

Note aThe
goodwill recorded during the period is a result of the acquisitions of MCE in the Microelectronic Solutions segment and of RIWS and Celerity in the Test
Solutions segment.

Note bThe
goodwill increased due to changes in foreign currency exchange rates.

12

---



3.    Discontinued Operations

In February 2004, the Board of Directors of the Company approved a formal plan to divest the Company's thin film interconnect manufacturing operation 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. 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 Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company has
reported the results of operations of this business as income (loss) from discontinued operations. Net sales from this discontinued operation were $7.2 million and $7.9 million for the
nine months ended March 31, 2004 and 2003, respectively.

All
prior periods have been restated to conform to this presentation. As a result, the assets and liabilities of the discontinued operation 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.

4.    Earnings Per Share

In accordance with SFAS No. 128 "Earnings Per Share," net income per common share ("Basic EPS") is computed by dividing net income by the weighted average
common shares outstanding. Net income per common share, assuming dilution ("Diluted EPS") is computed by dividing net income by the weighted average common shares outstanding plus potential dilution
from the exercise of stock options. A reconciliation of the numerators and denominators of the Basic EPS and Diluted EPS calculations is as follows:

|                                                                                                               |          | Nine Months
Ended March 31,
|-------------------------------------------------------------------------------------------------------------- | -------- | ---------------------------
|
|
|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 |                            
|                                                                                                               |          |                            

13

---



|                                                                                                               |          | Three Months
Ended March 31,
|-------------------------------------------------------------------------------------------------------------- | -------- | ----------------------------
|
|
|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 5.3 million shares at exercise prices ranging between $15.11 and $34.41 per share were outstanding as of March 31, 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.    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 nine months ended March 31, 2004 was $6.82 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 77%, and an expected life
of 5.2 years. The per share weighted average fair value of stock options granted during the nine months ended March 31, 2003 was $5.36 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 3.9%, expected volatility of 112% and an
expected life of 5.4 years. The Company's

14

---



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

|                                                                                                                            |                     | Nine Months Ended
March 31, |        | Three Months Ended
March 31, |  
|--------------------------------------------------------------------------------------------------------------------------- | ------------------- | --------------------------- | ------ | ---------------------------- | -
|
|
|Income from continuing operations                                                                                           |                     | $                           | 11,784 |                              | $
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all grants, net of tax |                     |                             | (8,539 | )                            |  
|                                                                                                                            |                     |                             |        |                              |  
|Pro forma income (loss) from continuing operations                                                                          |                     | $                           | 3,245  |                              | $
|                                                                                                                            |                     |                             |        |                              |  
|Earnings (loss) per share:                                                                                                  |                     |                             |        |                              |  
|                                                                                                                            | Basicas reported   |                             | $      | 0.18                         |  
|                                                                                                                            |                     |                             |        |                              |  
|                                                                                                                            | Basicpro forma     |                             | $      | 0.05                         |  
|                                                                                                                            |                     |                             |        |                              |  
|                                                                                                                            | Dilutedas reported |                             | $      | 0.17                         |  
|                                                                                                                            |                     |                             |        |                              |  
|                                                                                                                            | Dilutedpro forma   |                             | $      | 0.05                         |  
|                                                                                                                            |                     |                             |        |                              |  

---

6.    Comprehensive Income

The components of comprehensive income are as follows:

|                                                                    |  | Nine Months Ended
March 31, |       
|------------------------------------------------------------------- |  | --------------------------- | ------
|
|
|Net income                                                          |  | $                           | 3,869 
|Unrealized gain (loss) on interest rate swap agreements, net of tax |  |                             | 63    
|Foreign currency translation adjustment                             |  |                             | 9,341 
|                                                                    |  |                             |       
|Total comprehensive income                                          |  | $                           | 13,273
|                                                                    |  |                             |       

|                                                                    |  | Three Months Ended
March 31,
|------------------------------------------------------------------- |  | ----------------------------
|
|
|Net income                                                          |  | $                           
|Unrealized gain (loss) on interest rate swap agreements, net of tax |  |                             
|Foreign currency translation adjustment                             |  |                             
|                                                                    |  |                             
|Total comprehensive income                                          |  | $                           
|                                                                    |  |                             

15

---



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, June 30, 2003  |  | $                                                                    | (268 | )                                                 | $ | (2,445                                  | ) | $                 
|Nine months activity    |  |                                                                      | 63   |                                                   |   |                                        |   |                   
|                        |  |                                                                      |      |                                                   |   |                                         |   |                   
|Balance, March 31, 2004 |  | $                                                                    | (205 | )                                                 | $ | (2,445                                  | ) | $                 
|                        |  |                                                                      |      |                                                   |   |                                         |   |                   

7.    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 $3.3 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 the LIBOR (1.1% at March 31, 2004) plus 150 basis points. 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.

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 $287,000 as of March 31, 2004 in favor of the banks.

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. In connection with the purchase of certain materials for use in manufacturing, the Company has a letter of credit of
$2.0 million. At March 31, 2004, the Company's available unused line of credit was approximately $44.9 million after consideration of this and other letters of credit.

8.    Inventories

Inventories consist of the following:

|                |  | March 31,
2004 |         | June 30,
2003
|--------------- |  | -------------- | ------- | -------------
|
|Raw materials   |  | $              | 34,774  |              
|Work in process |  |                | 45,895  |              
|Finished goods  |  |                | 20,483  |              
|                |  |                |         |              
|                |  | $              | 101,152 |              
|                |  |                |         |              

16

---



9.    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.

Changes
in the Company's product warranty liability during the nine months ended March 31, 2004 were as follows:

Nine Months Ended
March 31,2004

2003(In thousands)Balance at beginning of period

$
1,308

$
1,390Provision for warranty obligations


1,045


1,266Charges incurred


(1,061
)

(1,386
)Acquired warranty obligations


187


Balance at end of period

$
1,479

$
1,270


10.    Defined Benefit Plan

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. The SERP expense for the nine months ended March 31, 2004 and 2003 was $900,000 and $887,000, respectively.

11.    Income Taxes

The Company recorded credits of $2.2 million and $84,000 to additional paid-in capital during the nine months ended March 31, 2004 and
2003, respectively, in connection with the tax benefit related to compensation deductions on the exercise of stock options.

12.    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.

13.    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 SystemsIsolator Productsa) Commercial Spring and Rubber Isolatorsb) Industrial Spring and Rubber Isolatorsc) Military Wire-Rope Isolators


17

---



Business Segment Data:

|                                   |                                                       | For The Nine Months Ended
March 31, |       
|---------------------------------- | ----------------------------------------------------- | ----------------------------------- | ------
|
|
|Net sales:                         |                                                       |                                     |       
|                                   | Microelectronic solutions                             |                                     | $     
|                                   | Test solutions                                        |                                     |       
|                                   | Isolator products                                     |                                     |       
|                                   |                                                       |                                     |       
|                                   |                                                       | Net sales                           |       
|                                   |                                                       |                                     |       
|Segment adjusted operating income: |                                                       |                                     |       
|                                   | Microelectronic solutions                             |                                     | $     
|                                   | Test solutions                                        |                                     |       
|                                   | Isolator products                                     |                                     |       
|                                   | General corporate expenses                            |                                     |       
|                                   |                                                       |                                     |       
|                                   |                                                       |                                     | 25,910
|                                   | Acquired in-process research and development(1)       |                                     |       
|                                   | Interest expense                                      |                                     |       
|                                   | Other expense (income), net                           |                                     |       
|                                   |                                                       |                                     |       
|                                   | Income from continuing operations before income taxes |                                     | $     
|                                   |                                                       |                                     |       

Business Segment Data:

|                                                      |                             | For The Three Months Ended
March 31, |       
|----------------------------------------------------- | --------------------------- | ------------------------------------ | ------
|
|
|Net sales:                                            |                             |                                      |       
|                                                      | Microelectronic solutions   |                                      | $     
|                                                      | Test solutions              |                                      |       
|                                                      | Isolator products           |                                      |       
|                                                      |                             |                                      |       
|                                                      |                             | Net sales                            |       
|                                                      |                             |                                      |       
|Segment adjusted operating income:                    |                             |                                      |       
|                                                      | Microelectronic solutions   |                                      | $     
|                                                      | Test solutions              |                                      |       
|                                                      | Isolator products           |                                      |       
|                                                      | General corporate expenses  |                                      |       
|                                                      |                             |                                      |       
|                                                      |                             |                                      | 12,651
|                                                      | Interest expense            |                                      |       
|                                                      | Other expense (income), net |                                      |       
|                                                      |                             |                                      |       
|Income from continuing operations before income taxes |                             | $                                    | 10,402
|                                                      |                             |                                      |       

Management
evaluates the operating results of the three segments based upon reported operating income, less costs related to restructurings and in-process research and
development charges.

18

---



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

For The Nine Months Ended
March 31,2004

2003(In thousands)United States of America

$
194,804

$
132,855Europe and Middle East


76,886


55,704Asia and Australia


23,596


13,061Rest of World


4,897


3,877$
300,183

$
205,497


19

---





ITEM 2MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We use our advanced design, engineering and manufacturing abilities to produce microelectronic and testing solutions that we sell primarily into the broadband
communication, aerospace and defense markets. We also design and manufacture motion control systems and shock and vibration isolation systems which are used for commercial, industrial and defense
applications. We have built our businesses through acquisitions and internal product development. Our operations are grouped into three segments:



Our
consolidated financial statements include the accounts of Aeroflex Incorporated and all of our subsidiaries. All of our subsidiaries are wholly-owned.

Our
microelectronic solutions segment has been designing, manufacturing and selling state-of-the-art microelectronics for the electronics industry
since 1974. We built this segment's business primarily through various acquisitions, as follows:



Our
test solutions segment consists of two divisions: (1) instruments and (2) motion control products. We built this segment's business primarily through various
acquisitions, as follows:



20

---





Our
motion control products division has been engaged in the development and manufacture of electro-optical scanning devices used in infra-red night vision systems since
1975. Additionally, it is engaged in the design, development and production of stabilization tracking devices and systems and magnetic motors used in satellites and other high reliability
applications.

Our
isolator products segment has been designing, developing, manufacturing and selling severe service shock and vibration isolation systems since 1961. These devices are primarily used
in defense applications. In October 1983, we acquired Vibration Mountings & Controls, Inc., which manufactures a line of off-the-shelf rubber and spring
shock, vibration and structure borne noise control devices used in commercial and industrial applications. In December 1986, we acquired the operating assets of Korfund Dynamics Corporation, a
manufacturer of an industrial line of heavy duty spring and rubber shock mounts.

In
addition, our Aeroflex Pearl River subsidiary designs, develops, manufactures and markets microelectronic products in the form of passive thin film circuits and interconnects. 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 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. 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 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.

Approximately
32% of our sales for the nine months ended March 31, 2004, 33% of our sales for fiscal 2003 and 48% of our sales for fiscal 2002 were to agencies of the United
States government or to prime defense contractors or subcontractors of the United States government.

As
used in this report, "we," "us" and "our" mean Aeroflex Incorporated and its subsidiaries (unless the content indicates otherwise).

21

---



Nine Months Ended March 31, 2004 Compared to Nine Months Ended March 31, 2003

Net Sales.Net sales increased 46% to $300.2 million for the nine months ended March 31, 2004 from
$205.5 million for the nine months ended March 31, 2003. Net sales in the microelectronic solutions ("AMS") segment increased 65% to $114.1 million for the nine months ended
March 31, 2004 from $69.0 million for the nine months ended March 31, 2003 due primarily to the acquisition of MCE in September 2003. Net sales in the test solutions
("ATS") segment increased 40% to $174.7 million for the nine months ended March 31, 2004 from $124.6 million for the nine months ended March 31, 2003 due primarily to the
acquisition of RIWS in July 2003 and increased sales in our communication test products business. Net sales in the isolator products ("AIP") segment were $11.4 million for the nine
months ended March 31, 2004 and $11.9 million for the nine months ended March 31, 2003.

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.

|Nine Months
Ended
March 31, |  | AMS |        | % of
sales |    | ATS |   | % of
sales |  | AIP |   | % of
sales |       | Total |    | % of
sales |  
|--------------------------- |  | --- | ------ | ---------- | -- | --- | - | ---------- |  | --- | - | ---------- | ----- | ----- | -- | ---------- | -
|2004                        |  | $   | 57,271 |            | 50 | %   | $ | 75,536     |  | 43  | % | $          | 2,887 |       | 25 | %          | $
|2003                        |  |     | 32,228 |            | 47 | %   |   | 45,561     |  | 37  | % |            | 3,179 |       | 27 | %          |  

Gross
profit increased $25.0 million, or 78%, in the AMS segment primarily as a result of the effect of the acquisition of MCE in September 2003 and increased margins in
our integrated circuits business due to a favorable sales mix which included more high margin standard products. Gross profit increased $30.0 million, or 66%, 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.

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

|Nine Months
Ended
March 31, |  | AMS |        | % of
sales |    | ATS |   | % of
sales |  | AIP |   | % of
sales |       | Corporate |    | Total |   | % of
sales | 
|--------------------------- |  | --- | ------ | ---------- | -- | --- | - | ---------- |  | --- | - | ---------- | ----- | --------- | -- | ----- | - | ---------- | 
|2004                        |  | $   | 17,681 |            | 15 | %   | $ | 40,876     |  | 23  | % | $          | 2,407 |           | 21 | %     | $ | 8,385      | 
|2003                        |  |     | 9,237  |            | 13 | %   |   | 28,876     |  | 23  | % |            | 2,755 |           | 23 | %     |   | 4,773      | 

Selling,
general and administrative costs increased $8.4 million, or 91%, in the AMS segment due primarily to the addition of the expenses of MCE. Selling, general and
administrative costs increased $12.0 million, or 42% in the ATS segment due primarily to the addition of the expenses of RIWS. Selling, general and administrative costs decreased $348,000 in
the AIP segment due primarily to lower commissions due to product mix. Corporate selling, general and administrative expenses increased $3.6 million due primarily to increased compensation
expense, professional fees and insurance expense.

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

|Nine Months
Ended
March 31, |  | AMS |        | % of
sales |    | ATS |   | % of
sales |  | AIP |   | % of
sales |   | Total |   | % of
sales |  
|--------------------------- |  | --- | ------ | ---------- | -- | --- | - | ---------- |  | --- | - | ---------- | - | ----- | - | ---------- | -
|2004                        |  | $   | 10,744 |            | 9  | %   | $ | 24,243     |  | 14  | % | $          | 0 |       | 0 | %          | $
|2003                        |  |     | 9,203  |            | 13 | %   |   | 12,331     |  | 10  | % |            | 0 |       | 0 | %          |  

Self-funded
research and development costs increased $1.5 million, or 17%, in the AMS segment primarily due to the addition of the expenses of MCE offset, in part, by
reduced expenses in our microelectronic modules business. Research and development costs increased $11.9 million, or 97%, in

22

---



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 $3.4 million, or 167%, due to the acquisitions of MCE,
RIWS and Celerity.

Acquired In-Process Research and Development.In connection with the acquisition of Celerity, we allocated
$1.1 million of the purchase price to incomplete research and development projects. 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.

Other Expense (Income).Interest expense was $1.1 million for the nine months ended March 31, 2004 and $810,000
for the nine months ended March 31, 2003. Other expense of $2.1 million for the nine months ended March 31, 2004 consisted primarily of $2.0 million of foreign currency
transaction losses and a $556,000 charge to adjust the fair value of property held for sale to its fair value, partially offset by $197,000 of income on investments, a $91,000 increase in the fair
value of our interest rate swap agreements and $183,000 of interest income. Other income of $285,000 for the nine months ended March 31, 2003 consisted of $801,000 of interest income partially
offset by foreign currency transaction losses of $570,000 and a $180,000 decrease in the fair value of our interest rate swap agreements. Interest income decreased primarily due to lower average
levels of cash and marketable securities, which were used to acquire MCE and RIWS, and lower market interest rates.

Provision for Income Taxes.The income tax provision was $6.7 million (an effective income tax rate of 36%) for the
nine months ended March 31, 2004 and the income tax provision was $3.9 million (an effective income tax rate of 34%) for the nine months ended March 31, 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 and, for the nine months ended March 31, 2004, non-deductible in-process research and development costs.

Income From Continuing Operations.The income from continuing operations for the nine months ended March 31, 2004 was
$11.8 million, or $.17 per diluted share, versus income from continuing operations of $7.4 million, or $.12 per diluted share, for the nine months ended March 31, 2003.

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Net Sales.Net sales increased 61% to $116.8 million for the three months ended March 31, 2004 from
$72.5 million for the three months ended March 31, 2003. Net sales in the microelectronic solutions ("AMS") segment increased 86% to $45.4 million for the three months ended
March 31, 2004 from $24.4 million for the three months ended March 31, 2003 due primarily to the acquisition of MCE in September 2003. Net sales in the test solutions
("ATS") segment increased 54% to $67.8 million for the three months ended March 31, 2004 from $43.9 million for the three months ended March 31, 2003 due primarily to the
acquisition of RIWS in July 2003 and increased sales in our communication test products business. Net sales in the isolator products ("AIP") segment were $3.7 million for the three
months ended March 31, 2004 and $4.2 million for the three months ended March 31, 2003.

23

---







|Three Months
Ended
March 31, |  | AMS |        | % of
sales |    | ATS |   | % of
sales |  | AIP |   | % of
sales |       | Total |    | % of
sales |  
|---------------------------- |  | --- | ------ | ---------- | -- | --- | - | ---------- |  | --- | - | ---------- | ----- | ----- | -- | ---------- | -
|2004                         |  | $   | 23,253 |            | 51 | %   | $ | 30,055     |  | 44  | % | $          | 816   |       | 22 | %          | $
|2003                         |  |     | 11,786 |            | 48 | %   |   | 16,626     |  | 38  | % |            | 1,147 |       | 27 | %          |  

Gross
profit increased $11.5 million, or 97%, in the AMS segment due primarily to the acquisition of MCE in September 2003 and increased margins in the
integrated circuits business due to a favorable sales mix which included more high margin standard products. In the ATS segment, gross profit increased $13.4 million, or 81%, due primarily to
the acquisition of RIWS in June 2003 and increased sales and margins in our communications test products business.



|Three Months
Ended
March 31, |  | AMS |       | % of
sales |    | ATS |   | % of
sales |  | AIP |   | % of
sales |     | Corporate |    | Total |   | % of
sales | 
|---------------------------- |  | --- | ----- | ---------- | -- | --- | - | ---------- |  | --- | - | ---------- | --- | --------- | -- | ----- | - | ---------- | 
|2004                         |  | $   | 6,933 |            | 15 | %   | $ | 14,527     |  | 21  | % | $          | 814 |           | 22 | %     | $ | 3,725      | 
|2003                         |  |     | 3,190 |            | 13 | %   |   | 10,199     |  | 23  | % |            | 943 |           | 22 | %     |   | 1,885      | 

Selling,
general and administrative expenses in the AMS segment increased $3.7    million, or 117%, due primarily to the addition of the expenses of MCE.
Selling, general and administrative expenses increased by $4.3 million, or 42%, in the ATS segment due primarily to the addition of the expenses at RIWS. Selling, general and administrative
expenses decreased $129,000 or 14% in the AIP segment due primarily to lower commissions due to product mix. Corporate selling, general and administrative expenses increased $1.8 million, or
98%, due primarily to increased compensation expense, professional fees and insurance expense.



|Three Months
Ended
March 31, |  | AMS |       | % of
sales |    | ATS |   | % of
sales |  | AIP |   | % of
sales |   | Total |   | % of
sales |  
|---------------------------- |  | --- | ----- | ---------- | -- | --- | - | ---------- |  | --- | - | ---------- | - | ----- | - | ---------- | -
|2004                         |  | $   | 4,202 |            | 9  | %   | $ | 9,140      |  | 13  | % | $          | 0 |       | 0 | %          | $
|2003                         |  |     | 3,226 |            | 13 | %   |   | 4,106      |  | 9   | % |            | 0 |       | 0 | %          |  

Our
self-funded research and development costs increased $976,000, or 30%, in the AMS segment primarily due to the addition of the expenses of MCE, partially
offset by reduced expenses at our microelectronic modules business. Research and development costs increased $5.0 million, or 123%, in the ATS segment due primarily 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 $1.4 million, or    210%, due to the
acquisitions of MCE, RIWS and Celerity.

Other Expense (Income).Interest expense was $343,000 for the three months ended March 31, 2004 and $246,000 for the
three months ended March 31, 2003. Other expense of $1.9 million for the three months ended March 31, 2004 consisted primarily of $1.7 million of foreign currency
transaction losses and a $200,000 charge to adjust the fair value of property held for sale to its fair value. Other income of $294,000 for the three months ended March 31, 2003 consisted of
$373,000 of interest income, partially offset by foreign currency transaction losses of $106,000. Interest income decreased primarily due to lower average levels of cash and marketable securities,
which were used to acquire MCE and RIWS.

24

---



Provision for Income Taxes.The income tax provision was $3.8 million (an effective income tax rate of 37%) for the
three months ended March 31, 2004 and the income tax provision was $1.9 million (an effective income tax rate of 34%) for the three months ended March 31, 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 and, for the three months ended March 31, 2004, non-deductible in-process research and development costs.

Income From Continuing Operations.Income from continuing operations for the three months ended March 31, 2004 was
$6.6 million or $.09 per diluted share, versus income from continuing operations of $3.5 million, or $.06 per diluted share, for the three months ended March 31, 2003.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements.

Liquidity and Capital Resources

As of March 31, 2004, we had $229.0 million in working capital. Our current ratio was 3.6 to 1 at March 31, 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 $3.3 million and is secured by the pledge of the stock of certain of our
subsidiaries. The interest rate on revolving credit borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to LIBOR
(1.1% at March 31, 2004) plus 150 basis points. 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. In connection with the purchase of certain materials for use in manufacturing, we have a letter of credit of
$2.0 million.

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.

For
the nine months ended March 31, 2004, our operations provided cash from continuing operations of $16.0 million. For the nine months ended March 31, 2004, our
investing activities used cash of $69.0 million, primarily for the acquisitions of MCE, RIWS and Celerity. For the nine months ended March 31, 2004, our financing activities provided
cash of $94.4 million, primarily from the issuance of common stock in a public offering as described below.

On
July 31, 2003, we acquired RIWS for cash of $38 million and a deferred payment of up to $16.5 million in either cash or Aeroflex common stock, at our option,
depending on RIWS achieving certain performance goals for the year ending July 31, 2004.

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.

25

---



On
March 10, 2004, we completed the sale of 7,000,000 shares of our common stock at $13.75 per share. We received $91.3 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.

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. 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 March 31, 2004, our available unused line of credit was $44.9 million after consideration of letters of credit.

The
following table summarizes, as of March 31, 2004, our obligations and commitments to make future payments under debt and operating leases:

|                 |  | 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 $17.7 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 March 31, 2004 will materially adversely affect our liquidity.

Accounting Policies Involving Significant Estimates

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

Revenue and Cost Recognition Under Long-Term Contracts

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, 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. 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

26

---



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.

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.

Long-lived
assets other than goodwill, are reviewed for impairment not less than annually and 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 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.

27

---



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 thin film interconnect manufacturing
business, the integration of the business of each of MCE, RIWS and Celerity, 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. Some 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 March 31, 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 March 31, 2004, the effect on our net income would be a decrease of approximately $54,000 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 March 31, 2004, the effect on our other comprehensive income would be approximately $8.4 million.

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

There were no significant changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 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.

28

---





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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

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



29

---





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)
|------------ |  | ----------------------------------
|             |  |                                   
|May 17, 2004 |  | By:                               

30

---



QuickLinks