UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 
20549  FORM 10-K  FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934  (Mark
One) ýANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934  For the fiscal year ended June 30, 2005  OR  oTRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934  For the transition period from               
to  Commission File No. 000-02324  Aeroflex Incorporated (Exact name of registrant as specified in its charter)  Delaware
  
  11-1974412(State or Other Jurisdiction of
  
  (I.R.S. EmployerIncorporation or Organization)
  
  Identification No.)35 South Service Road, Plainview, New York
  
  11803(Address of Principal Executive Offices)
  
  (Zip Code)Registrants telephone number, including area code:(516) 694-6700  Securities registered pursuant to Section 12(b) of the Act:  Name of Each Exchange onTitle of Class
  
  Which RegisteredNone
  Securities
  registered pursuant to Section 12(g) of the Act:
  
  Common Stock, $.10 par value(Title of Class)  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. 
Yesý        No o  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-Ko.  Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yesý       No o  State
the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked prices of such common equity, as of
the last business day of the registrants most recently completed second fiscal
quarter.  As of December 31, 2004
 approximately $892,622,000.  Indicate
the number of shares outstanding of each of the registrants classes of common
stock, as of the latest practicable date (applicable only to corporate
registrants).  Common Stock, par value
$.10 per share; outstanding as of September 9, 2005  74,677,711.  Documents
incorporated by reference:  Part III
(Items 10, 11, 12, 13 and 14)  Registrants definitive proxy statement to be
filed pursuant to Regulation 14A of the Securities Act of 1934.


ITEM 1- BUSINESS  Overview  We
use our advanced design, engineering and manufacturing capabilities to produce
microelectronic and test solutions that we sell primarily into the broadband
communications, aerospace and defense markets. 
We also design and manufacture motion control systems which are used for
industrial and defense applications.  Our
operating strategy is based on the following key objectives:  to
strengthen and expand our portfolio of proprietary technologies; to
broaden the applications and target markets for our existing products; to
expand the scope of our content in our customers products; to
increase our operating efficiencies; to
maintain a conservative capital structure; and to
opportunistically pursue strategic acquisitions.  Microelectronic Solutions  We
have been a designer and supplier ofmicroelectronics for more than 20 years.  Our products include (i) custom and
standard integrated circuits, such as databuses, transceivers,
microcontrollers, microprocessors and memories and (ii) components,
sub-assemblies and modules for military and commercial communication systems.  Our
design, engineering and manufacturing know-how allow us to achieve the critical
tolerances required for aerospace and defense components and high Gigahertz RF
and microwave signals.  We are one of the
worlds leading manufacturers of application specific multi-function modules
and space hybrid microcircuits that are highly reliable, small and lightweight
 attributes that are significant for space components.  In
addition, many of our integrated circuits are radiation tolerant for satellite
and space applications.  We have
pioneered the use of commercial foundries to produce radiation tolerant
integrated circuits, known as Commercial RadHard.  Our products are on over 100 aerospace
platforms.  In
September 2003, we acquired MCE Technologies, Inc.   MCE designs, manufactures and markets a broad
range of devices, components and subsystems that are used in wireless broadband
access, cable head-end systems, fiber optic networking and satellite
applications.  Test Solutions  We
design, develop and manufacture a broad line of test equipment which includes:  Wireless Test Equipment.We offer an extensive line of standard test platforms for research and
development, conformance testing, base station and handset testing, as well as
protocol test systems and interference analyzers.  We supply products and customized solutions
to both leading manufacturers within the wireless cellular industry and to
wireless service providers.  Frequency Synthesizers.Our line of frequency synthesizers offers a superior combination of
high-speed and low-phase noise, covering all communications frequencies.  These synthesizers are used in various applications
such as automatic test systems, radar systems and semiconductor test systems.  2


Radio Test Equipment.We offer test systems for both military and private mobile radio test
systems.  Our products are used to test
radio communications for military, police, fire and emergency response units,
which we expect to be increasingly important in homeland defense programs.  Synthetic Test Systems.We have developed a new concept in test systems which significantly
reduces test time by replacing the traditional single instrument concept of a rack
and stack system with a modular system that uses our synthesizer and receiver
technology, together with proprietary software algorithms, to make multiple complex
measurements simultaneously.  These
systems are easily reconfigurable and upgradeable and are used in satellite
testing, transmit receive module testing and base station testing.  Avionics Test Equipment.Our extensive line of avionics test equipment is used in the design,
manufacture, test and maintenance of both commercial and military avionics
systems.  Other General Purpose Test
Equipment.  We also offer a wide range of general purpose
test equipment for a variety of applications including broadcast testing,
spectrum analysis and production test.  We
recently acquired four businesses in this segment:  In July 2003, we acquired Racal
Instruments Wireless Solutions Group (RIWS) which added the bulk of the
wireless test equipment capabilities referred to above.  In October 2003, we acquired the
business of Celerity Systems, Inc. (CA), which designs, develops and
manufactures modular digital test and measurement solutions for the
communications, satellite, wireless and broadband test markets, including
broadband signal generators.  In April 2005, we acquired JcAIR Test
Systems, which manufactures customized avionics test solutions, both manual and
automated, for manufacturing, repair and ground support operations.  In May 2005, we acquired the SPG
division of UbiNetics Holding Limited, which is a developer, manufacturer and
integrator of wireless test and measurement solutions specific to commercial
wireless development organizations and service operations.  We
also design, develop and produce motion control systems including stabilization
and tracking devices, magnetic motors and scanning devices.  We
are incorporated under the laws of the state of Delaware.  Our executive offices are located at 35 South
Service Road, Plainview, New York, 11803, our telephone number is (516) 694-6700
and our website is located at www.aeroflex.com.  Customers  We
have hundreds of customers in the communications, satellite and
aerospace/defense industries.  No one
customer accounted for more than 10% of our net sales in each of the years in
the three-year period ended June 30, 2005.  3


Marketing and Distribution  We
use a team-based sales approach to assist our personnel to closely manage
relationships at multiple levels of the customers organization, including
management, engineering and purchasing personnel.  Our integrated sales approach involves a team
consisting of a senior executive, a business development specialist and members
of our engineering department.   Our use
of experienced engineering personnel as part of the sales effort enables close
technical collaboration with our customers during the design and qualification
phase of new communications equipment. 
We believe that this is critical to the integration of our product into
our customers equipment.  Some of our
executive officers are also involved in all aspects of our relationships with
our major customers and work closely with their senior management.  We also use manufacturers representatives
and independent sales representatives as needed.  Our acquisitions since fiscal 2002 expanded
the number of our sales and distribution locations to include additional
offices in California, Kansas, Maryland, Michigan, New Jersey, in the United
States; Stevenage, Burnham and Cambridge in the United Kingdom; Scotland,
France, Spain, Germany, Denmark, in Europe; Japan and Hong Kong, Beijing,
Shenzen and Nanjing in China.  Research and Development  Our
research and development efforts primarily involve engineering and design
relating to:  developing
new products, improving
existing products, adapting
existing products to new applications and developing
prototype components to bid on specific programs.  Certain
product development and similar costs are recoverable under contractual
arrangements and those that are not recoverable are expensed in the year
incurred.  The costs of our self-funded
research activities were approximately $61.4 million for fiscal 2005,
$50.0 million for fiscal 2004, and $29.5 million for fiscal
2003.  The increase in fiscal 2005 from
fiscal 2004 is primarily attributable to increased development costs associated
with field programmable gate arrays ($3.8 million) and microelectronic
modules ($1.4 million), the inclusion of MCE for a full year versus ten
months last year ($1.2 million), and increased development expense for
wireless communication test equipment ($3.3 million).  The increase in fiscal 2004 from 2003 is
primarily attributable to additional expense of MCE, RIWS and Celerity.   In
connection with our SPG and JcAIR acquisitions in fiscal 2005, we allocated
$2.8 million and $200,000, respectively, of the purchase price to
in-process research and development projects. 
 In connection with our
acquisitions of MCE, RIWS and Celerity in fiscal 2004, we allocated $420,000,
$2.7 million and $1.1 million, respectively, of the purchase price to
in-process research and development projects.  Backlog  We
include in backlog firm purchase orders or contracts providing for delivery of
products and services.  At June 30,
2005, our order backlog was approximately $209.5 million, approximately 91%
of which was scheduled to be delivered on or before June 30, 2006.  Approximately 54% of this backlog represents
commercial contracts and approximately 46% of this backlog represents
government contracts.  Generally,
government contracts are cancelable with payment to us of amounts which we have
spent under the contract together with a reasonable profit, if any, while
commercial contracts are not cancelable.  At
June 30, 2004, our backlog of orders was approximately $172.9 million.  Approximately 87% of this backlog was
scheduled to be delivered before June 30, 2005.  Approximately 52% of this backlog represented
orders for government contracts.  4


Competition  In
all phases of our operations, we compete primarily on the basis of both
performance and price.  In the
manufacture of microelectronics, we believe our primary competitors are
ILC/Data Devices Corp., BAE Systems and Honeywell International.  In the manufacture of test products, we
believe our primary competitors are Agilent Technologies, Rohde &
Schwartz, Anritsu, Spirent and Anite.  We
also experience significant competition from the in-house capabilities of our
current and potential customers.  We
believe that in all of our operations we compete favorably in the principal
competitive areas of:  technology, performance, reliability, quality, customer
service and price.  We
believe that to remain competitive in the future, we will need to invest
significant financial resources in research and development.  To
the extent that we are engaged in government contracts, our success or failure,
to a large measure, is based upon our ability to compete successfully for
contracts and to complete them at a profit. 
Government business is necessarily affected by many factors such as
variations in the military requirements of the government and defense budget
allocations.  Government Sales  Approximately
32% of our sales for fiscal 2005, 34% of our sales for fiscal 2004 and 39% of
our sales for fiscal 2003 were to agencies of the United States Government or
to prime defense contractors or subcontractors of the United States
Government.  Our defense contracts have
been awarded either on a bid basis or after negotiation.  The contracts are primarily fixed price
contracts, though we also have or had defense contracts providing for cost plus
fixed fee.  Our defense contracts contain
customary provisions for termination at the convenience of the government
without cause.  In the event of such
termination, we are generally entitled to reimbursement for our costs and to
receive a reasonable profit, if any, on the work done prior to termination.  Manufacturing  We
assemble, test, package and ship products at our manufacturing facilities
located in:  Cupertino,
California, Sunnyvale,
California, Colorado
Springs, Colorado, New
Century, Kansas, Wichita,
Kansas, Frederick,
Maryland, Ann
Arbor, Michigan, Whippany,
New Jersey, Hauppauge,
New York, Plainview,
New York, Powell,
Ohio, Elancourt,
France, Burnham,
United Kingdom, Cambridge,
United Kingdom and Stevenage,
United Kingdom.  5


We
have been manufacturing products for defense programs for many years in
compliance with stringent military specifications. Our microelectronic
manufacturing in Plainview and Colorado Springs are space certified and
qualified.  We believe we have brought to
the commercial market the manufacturing quality and discipline we have
demonstrated in the defense and space markets. 
For example, most of our manufacturing plants are ISO-9001 certified,
our Plainview, Hauppauge, and Colorado Springs facilities are also certified to
the more stringent AS9100 standard.  Many
of the component parts we use in our products are purchased, including:  semiconductors, transformers
and amplifiers.  Although
we have several sole source arrangements, all the materials and components we
use, including those purchased from a sole source, are readily available and
are or can be purchased from time to time in the open market.  We have no long-term commitments for their
purchase.  No supplier provides more than
10% of our raw materials.  Patents and Trademarks  We
own several patents, patent licenses and trademarks.  In order to protect our intellectual property
rights, we rely on a combination of trade secret, copyright, patent and
trademark laws and employee and third-party nondisclosure agreements.  We also limit access to and distribution of
our proprietary information.  While we
believe that in the aggregate our patents and trademarks are important to our operations,
we do not believe that one or any group of them is so important that its
termination could materially affect us.  Seasonality  Although
our business is not affected by seasonality, historically our revenues and
earnings increase sequentially from quarter to quarter within a fiscal year,
but the first quarter is typically less than the previous years fourth
quarter.  Employees  As
of June 30, 2005, we had approximately 2,640 employees, of whom 1,535 were
employed in a manufacturing capacity, and 1,105 were employed in engineering,
sales, administrative or clerical positions.  
Approximately 110 of our employees are covered by a collective
bargaining agreement.  The collective
bargaining agreement expires September 30, 2007.   We believe that our employee relations are
satisfactory.  Regulation  Our
operations are subject to various environmental, health and employee safety
laws.  We have expended funds and
management has spent time complying with environmental, health and worker
safety laws which apply to our operations and facilities and we expect that we will
continue to do so.  Our principal
products or services do not require any governmental approval except for the
requirement that we obtain export licenses for certain of our products.  Compliance with environmental laws has not
historically materially affected our capital expenditures, earnings or
competitive position.  We do not expect
compliance with environmental laws to have a material effect on us in the
future.  6


Because
we participate in the defense industry, we are subject to audit from time to
time for our compliance with government regulations by various agencies,
including (1) the Defense Contract Audit Agency, (2) the Defense
Investigative Service, and (3) the Defense Logistics Agency.  These and other governmental agencies may
also, from time to time, conduct inquires or investigations regarding a broad
range of our activities.  Responding to
any audits, inquiries or investigations may involve significant expense and
divert management attention.  Also, an
adverse finding in any audit, inquiry or investigation could involve penalties
that may have a material adverse effect on our business, results of operations
or financial condition.  We
believe that we generally comply with all applicable environmental, health and
worker safety laws and governmental regulations.  Nevertheless, we cannot guarantee that in the
future we will not incur additional costs for compliance or that those costs
will not be material.  Financial Information About Industry Segments  The
sales and operating profits of each industry segment and the identifiable
assets attributable to each industry segment for each of three years in the
period ended June 30, 2005 are set forth in Note 15 of Notes to
Consolidated Financial Statements.  Financial Information About Geographic Areas  The
majority of our customers are located in the United States, but sales to customers
in foreign countries accounted for 40% of our total sales in 2005, 36% in 2004
and 35% in 2003.  In fiscal year 2005, 60%
of our sales were to customers located in the United States, 27% to Europe and
the Middle East, 12% to Asia and Australia, and 1% to the rest of the
world.  In fiscal year 2004, 64% of our
sales were to customers located in the United States, 26% to Europe and the
Middle East, 9% to Asia and Australia, and 1% to the rest of the world.  Most
of our operations are located in the United States; however, we also have
operations in Europe and Asia.  Each of
Aeroflex International Limited, which we acquired in May 2002, RIWS, which
we acquired in July 2003 and SPG, which we acquired in May 2005 have
significant operations in the United Kingdom. 
Specifically, net sales from facilities located in the United Kingdom
were approximately $131 million in 2005, $121 million in 2004 and $68 million
in 2003.  Total assets of the United
Kingdom operations were $235 million in 2005, $139 million in 2004,
and $66 million in 2003.  Available Information  We
file reports with the SEC.  The public
may read and copy any materials filed by us with the SEC at the SECs public
reference room at 450 Fifth Street, NW, Washington, D.C., 20549.  The public may obtain information about the
operation of the SECs public reference rooms by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an internet site at www.sec.gov
that contains reports, proxy and information statements and other information
about issuers like us that file electronically with the SEC.  In
addition, we make available free of charge on our website at www.aeroflex.com our
annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) under the Exchange Act as
soon as reasonably practical after we electronically file such material with,
or furnish it to, the SEC.  7


ITEM 2  PROPERTIES  Following
is a description of the significant properties owned or leased by us at June 30,
2005:  Our
executive offices and the manufacturing facilities of Aeroflex Plainview, Inc.
(formerly Aeroflex Laboratories, Inc.), one of our subsidiaries, are an
aggregate of approximately 69,000 square feet and are located in premises which
we own in Plainview, Long Island, New York.(1)  Aeroflex
Plainview, Inc., also leases a manufacturing facility in Hauppauge, Long
Island, New York, of approximately 47,000 square feet, with an annual rental of
approximately $289,000.  The lease
expires in 2010.(2)  Our
subsidiary, Aeroflex Powell, Inc (formerly Aeroflex Lintek Corp.), leases
approximately 20,000 square feet of space in Powell, Ohio, with an annual
rental of approximately $230,000.  The
lease expires in 2008.  This subsidiary
also leases approximately 16,000 square feet of space in Cupertino, California,
with an annual rental of approximately $308,000.  This lease expires in 2006.(2)  Our
subsidiary, Aeroflex Colorado Springs, Inc. (formerly Aeroflex UTMC
Microelectronic Systems, Inc.), conducts manufacturing operations at a
plant located in Colorado Springs, Colorado. 
The plant, which we own, is approximately 102,000 square feet.(3)  Our
subsidiary, Aeroflex Wichita, Inc. (formerly IFR Systems, Inc.),
conducts manufacturing operations at a plant located in Wichita, Kansas.  The plant, which we own, is approximately 156,000
square feet.(2)  Our
subsidiary, Aeroflex International Ltd. (formerly IFR Ltd.) conducts
manufacturing operations at three owned facilities in Stevenage, England,
comprising approximately 81,000, 34,000 and 27,000 square feet.(2)  Our
subsidiary, Aeroflex Inmet, Inc., conducts manufacturing operations at a
plant located in Ann Arbor, Michigan. 
The plant, which we own, is approximately 32,000 square feet.(3)  Our
subsidiary, Aeroflex KDI, Inc., conducts manufacturing operations at a
plant located in Whippany, New Jersey. 
The plant, which we own, is approximately 57,000 square feet.(3)  Our
subsidiary, Aeroflex Weinschel, Inc., leases approximately 32,000 square
feet of space in Frederick, Maryland, with an annual rental of approximately $388,000.  This lease expires in 2011.(3)  Our
subsidiary, Aeroflex Metelics, Inc., leases approximately 20,000 square
feet in Sunnyvale, California, with an annual rental of approximately $316,000.  This lease expires in 2012.(3)  Our
subsidiary, Racal Instruments Wireless Solutions Limited, leases approximately
70,000 square feet in Burnham, England, with an annual rental of approximately
$1.1 million.  This lease expires in
2007.(2)  We
believe that our facilities are adequate for our current and presently
foreseeable needs and that we will be able to renew or replace our expiring
leases on our rental properties on commercially reasonable terms.  
 (1)           Used by both Microelectronic
Solutions and Test Solutions segments. (2)           Used by Test Solutions segment. (3)           Used by Microelectronic Solutions
segment.  8


ITEM 3  LEGAL PROCEEDINGS  We
have recently learned that we may have inadvertently violated certain
International Traffic in Arms Regulations (ITAR) by exporting certain products
and services without licenses.  These
exports resulted from an error in classifying the products and services as
commercial rather than military.  We have
prepared and filed a voluntary disclosure with the State Department in which
the details of the exports and erroneous classifications are described.  At this time, it is not possible to determine
whether any fines or other penalties will be asserted against us, or the
materiality of any outcome.  We
are involved in various other routine legal matters.  We believe the outcome of these matters will
not have a material adverse effect on us.  ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  Not
applicable.  9


PART II  ITEM 5  MARKET FOR THE REGISTRANTS
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES  Market Information  Our
common stock trades on the Nasdaq National Market System under the symbol ARXX.  The following table sets forth, for the
fiscal periods indicated, the high and low closing sales prices of our common
stock as reported by the Nasdaq National Market.  Common StockHigh
  
  LowFiscal Year Ended June 30, 2004First Quarter
  
  $
  10.38
  
  $
  7.41Second Quarter
  
  13.02
  
  8.76Third Quarter
  
  16.39
  
  11.85Fourth Quarter
  
  15.70
  
  11.78Fiscal Year Ended June 30, 2005First Quarter
  
  $
  13.95
  
  $
  9.06Second Quarter
  
  13.41
  
  10.23Third Quarter
  
  11.69
  
  8.92Fourth Quarter
  
  9.23
  
  6.60
  Holders  As
of September 9, 2005, there were approximately 675 record holders of our
common stock.  Dividends  We
have never declared or paid any cash dividends on our common stock.  There have been no stock dividends declared
or paid on our common stock during the past three years.  We currently intend to retain any future
earnings for use in the operation and development of our business and for
acquisitions and, therefore, do not intend to declare or pay any cash dividends
on our common stock in the foreseeable future. 
In addition, our bank loan and security agreement, as amended, prohibits
us from paying cash dividends.  10


Equity Compensation Plan Information as of June 30, 2005  Number of securities
  to be issued upon
  exercise of outstanding
  options
  
  Weighted-average
  exercise price of
  outstanding options
  
  Number of securities
  remaining available
  for future issuance
  under equity
  compensation plans
  (excluding securities
  reflected column (a))(a)
  
  (b)
  
  (c)Plan Category
  (1)Equity compensation plans  approved by security holders
  
  7,536,071
  
  $
  12.42
  
  273,343Equity compensation plans  not approved by security  holders
  
  7,847,995
  
  $
  11.05
  
  2,461,474Total
  
  15,384,066
  
  $
  11.72
  
  2,734,817   Issuer Purchases of Equity Securities  Total Number of
  
  Maximum NumberShares Purchased
  
  of Shares thatas Part of
  
  May Yet beTotal Number of
  
  
  
  Publicly
  
  Purchased underShares
  
  Average Price
  
  Announced Plans
  
  the Plans orPeriod
  
  Purchased (2)
  
  Paid Per Share
  
  or Programs
  
  ProgramsMay 2005
  
  
  
  $
  
  
  
  
  June 2005
  
  50,000
  
  8.33
  
  50,000
  
  2,950,000  
 (1)For description of plans, see Note 9 to the Consolidated Financial
Statements.  (2)All purchases were made in open market transactions.  Our 3.0 million share stock buyback
program has been in effect since May 23, 2005.  There is no time limit on the repurchases to
be made under the Plan.  11


ITEM 6  SELECTED FINANCIAL DATA  (In
thousands, except percentages, footnotes and per share amounts)  Years ended June 30,2005
  
  2004
  
  2003
  
  2002
  
  2001Operations Statement DataNet sales
  
  $
  463,371
  
  $
  414,101
  
  $
  265,807
  
  $
  171,531
  
  $
  161,868Income from continuing operations
  
  18,644
  (1)
  20,464
  (2)
  10,895
  
  7,621
  (3)
  13,064
  (4)Discontinued operations
  
  (1,603
  )
  (8,317
  )
  (4,500
  )
  (18,402
  )
  8,158Cumulative effect of a change in accounting
  
  
  
  
  
  
  
  
  
  132Net income (loss)
  
  17,041
  (1)
  12,147
  (2)
  6,395
  
  (10,781
  )(3)
  21,354
  (4)Income from continuing  operations per common shareBasic
  
  $
  0.25
  (1)
  $
  0.30
  (2)
  $
  0.18
  
  $
  0.13
  (3)
  $
  0.22
  (4)Diluted
  
  0.25
  (1)
  0.29
  (2)
  0.18
  
  0.12
  (3)
  0.21
  (4)Weighted average number of common shares outstandingBasic
  
  74,634
  
  67,917
  
  60,193
  
  59,973
  
  58,124Diluted
  
  75,885
  
  69,931
  
  60,753
  
  62,012
  
  61,041  As of or for the years ended June 30,2005
  
  2004
  
  2003
  
  2002
  
  2001Balance Sheet DataWorking capital
  
  $
  161,749
  
  $
  237,865
  
  $
  161,925
  
  $
  145,095
  
  $
  152,362Total assets
  
  589,849
  
  551,391
  
  331,262
  
  318,096
  
  310,111Long-term debt (including current portion)
  
  4,824
  
  10,275
  
  9,270
  
  11,244
  
  9,569Stockholders equity
  
  443,980
  
  427,097
  
  258,415
  
  249,482
  
  255,121Other StatisticsAfter tax profit margin from continuing operations
  
  4.0
  %(1)
  4.9
  %(2)
  4.1
  %
  4.4
  %(3)
  8.1
  %(4)Return on average stockholders equity from
  continuing operations
  
  4.3
  %(1)
  6.0
  %(2)
  4.3
  %
  3.0
  %(3)
  5.7
  %(4)Stockholders equity per share (5)
  
  $
  5.95
  
  $
  5.75
  
  $
  4.30
  
  $
  4.16
  
  $
  4.28  
 (1)Includes
$3.0 million ($3.0 million, net of tax, or $.04 per diluted share) charge
for the write-off of in-process research and development acquired with the
purchases of JcAIR and SPG in fiscal 2005.  Also includes $3.1 million ($1.9 million,
net of tax, or $.02 per diluted share) charge for the restructuring of our
European sales and management organization. (2)Includes
$4.2 million ($3.9 million, net of tax, or $.06 per diluted share) charge
for the write-off of in-process research and development acquired in connection
with the purchases of MCE, RIWS and Celerity in fiscal 2004. (3)  Includes
$3.1 million ($2.1 million, net of tax, or $.03 per diluted share) charge
for the consolidation of our manufacturing operations in order to take
advantage of excess manufacturing capacity and reduce operating costs including
charges related to excess equipment capacity. 
Also includes $1.1 million ($1.1 million, net of tax, or $.02
per diluted share) charge for the write-off of in-process research and
development acquired in connection with the purchase of IFR Systems, Inc.
in May 2002. (4)Includes $1.5 million
($990,000, net of tax, or $.02 per diluted share) charge for the write-off of
in-process research and development acquired in connection with the purchase of
RDL, Inc. in October 2000. (5)Calculated by
dividing stockholders equity, at the end of the year, by the number of shares
outstanding at the end of the year.  12


ITEM 7  -  MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Overview  We
use our advanced design, engineering and manufacturing capabilities to produce
microelectronic and test solutions that we sell primarily into the broadband
communications, aerospace and defense markets. 
We also design and manufacture motion control systems which are used for
industrial and defense applications.  We
have been a designer and supplier of microelectronics for more than 20
years.  Our products include (i) custom
and standard integrated circuits, such as databuses, transceivers,
microcontrollers, microprocessors and memories; and (ii) components,
sub-assemblies and modules for military and commercial communication systems.  We
design, develop and manufacture a broad line of test equipment which includes:  Wireless
Test Equipment, Frequency
Synthesizers, Radio
Test Equipment, Synthetic
Test Systems, Avionics
Test Equipment and Other
General Purpose Test Equipment.  We
also design, develop and produce motion control systems including stabilization
and tracking devices, magnetic motors and scanning devices.  Our
operating strategy is based on the following key objectives:  to
strengthen and expand our portfolio of proprietary technologies; to
broaden the applications and target markets for our existing products; to
expand the scope of our content in our customers products; to
increase our operating efficiencies; to
maintain a conservative capital structure; and to
opportunistically pursue strategic acquisitions.  In
December 2002, our Board of Directors approved a formal plan to
discontinue our fiber optic lithium niobate modulator operation which was
acquired in March 2001.   The plan
called for an immediate cessation of operations and disposal of existing
assets.  The abandonment of the operation
resulted in a charge of $2.6 million ($1.7 million, net of tax) in
the quarter ended December 31, 2002. 
The charge included a cash requirement of $1.4 million, primarily
for equipment leases and payroll costs, and a non-cash charge of $1.2 million,
primarily for the write-off of owned equipment. 
In accordance with SFAS No. 144, the abandonment has been reported
as a discontinued operation and, accordingly, losses from operations and the
loss on abandonment have been reported separately from continuing operations.  As
a result of continued operating losses, in February 2004, our Board of
Directors approved a plan to divest our thin film interconnect manufacturing
operation (MIC) and to seek a strategic buyer.  As a result of this decision, we recorded a
$9.1 million ($6.2 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 loss on disposal and the results of operations
of this business as income (loss) from discontinued operations and all prior
periods have been restated in order to conform to this presentation.  MIC designed, developed, manufactured and
marketed microelectronic products in the form of passive thin film circuits and
interconnects.  13


In
September 2004, we sold the stock of MIC for $8.8 million and recorded
an additional loss on disposal of $1.3 million ($1.3 million, net of
tax).  Since the sale of the stock
created a capital loss for tax purposes and we have no current capital gains to
offset it, we recorded a full valuation allowance against the tax benefit.  Under the terms of the sale agreement, we
have retained certain liabilities relating to potential adverse environmental
conditions that may exist as of the date of sale, litigation pending against
MIC as of the date of sale and defects in products designed, developed,
manufactured or sold by MIC prior to the sale date which result in a recall,
withdrawal or market suspension of the product or result in injury to persons
or property.  We believe these
contingencies will not have a material adverse effect on our consolidated
financial statements.  In
June 2004, our Board of Directors approved a formal plan to divest our
shock and vibration control device manufacturing business (VMC) and to seek a
strategic buyer.  This operation had
previously comprised the Isolator Products segment.  In March 2005, we sold the net assets of
VMC for $8.4 million in cash.  We recorded
a  gain on disposition of $860,000
($505,000, net of tax).  Under the terms
of the sale agreement, we have retained certain liabilities relating to adverse
environmental conditions that currently exist at the premises occupied by VMC,
litigation pending against VMC as of the date of sale, and to the extent
covered by insurance, product liability for products sold prior to the closing
date.  We have recorded a reserve for the
estimated remediation costs related to adverse environmental conditions that
currently exist at the premises occupied by VMC.  In
April 2005, we acquired JcAIR Test Systems, which manufactures customized
avionics test solutions, both manual and automated, for manufacturing, repair
and ground support operations.  In
May 2005, we acquired the SPG division of UbiNetics Holding Limited, which
is a developer, manufacturer and integrator of wireless test and measurement
solutions specific to commercial wireless development organizations and service
operations.  Approximately
32% of our sales for fiscal 2005, 34% of our sales for fiscal 2004 and 39% of
our sales for fiscal 2003 were to agencies of the United States government or
to prime defense contractors or subcontractors of the United States
government.  Our government contracts
have been awarded either on a bid basis or after negotiation.   Our government contracts are primarily fixed
price contracts, although we also have or had government contracts providing
for cost plus fixed fee.  Our government
contracts have customary provisions for termination at the convenience of the
government without cause.  In the event
of such termination, we are generally entitled to reimbursement for our costs
and to receive a reasonable profit, if any, on the work done prior to
termination.  Our
product development efforts primarily involve engineering and design relating
to:  developing
new products, improving
existing products, adapting
existing products to new applications and developing
prototype components to bid on specific programs.  Some
of our development efforts are reimbursed under contractual agreements.  Product development and similar costs which
are not reimbursed under contractual arrangements are expensed in the period
incurred.  14


Statement of Operations  The following table sets
forth our net sales and operating income by business segment and a
reconciliation to income from continuing operations before income taxes for the
periods indicated.  Years Ended June 30,2005
  
  2004
  
  2003(In thousands)Net Sales:Microelectronic Solutions (AMS)
  
  $
  193,005
  
  $
  164,526
  
  $
  95,820Test Solutions (ATS)
  
  270,366
  
  249,575
  
  169,987Net Sales
  
  $
  463,371
  
  $
  414,101
  
  $
  265,807Operating
  Income:Microelectronic Solutions
  
  $
  45,377
  
  $
  42,044
  
  $
  19,886Test Solutions
  
  22,818
  
  18,678
  
  6,782General Corporate Expenses
  
  (20,289
  )
  (12,737
  )
  (7,045
  )47,906
  
  47,985
  
  19,623Amortization of
  acquired intangibles
  
  -AMS
  
  (2,154
  )
  (1,982
  )
  (622
  )-ATS
  
  (6,742
  )
  (5,748
  )
  (2,099
  )Restructuring
  charges-ATS
  
  
  (3,124
  )
  
  
  Acquired in-process research and development
  -AMS
  
  
  
  (420
  )
  -ATS
  
  (2,974
  )
  (3,800
  )
  Current period impact of acquisition related
  adjustment to inventory-ATS
  
  (840
  )
  
  
  Interest expense
  
  
  (895
  )
  (1,403
  )
  (1,104
  )Other income
  (expense), net
  
  
  1,844
  
  (1,711
  )
  459Income from continuing operations before income
  taxes
  
  $
  33,021
  
  $
  32,921
  
  $
  16,257  The following table sets
forth certain items from our statement of operations as a percentage of net
sales for the periods indicated.  The
special charges represent the write-offs of in-process research and development
for the years ended June 30, 2005 and 2004 and restructuring charges for
the year ended June 30, 2005.  15


Years Ended June 30,2005
  
  2004
  
  2003Net sales
  
  100.0
  %
  100.0
  %
  100.0
  %Cost of sales
  
  52.8
  
  53.5
  
  59.3Gross profit
  
  47.2
  
  46.5
  
  40.7Operating expenses:Selling, general and administrative costs
  
  23.8
  
  22.9
  
  22.2Research and development costs
  
  13.3
  
  12.0
  
  11.1Amortization of acquired intangibles
  
  1.9
  
  1.9
  
  1.0Special charges
  
  1.3
  
  1.0
  
  Total operating expenses
  
  40.3
  
  37.8
  
  34.3Operating income
  
  6.9
  
  8.7
  
  6.4Other income (expense), net
  
  0.2
  
  (0.8
  )
  (0.3
  )Income before income taxes
  
  7.1
  
  7.9
  
  6.1Provision for income taxes
  
  3.1
  
  3.0
  
  2.0Income from continuing operations
  
  4.0
  
  4.9
  
  4.1Discontinued operations
  
  (0.3
  )
  (2.0
  )
  (1.7
  )Net income
  
  3.7
  %
  2.9
  %
  2.4
  %  Fiscal Year Ended June 30, 2005 Compared to Fiscal Year Ended June 30,
2004  Net Sales.Net sales increased 12% to $463.4 million
in fiscal 2005 from $414.1 million in fiscal 2004.  Net sales in the microelectronic solutions (AMS)
segment increased 17% to $193.0 million in fiscal 2005 from $164.5 million
in fiscal 2004 due primarily to the inclusion of MCE, acquired in September 2003,
for a full year versus ten months in fiscal 2004 together with organic growth
in MCE and also as a result of increased sales of our microelectronic module
and integrated circuits.  Net sales in
the test solutions (ATS) segment increased 8% to $270.4 million in
fiscal 2005 from $249.6 million in fiscal 2004 primarily due to increased
sales in our wireless communication test products business and, to a lesser
degree, sales from our recently acquired JcAIR and SPG businesses.  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.  Gross profit equals net sales less cost of
sales.  Fiscal YearEnded
  
  
  
  % of
  
  
  
  % of
  
  
  
  % ofJune 30,
  
  AMS
  
  sales
  
  ATS
  
  sales
  
  Total
  
  sales2005
  
  $
  98,220
  
  51
  %
  $
  120,392
  
  45
  %
  $
  218,612
  
  47
  %2004
  
  83,264
  
  51
  %
  109,428
  
  44
  %
  192,692
  
  47
  %  Gross profit increased $15.0 million, or 18%,
in the AMS segment primarily as a result of the effect of the acquisition of
MCE in September 2003, organic growth in volume of MCE since last year and
an increase in sales in our microelectronic modules and integrated circuits
businesses.  Gross profit increased $11.0 million,
or 10%, in the ATS segment primarily as a result of increased sales and margins
in our wireless communications test products business and, to a lesser degree,
our recently acquired JcAIR and SPG businesses.  16


Selling, General and Administrative Costs.Selling, general and administrative costs include office and management
salaries, fringe benefits, commissions, insurance and professional fees.  Fiscal YearEnded
  
  
  
  % of
  
  
  
  % of
  
  
  
  
  
  % ofJune 30,
  
  AMS
  
  sales
  
  ATS
  
  sales
  
  Corporate
  
  Total
  
  sales2005
  
  $
  30,341
  
  16
  %
  $
  62,641
  
  23
  %
  $
  20,289
  
  $
  113,271
  
  24
  %2004
  
  25,810
  
  16
  %
  56,188
  
  23
  %
  12,737
  
  94,735
  
  23
  %  Selling, general and administrative costs increased
$4.5 million, or 18%, in the AMS segment due primarily to the addition of
the expenses of MCE for a full year versus ten months in last fiscal year and
increased commissions resulting from increased sales.  Selling, general and administrative costs
increased $6.5 million, or 11%, in the ATS segment due primarily to
restructuring charges of $3.1 million in our European operations, $1.3 million
due to the addition of the expenses of JcAIR and SPG and $1.2 million due
to the full year impact of RIWS in fiscal 2005 versus eleven months in fiscal
2004.  Corporate selling, general and
administrative expenses increased $7.6 million due primarily to increased
professional fees of $7.1 million, principally related to Sarbanes Oxley compliance
related expenses.  We initiated strategic plans to reorganize certain
of our European operations in our Test Solutions business segment.  In connection with this restructuring, we
recorded charges of $3.1 million in the fiscal year ended June 30,
2005 for workforce reductions, primarily in management and sales.  The restructuring charge is expected to
generate savings of approximately $4.2 million per year.  Research and Development Costs.  
Research and development costs include material, engineering labor and
allocated overhead.  Fiscal YearEnded
  
  
  
  % of
  
  
  
  % of
  
  
  
  % ofJune 30,
  
  AMS
  
  sales
  
  ATS
  
  sales
  
  Total
  
  sales2005
  
  $
  22,502
  
  12
  %
  $
  38,897
  
  14
  %
  $
  61,399
  
  13
  %2004
  
  15,409
  
  9
  %
  34,563
  
  14
  %
  49,972
  
  12
  %  Self-funded research and development costs increased
$7.1 million, or 46%, in the AMS segment primarily due to the increased
development cost associated with field programmable gate arrays ($3.8 million)
and microelectronic modules ($1.4 million), and to a lesser degree, the
inclusion of MCE for a full year versus ten months last year
($1.2 million).  Research and
development costs increased $4.3 million, or 13%, in the ATS segment
primarily due to the addition of the developmental expenses for wireless
communication test equipment, which is expected to continue to have higher
research and development costs.  Amortization of Acquired Intangibles. Amortization increased $1.2 million, or
15%, to $8.9 million, primarily due to the acquisitions of JcAIR and SPG.  Acquired in-Process Research and Development.In connection with the acquisition of SPG, we allocated $2.8 million
of the purchase price to incomplete research and development projects.  In connection with the acquisition of JcAIR,
we allocated $200,000 of the purchase price to incomplete research and
development projects.  These allocations
represent the estimated fair value of such incomplete research and development
projects, at the acquisition date, 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.  17


The values assigned to these projects were
determined by identifying significant research projects for which technological
feasibility had not been established.  
At its acquisition date, SPG was conducting development activities
associated with the completion of test mobile products used to test evolving 3G
(third-generation) mobile communications networks and equipment that tests the
functionality and performance of Wide-Band-Code-Division-Multiple-Access
technology.  At its acquisition date,
JcAIR was conducting development activities associated with the completion of
the general avionic test equipment sets. 
These projects under development at the valuation date represent
technologies which are expected to address emerging market demands.  We intend to continue with these development
efforts and, if successfully completed, release the products to market.  At its
acquisition date, SPG expected to spend approximately $2.2 million to
complete all phases of the research and development, with anticipated completion
dates ranging from two to five months from that date.   At its
acquisition date, JcAIR expected to spend approximately $900,000 to complete
all phases of the research and development, with anticipated completion dates
ranging from fifteen to twenty months from that date.  We determined the value assigned to purchased
in-process technology by estimating the contribution of the purchased in-process
technology in developing a commercially viable product, estimating the
resulting net cash flows from the expected sales of such a product, and
discounting the net cash flows to their present value using an appropriate
discount rate.  Revenue growth rates for the acquired companies were
estimated based on a detailed forecast, as well as discussions with the
finance, marketing and engineering personnel of the acquired companies.  Allocation of total projected revenues to
in-process research and development were based on discussions with the acquired
companies management.  Selling, general
and administrative expenses and profitability estimates were determined based
on forecasts as well as an analysis of comparable companies margin
expectations.  The projections utilized in the transaction pricing
and purchase price allocation exclude the potential synergetic benefits related
specifically to our ownership.  Due to
the stage of the development and reliance on future, unproven products and
technologies, the nature of the forecasts and the risks associated with the
projected growth and profitability of the development projects, discount rates
of 24% and 40% (assumes the contingent payment is earned) were used to discount
SPGs cash flows from the in-process technology, and 24% was used to discount JcAIRs
cash flows.   The discount rate was
commensurate with the acquired companies market position, the uncertainties in
the economic estimates described above, the inherent uncertainty surrounding
the successful development of the purchased in-process technology, the useful
lives of such technology, the profitability levels of such technology, and the
uncertainty related to technological advances that could render development
stage technologies obsolete.  We believe that the foregoing assumptions used in
the forecasts were reasonable at the time of the acquisitions.  No assurance can be given, however, that the
underlying assumptions used to estimate sales, development costs or
profitability, or the events associated with such projects will transpire as
estimated.  For these reasons, actual
results may vary from projected results.  Remaining development efforts for the acquired
companies research and development included various phases of design,
development and testing.  Funding for
such projects is expected to come primarily from internally generated sources.  As evidenced by the continued support of the
development of these projects, we believe we have a reasonable chance of
successfully completing the research and development programs.  However, as with all of our technology
development, there is a risk associated with the completion of the research and
development projects, and there is no assurance that technological or commercial
success will be achieved.  If the development of these in-process research and
development projects is unsuccessful, our sales and profitability may be
adversely affected in future periods. 
Commercial results are also subject to certain market events and risks,
which are beyond our control, such as trends in technology, changes in
government regulation, market size and growth, and product introduction or
other actions by competitors.  18


Other Income (Expense).Interest expense was $895,000 in fiscal 2005
and $1.4 million in fiscal 2004. 
Other income of $1.8 million in fiscal 2005 consisted primarily of
$1.7 million of interest income.  Other expense of $1.7 million in fiscal
2004 consisted primarily of $2.0 million of foreign currency transaction
losses partially offset by interest income of $456,000.  Foreign currency transaction losses decreased
primarily due to foreign currency contract strategies that we employed in
fiscal 2005.  Interest income increased
primarily due to higher average levels of cash and marketable securities.  Interest income is expected to decrease in
fiscal 2006 as a result of our decreased cash position resulting from the use
of cash for acquisitions.  Interest
expense decreased in fiscal 2005 due to lower borrowings.  Provision for Income Taxes.The income tax provision was $14.4 million
(an effective income tax rate of 43.5%) in fiscal 2005 and $12.5 million
(an effective income tax rate of 37.8%) in fiscal 2004.  The effective income tax rate for the two periods
differed from the amount computed by applying the U.S. Federal income tax rate
to income before income taxes primarily due to foreign, state and local income
taxes, and research and development credits and non-deductible in-process
research and development costs.  The
primary difference in rates between the two years is due to the increase in
domestic income relative to foreign income and a valuation allowance recorded
on foreign losses.  Domestic income is
taxed at higher effective tax rates than foreign income which increases the overall
global tax rate.  Income from Continuing Operations.Income from
continuing operations for the year ended June 30, 2005 was $18.6 million,
or $.25 per diluted share, versus $20.5 million, or $.29 per diluted share,
in 2004.  Fiscal 2005 income from
continuing operations included a $3.0 million charge ($3.0 million,
net of tax, or $.04 per diluted share), for in-process research and development
related to the acquisitions of JcAIR and SPG. 
Fiscal 2004 income from continuing operations included a $4.2 million
charge ($3.9 million, net of tax, or $.06 per diluted share) for
in-process research and development related to the acquisitions of MCE, RIWS
and Celerity.  Fiscal Year Ended June 30, 2004 Compared to Fiscal Year Ended June 30,
2003  Net Sales.Net sales increased 56% to $414.1 million
in fiscal 2004 from $265.8 million in fiscal 2003.   Net sales in the microelectronic solutions (AMS)
segment increased 72%to$164.5 million
in fiscal 2004 from $95.8 million in fiscal 2003 due primarily to the
acquisition of MCE in September 2003.  Net sales in the test solutions (ATS) segment
increased 47% to $249.6 million in fiscal 2004 from $170.0 million in
fiscal 2003 primarily due to the acquisition of RIWS in July 2003 and
increased sales in our communication test products business.  Gross Profit.  Fiscal YearEnded
  
  
  
  % of
  
  
  
  % of
  
  
  
  % ofJune 30,
  
  AMS
  
  sales
  
  ATS
  
  sales
  
  Total
  
  sales2004
  
  $
  83,264
  
  51
  %
  $
  109,428
  
  44
  %
  $
  192,692
  
  47
  %2003
  
  45,723
  
  48
  %
  62,364
  
  37
  %
  108,087
  
  41
  %  Gross profit increased $37.5 million, or 82%,
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 $47.1 million,
or 75%, in the ATS segment primarily as a result of the effect of the
acquisition of RIWS in July 2003 and increased sales and margins in our
communications test products business due to improved factory utilization.  19


Selling, General and Administrative Costs.  Fiscal YearEnded
  
  
  
  % of
  
  
  
  % of
  
  
  
  
  
  % ofJune 30,
  
  AMS
  
  sales
  
  ATS
  
  sales
  
  Corporate
  
  Total
  
  sales2004
  
  $
  25,810
  
  16
  %
  $
  56,188
  
  23
  %
  $
  12,737
  
  $
  94,735
  
  23
  %2003
  
  13,468
  
  14
  %
  38,436
  
  23
  %
  7,045
  
  58,949
  
  22
  %  Selling, general and administrative costs increased
$12.3 million, or 92%, in the AMS segment due primarily to the
addition of the expenses of MCE. 
Selling, general and administrative costs increased $17.8 million,
or 46%, in the ATS segment due primarily to the addition of the expenses of
RIWS and Celerity.  Corporate selling,
general and administrative expenses increased $5.7 million due primarily
to increased compensation expense, professional fees and insurance expense.  Research and Development Costs.  Fiscal YearEnded
  
  
  
  % of
  
  
  
  % of
  
  
  
  % ofJune 30,
  
  AMS
  
  sales
  
  ATS
  
  sales
  
  Total
  
  sales2004
  
  $
  15,409
  
  9
  %
  $
  34,563
  
  14
  %
  $
  49,972
  
  12
  %2003
  
  12,369
  
  13
  %
  17,146
  
  10
  %
  29,515
  
  11
  %  Self funded research and development costs increased
$3.0 million, or 25%, 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 costsincreased $17.4 million,
or 102%, in the ATS segment primarily due to the addition of the expenses of
RIWS, which historically had, and is expected to continue to have, higher
research and development costs.  Amortization of Acquired Intangibles.   Amortization increased $5.0 million, or 184%,
due to the acquisitions of MCE, RIWS and Celerity.  Acquired In-Process Research and Development.In connection with the acquisition of RIWS, we allocated $2.7 million
of the purchase price to incomplete research and development projects.  In connection with the acquisition of MCE, we
allocated $420,000 of the purchase price to incomplete research and development
projects.  In connection with the
acquisition of Celerity, we allocated $1.1 million of the purchase price
to incomplete research and development projects.  These allocations represent the estimated
fair value of such incomplete research and development, at the acquisition
date, based on future cash flows that have been adjusted by the respective
projects completion percentage.  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 Income (Expense).Interest expense increased to $1.4 million
in fiscal 2004 from $1.1 million in fiscal 2003.   Other expense of $1.7 million in fiscal
2004 consisted primarily of $2.0 million of foreign currency transaction
losses, offset by interest income of $456,000. 
Other income of $459,000 in fiscal 2003 consisted of $945,000 of
interest income partially offset by foreign currency transaction losses of
$605,000.  Interest income decreased
primarily due to lower average levels of cash and marketable securities, which
were used to acquire MCE, RIWS and Celerity, and lower market interest rates.  20


Provision for Income Taxes.The income tax provision was $12.5 million
(an effective income tax rate of 37.8%) in fiscal 2004 and $5.4 million
(an effective income tax rate of 33.0%) in fiscal 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 fiscal
year ended June 30, 2004, non-deductible in-process research and
development costs.  Income from Continuing Operations.Income from
continuing operations for the year ended June 30, 2004 was $20.5 million,
or $.29 per diluted share, versus $10.9 million, or $.18 per diluted share,
in 2003.  Fiscal 2004 income from
continuing operations included a $4.2 million charge ($3.9 million,
net of tax, or $.06 per diluted share), for in-process research and development
related to the acquisitions of MCE, RIWS and Celerity.  Liquidity and Capital Resources  As of June 30, 2005, we had $161.7 million
of working capital.  Our current ratio
was 2.6 to 1 at June 30, 2005.  On February 14,
2003, we executed an amended and restated revolving credit and security
agreement with two banks which replaced a previous loan agreement.  The amended and restated loan agreement
increased the line of credit to $50 million through February 2007,
continued the mortgage on our Plainview property for $2.5 million and is
secured by the pledge of the stock of certain of our subsidiaries.  The interest rate on revolving credit
borrowings under this agreement is at various rates depending upon certain
financial ratios, with the current rate substantially equivalent to LIBOR plus
1% (4.3% at June 30, 2005).  The
mortgage is payable in monthly installments of approximately $26,000 through March 2008
and a balloon payment of $1.6 million in April 2008.  We have entered into interest rate swap
agreements for the outstanding amount under the mortgage agreement at
approximately 7.6% in order to reduce the interest rate risk associated with
these borrowings.  The terms of our loan agreement require compliance
with certain covenants including minimum consolidated tangible net worth and
pretax earnings, maintenance of certain financial ratios, limitations on
indebtedness and prohibition of the payment of cash dividends.  We are currently in full compliance with all
of the covenants contained in our loan agreement.  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.  Although we believe that the performance goals
have not been met, the determination is not final.  This acquisition was funded with available
cash-on-hand.  On September 3, 2003, we acquired MCE for
approximately 5.8 million shares of Aeroflex common stock.  In addition, we discharged $22.8 million
of MCE outstanding bank debt, other indebtedness and preferred stock and issued
stock options for 315,000 shares of Aeroflex common stock with exercise prices
ranging from $2.88 to $9.59 in exchange for outstanding options of MCE.  On October 31, 2003, we acquired the business
of Celerity for approximately $4.0 million in cash, 428,000 shares of
Aeroflex common stock and release of certain liabilities totaling $1.8 million.  On March 10, 2004, we completed the sale of 7.0 million
shares of our common stock at $13.75 per share. 
We received $91.2 million, net of commission and expenses.  These net proceeds were used for working
capital and other general corporate purposes including research and development
and acquisitions.  On April 19, 2005, we acquired JcAIR for $35 million
in cash.  On May 23, 2005, we acquired SPG for $84 million
in cash and a contingent payment of up to $4 million in cash depending on
SPG achieving certain performance goals for the year ending June 30, 2006.  21


In fiscal 2005, our continuing operations provided
$37.8 million, primarily from our continued profitability.  In fiscal 2005, our investing activities used
cash of $117.6. million principally for acquisitions ($117.8 million)
and capital expenditures ($15.6 million) offset, in part, by net proceeds
from the sale of our discontinued subsidiaries ($16.0 million).  In fiscal 2005, our financing activities used $4.0 million
including debt repayments of $5.5 million, partially offset by $1.8 million
in proceeds from the exercise of stock options.  We believe that existing cash and unused lines of
credit coupled with internally generated funds will be sufficient for our
working capital requirements, capital expenditure needs and the servicing of
our debt for the foreseeable future.  Our
cash and lines of credit are available to fund acquisitions and other potential
large cash needs that may arise.  At June 30,
2005, our available unused line of credit was $41.6 million after
consideration of letters of credit.  Contractual Obligations  The following table summarizes our obligations and
commitments to make future payments under debt, operating leases, and
employment contracts as of June 30, 2005:  Payments due by periodLess Than
  
  
  
  
  
  AfterTotal
  
  1 Year
  
  1-3 Years
  
  4-5 Years
  
  5 Years(In thousands)Long-term debt
  
  $
  4,824
  
  $
  634
  
  $
  2,776
  
  $
  669
  
  $
  745Operating leases
  
  38,133
  
  8,280
  
  10,963
  
  6,420
  
  12,470Employment contracts
  
  7,200
  
  2,267
  
  3,153
  
  1,780
  
  Total
  
  $
  50,157
  
  $
  11,181
  
  $
  16,892
  
  $
  8,869
  
  $
  13,215  The operating lease commitments shown in the above
table have not been reduced by future minimum sub-lease rentals of $16.2 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
June 30, 2005 will materially adversely affect our liquidity.  Legal Proceedings  We are involved in various routine legal
matters.  We believe the outcome of these
matters will not have a materially adverse effect on our consolidated financial
statements.  The Registrant recently has learned that it
inadvertently may have violated certain International Traffic in Arms
Regulations (ITAR) by exporting certain products and services without
licenses.  These exports resulted from an
error in classifying the products and services as commercial rather than
military.  The Registrant has prepared
and filed a voluntary disclosure with the State Department in which the details
of the exports and erroneous classifications are described.  At this time, it is not possible to determine
whether any fines or other penalties will be asserted against the Registrant,
or the materiality of any outcome.  We are undergoing routine audits by taxing
authorities of our state income tax returns covering periods from 2002 to 2004.  We believe that the probable outcome of these
various audits should not materially affect our consolidated financial
statements.  22


Backlog  Our backlog of orders was $209.5 million at June 30,
2005 and $172.9 million at June 30, 2004.  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.  If title does
not pass until the product reaches the customers delivery site, the
recognition of revenue is deferred until that time.  Revenues associated with certain long-term
contracts are recognized in accordance with Statement of Position No. 81-1
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts (SOP 81-1).  Under SOP 81-1,
we use the percentage-of-completion method, whereby revenues and associated
costs are recognized as work on a contract progresses.  We measure the extent of progress toward
completion generally based upon one of the following (based upon an assessment
of which method most closely aligns to the underlying earnings process): (i) the
units-of-delivery method, (ii) the cost-to-cost method, using the ratio of
contract costs incurred as a percentage of  total estimated costs at contract completion
(based upon engineering and production estimates), or (iii) the
achievement of contractual milestones. 
Provisions for anticipated losses or revisions in estimated profits on
contracts-in- process are recorded in the period in which such anticipated
losses or revisions become evident. 
Revenue from software support and maintenance contracts is recognized
ratably over the term of the contract in accordance with SOP-97-2, Software
Revenue Recognition.  Certain
of our sales are to distributors which have a right to return some portion of
product within eighteen months of sale.  We
recognize revenue on these sales at the time of shipment to the distributor as
these sales meet all of the criteria of Statement of Financial Accounting
Standards (SFAS) No. 48, Revenue Recognition When Right of Return
Exists.  Historically, the returns under
these arrangements have been insignificant and can be reasonably
estimated.  An estimate of such returns
is recorded at the time sales are recognized.   23


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 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 Assets,  Intangible Assets and Goodwill  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, including anticipated renewals, 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 there is an indication that goodwill is impaired on an
annual basis unless events or circumstances warrant a more frequent
assessment.  The impairment assessment
involves, among other things, an estimation of the fair value of each of our
reporting units (as defined in SFAS No. 142).  Such estimations are inherently subjective,
and subject to change in future periods.  If the impairment review of goodwill, intangible
assets and other long-lived assets differs significantly from actual results,
it could have a material effect on our results of operations and financial
condition.  Restructuring Charges  When we incur a liability related to a restructuring
charge, we estimate and record all appropriate expenses.  These expenses include severance, retention
bonuses, fringe benefits, asset impairment, buyout of leases and inventory
write-downs.  To the extent that our
estimates differ from actual expenses, there could be significant additional
expenses or reversals of previously recorded charges in the future.  Income Taxes  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 or benefit in our consolidated statement of operations.  We evaluate the realizability of the deferred
tax assets and assess the adequacy of the valuation allowance quarterly.  Off-Balance Sheet Arrangements  We
do not maintain any off-balance sheet arrangements, transactions, obligations
or other relationships with unconsolidated entities that would be expected to
have material current or future effect upon our financial condition or results
of operations.  24


Risks Relating to our Business  General economic conditions could adversely affect our revenues, gross
margins and expenses.  Our revenues and gross margins will depend
significantly on the overall demand for microelectronic products and testing
solutions, particularly in the product and service segments in which we
compete.  Weaker demand for our products
and services caused by economic weakness may result in decreased revenues,
earnings levels or growth rates and problems with the saleability of inventory
and realizability of customer receivables. 
In the past, we have observed effects of the global economic downturn in
many areas of our business.  Delays or
reductions in spending for our products could have a material adverse effect on
our business, results of operations and financial condition.  Our operating results may fluctuate significantly on a quarterly basis.  Our sales and other operating results have
fluctuated significantly in the past, and we expect this trend will continue.  Factors which affect our results include:  the
timing, cancellation or rescheduling of customer estimates, orders and
shipments; the
pricing and mix of products sold; new
product introductions; our
ability to obtain components and subassemblies from contract manufacturers and
suppliers; and variations
in manufacturing efficiencies.  Many of these factors are beyond our control.  Our performance in any one fiscal quarter is
not necessarily indicative of any financial trends or future performance.  In the event that any of our customers encounter financial difficulties
and fail to pay us, it could adversely affect our results of operations and
financial condition.  We manufacture products to customer specifications
and purchase products in response to customer orders.  In addition, we may commit significant
amounts to maintain inventory in anticipation of customer orders.  In the event that any customer, for whom we
maintain inventory, experiences financial difficulties, we may be unable to sell
such inventory at its current profit margin, if at all.  In such an event, our gross margins would
decline.  In addition, if the financial
condition of any customer deteriorates, resulting in an impairment of that
customers ability to pay us amounts owed in respect of a significant amount of
outstanding receivables, our financial condition would be adversely affected.  If we cannot continue to develop, manufacture and market innovative products
and services rapidly that meet customer requirements for performance and
reliability, we may lose market share and our revenues may suffer.  The process of developing new high technology
products and services is complex and uncertain, and failure to anticipate
customers changing needs and emerging technological trends accurately and to
develop or obtain appropriate intellectual property could significantly harm
our results of operations.  We must make
long-term investments and commit significant resources before knowing whether
our predictions will eventually result in products that the market will
accept.  We must accurately forecast
volumes, mix of products and configurations that meet customer requirements,
and we may not succeed.  25


Due to the international nature of our business, political or economic
changes could harm our future revenues, costs and expenses and financial
condition.  Our future revenues, costs and expenses could be
adversely affected by a variety of international factors, including:  changes
in a countrys or regions political or economic conditions; longer
accounts receivable cycles; trade
protection measures; unexpected
changes in regulatory requirements; differing
technology standards and/or customer requirements; and import
or export licensing requirements, which could affect our ability to obtain
favorable terms for components or lead to penalties or restrictions.  A portion of our product and component
manufacturing, along with key suppliers, is located outside of the United States,
and also could be disrupted by some of the international factors described
above.  We are exposed to foreign currency exchange rate risks that could
adversely affect our business, results of operations and financial condition.  We are exposed to foreign currency exchange rate
risks that are inherent in our sales commitments, anticipated sales, and assets
and liabilities that are denominated in currencies other than the United States
dollar.  Failure to sufficiently hedge or
otherwise manage foreign currency risks properly could adversely affect our
business, results of operations and financial condition.  As part of our business strategy, we may complete acquisitions or
divest non-strategic businesses and product lines.  These actions could adversely affect our
business, results of operations and financial condition.  As part of our business strategy, we engage in
discussions with third parties regarding, and enter into agreements relating
to, possible acquisitions, strategic alliances, ventures and divestitures in
order to manage our product and technology portfolios and further our strategic
objectives.  In order to pursue this
strategy successfully, we must identify suitable acquisition, alliance or
divesture candidates, complete these transactions, some of which may be large
and complex, and integrate acquired companies. 
Integration and other risks of acquisitions and strategic alliances can
be more pronounced for larger and more complicated transactions, or if multiple
acquisitions are pursued simultaneously.  The integration of our recent acquisitions of JcAIR
and SPG may make the completion and integration of subsequent acquisitions more
difficult.  However, if we fail to
identify and complete these transactions, we may be required to expend resources
to internally develop products and technology or may be at a competitive
disadvantage or may be adversely affected by negative market perceptions, which
may have a material effect on our revenues and selling, general and
administrative expenses taken as a whole.  Acquisitions and strategic alliances may require us
to integrate with a different company culture, management team and business
infrastructure and otherwise manage integration risks.  Even if an acquisition or alliance is
successfully integrated, we may not receive the expected benefits of the
transaction.  Managing acquisitions,
alliances and divestitures requires varying levels of management resources,
which may divert managements attention from the other business
operations.  Acquisitions, including
abandoned acquisitions, also may result in significant costs and expenses and
charges to earnings.  As a result, any
completed, pending or future transactions may contribute to our financial
results differing from the investment communitys expectations in a given
quarter.  26


In order to be successful, we must retain and motivate key employees,
and failure to do so could seriously harm us.  In order to be successful, we must retain and
motivate executives and other key employees, including those in managerial,
technical, marketing and information technology support positions.  In particular, our product generation efforts
depend on hiring and retaining qualified engineers.  Attracting and retaining skilled workers and
qualified sales representatives is also critical to us.  Experienced management and technical,
marketing and support personnel in the microelectronics and test solutions
industries are in demand and competition for their talents is intense.  Employee retention may be a particularly
challenging issue following our recent acquisitions since we also must continue
to motivate employees and keep them focused on our strategies and goals, which
may be particularly difficult due to the potential distractions related to
integrating the acquired operations.  Terrorist acts or acts of war may seriously harm our business, results
of operations and financial condition.  Terrorist acts or acts of war (wherever located
around the world) may cause damage or disruption to us, our employees,
facilities, partners, suppliers, distributors and resellers, and customers,
which could significantly impact our revenues, expenses and financial
condition.  The potential for future
terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility have created many economic and
political uncertainties, which could adversely affect our business and results
of operations in ways that cannot presently be predicted.  In addition, as a company with headquarters
and significant operations located in the United States, we may be impacted by
actions against the United States.  We
will be predominantly uninsured for losses and interruptions caused by
terrorist acts or acts of war.  Our stock price has historically fluctuated and may continue to
fluctuate.  Our stock price, like that of other technology
companies, can be volatile. Some of the factors that can affect our stock price
are:  the
announcement of new products, services or technological innovations by us or
our competitors; quarterly
increases or decreases in our revenue or earnings; changes
in quarterly revenue or earnings estimates by the investment community; and speculation
in the press or investment community about our strategic position, financial
condition, results of operations, business or significant transactions.  General market conditions and domestic or
international macroeconomic and geopolitical factors unrelated to our
performance may also affect our stock price. 
In addition, following periods of volatility in a Registrants
securities, securities class action litigation against a Registrant is
sometimes instituted.  This type of
litigation could result in substantial costs and the diversion of management
time and resources.  Forward-Looking Statements  All statements other than statements of historical
fact included in this Annual Report, including without limitation statements
under Managements Discussion and Analysis of Financial Condition and Results
of Operations regarding our financial position, business strategy and plans
and objectives of our management for future operations, are forward-looking
statements.  When used in this Annual
Report, words such as anticipate, believe, estimate, expect, intend
and similar expressions, as they relate to us or our management, identify
forward-looking statements.  Such
forward-looking statements are based on the current beliefs of our management,
as well as assumptions made by and information currently available to our
management.  Actual results could differ
materially from those contemplated by the forward-looking statements as a
result of certain factors, including but not limited to those set forth above.  Such statements reflect our current views
with respect to the future and are subject to these and other risks,
uncertainties and assumptions relating to Aeroflexs financial condition,
results of operation, growth strategy and liquidity.  Aeroflex does not undertake any obligation to
update such forward-looking statements.  27


ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK  We are exposed to market risk related to changes in
interest rates and to foreign currency exchange rates.  Most of our debt is at fixed rates of
interest or at a variable rate with an interest rate swap agreement which
effectively converts the variable rate debt into fixed rate debt.  Therefore, if market interest rates increase
by 10% from levels at June 30, 2005, the effect on our net income as well
as the fair value of our swap 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 June 30,
2005, the effect on our net income would be insignificant.  If foreign currency exchange rates (primarily
the British Pound and the Euro) change by 10% from levels at June 30,
2005, the effect on our other comprehensive income would be approximately $17.6 million.  Foreign currency contracts are used to
protect the Registrant from fluctuations in exchange rates.  The Registrant periodically enters into
foreign currency contracts, which are not designated as hedges, and the change
in fair value is included in income currently, within other income
(expense).  As of June 30, 2005, the
Registrant had $2.5 million of notional value foreign currency forward
contracts maturing through September 2005. 
Notional amounts do not quantify risk or represent assets or liabilities
of the Registrant, but are used in the calculation of cash settlements under
the contracts.  The fair value of these
contracts at June 30, 2005 was $92,000 less than the notional value.  ITEM 8  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  The financial statements and supplementary data
listed in the accompanying Index to Financial Statements and Schedules are
attached as part of this report.  ITEM 9 CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  None.  ITEM 9A  CONTROLS AND PROCEDURES  (a)           Disclosure Controls
and Procedures  We maintain disclosure controls and procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit to the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified by the Commissions rules and
forms, and that information is accumulated and communicated to our management,
including our chief executive officer and our chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.  The effectiveness of our disclosure controls
and procedures is subject to certain limitations, including the exercise of
judgment in designing, implementing and evaluating the controls and procedures,
the assumptions used in identifying the likelihood of future events, and the
inability to eliminate errors or misconduct completely.  As a result, there can be no assurance that
our disclosure controls and procedures will detect all errors or fraud.  By their nature, any system of internal
control, including our system, can provide only reasonable assurance regarding
managements control objectives.  Under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934 (the Exchange Act)) as of June 30,
2005, the end of the period covered by this report.  Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of June 30, 2005.  28


(b)           Managements Report
on Internal Control Over Financial Reporting  Our management is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) of
the Securities Exchange Act of 1934, as amended).  Under the supervision of and with the participation
of our Chief Executive Officer and our Chief Financial Officer, our management
conducted an assessment of the effectiveness of our internal control over
financial reporting based on the framework and criteria established in Internal Control  Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, our management has
concluded that, as of June 30, 2005, our internal control over financial
reporting was effective.  We acquired JcAIR, Inc. and UbiNetics Limited
during 2005, and management, as permitted, excluded these entities from its assessment
of the effectiveness of our internal control over financial reporting as of
June 30, 2005. These entities comprise an aggregate total assets of
approximately $140 million and total revenues of approximately
$8 million which are included in our consolidated financial statements as
of and for the year ended June 30, 2005.  KPMG LLP, the independent registered public
accounting firm that audits our consolidated financial statements, has issued
its attestation report on managements assessment of internal control over
financial reporting.  That attestation
report appears on page S-1.  (c)           Changes in Internal
Controls  A companys internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles.  A companys internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.  Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.  There were no significant changes in our internal
controls over financial reporting that occurred during the quarter ended
June 30, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.  In connection with the assessment of the
effectiveness of our internal control over financial reporting as of
June 30, 2005, significant deficiencies related to the effectiveness of
certain of our review controls covering the completeness and accuracy of income
taxes and accounting for business combinations were identified. Although these
deficiencies do not constitute a material weakness, management plans
improvements to internal controls including the strengthening of existing
controls and establishment of additional monitoring controls.  ITEM 9B  OTHER INFORMATION  None.  29


PART III  The
information required by items 10, 11, 12, 13 and 14 of Part III is
incorporated by reference to our definitive proxy statement in connection with
our Annual Meeting of Stockholders scheduled to be held on November 10, 2005.  The proxy statement is to be filed with the
Securities and Exchange Commission within 120 days following the end of our
fiscal year ended June 30, 2005.  ITEM 15  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K  (a)See index to Financial Statements at
beginning of attached financial statements.  (b)Exhibits  3.1
  Certificate of Incorporation, as amended. (Incorporated by reference
  to Exhibit 3.1 to Form 10-Q for the quarter ended
  September 30, 2001).3.2
  By-Laws, as amended. (Incorporated by reference to Exhibit 3.1
  to Quarterly Report on Form 8-K filed on August 17, 2005).4.1
  Fifth Amended and Restated Loan and Security Agreement dated as of
  February 14, 2003 among the Registrant, certain of its subsidiaries,
  JPMorgan Chase Bank and Fleet National Bank. (Incorporated by reference to
  Exhibit 10.1 to Form 10-Q for the quarter ended December 31,
  2002).10.2
  1994 Non-Qualified Stock Option Plan. (Incorporated by reference to
  Exhibit 10.2 to Annual Report on Form 10-K for the year ended
  June 30, 1994).10.3
  1994 Outside Directors Stock Option Plan. (Incorporated by reference
  to Exhibit 10.3 of Annual Report on Form 10-K for the year ended
  June 30, 1994).10.4
  Employment Agreement between Aeroflex Incorporated and Harvey R.
  Blau. (Incorporated by reference to Exhibit 10.1 to Report on
  Form 10-Q for the quarter ended March 31, 1999).10.5
  Employment Agreement between Aeroflex Incorporated and Michael Gorin.
  (Incorporated by reference to Exhibit 10.2 to Report on Form 10-Q
  for the quarter ended March 31, 1999).10.6
  Employment Agreement between Aeroflex Incorporated and Leonard Borow.
  (Incorporated by reference to Exhibit 10.3 to Report on Form 10-Q
  for the quarter ended March 31, 1999).10.7
  1996 Stock Option Plan. (Incorporated by reference to Exhibit A
  to Definitive schedule 14A filed September 30, 1996).10.8
  1998 Stock Option Plan. (Incorporated by reference to Exhibit 10
  to Quarterly Report on Form 10-Q for the quarter ended March 31,
  1998).10.9
  1999 Stock Option Plan. (Incorporated by reference to
  Exhibit 4.1 to Registration Statement on Form S-8, Registration
  Statement #333-31654).10.10
  Key Employee Stock Option Plan. (Incorporated by reference to
  Exhibit 4.1 to Registration Statement on Form S-8, Registration
  Statement #333-53622).10.11
  2000 Stock Option Plan, as amended. (Incorporated by reference to
  Exhibit 4 to Registration Statement on Form S-8, #333-97027).  30


10.12
  2002 Stock Option Plan. (Incorporated by reference to Exhibit 4
  to Registration Statement on Form S-8, #333-97029).10.13
  Amendment No. 1 to Employment Agreement between Aeroflex
  Incorporated and Harvey R. Blau, effective September 1, 1999.
  (Incorporated by reference to Exhibit 10.17 to Form 10-K for the
  fiscal year ended June 30, 2000).10.14
  Amendment No. 1 to Employment Agreement between Aeroflex
  Incorporated and Michael Gorin, effective September 1, 1999.
  (Incorporated by reference to Exhibit 10.18 to Form 10-K for the
  fiscal year ended June 30, 2000).10.15
  Amendment No. 1 to Employment Agreement between Aeroflex
  Incorporated and Leonard Borow, effective September 1, 1999.
  (Incorporated by reference to Exhibit 10.19 to Form 10-K for the
  fiscal year ended June 30, 2000).10.16
  Amendment No. 2 to Employment Agreement between Aeroflex
  Incorporated and Harvey R. Blau, effective August 13, 2001.
  (Incorporated by reference to Exhibit 10.16 to Form 10-K for the
  fiscal year ended June 30, 2001).10.17
  Amendment No. 2 to Employment Agreement between Aeroflex
  Incorporated and Michael Gorin, effective August 13, 2001. (Incorporated
  by reference to Exhibit 10.17 to Form 10-K for the fiscal year
  ended June 30, 2001).10.18
  Amendment No. 2 to Employment Agreement between Aeroflex
  Incorporated and Leonard Borow, effective August 13, 2001. (Incorporated
  by reference to Exhibit 10.18 to Form 10-K for the fiscal year
  ended June 30, 2001).10.19
  Aeroflex Incorporated Key Employee Deferred Compensation Plan.
  (Incorporated by reference to Exhibit 10.19 to Form 10-K for the
  fiscal year ended June 20, 2001).10.20
  Trust Under Deferred Compensation Plan. (Incorporated by reference to
  Exhibit 10.20 to Form 10-K for the fiscal year ended June 30,
  2001).10.21
  Amendment No. 3 to Employment Agreement between Aeroflex
  Incorporated and Harvey R. Blau, effective November 8, 2001.
  (Incorporated by reference to Exhibit 10.1 to Form 10-Q for the
  quarter ended September 30, 2001).10.22
  Amendment No. 3 to Employment Agreement between Aeroflex
  Incorporated and Michael Gorin, effective November 8, 2001.
  (Incorporated by reference to Exhibit 10.2 to Form 10-Q for the
  quarter ended September 30, 2001).10.23
  Amendment No. 3 to Employment Agreement between Aeroflex
  Incorporated and Leonard Borow, effective November 8, 2001.
  (Incorporated by reference to Exhibit 10.3 to Form 10-Q for the
  quarter ended September 30, 2001).10.24
  Agreement and Plan of Merger, dated as of June 27, 2003, among
  Aeroflex Incorporated, Acquisition, MCE and Michael J. Endres. (Incorporated
  by reference to Exhibit 99.1 of Report on Form 8-K filed
  July 2, 2003).10.25
  Form of Warrant Exchange Agreement. (Incorporated by reference
  to Exhibit 99.2 of Report on Form 8-K filed July 2, 2003).10.26
  Form of MCE Shareholders Agreement. (Incorporated by reference
  to Exhibit 99.3 of Report on Form 8-K filed July 2, 2003).  31


10.27
  Stock Purchase Agreement dated as of July 31, 2003, by and among
  Racal Instruments Group Limited, Aeroflex and IFR Systems Limited, a
  wholly-owned subsidiary of Aeroflex Incorporated. (Incorporated by reference
  to Exhibit 99.1 to Report on Form 8-K dated July 31, 2003).10.28
  Asset Purchase Agreement dated as of July 31, 2003, by and
  between Racal Instruments Inc. and Aeroflex Incorporated. (Incorporated by
  reference to Exhibit 99.2 to Report on Form 8-K dated July 31,
  2003).10.29
  Asset Purchase Agreement dated as of July 31, 2003, by and among
  Racal Instruments Group Limited and Aeroflex Incorporated. (Incorporated by
  reference to Exhibit 99.3 to Report on Form 8-K dated July 31,
  2003).10.30
  Employment Agreement between Aeroflex Incorporated and Carl Caruso
  dated November 6, 2003. (Incorporated by reference to Exhibit 10.2
  to Report on Form 10-Q for the quarter ended December 31, 2003).10.31
  Employment Agreement between Aeroflex Incorporated and Charles
  Badlato dated November 6, 2003. (Incorporated by reference to
  Exhibit 10.1 to Report on Form 10-Q for the quarter ended
  December 31, 2003).10.32
  Amendment No. 4 to Employment Agreement between Aeroflex
  Incorporated and Harvey R. Blau dated as of May 13, 2004. (Incorporated
  by reference to Exhibit 10.1 to Form 10-Q for the quarter ended
  March 31, 2004).10.33
  Amended No. 4 to Employment Agreement between Aeroflex
  Incorporated and Michael Gorin dated as of May 13, 2004. (Incorporated
  by reference to Exhibit 10.2 to Form 10-Q for the quarter ended
  March 31, 2004).10.34
  Amendment No. 4 to Employment Agreement between Aeroflex
  Incorporated and Leonard Borow dated May 13, 2004. (Incorporated by
  reference to Exhibit 10.3 to Form 10-Q for the quarter ended
  March 31, 2004).10.35
  Amendment No. 1 to Employment Agreement between Aeroflex
  Incorporated and Carl Caruso dated March 11, 2005. (Incorporated by
  reference to Exhibit 10.1 of Report on Form 8-K filed
  March 31, 2005).10.36
  Sale and Purchase Agreement, dated as of May 23, 2005, between
  UbiNetics Holdings Limited and Aeroflex Test Solutions Limited. (Incorporated
  by reference to Exhibit 10.1 to Report on Form 8-K filed
  May 27, 2005).10.37
  Deed of Guarantee, dated as of May 23, 2005, made between
  Aeroflex Incorporated and UbiNetics Holdings Limited. (Incorporated by
  reference to Exhibit 10.2 to Report on Form 8-K filed May 27,
  2005).10.38
  Amendment No. 5 to Employment Agreement between Aeroflex
  Incorporated and Harvey R. Blau dated August 17, 2005. (Incorporated by
  reference to Exhibit 10.1 to Report on Form 8-K filed
  August 17, 2005).10.39
  Amendment No. 5 to Employment Agreement between Aeroflex
  Incorporated and Michael Gorin dated August 17, 2005. (Incorporated by
  reference to Exhibit 10.2 to Report on Form 8-K filed
  August 17, 2005).10.40
  Amendment No. 5 to Employment Agreement between Aeroflex
  Incorporated and Leonard Borow dated August 17, 2005. (Incorporated by
  reference to Exhibit 10.3 to Report on Form 8-K filed
  August 17, 2005).  32


10.41
  Consulting and Retirement Agreement between Aeroflex Incorporated and
  Michael Gorin dated August 17, 2005. (Incorporated by reference to
  Exhibit 10.4 to Report on Form 8-K filed August 17, 2005).21
  The following is a list of the Registrants subsidiaries as of
  June 30, 2005:  Jurisdiction ofName
  
  IncorporationAeroflex Cambridge, Ltd.
  
  
  EnglandAeroflex Colorado Springs, Inc.
  
  
  DelawareAeroflex Inmet, Inc.
  
  
  MichiganAeroflex International Ltd.
  
  
  EnglandAeroflex KDI, Inc.
  
  
  MichiganAeroflex Metelics, Inc.
  
  
  CaliforniaAeroflex Microelectronics Solutions, Inc.
  
  
  MichiganAeroflex Plainview, Inc.
  
  
  DelawareAeroflex Powell, Inc.
  
  
  OhioAeroflex Systems Corp.
  
  
  DelawareAeroflex Weinschel, Inc.
  
  
  MichiganAeroflex Wichita, Inc.
  
  
  DelawareEuroptest, S.A.
  
  
  FranceRacal Instruments Wireless Solutions Limited
  
  
  England  23
  Consent of Independent Registered Public Accounting Firm31.1
  Certification of Chief Executive Officer pursuant to Section 302
  of Sarbanes-Oxley Act of 2002.31.2
  Certification of Chief Financial Officer pursuant to Section 302
  of Sarbanes-Oxley Act of 2002.31.3
  Certification of Chief Operating Officer pursuant to Section 302
  of Sarbanes-Oxley Act of 2002.32.1
  Certification of Chief Executive Officer pursuant to Section 906
  of Sarbanes-Oxley Act of 2002.32.2
  Certification of Chief Financial Officer pursuant to Section 906
  of Sarbanes-Oxley Act of 2002.  33


Pursuant to the requirements of Section 13 or
15(d) 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 IncorporatedDate: September 13, 2005By:
  /s/ Harvey R. BlauHarvey R. Blau, Chairman andChief Executive Officer  Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons in the capacities and on the dates indicated:  /s/ Harvey R. Blau
  
  Chairman of the Board
  
  September 8, 2005Harvey R. Blau
  
  (Chief Executive Officer)/s/ Michael Gorin
  
  Vice Chairman, Chief Financial Officer
  
  September 8, 2005Michael Gorin
  
  and Director(Chief Financial Officer andPrincipal
  Accounting Officer)/s/ Leonard Borow
  
  President, Chief Operating Officer,
  
  September 8, 2005Leonard Borow
  
  Secretary and
  Director/s/ Paul Abecassis
  
  Director
  
  September 8, 2005Paul Abecassis/s/ John F. Benedik
  
  Director
  
  September 8, 2005John F. Benedik/s/ Milton Brenner
  
  Director
  
  September 8, 2005Milton Brenner/s/ Ernest E. Courchene, Jr.
  
  Director
  
  September 8, 2005Ernest E. Courchene, Jr./s/ Michael A. Nelson
  
  Director
  
  September 8, 2005Michael A. Nelson/s/ Eugene Novikoff
  
  Director
  
  September 8, 2005Eugene Novikoff/s/ Joseph Pompeo
  
  Director
  
  September 8, 2005Joseph Pompeo/s/ Barton D. Strong
  
  Director
  
  September 8, 2005Barton D. Strong  34


AEROFLEX INCORPORATED  AND SUBSIDIARIES   FINANCIAL STATEMENTS AND SCHEDULES  COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K  TO SECURITIES AND EXCHANGE COMMISSION  AS OF JUNE 30, 2005 AND 2004  AND FOR THE YEARS  ENDED JUNE 30, 2005, 2004 AND 2003


FINANCIAL STATEMENTS AND SCHEDULES  I N D E XITEM
  15(a)1.
  FINANCIAL
  STATEMENTSReports of Independent Registered Public Accounting
  FirmConsolidated financial statements:Balance sheets  June 30, 2005 and 2004Statements of operations  each of the years in the
  three year period ended June 30, 2005Statements
  of stockholders equity and comprehensive income  each of the years in the
  three year period ended June 30, 2005Statements of cash flows  each of the years in the
  three year period ended June 30, 2005Notes (1-15)Quarterly financial data (unaudited)2.
  FINANCIAL
  STATEMENT SCHEDULE:II  Valuation and qualifying accounts  All
other schedules have been omitted because they are inapplicable, not required,
or the information is included elsewhere in the financial statements or notes thereto.


Report of Independent Registered
Public Accounting Firm  The Board of Directors and Stockholders Aeroflex Incorporated:  We have
audited managements assessment, included in the accompanying Item 9A(b) Managements Report on Internal Control Over
Financial Reporting,that Aeroflex Incorporated maintained effective
internal control over financial reporting as of June 30, 2005, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).Aeroflex
Incorporateds management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit.  We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.  A companys internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles.  A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.  Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements.  Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.  In our
opinion, managements assessment that Aeroflex Incorporated maintained
effective internal control over financial reporting as of June 30, 2005,
is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Also,
in our opinion, Aeroflex Incorporated maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2005,
based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  S-1


As
described in Managements Report on Internal
Control Over Financial Reporting, Aeroflex Incorporated acquired
JcAIR, Inc. and UbiNetics Limited during 2005, and management excluded
from its assessment of the effectiveness of Aeroflex Incorporateds internal
control over financial reporting as of June 30, 2005, internal control
over financial reporting associated with these entities comprising aggregate
total assets of approximately $140 million and total revenues of approximately
$8 million included in Aeroflex Incorporateds consolidated financial
statements as of and for the year ended June 30, 2005. Our audit of
internal control over financial reporting of Aeroflex Incorporated also
excluded an evaluation of the internal control over financial reporting of
JcAIR, Inc. and UbiNetics Limited.  We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated
balance sheets of Aeroflex Incorporated and
subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of operations,
stockholders equity and comprehensive income, and cash flows for each of the
years in the three-year period ended June 30, 2005, and our report dated September 13, 2005, expressed an unqualified opinion on those consolidated
financial statements.   /s/ KPMG LLPMelville, New YorkSeptember 13, 2005  S-2


Report of Independent Registered Public
Accounting Firm  The Board of Directors and Stockholders Aeroflex Incorporated:  We
have audited the accompanying consolidated
balance sheets of Aeroflex Incorporated and
subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of operations,
stockholders equity and comprehensive income, and cash flows for each of the
years in the three-year period ended June 30, 2005. In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule listed in Item 15(a)2.  These consolidated
financial statements and the financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated
financial statements and the financial statement schedule based on our
audits.  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.  In
our opinion, the consolidated
financial statements referred to above present fairly, in all material
respects, the financial position of Aeroflex Incorporated and subsidiaries as
of June 30, 2005, and 2004, and the results of their operations and their
cash flows for each of the years in the three-year period ended June 30,
2005, in conformity with U.S. generally accepted accounting principles.  Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.  We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Aeroflex
Incorporateds internal control over financial reporting as of June 30,
2005, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated September 13,
2005, expressed an unqualified opinion
on managements assessment of, and the effective operation of, the Companys
internal control over financial reporting. Such report contains an explanatory
paragraph relating to the exclusion of internal control over financial
reporting associated with two entities acquired during 2005 from managements
assessment and our assessment of the effectiveness of internal control over
financial reporting of the Company as of June 30, 2005.   /s/ KPMG LLPMelville, New YorkSeptember 13,
  2005  S-3


Aeroflex Incorporated and Subsidiaries  Consolidated Balance Sheets (In
thousands)  June 30,
  2005
  
  June 30,
  2004AssetsCurrent
  Assets:Cash and cash equivalents
  
  $
  12,974
  
  $
  98,502Accounts receivable, less allowance for
  doubtful accounts of $1,210 and $1,618 at June 30, 2005 and 2004, respectively
  
  101,317
  
  97,031Inventories
  
  118,906
  
  94,617Deferred income taxes
  
  18,499
  
  16,774Assets of discontinued operations
  
  
  
  11,910Prepaid expenses and other current assets
  
  11,107
  
  8,646Total current assets
  
  262,803
  
  327,480Property,
  plant and equipment, net
  
  78,195
  
  74,372Assets of
  discontinued operations
  
  
  
  9,717Other assets
  
  13,537
  
  10,932Intangible assets with definite lives, net
  of accumulated amortization of $23,472 and $14,620 at June 30, 2005 and
  2004, respectively
  
  67,266
  
  40,602Goodwill
  
  168,048
  
  88,288Total assets
  
  $
  589,849
  
  $
  551,391  See
notes to consolidated financial statements  S-4


June 30,
  2005
  
  June 30,
  2004Liabilities
  and Stockholders EquityCurrent
  liabilities:Current portion of long-term debt
  
  $
  634
  
  $
  4,770Accounts payable
  
  35,907
  
  25,293Advance payments by customers
  
  15,183
  
  11,725Income taxes payable
  
  3,657
  
  1,088Liabilities of discontinued operations
  
  
  
  4,573Accrued payroll expenses
  
  15,222
  
  13,966Accrued expenses and other current
  liabilities
  
  30,451
  
  28,200Total current liabilities
  
  101,054
  
  89,615Long-term
  debt
  
  4,190
  
  5,505Deferred
  income taxes
  
  17,146
  
  9,445Liabilities
  of discontinued operations
  
  
  
  3,613Other
  long-term liabilities
  
  23,479
  
  16,116Total liabilities
  
  145,869
  
  124,294Commitments
  and contingenciesStockholders
  equity:Preferred stock, par value $.10 per share;
  authorized 1,000 shares Series A Junior Participating Preferred Stock,
  par value $.10 per share, authorized 110; none issued
  
  
  
  Common stock, par value $.10 per share;
  authorized 110,000 shares; issued 74,618 and 74,282 shares at June 30,
  2005 and 2004, respectively
  
  7,462
  
  7,428Additional paid-in capital
  
  372,666
  
  370,491Accumulated other comprehensive income
  
  9,020
  
  11,387Retained earnings
  
  54,846
  
  37,805443,994
  
  427,111Less:
  Treasury stock, at cost (4 shares at June 30, 2005 and 2004)
  
  14
  
  14Total stockholders equity
  
  443,980
  
  427,097Total liabilities and stockholders equity
  
  $
  589,849
  
  $
  551,391  See notes to consolidated financial
statements  S-5


Aeroflex Incorporated and Subsidiaries  Consolidated Statements of Operations  (In
thousands, except per share data)  Years Ended June 30,2005
  
  2004
  
  2003Net sales
  
  $
  463,371
  
  $
  414,101
  
  $
  265,807Cost of
  sales
  
  244,759
  
  221,409
  
  157,720Gross profit
  
  218,612
  
  192,692
  
  108,087Selling, general and administrative costs
  (including restructuring charges of $3,124 in 2005, note 4)
  
  113,271
  
  94,735
  
  58,949Research and
  development costs
  
  61,399
  
  49,972
  
  29,515Amortization
  of acquired intangibles
  
  8,896
  
  7,730
  
  2,721Acquired
  in-process research and development costs (Note 3)
  
  2,974
  
  4,220
  
  Total operating costs
  
  186,540
  
  156,657
  
  91,185Operating income
  
  32,072
  
  36,035
  
  16,902Other income
  (expense)Interest expense
  
  (895
  )
  (1,403
  )
  (1,104
  )Other income (expense), net (including
  interest income and dividends of $1,746, $456 and $945)
  
  1,844
  
  (1,711
  )
  459Total other income (expense)
  
  949
  
  (3,114
  )
  (645
  )Income from
  continuing operations before income taxes
  
  33,021
  
  32,921
  
  16,257Provision
  for income taxes
  
  14,377
  
  12,457
  
  5,362Income from continuing operations
  
  18,644
  
  20,464
  
  10,895Discontinued
  operationsLoss from discontinued operations, net of
  tax benefit of $(100), $(1,030) and $(1,222) (note 2)
  
  (791
  )
  (2,158
  )
  (2,766
  )Income (loss) on disposal of operations,
  net of tax provision (benefit) of $355, $(2,941) and $(893) (note 2)
  
  (812
  )
  (6,159
  )
  (1,734
  )Loss from discontinued operations, net of
  tax
  
  (1,603
  )
  (8,317
  )
  (4,500
  )Net income
  
  $
  17,041
  
  $
  12,147
  
  $
  6,395Income
  (loss) per common share:BasicContinuing operations
  
  $
  0.25
  
  $
  0.30
  
  $
  0.18Discontinued operations
  
  (0.02
  )
  (0.12
  )
  (0.07
  )Net income
  
  $
  0.23
  
  $
  0.18
  
  $
  0.11DilutedContinuing operations
  
  $
  0.25
  
  $
  0.29
  
  $
  0.18Discontinued operations
  
  (0.03
  )
  (0.12
  )
  (0.07
  )Net income
  
  $
  0.22
  
  $
  0.17
  
  $
  0.11Weighted
  average number of common shares outstanding:Basic
  
  74,634
  
  67,917
  
  60,193Diluted
  
  75,885
  
  69,931
  
  60,753  See
notes to consolidated financial statements  S-6


Aeroflex Incorporated and Subsidiaries  Consolidated Statements of Stockholders Equity and Comprehensive Income (In
thousands)  AccumulatedAdditional
  
  Other
  ComprehensiveCommon
  Stock
  
  Paid-in
  
  Income
  
  Retained
  
  Treasury
  Stock
  
  ComprehensiveTotal
  
  Shares
  
  Par
  Value
  
  Capital
  
  (Loss)
  
  Earnings
  
  Shares
  
  Cost
  
  Income (Note 10)Balance,
  July 1, 2002
  
  $
  249,482
  
  60,006
  
  $
  6,001
  
  $
  222,351
  
  $
  1,881
  
  $
  19,263
  
  4
  
  $
  (14
  )Stock issued upon
  exercise of stock options including tax benefit (Note 11)
  
  591
  
  116
  
  11
  
  580
  
  
  
  
  
  
  
  Deferred
  compensation
  
  12
  
  
  
  
  
  12
  
  
  
  
  
  
  
  Other
  comprehensive income
  
  1,935
  
  
  
  
  
  
  
  1,935
  
  
  
  
  
  
  
  $
  1,935Net income
  
  6,395
  
  
  
  
  
  
  
  
  
  6,395
  
  
  
  
  
  6,395Balance,
  June 30, 2003
  
  258,415
  
  60,122
  
  6,012
  
  222,943
  
  3,816
  
  25,658
  
  4
  
  (14
  )
  $
  8,330Stock issued upon
  exercise of stock options including tax benefit (Note 11)
  
  7,639
  
  910
  
  91
  
  7,548
  
  
  
  
  
  
  
  Stock and options
  issued for acquisition of businesses
  
  50,151
  
  6,250
  
  625
  
  49,526
  
  
  
  
  
  
  
  Stock issued in
  public offering
  
  91,170
  
  7,000
  
  700
  
  90,470
  
  
  
  
  
  
  
  Deferred
  compensation
  
  4
  
  
  
  
  
  4
  
  
  
  
  
  
  
  Other
  comprehensive income
  
  7,571
  
  
  
  
  
  
  
  7,571
  
  
  
  
  
  
  
  $
  7,571Net income
  
  12,147
  
  
  
  
  
  
  
  
  
  12,147
  
  
  
  
  
  12,147Balance,
  June 30, 2004
  
  427,097
  
  74,282
  
  7,428
  
  370,491
  
  11,387
  
  37,805
  
  4
  
  (14
  )
  $
  19,718Stock issued upon
  exercise of stock options including tax benefit (Note 11)
  
  2,625
  
  386
  
  39
  
  2,586
  
  
  
  
  
  
  
  Stock repurchase
  and retirement
  
  (416
  )
  (50
  )
  (5
  )
  (411
  )
  
  
  
  
  
  
  Other
  comprehensive income (loss)
  
  (2,367
  )
  
  
  
  
  
  
  (2,367
  )
  
  
  
  
  
  
  $
  (2,367
  )Net income
  
  17,041
  
  
  
  
  
  
  
  
  
  17,041
  
  
  
  
  
  17,041Balance,
  June 30, 2005
  
  $
  443,980
  
  74,618
  
  $
  7,462
  
  $
  372,666
  
  $
  9,020
  
  $
  54,846
  
  4
  
  $
  (14
  )
  $
  14,674  See
notes to consolidated financial statements  S-7


Aeroflex Incorporated and Subsidiaries  Consolidated Statements of Cash Flows (In
thousands)  Years Ended
  June 30,2005
  
  2004
  
  2003Cash flows from operating activities:Net income
  
  $
  17,041
  
  $
  12,147
  
  $
  6,395Loss from discontinued operations
  
  1,603
  
  8,317
  
  4,500Income from continuing operations
  
  18,644
  
  20,464
  
  10,895Adjustments to reconcile income from
  continuing operations to net cash provided by (used in) operating activities:Acquired in-process research and
  development
  
  2,974
  
  4,220
  
  Depreciation and amortization
  
  24,412
  
  21,856
  
  12,450Tax benefit from stock option exercise
  
  796
  
  2,462
  
  90Deferred income taxes
  
  (4,208
  )
  (469
  )
  2,781Other, net
  
  (219
  )
  118
  
  669Change in operating assets and liabilities,
  net of effects from purchases of businesses:Decrease (increase) in accounts receivable
  
  160
  
  (19,818
  )
  (939
  )Decrease (increase) in inventories
  
  (18,853
  )
  (5,291
  )
  (1,866
  )Decrease (increase) in prepaid expenses and
  other assets
  
  (2,847
  )
  2,241
  
  (318
  )Increase (decrease) in accounts payable,
  accrued expenses and other liabilities
  
  16,971
  
  157
  
  (2,479
  )Net cash provided by continuing operations
  
  37,830
  
  25,940
  
  21,283Net cash provided by (used in) discontinued
  operations
  
  (1,219
  )
  (1,840
  )
  101Net cash provided by operating activities
  
  36,611
  
  24,100
  
  21,384Cash flows from investing activities:Payment for purchase of businesses, net of
  cash acquired
  
  (117,825
  )
  (61,760
  )
  (1,058
  )Capital expenditures
  
  (15,636
  )
  (11,138
  )
  (5,920
  )Proceeds from the sale of property, plant
  and equipment
  
  1,644
  
  220
  
  49Purchase of marketable securities
  
  (634,807
  )
  
  
  Proceeds from sale of marketable securities
  
  634,807
  
  
  
  Net cash used in continuing operations
  
  (131,817
  )
  (72,678
  )
  (6,929
  )Net cash provided by (used in) discontinued
  operations
  
  14,171
  
  (389
  )
  (944
  )Net cash used in investing activities
  
  (117,646
  )
  (73,067
  )
  (7,873
  )Cash flows from financing activities:Net proceeds from issuance of common stock
  
  
  
  91,170
  
  Purchase and retirement of treasury stock
  
  (416
  )
  
  
  Borrowings under debt agreements
  
  37
  
  26,115
  
  Debt repayments
  
  (5,489
  )
  (28,041
  )
  (1,974
  )Proceeds from the exercise of stock options
  and warrants
  
  1,829
  
  5,177
  
  501Amounts paid for withholding taxes on stock
  option exercises
  
  (226
  )
  (2083
  )
  (90
  )Withholding taxes collected for stock
  option exercises
  
  226
  
  2083
  
  90Net cash provided by (used in) financing
  activities
  
  (4,039
  )
  94,421
  
  (1,473
  )Effect of exchange rate changes on cash and
  cash equivalents
  
  (454
  )
  1,741
  
  710Net increase (decrease) in cash and cash
  equivalents
  
  (85,528
  )
  47,195
  
  12,748Cash and cash equivalents at beginning of
  period
  
  98,502
  
  51,307
  
  38,559Cash and cash equivalents at end of period
  
  $
  12,974
  
  $
  98,502
  
  $
  51,307  See notes to consolidated financial
statements  S-8


AEROFLEX INCORPORATED AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1.Summary of Significant Accounting
Principles and Policies  Principles of Consolidation The
accompanying consolidated financial statements include the accounts of Aeroflex
Incorporated and its subsidiaries (the Company), all of which are
wholly-owned.  All intercompany balances
and transactions have been eliminated.  Use of Estimates The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires that management of the Company make a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities.  Among the more significant estimates included
in the consolidated financial statements are revenue and cost recognition under
long-term contracts, the valuation of accounts receivable, inventories and
deferred tax assets, the recoverability of long-lived and intangible assets and
goodwill.  Actual results could differ
from those estimates.  Cash and Cash Equivalents The
Company considers all highly liquid investments having maturities of three
months or less at the date of acquisition to be cash equivalents.  Inventories Inventories,
including amounts related to long-term contracts accounted for under
percentage-of-completion accounting, are stated at the lower of cost (first-in,
first-out) or market.  Financial Instruments and Derivatives The
fair values of all financial instruments, other than long-term debt (see Note
8), approximate book values because of the short maturity of these instruments.  The
Company accounts for derivatives in accordance with Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS 138, Accounting for
Certain Derivative Instruments and Hedging Activities.  This statement requires companies to record
derivatives on the balance sheet as assets or liabilities at their fair
value.  For derivatives designated and
qualifying as effective cash flow hedges of financial instruments under SFAS No. 133,
changes in the fair value of such derivatives are recorded as components of
other comprehensive income.  Foreign currency
derivatives that are not designated as hedges are recorded at fair value and
changes in fair value are recorded as gains or losses in other income or
expense. The fair value of these contracts at June 30, 2005, was $92,000
less than the notional value.  Revenue Recognition The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the selling price is
fixed or determinable and collectibility of the resulting receivable is
reasonably assured.  S-9


For
arrangements other than certain long-term contracts, revenue (including
shipping and handling fees) is recognized when products are shipped and title has
passed to the customer.  If title does
not pass until the product reaches the customers delivery site, then
recognition of revenue is deferred until that time.  Revenues associated with certain long-term
contracts are recognized in accordance with Statement of Position No. 81-1
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts (SOP 81-1).  Under SOP
81-1, the Company uses the percentage-of-completion method, whereby
revenues and associated costs are recognized as work on a contract
progresses.  The Company measures the
extent of progress toward completion generally based upon one of the following
(based upon an assessment of which method most closely aligns to the underlying
earnings process):  (i) the
units-of-delivery method, (ii) the cost-to-cost method, using the ratio of
contract costs incurred as a percentage of total estimated costs at contract
completion (based upon engineering and production estimates), or (iii) the
achievement of contractual milestones. 
Provisions for anticipated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such anticipated
losses or revisions become evident. 
Revenue from software support and maintenance contracts is recognized
ratably over the term of the contract in accordance with SOP 97-2, Software
Revenue Recognition.  Certain
of the Companys sales are to distributors which have a right to return some
portion of product within eighteen months of sale.  The Company recognizes revenue on these sales
at the time of shipment to the distributor as these sales meet all of the
criteria of Statement of Financial Accounting Standards (SFAS) No. 48, Revenue
Recognition When Right of Return Exists. 
Historically, the returns under these arrangements have been
insignificant and can be reasonably estimated. 
An estimate of such returns is recorded at the time sales are
recognized.  Property, Plant and Equipment 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, including anticipated renewals, or the
estimated life of the asset, whichever is shorter.  Research and Development Costs All
research and development costs are charged to expense as incurred.  See Note 3 for a discussion of acquired
in-process research and development.  For
our software products, costs incurred between the date of technological
feasibility and the date that the software is available for general release are
capitalized.  Historically, such costs
have been insignificant.  S-10


Intangible Assets Intangible
assets are carried at cost less accumulated amortization and are being
amortized on a straight-line basis over periods ranging from 1 to 16
years.  In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, whenever
events or changes in circumstances indicate that the carrying value of its
intangible assets may be impaired, the Company evaluates the recoverability of
such assets by estimating the future cash flows.  If the sum of the undiscounted cash flows
expected to result from the use of the asset, and its eventual disposition, is
less than the carrying amount of the asset, the Company will recognize an
impairment loss to the extent of the excess of the carrying amount of the asset
over their fair value.  SFAS
No. 141, Business Combinations, specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported apart from goodwill.  SFAS No. 142,
Goodwill and Other Intangible Assets, requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No. 142.  SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives, and reviewed for impairment in accordance
with SFAS No. 144.  In its
determination of the fair value of reporting units for purposes of analyzing
potential impairment under SFAS No. 142, the Company primarily considers
discounted cash flow analyses and income multiples of companies in similar
businesses.  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. 
The effect of options in a loss period would be anti-dilutive, therefore
Basic EPS and Diluted EPS are the same in a loss period.  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. 
Effective July 1, 1996, the Company adopted SFAS No. 123, Accounting
for Stock-Based Compensation.  As
provided by SFAS No. 123, the Company has elected not to implement the
fair value based accounting method for employee and director stock options, but
instead has elected to disclose the pro forma net income and pro forma net
income per share for employee and director stock option grants made beginning
in fiscal 1996 as if such method had been used to account for stock-based
compensation cost as described in SFAS No. 123.   See Recent Accounting Pronouncements,
below, regarding the provisions of SFAS No. 123 (R) which  becomes effective during our quarter ending September 30,
2005.  The
per share weighted average fair value of stock options granted during fiscal
2005, 2004 and 2003 was $5.07, $6.99 and $5.24, respectively, on the date of
grant using the Black Scholes option-pricing model with the following weighted
average assumptions:  2005 
expected dividend yield of 0%, risk free interest rate of 3.8%, expected stock
volatility of 75%, and an expected option life of 3.9 years; 2004 
expected dividend yield of 0%, risk free interest rate of 4.6%, expected stock
volatility of 76%, and an expected option life of 5.2 years; 2003 
expected dividend yield of 0%, risk free interest rate of 3.5%, expected stock
volatility of 108%, and an expected option life of 5.4 years.  The pro forma compensation cost before income
taxes was $20.2 million, $20.1 million and $43.2 million for the
years ended June 30, 2005, 2004 and 2003, respectively, based on the
aforementioned fair value at the grant date only for options granted after
fiscal year 1995.  S-11


The
Companys net income (loss) and net income (loss) per share using this pro
forma compensation cost would have been:  Years Ended June 30,2005
  
  2004
  
  2003(In thousands, except per share
  amounts)Net income-as reported
  
  $
  17,041
  
  $
  12,147
  
  $
  6,395Deduct: Total stock-based
  compensation expense determined under fair value based method, net of tax
  
  (12,832
  )
  (12,524
  )
  (28,491
  )Net income (loss) - pro forma
  
  $
  4,209
  
  $
  (377
  )
  $
  (22,096
  )Net income per share - as reportedBasic
  
  $
  0.23
  
  $
  0.18
  
  $
  0.11Diluted
  
  0.22
  
  0.17
  
  0.11Net income (loss) per share - pro formaBasic
  
  $
  0.06
  
  $
  (0.01
  )
  $
  (0.37
  )Diluted
  
  0.06
  
  (0.01
  )
  
  *  
 *As
a result of the pro forma loss from continuing operations, all options are
anti-dilutive.  Income Taxes Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be realized or
settled.  The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.  Foreign Currency Translations The
financial statements of the Companys foreign subsidiaries are measured in
their local currency and then translated into U.S. dollars using the current
rate method.  Under the current rate
method, assets and liabilities are translated using the exchange rate at the
balance sheet date.  Revenues and
expenses are translated at average rates prevailing throughout the year.  Gains and losses resulting from the translation
of financial statements of the foreign subsidiaries are accumulated in other
comprehensive income (loss) and presented as part of stockholders equity.  Realized and unrealized exchange gains or
losses from the settlement of foreign currency transactions are reflected in
the consolidated statement of operations in other income (expense).  Comprehensive Income Comprehensive
income consists of net income and equity adjustments relating to foreign
currency translation, fair value of derivatives and minimum pension liability
and is presented in the Consolidated Statements of Stockholders Equity and
Comprehensive Income.  S-12


Recent Accounting Pronouncements In
May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, (SFAS No. 154) which establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements
specific to the newly adopted accounting principle.  The statement provides guidance for
determining whether retrospective application of a change in accounting
principle is impracticable.  The
statement also addresses the reporting of a correction of an error by restating
previously issued financial statements. 
SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005.  The adoption of this statement is not
expected to have any effect on our consolidated financial statements.  In
April 2005, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 47 (FIN 47), Accounting for Conditional Asset
Retirement Obligations  An Interpretation of FASB Statement No. 143.  FIN 47 clarifies the terms of FASB Statement No. 143
and requires an entity to recognize a liability for a conditional asset
retirement obligation if the entity has sufficient information to reasonably
estimate its fair value.  FIN 47 is
effective no later than the end of fiscal years ending after December 15,
2005.  The Company is currently
evaluating the impact of this standard on its consolidated financial
statements.  On
December 31, 2004, the FASB issued FASB Staff Position FAS 109-1, Application
of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004, (FSP No. 109-1), and FASB Staff Position No. FAS
109-2, Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004, (FSP No. 109-2).  These staff positions provide accounting
guidance on how companies should account for the effects of the American Jobs
Creation Act of 2004 (AJCA) that was signed into law on October 22,
2004.  FSP No. 109-1 states
that the tax relief (special tax deduction for domestic manufacturing) from
this legislation should be accounted for as a special deduction instead of a
tax rate reduction.  FSP No. 109-2
gives a company additional time to evaluate the effects of the legislation on
any plan for reinvestment or repatriation of foreign earnings for purposes of
applying FASB Statement No. 109. 
The Company is investigating the repatriation provision to determine
whether it might repatriate extraordinary dividends, as defined in the AJCA.
The Company is currently evaluating all available U.S. Treasury guidance.  In
December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment.
This statement replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees.  In March 2005,
the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107
(SAB 107) which provides the Staffs views regarding interactions between SFAS No. 123(R)
and certain SEC rules and regulations and provides interpretations of the
valuation of share-based payments for public companies.  SFAS 123(R) requires all stock-based
compensation to be recognized as an expense in the financial statements and
that such cost be measured according to the fair value of stock options.  SFAS 123(R) will be effective for fiscal
years beginning after June 15, 2005, which is the Companys first quarter
of fiscal 2006.  The adoption of SFAS
123(R) will impact the Companys results of operations by increasing compensation
expenses, however will not impact our cash flows.  The amount of the impact is still being determined
by the Company.  S-13


In
November 2004, the FASB issued SFAS No. 151, Inventory Costs 
an amendment of Accounting Research Bulletin No. 43, Chapter 4.  SFAS No. 151 requires all companies to
recognize a current period charge for abnormal amounts of idle facility
expense, freight, handling costs and wasted materials.  This statement also requires that the
allocation of fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities.  SFAS No. 151 will be effective for
fiscal years beginning after June 15, 2005, which is the Companys first
quarter of fiscal 2006.  The Company is
currently evaluating the effect that this statement will have on its
consolidated financial statements.  2.Discontinued Operations  In
December 2002, the Board of Directors of the Company approved a formal
plan to discontinue the Companys fiber optic lithium niobate modulator
operation (TriLink) due to the continued weakness in the fiber optic end-user
market and reductions in pricing.  This
operation had previously been included in the Microelectronic Solutions
segment.  The plan called for an
immediate cessation of operations and disposal of existing assets.  The abandonment of the operation resulted in
a charge of $2.6 million ($1.7 million, net of tax) in the quarter
ended December 31, 2002.  The charge
included a cash requirement of $1.4 million, primarily for existing
equipment leases and payroll costs, and a non-cash charge of $1.2 million
primarily for the write-off of owned equipment.  As
a result of continued operating losses, the Board of Directors of the Company,
in February 2004, approved a formal plan to divest the Companys thin film
interconnect manufacturing operation (MIC) and to seek a strategic
buyer.  This operation had previously
been included in the Microelectronic Solutions segment.  As a result of this decision, the Company
recorded a $9.1 million ($6.2 million, net of tax) loss on disposal.
This charge included a cash requirement of $2.6 million primarily for
existing equipment leases, and a non-cash charge of $6.5 million for the
write down of goodwill, other intangibles and owned equipment.  In
September 2004, the Company sold the stock of MIC for $8.8 million
and recorded an additional loss on disposal of $1.3 million ($1.3 million,
net of tax).  Since the sale of the stock
created a capital loss for tax purposes and the Company has no current capital
gains to offset it, the Company recorded a full valuation allowance against the
tax benefit.  Under the terms of the sale
agreements, the Company has retained certain liabilities relating to potential
adverse environmental conditions that may exist as of the date of sale,
litigation pending against MIC as of the date of sale and product defects in
products designed, developed, manufactured or sold by MIC prior to the sale
date which result in a recall, withdrawal or market suspension of the product
or result in injury to persons or property. 
Management believes these contingencies will not have a material adverse
effect on the Companys consolidated financial statements.  In
June 2004, the Board of Directors of the Company approved a formal plan to
divest the Companys shock and vibration control device manufacturing business
(VMC) and to seek a strategic buyer. 
This operation had previously comprised the Isolator Products
segment.  In March 2005, the Company
sold the net assets of VMC for $8.4 million in cash.  The Company recorded a gain on disposition of
$860,000 ($505,000, net of tax).  Under
the terms of the sale agreements, the Company has retained certain liabilities
relating to adverse environmental conditions that currently exist at the
premises occupied by VMC, litigation pending against VMC as of the date of
sale, and to the extent covered by insurance, for product liability for
products sold prior to the closing date. 
The Company has recorded a reserve for the estimated remediation costs
related to adverse environmental conditions that currently exist at the
premises occupied by VMC.  S-14


In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, these business units have been reported as discontinued
operations and, accordingly, income and losses from operations and the gain and
(losses) on disposal/abandonment have been reported separately from continuing
operations.  Net sales and income (loss)
from discontinued operations (including gains (losses) on disposal/abandonment)
for the years ended June 30, 2005, 2004 and 2003 were as follows:  Years Ended June 30,2005
  
  2004
  
  2003(In thousands)Net salesTriLink
  
  $
  
  
  $
  
  
  $
  58MIC
  
  3,313
  
  10,689
  
  10,141VMC
  
  12,406
  
  16,025
  
  16,245$
  15,719
  
  $
  26,714
  
  $
  26,444Income (loss) from discontinued operationsTriLink
  
  $
  14
  
  $
  
  
  $
  (2,138
  )MIC
  
  (1,140
  )
  (8,599
  )
  (2,905
  )VMC
  
  (477
  )
  282
  
  543$
  (1,603
  )
  $
  (8,317
  )
  $
  (4,500
  )  To
conform with this presentation, all prior periods have been restated.  As a result, the assets and liabilities of
the discontinued operations have been reclassified on the balance sheet from
the historical classifications and presented under the captions assets of
discontinued operations and liabilities of discontinued operations,
respectively.  As of June 30, 2005
and 2004, the net assets of the discontinued operations consisted of the
following:  June 30,2005
  
  2004(In thousands)Accounts receivable
  
  $
  
  
  $
  5,133Inventory
  
  
  
  5,247Prepaid expenses and other current assets
  
  
  
  1,530Current assets
  
  
  
  11,910Property, plant and equipment, net
  
  
  
  5,543Intangibles
  
  
  
  1,550Other assets
  
  
  
  2,624Non-current assets
  
  
  
  9,717Total assets
  
  
  
  21,627Accounts payable
  
  
  
  704Accrued expenses
  
  
  
  3,869Current liabilities
  
  
  
  4,573Long term debt
  
  
  
  3,565Other long term liabilities
  
  
  
  48Long term liabilities
  
  
  
  3,613Total liabilities
  
  
  
  8,186Net assets
  
  $
  
  
  $
  13,441  S-15


3.Acquisition of Businesses and
Intangible Assets  Racal Instruments Wireless Solutions Group  On
July 31, 2003, the Company acquired the Racal Instruments Wireless
Solutions Group (RIWS) for cash of $38 million and a deferred payment of
up to $16.5 million in either cash or Aeroflex common stock, at the
Companys option, depending on RIWS achieving certain performance goals for the
year ending July 31, 2004.  The
Company did not include this contingent consideration in its initial purchase
price allocation as the payment of this consideration was not considered to be
certain beyond a reasonable doubt at the date of acquisition.  Although the Company believes that the
performance goals have not been met, the determination is not final.  RIWS
develops, manufactures and integrates digital wireless testing and measurement
solutions.  The addition of RIWS testing
solutions products and technologies has enabled the Company to provide a full
spectrum of wireless testing solutions from development to production and
services primarily for infrastructure testing and mobile handset testing.  The
Company evaluated the acquired tangible and identifiable intangible assets to
serve as a basis for allocation of the purchase price.  The Company allocated the purchase price,
including acquisition costs of approximately $2.6 million, based on the
estimated fair value of the assets acquired and liabilities assumed as follows:  (In thousands)Current assets (excluding cash of $5.9 million)
  
  $
  21,321Property, plant and equipment
  
  8,672Developed technology
  
  15,600Customer related intangibles
  
  1,700Tradenames
  
  200Goodwill
  
  17,674In-process research and development
  
  2,700Total assets acquired
  
  67,867Current liabilities
  
  (27,924
  )Deferred taxes
  
  (5,250
  )Total liabilities assumed
  
  (33,174
  )Net assets acquired
  
  $
  34,693
  The
developed technology, tradenames and customer related intangibles are being
amortized on a straight-line basis over a range of 1 to 8 years.  Approximately $5.4 million of the
goodwill is deductible for tax purposes. 
At the acquisition date, the acquired in-process research and
development was not considered to have reached technological feasibility and
had no alternative future uses.  Therefore,
in accordance with accounting principles generally accepted in the United
States of America, the value of such has been expensed in the quarter ended September 30,
2003 in operating costs.  The allocation
to in-process research and development represents the estimated fair value of
such incomplete research and development, at the acquisition date, based on
future cash flows that have been adjusted by the respective projects
completion percentage.  As of the
acquisition date, cash flows from these projects were expected to commence in
calendar year 2004.  A 35% risk adjusted
discount rate was applied to the projects cash flows in determining fair
value.  At the acquisition date, RIWS was
conducting design, development, engineering and testing activities associated
with the completion of new 2.5G and 3G protocol and conformance testers.  S-16


MCE Technologies, Inc.  On
September 3, 2003, the Company acquired all of the outstanding stock of
MCE Technologies, Inc. (MCE) for approximately 5.8 million shares
of Aeroflex common stock with a fair value of approximately $43.5 million.  In addition, the Company discharged $22.8 million
of MCE outstanding bank debt, other indebtedness and preferred stock.  Further, the Company issued fully vested
stock options for 315,000 shares of Aeroflex common stock with exercise prices
ranging from $2.88 to $9.59 in exchange for fully vested outstanding options of
MCE.  The fair value of these options was
approximately $2.4 million utilizing the Black-Scholes option pricing
model.  MCE designs, manufactures and
markets a broad range of microelectronic devices, components and multi-function
modules servicing wireless, broadband infrastructure, satellite communications
and defense markets.  These product
offerings complement the existing product lines of the Company.  The
Company evaluated the acquired tangible and identifiable intangible assets to
serve as a basis for allocation of the purchase price. The Company allocated
the purchase price, including acquisition costs of approximately $2.0 million,
based on the estimated fair value of the assets acquired and liabilities
assumed as follows:  (In thousands)Current assets (excluding cash of $1.8 million)
  
  $
  19,020Property, plant and equipment
  
  12,517Developed technology
  
  8,850Tradenames
  
  1,100Customer related intangibles
  
  2,520Goodwill
  
  42,638In-process research and development
  
  420Other
  
  459Total assets acquired
  
  87,524Current liabilities
  
  (12,551
  )Long-term debt
  
  (89
  )Deferred taxes
  
  (5,963
  )Other long-term liabilities
  
  (11
  )Total liabilities assumed
  
  (18,614
  )Net assets acquired
  
  $
  68,910
  The
developed technology, customer related intangibles, and tradenames are being
amortized on a straight-line basis over a range of 1 to 15 years.  The goodwill is not deductible for tax
purposes.  At the acquisition date, the
acquired in-process research and development was not considered to have reached
technological feasibility and had no alternative future uses.  Therefore, in accordance with accounting
principles generally accepted in the United States of America, the value of
such has been expensed in the quarter ended September 30, 2003 in
operating costs.  The allocation to
in-process research and development represents the estimated fair value of such
incomplete research and development, at the acquisition date, based on future
cash flows that have been adjusted by the respective projects completion
percentage.  As of the acquisition date,
cash flows from these projects were expected to commence in fiscal year
2004.  A 30% risk adjusted discount rate
was applied to the projects cash flows in determining fair value.  At the acquisition date, MCE was conducting
development activities associated with the completion of certain high frequency
component technology.  S-17


Celerity Systems Inc. (CA)  On
October 31, 2003, the Company acquired the business of Celerity Systems
Inc. (CA) (Celerity) for $4.0 million of cash, 428,000 shares of
Aeroflex common stock with a fair market value of approximately $4.2 million
and a release of certain liabilities totaling $1.8 million.  Celerity designs, develops and manufactures
modular digital test and measurement solutions for the communications,
satellite, wireless and broadband test markets, including broadband signal
generators.  Celeritys technology
enhances the Companys automatic systems capability.  The
Company evaluated the acquired tangible and identifiable intangible assets to
serve as a basis for allocation of the purchase price.  The Company allocated the purchase price,
including acquisition costs of approximately $106,000, based on the estimated
fair value of the assets acquired and liabilities assumed as follows:  (In thousands)Current assets
  
  $
  2,137Property, plant and equipment
  
  737Developed technology
  
  3,405Goodwill
  
  2,220In-process research and development
  
  1,100Total assets acquired
  
  9,599Current liabilities assumed
  
  (1,291
  )Net assets acquired
  
  $
  8,308
  The
developed technology is being amortized on a straight-line basis over 7
years.  The goodwill is fully deductible
for tax purposes.  At the acquisition
date, the acquired in-process research and development was not considered to
have reached technological feasibility and had no alternative future uses.  Therefore, in accordance with accounting
principles generally accepted in the United States of America, the value of
such has been expensed in the quarter ended December 31, 2003 in operating
costs.  The allocation to in-process
research and development represents the estimated fair value of such incomplete
research and development, at the acquisition date, based on future cash flows
that have been adjusted by the respective projects completion percentage.  As of the acquisition date, cash flows from
these projects were expected to commence in fiscal year 2005.  A 35% risk adjusted discount rate was applied
to the projects cash flows in determining fair value.  At the acquisition date, Celerity was
conducting development activities associated with the completion of its next
generation modular technology.  S-18


JcAIR Test Systems  On
April 19, 2005, the Company acquired all of the outstanding stock of JcAIR
Test Systems (JcAIR) for cash of $35 million.  JcAIR provides customized avionics test
solutions in all areas of manual and automatic test equipment for
manufacturing, repair and ground support operation.  The addition of JcAIR is expected to enhance
the Companys avionics product portfolio and to provide more complete testing
solutions for the avionics system test market.  The
Company evaluated the acquired intangible and identifiable intangible assets to
serve as a basis for allocation of the purchase price.  The Company preliminarily allocated the
purchase price, including the acquisition costs of approximately $445,000,
based on the estimated fair value of the assets acquired and liabilities
assumed as follows:  In thousandsCurrent assets (excluding cash of $568,000)
  
  $
  9,920Property, plant and equipment
  
  1,525Developed technology
  
  12,000Customer related intangibles
  
  1,100Goodwill
  
  20,650In-process research and development
  
  200Total assets acquired
  
  45,395Current liabilities
  
  (6,149
  )Deferred taxes
  
  (4,369
  )Total liabilities assumed
  
  (10,518
  )Net assets acquired
  
  $
  34,877
  As
of June 30, 2005, the Company is completing its assessment of the fair
value of certain assets and liabilities as of the date of acquisition which is
expected to be finalized upon the receipt and completion of additional
information and analysis during fiscal 2006.  The
developed technology and customer related intangibles are being amortized on a
straight-line basis over a range of 3 to 15 years.  The goodwill is not deductible for tax
purposes.  At the acquisition date, the
acquired in-process research and development was not considered to have reached
technological feasibility and had no alternative future uses. Therefore, in
accordance with accounting principles generally accepted in the Untied States
of America, the value of such has been expensed in the quarter ended June 30,
2005 in operating costs. The allocation to in-process research and development
represents the estimated fair value of such incomplete research and
development, at the acquisition date, based on future cash flows that have been
adjusted by the respective projects completion percentage.  As of the acquisition date, cash flows from
these projects were expected to commence in fiscal 2006.  A 24% risk adjusted discount rate was applied
to the projects cash flows in determining fair value.   At the
acquisition date, JcAIR was conducting development activities associated with
the completion of the Mode 5 General Avionic Test Equipment sets.  S-19


SPG Division of UbiNetics Holdings Limited  On
May 23, 2005, the Company acquired all of the stock of UbiNetics Limited,
as well as certain assets located in India, Japan and Hong Kong, all of which
constituted UbiNetics Holdings Limiteds SPG test and measurement business (SPG)
for cash of $84 million and a deferred payment of up to approximately $4 million
depending on SPG achieving certain performance goals for the year ending June 30,
2006.  The Company did not include this
contingent consideration in its initial purchase price allocation as the
payment of this consideration was not considered to be certain beyond a
reasonable doubt at the date of acquisition. 
As a result, the Company will adjust goodwill for any contingent
consideration in the future if and when it is earned.  SPG develops, manufactures and integrates
wireless test and measurement solutions specific to commercial wireless product
development organizations and service operators.  The addition of SPGs wireless test and
measurement products and technologies is expected to enhance the Companys
wireless product portfolio and to enable the Company to provide more complete
testing solutions for the development, manufacturing and service markets.  The
Company evaluated the acquired tangible and identifiable intangible assets to
serve as a basis for allocation of the purchase price. The Company preliminarily
allocated the purchase price, including the acquisition costs of approximately
$3.0 million, based on the estimated fair value of the assets acquired and
liabilities assumed as follows:  In thousandsCurrent assets (excluding cash of $4.0 million)
  
  $
  5,070Property, plant and equipment
  
  2,203Developed technology
  
  21,000Customer related intangibles
  
  750Goodwill
  
  63,994In-process research and development
  
  2,800Total assets acquired
  
  95,817Current liabilities
  
  (5,539
  )Deferred taxes
  
  (6,862
  )Other long term liabilities
  
  (468
  )Total liabilities assumed
  
  (12,869
  )Net assets acquired
  
  $
  82,948
  As
of June 30, 2005, the Company is completing its assessment of the fair
value of certain assets and liabilities as of the date of acquisition which is
expected to be finalized upon the receipt and completion of additional
information and analysis during fiscal 2006.  The
developed technology and customer related intangibles are being amortized on a
straight-line basis over a range of 1 to 5 years.  The goodwill is not deductible for tax
purposes.  At the acquisition date, the
acquired in-process research and development was not considered to have reached
technological feasibility and had no alternative future uses.  Therefore, in accordance with accounting
principles generally accepted in the United States of America, the value of
such has been expensed in the quarter ended June 30, 2005 in operating
costs.  The allocation to in-process
research and development represents the estimated fair value of such incomplete
research and development, at the acquisition date, based on future cash flows that
have been adjusted by the respective projects completion percentage.  As of the acquisition date, cash flows from
these projects were expected to commence in fiscal year 2006.  As of the acquisition  S-20


date,
cash flows were expected under two scenarios  base case (assumes the
contingent payment is not earned) and earnout case (assumes the contingent
payment is earned).  In determining fair
value, a 24% risk adjusted discount rate was applied to the projects cash
flows under the base case, and a 40% risk adjusted discount rate was applied to
the projects cash flows under the earnout case.   At the acquisition date, SPG was conducting
development activities associated with the completion of test mobile products
used to test evolving 3G (third-generation) mobile communications networks and
equipment that tests the functionality and performance of
Wide-Band-Code-Division-Multiple-Access technology.  Summarized
below are the unaudited pro forma results of operations of the Company as if
RIWS, MCE, Celerity, JcAIR and SPG had been acquired at the beginning of the
fiscal periods presented.  The in-process
research and development write-offs for JcAIR and SPG have been included in the
June 30, 2005 pro forma income but not the June 30, 2004 pro forma
income and the in-process research and development write-offs for RIWS, MCE and
Celerity have been included in the June 30, 2004 pro forma income in order
to provide comparability to the respective historical periods.  Pro Forma
  Years Ended
  June 30,2005
  
  2004(In thousands, except per share
  data)Net sales
  
  $
  516,265
  
  $
  471,489Net income
  
  25,608
  
  4,920Net income per shareBasic
  
  $
  0.34
  
  $
  0.07Diluted
  
  0.34
  
  0.07  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, Celerity, JcAIR and SPG have been
included in the consolidated statement of operations from their respective
acquisition dates.  RIWS, Celerity, JcAIR
and SPG are included in the Test Solutions segment and MCE is included in the
Microelectronic Solutions segment.  S-21


Intangibles with Definite Lives The
components of amortizable intangible assets are as follows:  As of June 30, 2005
  
  As of June 30, 2004Gross Carrying
  Amount
  
  Accumulated
  Amortization
  
  Gross Carrying
  Amount
  
  Accumulated
  Amortization(In thousands)Existing technology
  
  $
  82,179
  
  $
  20,665
  
  $
  48,474
  
  $
  12,901Tradenames
  
  2,321
  
  1,457
  
  2,324
  
  912Customer related
  
  6,238
  
  1,350
  
  4,424
  
  807Total
  
  $
  90,738
  
  $
  23,472
  
  $
  55,222
  
  $
  14,620  The
aggregate amortization expense for amortized intangible assets was $8.9 million,
$7.7 million and $2.7 million for the years ended June 30, 2005,
2004 and 2003, respectively.  The
estimated aggregate amortization expense for each of the next five fiscal years
is as follows:  (In thousands)2006
  
  $
  13,8062007
  
  12,2332008
  
  11,5422009
  
  8,9982010
  
  7,675
  Goodwill The
carrying amount of goodwill is as follows:  Balance
  as of
  July 1, 2004
  
  Acquisitions
  
  Adjustment
  (Note a)
  
  Adjustment
  (Note b)
  
  Effect of
  foreign
  currency
  
  Balance
  as of
  June 30, 2005(In thousands)Microelectronic Solutions
  Segment
  
  $
  46,371
  
  $
  
  
  $
  317
  
  $
  
  
  $
  
  
  $
  46,688Test Solutions Segment
  
  41,917
  
  84,644
  
  (2,059
  )
  (1,912
  )
  (1,230
  )
  121,360Total
  
  $
  88,288
  
  $
  84,644
  
  $
  (1,742
  )
  $
  (1,912
  )
  $
  (1,230
  )
  $
  168,048  Balance
  as of
  July 1, 2003
  
  Acquisitions
  
  Adjustment
  
  Adjustment
  
  Effect of
  foreign
  currency
  
  Balance
  as of
  June 30, 2004(In thousands)Microelectronic Solutions
  Segment
  
  $
  4,050
  
  $
  42,321
  
  $
  
  
  $
  
  
  $
  
  
  $
  46,371Test Solutions Segment
  
  15,924
  
  23,864
  
  
  
  
  
  2,129
  
  41,917Total
  
  $
  19,974
  
  $
  66,185
  
  $
  
  
  $
  
  
  $
  2,129
  
  $
  88,288  
 Note a  These
adjustments to goodwill recorded during the period pertain to final adjustments
to the fair value of assets and liabilities assumed in the acquisitions of MCE
in the Microelectronic Solutions segment and of RIWS and Celerity in the Test
Solutions Segment. Note b  This
adjustment to goodwill is a result of a reduction in the purchase price of RIWS
in connection with the amount of actual working capital acquired as of
acquisition date.  S-22


4.Restructuring Charges  In
fiscal 2005, the Company initiated strategic plans to reorganize certain of its
European operations in its Test Solutions business segment in order to increase
operating income.   In connection with
this restructuring, the Company recorded charges of $3.1 million in the
fiscal year ended June 30, 2005 for workforce reductions, primarily in
management and sales. A total of 52 sales and administrative employees were
terminated.  The restructuring charge was
allocated entirely to selling, general, and administrative expense.  The
following tables set forth the charges and payments related to the
restructuring reserve for the years ended June 30, 2005 and 2004:  Balance
  July 1,
  2004
  
  Year Ended
  June 30, 2005
  
  Balance
  June 30,
  2005(In thousands)Restructuring
  Reserve
  
  Net Addition
  to
  Restructuring
  Reserve
  
  Cash
  Payments
  
  Foreign
  Currency
  Impact
  
  Restructuring
  ReserveWork force reduction
  
  $
  3
  
  $
  3,124
  
  $
  (2,128
  )
  $
  (75
  )
  $
  924Plant shutdown and other
  
  120
  
  
  
  (20
  )
  
  
  100Total
  
  $
  123
  
  $
  3,124
  
  $
  (2,148
  )
  $
  (75
  )
  $
  1,024  Balance
  July 1,
  2003
  
  Year Ended
  June 30, 2004
  
  Balance
  June 30,
  2004(In thousands)Restructuring
  Reserve
  
  Adjustments
  to
  Restructuring
  Reserve
  
  Cash
  Payments
  
  Foreign
  Currency
  Impact
  
  Restructuring
  ReserveWork force reduction
  
  $
  91
  
  $
  
  
  $
  (88
  )
  $
  
  
  $
  3Lease payments
  
  14
  
  
  
  (14
  )
  
  
  Plant shutdown and other
  
  120
  
  
  
  
  
  
  
  120Total
  
  $
  225
  
  $
  
  
  $
  (102
  )
  $
  
  
  $
  123   S-23


5.Inventories  Inventories
consist of the following:  June 30,2005
  
  2004(In thousands)Raw materials
  
  $
  43,158
  
  $
  35,228Work-in-process
  
  53,115
  
  40,248Finished goods
  
  22,633
  
  19,141$
  118,906
  
  $
  94,617
  Inventories
include contracts-in-process of $30.9 million and $23.9 million at June 30,
2005 and 2004, respectively, which consist substantially of unbilled material,
labor and overhead costs that are or were expected to be billed during the
succeeding fiscal year.  6.Property, Plant and Equipment  Property,
plant and equipment consists of the following:  EstimatedJune 30,
  
  Useful Life2005
  
  2004
  
  In Years(In thousands)Land
  
  $
  11,478
  
  $
  11,255Building and leasehold improvements
  
  28,783
  
  28,679
  
  2 to 40Machinery, equipment, tools and dies
  
  92,389
  
  76,994
  
  2 to 10Furniture and fixtures
  
  14,867
  
  12,685
  
  3 to 10Assets recorded under capital leases
  
  6,110
  
  4,756
  
  2 to 30153,627
  
  134,369Less accumulated depreciation
  and amortization
  
  75,432
  
  59,997$
  78,195
  
  $
  74,372  Depreciation
expense on property, plant and equipment was $15.5 million, $14.1 million
and $9.6 million for the years ended June 30, 2005, 2004 and 2003,
respectively.  Repairs
and maintenance expense on property, plant and equipment was $5.5 million,
$5.5 million and $3.3 million for the years ended June 30, 2005,
2004 and 2003, respectively.  7.Product Warranty  The
Company warrants its products against defects in design, materials and
workmanship, generally for one year from their date of shipment.  A provision for estimated future costs
relating to these warranties is recorded when revenue is recognized and is
included in cost of goods sold.  S-24


Activity
related to the Companys product warranty liability was as follows:  Years Ended June 30,2005
  
  2004(In thousands)Balance at beginning of period
  
  $
  1,702
  
  $
  1,308Provision for warranty obligations
  
  2,033
  
  1,413Liability assumed in acquisition of businesses
  
  167
  
  334Charges incurred
  
  (1,840
  )
  (1,395
  )Foreign currency impact
  
  (6
  )
  42Balance at end of period
  
  $
  2,056
  
  $
  1,702  8.Long-Term Debt and Credit
Arrangements  Long-term
debt consists of the following:  June 30,2005
  
  2004(In thousands)Revolving credit and mortgage agreement (a)
  
  $
  2,475
  
  $
  2,780Capitalized equipment lease obligations (b)
  
  
  
  2,077Capitalized facility and equipment lease obligations (c)
  
  2,260
  
  2,510Building mortgage (d)
  
  
  
  2,759Other
  
  89
  
  1494,824
  
  10,275Less current maturities
  
  634
  
  4,770$
  4,190
  
  $
  5,505  S-25


Aggregate
long-term debt as of June 30, 2005 matures in each fiscal year as follows:  (In thousands)2006
  
  $
  6342007
  
  6222008
  
  2,1542009
  
  3282010
  
  341Thereafter
  
  745$
  4,824
  Interest
paid was $1.0 million, $1.2 million and $1.0 million during the
years ended June 30, 2005, 2004 and 2003, respectively.  (a) On
February 14, 2003, the Company executed an amended and restated loan 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,
continues the mortgage on the Companys Plainview, New York property for $2.5 million
and is secured by the pledge of the stock of certain of the Companys
subsidiaries.  The interest rate on
borrowings under this agreement is at various rates depending upon certain
financial ratios, with the current rate substantially equivalent to LIBOR plus
1%  (4.3% at June 30, 2005) on the
revolving credit borrowings.  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 an interest rate
swap agreement for the outstanding amount under the mortgage agreement at
approximately 7.6% in order to reduce the interest rate risk associated with
these borrowings.  These instruments have
been designated and qualify as effective cash flow hedges.  The fair market value of the interest rate
swap agreements was $120,000 as of June 30, 2005 in favor of the
banks.  If this mortgage was prepaid,
although the Company has no intention of doing so, the $120,000 would be
charged to the statement of operations at that time.  The
terms of the loan agreement require compliance with certain covenants including
minimum consolidated tangible net worth and pretax earnings, maintenance of
certain financial ratios, limitations on indebtedness and prohibition of the
payment of cash dividends.  The Company
is currently in full compliance with all of the covenants contained in the loan
agreement.  At June 30, 2005 the
Companys available unused line of credit was approximately $41.6 million
after consideration of outstanding letters of credit.  (b) 
During the year ended June 30, 1998, the Company entered into equipment
loans with two banks totaling $6.2 million.  In June 2000, the remaining balance of
these loans of $4.1 million was refinanced under two sale and capital
leaseback agreements for approximately $6.0 million.  These agreements were paid in full in September 2004.  (c) 
In connection with the acquisition of IFR, the Company assumed a capital lease
obligation for $3.0 million on IFRs Wichita, Kansas facility and certain
equipment.  The obligation requires quarterly
payments through 2012 and bears interest at approximately 6.3%.  (d) In
connection with the acquisition of MCE, the Company assumed a building mortgage
obligation for $2.8 million on MCEs Ann Arbor, Michigan facility.  The obligation was paid in full in November 2004.  S-26


9.Stockholders Equity  Common Stock Offering On
March 10, 2004, the Company completed the sale of 7.0 million shares
of its Common Stock in a public offering at $13.75 per share.  The Company received $91.2 million, net
of commission and expenses.  These net
proceeds were used for working capital and other general corporate purposes
including research and development and acquisitions.  Stock Repurchase Program During
fiscal 2005, the Companys Board of Directors authorized a stock repurchase
program of up to 3.0 million shares of its Common Stock, subject to
certain limitations imposed by our lending banks.  Purchases will be made from time to time,
depending upon market conditions at prices deemed appropriate by
management.  As of June 30, 2005,
50,000 shares have been purchased and retired.  Stock Options and Warrants Under
the Companys stock option plans, options may be granted to purchase shares of
the Companys Common Stock exercisable at prices generally equal to the fair
market value on the date of grant.   In December 1993,
the Board of Directors adopted the Outside Director Stock Option Plan (the Directors
Plan) which provides for options to non-employee directors, which become
exercisable in three installments.  The
Directors Plan, as amended, covers 1.3 million shares of the Companys
Common Stock.  In November 1994, the
shareholders approved the Directors Plan and the 1994 Non-Qualified Stock
Option Plan (the 1994 Plan).  In November 1996,
the shareholders approved the 1996 Stock Option Plan (the 1996 Plan).  In April 1998, the Board of Directors
adopted the 1998 Stock Option Plan (the 1998 Plan).  In January 2000, the shareholders
approved the 1999 Stock Option Plan (the 1999 Plan).  In March 2000, the Board of Directors
adopted the 2000 Stock Option Plan (the 2000 Plan).  In November 2000, the shareholders
approved the Key Employee Stock Option Plan (the Key Employee Plan).  In June 2002, the Board of Directors
adopted the 2002 Stock Option Plan (the 2002 Plan).  In November 2002, the shareholders
approved the 2002 Outside Directors Stock Option Plan (the 2002 Directors
Plan), which provides for options to non-employee directors which become
exercisable in three installments.  The 1994
Plan, the 1996 Plan, the 1998 Plan, the 1999 Plan, the 2000 Plan, the Key
Employee Plan and the 2002 Plan provide for options which become exercisable in
one or more installments.  The 1994 Plan,
the 1996 Plan and the 1998 Plan each cover 3.8 million shares of the
Companys Common Stock.  The 1999 Plan
covers 2.3 million shares, the 2000 Plan covers 6.2 million shares,
the Key Employee Plan covers 4.0 million shares, the 2002 Plan covers 1.5 million
shares and the 2002 Directors Plan covers 525,000 shares.   Options under all plans shall expire not
later than ten years from the date of grant.  During
fiscal 2005, in connection with certain of its acquisitions, and the hiring of
employees, the Company has issued to employees, who are not executive officers,
options to purchase 310,000 shares of Common Stock which were not covered by
one of the above plans.  During
fiscal 2004, in connection with certain of its acquisitions, the Company has
issued to employees, who are not executive officers, options to purchase
710,000 shares of Common Stock which were not covered by one of the above
plans.  S-27


Additional
information with respect to the Companys stock options is as follows:  Weighted
  Average
  Exercise
  Prices
  
  Shares Under
  Outstanding
  Options(In thousands)Balance, July 1, 2002
  
  $
  15.08
  
  16,375Granted
  
  6.81
  
  327Forfeited
  
  25.78
  
  (2,739
  )Exercised
  
  4.35
  
  (116
  )Balance, June 30, 2003
  
  12.85
  
  13,847Granted
  
  10.58
  
  3,964Forfeited
  
  14.04
  
  (366
  )Exercised
  
  5.69
  
  (910
  )Balance, June 30, 2004
  
  12.68
  
  16,535Granted
  
  8.90
  
  1,154Forfeited
  
  19.69
  
  (1,919
  )Exercised
  
  4.74
  
  (386
  )Balance, June 30, 2005
  
  $
  11.72
  
  15,384  The
Companys stock option plans allow employees to use shares received from the
exercise of the option to satisfy the tax withholding requirements.  During fiscal years 2005, 2004 and 2003, no
payroll tax on stock option exercises was withheld from employees in shares of
the Companys Common Stock.  Options
to purchase 13.1 million, 11.9 million and 10.6 million shares
were exercisable at weighted average exercise prices of $12.06, $13.20 and
$12.57 per share as of June 30, 2005, 2004 and 2003, respectively. Options
covering 2.7 million shares are available for grant under existing option
plans as of June 30, 2005.  S-28


The
options outstanding as of June 30, 2005 are summarized in ranges as
follows:  Options OutstandingRange
  of
  Exercise
  Prices
  
  Weighted
  Average
  Exercise
  Price
  
  Options
  Outstanding
  
  Weighted
  Average
  Remaining
  Life(In thousands)$1.68 to $1.98
  
  $
  1.83
  
  59
  
  1.2
  Years3.30 to 4.65
  
  4.07
  
  1,183
  
  3.25.38 to 8.10
  
  7.05
  
  3,305
  
  5.38.16 to 13.56
  
  11.17
  
  6,596
  
  7.914.02 to 22.53
  
  17.67
  
  4,003
  
  5.326.00 to 34.41
  
  32.05
  
  238
  
  5.3$
  11.72
  
  15,384  Options ExercisableRange
  of
  Exercise
  Prices
  
  Weighted
  Average
  Exercise
  Price
  
  Options
  Exercisable(In thousands)$1.68 to $1.98
  
  $
  1.83
  
  593.30 to 4.65
  
  4.07
  
  1,1835.38 to 8.10
  
  7.00
  
  3,1328.16 to 13.56
  
  11.82
  
  4,59414.02 to 22.53
  
  17.73
  
  3,93526.00 to 34.41
  
  32.05
  
  238$
  12.06
  
  13,141  Shareholders Rights Plan On
August 13, 1998, the Companys Board of Directors approved a Shareholders
Rights Plan which provides for a dividend distribution of one right for each
share to holders of record of the Companys Common Stock on August 31,
1998 and the issuance of one right for each share of Common Stock that shall be
subsequently issued.  The rights become
exercisable only in the event a person or group (Acquiring Person)
accumulates 15% or more of the Companys Common Stock, or if an Acquiring
Person announces an offer which would result in it owning 15% or more of the
Common Stock.  The rights expire on August 31,
2008.  Each right will entitle the holder
to buy 1/2500 of a share of Series A Junior Participating Preferred Stock,
as amended, of the Company at a price of $65. 
In addition, upon the occurrence of a merger or other business
combination, or the acquisition by an Acquiring Person of 50% or more of the
Common Stock, holders of the rights, other than the Acquiring Person, will be
entitled to purchase either Common Stock of the Company or common stock of the
Acquiring Person at half their respective market values.  The Company will be entitled to redeem the
rights for $.01 per right at any time prior to a person becoming an Acquiring
Person.  S-29


Net Income (Loss) Per Share A
reconciliation of the numerators and denominators of the Basic EPS and Diluted
EPS calculations is as follows:  Years Ended June 30,2005
  
  2004
  
  2003(In thousands, except per share
  amounts)Computation of Adjusted Net
  Income (Loss):Income from continuing
  operations
  
  $
  18,644
  
  $
  20,464
  
  $
  10,895Discontinued operations, net
  of tax
  
  (1,603
  )
  (8,317
  )
  (4,500
  )Net income (loss)
  
  $
  17,041
  
  $
  12,147
  
  $
  6,395Computation of Adjusted
  Weighted Average Shares Outstanding:Weighted average shares
  outstanding
  
  74,634
  
  67,917
  
  60,193Add: Effect of dilutive
  options outstanding
  
  1,251
  
  2,014
  
  560Weighted average shares and
  common share equivalents used for computation of diluted earnings per common
  share
  
  75,885
  
  69,931
  
  60,753Income (Loss) Per Share -
  Basic:Income from continuing
  operations
  
  $
  0.25
  
  $
  0.30
  
  $
  0.18Discontinued operations
  
  (0.02
  )
  (0.12
  )
  (0.07
  )Net income (loss)
  
  $
  0.23
  
  $
  0.18
  
  $
  0.11Income (Loss) Per Share -
  Diluted:Income from continuing
  operations
  
  $
  0.25
  
  $
  0.29
  
  $
  0.18Discontinued operations
  
  (0.03
  )
  (0.12
  )
  (0.07
  )Net income (loss)
  
  $
  0.22
  
  $
  0.17
  
  $
  0.11  Options
to purchase 11.2 million shares at exercise prices ranging between $8.10
and $34.41 per share were outstanding as of June 30, 2005 but were not
included in the computation of Diluted EPS because the effect would be
anti-dilutive since the exercise prices of these options were greater than the
average market price of the common shares. 
Options to purchase 6.8 million shares at exercise prices ranging
between $13.48 and $34.41 per share were outstanding as of June 30, 2004
but were not included in the computation of Diluted EPS because the exercise
prices of these options were greater than the average market price of the
common shares.  Options to purchase 11.2 million
shares at exercise prices ranging between $6.56 and $34.41 per share were
outstanding as of June 30, 2003 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 share.  S-30


10.Comprehensive Income  The
components of comprehensive income are as follows:  Years Ended June 30,2005
  
  2004
  
  2003(In thousands)Net income (loss)
  
  $
  17,041
  
  $
  12,147
  
  $
  6,395Unrealized gain (loss) on interest rate swap agreement, net of tax
  
  54
  
  139
  
  (117
  )Minimum pension liability adjustment, net of tax
  
  (1,424
  )
  237
  
  (2,115
  )Foreign currency translation adjustment
  
  (997
  )
  7,195
  
  4,167Total comprehensive income (loss)
  
  $
  14,674
  
  $
  19,718
  
  $
  8,330  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)(In thousands)Balance, July 1, 2002
  
  $
  (151
  )
  $
  (330
  )
  $
  2,362
  
  $
  1,881Annual change
  
  (117
  )
  (2,115
  )
  4,167
  
  1,935Balance, June 30, 2003
  
  (268
  )
  (2,445
  )
  6,529
  
  3,816Annual change
  
  139
  
  237
  
  7,195
  
  7,571Balance, June 30, 2004
  
  (129
  )
  (2,208
  )
  13,724
  
  11,387Annual change
  
  54
  
  (1,424
  )
  (997
  )
  (2,367
  )Balance, June 30, 2005
  
  $
  (75
  )
  $
  (3,632
  )
  $
  12,727
  
  $
  9,020  S-31


11.Income Taxes  The provision for income
taxes from continuing operations consists of the following:  Years Ended June 30,2005
  
  2004
  
  2003(In thousands)Current:Federal
  
  $
  18,267
  
  $
  10,827
  
  $
  2,261State and local
  
  1,666
  
  2,076
  
  161Foreign
  
  (1,348
  )
  23
  
  15918,585
  
  12,926
  
  2,581Deferred:Federal
  
  (3,823
  )
  1,637
  
  2,879State and local
  
  803
  
  (493
  )
  834Foreign
  
  (1,188
  )
  (1,613
  )
  (932
  )(4,208
  )
  (469
  )
  2,781$
  14,377
  
  $
  12,457
  
  $
  5,362  The provision for income taxes
varies from the amount computed by applying the U.S. Federal income tax rate to
income from continuing operations before income taxes as a result of the
following:  Years Ended June 30,2005
  
  2004
  
  2003(In thousands)Tax at statutory rate
  
  $
  11,557
  
  $
  11,523
  
  $
  5,689Non-deductible acquired
  in-process research and development charge
  
  1,050
  
  1,092
  
  Undistributed earnings of foreign subsidiaries
  
  (1,368
  )
  (1,283
  )
  (1,479
  )Valuation allowances against state
  and foreign losses
  
  863
  
  
  
  795State and local income tax
  
  1,532
  
  1,185
  
  1,140Research and development credit and other, net
  
  743
  
  (60
  )
  (783
  )$
  14,377
  
  $
  12,457
  
  $
  5,362  S-32


Deferred tax assets and liabilities consist of:  June 30,2005
  
  2004(In
  thousands)Accounts receivable
  
  $
  287
  
  $
  510Inventories
  
  10,351
  
  11,260Accrued expenses and other current liabilities
  
  7,861
  
  5,004Current assets
  
  18,499
  
  16,774Capital lease obligation
  
  
  
  227Other long-term liabilities
  
  6,834
  
  4,304Capital loss carryforwards
  
  3,558
  
  678Tax loss carryforwards
  
  5,171
  
  4,087Tax credit carryforwards
  
  354
  
  651Less: valuation allowance
  
  (7,436
  )
  (3,210
  )Non-current assets
  
  8,481
  
  6,737Property, plant and equipment
  
  (3,800
  )
  (2,967
  )Intangibles
  
  (21,827
  )
  (13,215
  )Long-term liabilities
  
  (25,627
  )
  (16,182
  )Net non-current assets (liabilities)
  
  (17,146
  )
  (9,445
  )Total
  
  $
  1,353
  
  $
  7,329  In accordance with SFAS No. 109, the Company
records a valuation allowance against deferred tax assets if it is more likely
than not that some or all of the deferred tax assets will not be realized.  The Company has recorded a valuation allowance
primarily against foreign and state net operating loss carryforwards, capital
loss carryforwards and certain other tax credit carryforwards which may expire
before they can be utilized.  The
increase in the valuation allowance of $4.2 million in fiscal 2005, was
primarily related to a valuation allowance against the MIC capital loss
carryforward and certain foreign loss and foreign capital loss carryforwards.  Deferred taxes have not been provided on
undistributed earnings of foreign subsidiaries since, as of June 30, 2005,
substantially all of these earnings are expected to be permanently reinvested
in foreign operations.  Determination of
the amount of unrecognized deferred U.S. income tax liabilities and potential
foreign tax credits is not practical to calculate because of the complexity of
this hypothetical calculation.  On October 22, 2004, the American Jobs Creation
Act (AJCA) was signed into law and includes a deduction of 85% of certain
foreign earnings that are repatriated, as defined in the AJCA.  Aeroflex will evaluate the effects of the
AJCA on the Company to determine if the Company should continue to permanently
reinvest foreign earnings in foreign operations.  The Company recorded credits of $796,000, $2.5 million
and $90,000 to additional paid-in capital during the years ended June 30,
2005, 2004 and 2003, respectively, in connection with the tax benefit related
to compensation deductions on the exercise of stock options.  The tax loss carryforwards and tax credit
carryforwards expire beginning 2010 through 2023.  The Company is undergoing routine audits by taxing
authorities of its state income tax returns covering periods from 2002 to
2004.  Management believes that the
probable outcome of these various audits should not materially affect the
consolidated financial statements of the Company.  S-33


The Company made income tax payments of $14.0 million,
$12.7 million and $1.4 million and received refunds of $9,000,
$202,000 and $5.6 million during the years ended June 30, 2005, 2004
and 2003, respectively.  12.Employment Contracts  As of June 30, 2005, the Company has employment
agreements with its officers and certain other employees for periods through December 31,
2009 with annual remuneration ranging from $180,000 to $426,000, plus cost of
living adjustments and, in some cases, additional compensation based upon
earnings of the Company.  Future
aggregate minimum payments under these contracts are $2.3 million per
year.  Certain of the contracts provide
for a three-year consulting period at the expiration of the employment term at
two-thirds of salary.  In addition, these
officers have the option to terminate their employment agreements upon a change
in control of the Company, as defined, and receive lump sum payments equal to
the salary and bonus, if any, for the remainder of the term.  13.Employee Benefit Plans  401(k) and Profit Sharing Plans All employees of the Company and certain
subsidiaries who are not members of a collective bargaining agreement are eligible
to participate in a company sponsored 401(k) plan.  Each participant has the option to contribute
a portion of his or her compensation and receive a discretionary employer
matching contribution.  Furthermore,
employees of a certain subsidiary are eligible to participate in a qualified
profit sharing plan and receive an allocation of a discretionary share of their
subsidiarys profits.  For fiscal years
ended June 30, 2005, 2004 and 2003, these 401(k) and profit sharing plans
had an aggregate expense of $3.8 million, $3.3 million and $2.2 million,
respectively.  Defined Benefit Pension Plans Effective January 1, 1994, the Company
established a Supplemental Executive Retirement Plan (the SERP) which
provides retirement, death and disability benefits to certain of its
officers.  The SERP is currently
unfunded, however there are funds being held in a Rabbi Trust for the SERP
consisting primarily of cash surrender value of life insurance policies.  Those assets totaled $5.5 million and
$4.7 million at June 30, 2005 and 2004, respectively and are not
considered in the fair value of plan assets. 
The measurement date for the SERP is June 30.  The Company acquired MCE on September 3, 2003,
including its defined benefit pension plan (the MCE Plan).  The MCE Plan has been frozen since December 31,
1993.  The measurement date for the MCE
Plan is March 31.  S-34


Obligations and Funded Status:  June 30,2005
  
  2004(In
  thousands)Change in benefit obligationBenefit obligation at beginning of year
  
  $
  12,145
  
  $
  8,761Service cost
  
  305
  
  417Interest cost
  
  990
  
  653Plan participants contributions
  
  
  
  Amendments
  
  
  
  Actuarial (gain) loss
  
  5,382
  
  (163
  )Acquisition
  
  
  
  2,539Benefits paid
  
  (168
  )
  (62
  )Benefit obligation at end of year
  
  $
  18,654
  
  $
  12,145Change in plan assetsFair value of plan assets at beginning of year
  
  $
  1,839
  
  $
  Actual return on plan assets
  
  101
  
  111Acquisitions
  
  
  
  1,498Employer contributions
  
  339
  
  292Plan participants contributions
  
  
  
  Benefits paid
  
  (168
  )
  (62
  )Fair value of plan assets at end of year
  
  $
  2,111
  
  $
  1,839Funded status
  
  $
  (16,543
  )
  $
  (10,306
  )Unrecognized net transition asset
  
  424
  
  461Unrecognized net actuarial loss (gain)
  
  8,308
  
  3,356Unrecognized prior service cost (benefit)
  
  
  
  Net amount recognized
  
  $
  (7,811
  )
  $
  (6,489
  )  Amounts recognized in the
statement of financial position consist of:  June 30,2005
  
  2004(In
  thousands)Prepaid cost
  
  $
  
  
  $
  Accrued benefit cost (included in other long-term liabilities)
  
  (13,974
  )
  (10,306
  )Intangible assets
  
  424
  
  461Accumulated other comprehensive income
  
  5,739
  
  3,356Net amount recognized
  
  $
  (7,811
  )
  $
  (6,489
  )  The
accumulated benefit obligation for all defined benefit pension plans was $16.1 million
and $12.1 million at June 30, 2005 and 2004, respectively.  In
determining the long-term rate of return for the MCE plan, the Company
considers the historical rates of return, the nature of the plans investments
and an expectation for the plans investment strategy.  S-35


Information
for pension plans with accumulated benefit obligations and projected benefit
obligations in excess of plan assets is as follows:  Total
  
  Total2005
  
  2004Projected benefit obligation
  
  $
  (18,654
  )
  $
  (12,145
  )Accumulated benefit obligation
  
  (16,085
  )
  (12,145
  )Fair value of plan assets
  
  2,111
  
  1,839
  S-36


Components of Net Periodic Benefit Cost  Years
  ended June 30,2005
  
  2004(In
  thousands)Service cost
  
  $
  305
  
  $
  417Interest cost
  
  990
  
  653Expected return on plan assets
  
  (145
  )
  (104
  )Amortization of net transition (asset) obligation
  
  38
  
  38Recognized actuarial (gain) loss
  
  451
  
  200Net periodic benefit cost
  
  $
  1,639
  
  $
  1,204  Additional Information  Years
  Ended June 30,2005
  
  2004(In
  thousands)Increase (decrease) in minimum liability included in other
  comprehensive income
  
  $
  2,383
  
  $
  (348
  )  Assumptions  Weighted-average assumptions used
to determine benefit obligations  SERP
  
  MCE
  PlanJune 30,
  
  June 30,2005
  
  2004
  
  2005
  
  2004Discount rate
  
  5.25
  %
  6.25
  %
  5.75
  %
  5.75
  %Rate of compensation increase
  
  0.00
  %
  0.00
  %
  N/A
  
  N/A  Weighted-average assumptions used
to determine net periodic benefit cost  SERP
  
  MCE
  PlanYears
  ended June 30,
  
  Years
  ended June 30,2005
  
  2004
  
  2005
  
  2004Discount rate
  
  6.25
  %
  6.00
  %
  5.75
  %
  6.25
  %Expected long-term return on plan assets
  
  N/A
  
  N/A
  
  7.75
  %
  7.75
  %Rate of compensation increase
  
  0.00
  %
  0.00
  %
  N/A
  
  N/A  In
determining the long-term rate of return for the MCE Plan, the Company
considers the historical rates of return, the nature of the Plans investment
and an expectation of the Plans investment strategy.  S-37


Plan Assets  The
MCE pension plan weighted-average asset allocations at June 30, 2005 and
2004, by asset category are as follows:  June 30,2005
  
  2004(In
  thousands)Actual asset allocation:Equity securities
  
  70.20
  %
  60.41
  %Debt securities
  
  27.62
  
  33.99Other
  
  2.18
  
  5.60Total
  
  100.00
  %
  100.00
  %Target asset allocation:Equity securities
  
  60.00
  %
  60.00
  %Debt securities
  
  40.00
  
  40.00Total
  
  100.00
  %
  100.00
  %  The
target policy was set to maximize returns with consideration to the long-term
nature of the obligations and maintaining a lower level of overall volatility
through the allocation to debt securities. 
During the year, the asset allocation is reviewed for adherence to the
target policy and is rebalanced periodically towards the target weights.  Cashflows  Contributions The
Company expects to contribute approximately $164,000 to the MCE pension plan in
the fiscal year ending June 30, 2006.  Estimated Future Benefit Payments  The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:  Years
  Ending June 30,(In
  thousands)2006
  
  $
  5452007
  
  8242008
  
  8302009
  
  8402010
  
  848Years 2011-2015
  
  4,591  S-38


14.Commitments and Contingencies  Operating Leases  Several of the Companys operating facilities and
certain machinery and equipment are leased under agreements expiring through
2020.  The leases for machinery and
equipment generally contain options to purchase at the then fair market value
of the related leased assets.  Future minimum payments under operating leases as of
June 30, 2005 are as follows for the fiscal years:  (In
  thousands)2006
  
  $
  8,2802007
  
  6,4622008
  
  4,5012009
  
  3,5812010
  
  2,839Thereafter
  
  12,470Future minimum lease payments
  
  38,133Sub-lease income
  
  16,154Net minimum lease payments
  
  $
  21,979
  Rental expense was $9.6 million, $8.7 million
and $6.2 million during the fiscal years 2005, 2004 and 2003,
respectively.  Sub-lease rental income
was $1.2 million, $1.1 million and $965,000 for the fiscal years
2005, 2004 and 2003, respectively.  Legal Matters The Company recently has learned that it may have
inadvertently violated certain International Traffic in Arms Regulations (ITAR)
by exporting certain products and services without licenses.  These exports resulted from an error in
classifying the products and services as commercial rather than military.  The Company has prepared and filed a
voluntary disclosure with the State Department in which the details of the
exports and erroneous classifications are described.  At this time, it is not possible to determine
whether any fines or other penalties will be asserted against the Company, or
the materiality of any outcome.  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.  15.Business Segments  The Companys business segments, and major products
included in each segment, are as follows:  Microelectronic Solutions (AMS): a)Microelectronic Components, Sub-assemblies
and Modules b)Integrated Circuits  Test Solutions (ATS): a)Instrument Products and Test Systems b)Motion Control Systems  S-39


The Company is a manufacturer of advanced technology
systems and components for commercial industry, government and defense
contractors.  Approximately 32%, 34% and
39% of the Companys sales for the fiscal years 2005, 2004 and 2003,
respectively, were to agencies of the United States government or to prime
defense contractors or subcontractors of the United States government.  No one customer constituted more than 10% of
the Companys sales during any year in the periods presented.  Inter-segment sales were not material and
have been eliminated from the tables below.  Most of the Companys operations are located in the
United States, however, it also has operations in Europe and Asia.  Each of Aeroflex International Limited, which
we acquired in May 2002, RIWS, which we acquired in July 2003, and
SPG, which we acquired in May 2005, have significant operations in the
United Kingdom.  Specifically, net sales
from facilities located in the United Kingdom were approximately $131 million,
$121 million and $68 million for the fiscal years 2005, 2004 and
2003, respectively.  Total assets of the
United Kingdom operations were $235 million, $139 million and $66 million
for the fiscal years 2005, 2004 and 2003, respectively.  The Companys sales to customers by geographic
region were:  Years
  Ended June 30,2005
  
  2004
  
  2003United States
  
  60
  %
  64
  %
  65
  %Europe and the Middle East
  
  27
  
  26
  
  27Asia and Australia
  
  12
  
  9
  
  7Other Regions
  
  1
  
  1
  
  1100
  %
  100
  %
  100
  %  S-40


Years
  Ended June 30,2005
  
  2004
  
  2003(In
  thousands)Business Segment Data:Net sales:Microelectronic Solutions
  
  $
  193,005
  
  $
  164,526
  
  $
  95,820Test Solutions
  
  270,366
  
  249,575
  
  169,987Net sales
  
  $
  463,371
  
  $
  414,101
  
  $
  265,807Segment adjusted operating income:Microelectronic Solutions
  
  $
  45,377
  
  $
  42,044
  
  $
  19,886Test Solutions
  
  22,818
  
  18,678
  
  6,782General corporate expenses
  
  (20,289
  )
  (12,737
  )
  (7,045
  )47,906
  
  47,985
  
  19,623Amortization of acquired intangibles
  - AMS
  
  (2,154
  )
  (1,982
  )
  (622
  )- ATS
  
  (6,742
  )
  (5,748
  )
  (2,099
  )Restructuring charges - ATS
  
  (3,124
  )
  
  
  Acquired in-process research and development
  - AMS
  
  
  
  (420
  )
  - ATS
  
  (2,974
  )
  (3,800
  )
  Current period impact of acquisition related adjustment to inventory
  - ATS
  
  (840
  )
  
  
  Interest expense
  
  (895
  )
  (1,403
  )
  (1,104
  )Other income (expense), net
  
  1,844
  
  (1,711
  )
  459Income from continuing operations before income taxes
  
  $
  33,021
  
  $
  32,921
  
  $
  16,257Total assets:Microelectronic Solutions
  
  $
  171,932
  
  $
  180,072
  
  $
  75,099Test Solutions
  
  386,230
  
  253,039
  
  163,954Corporate
  
  31,687
  
  96,653
  
  63,835Assets of discontinued operations
  
  
  
  21,627
  
  28,374Total assets
  
  $
  589,849
  
  $
  551,391
  
  $
  331,262Capital expenditures:Microelectronic Solutions
  
  $
  6,632
  
  $
  3,793
  
  $
  2,488Test Solutions
  
  8,925
  
  6,391
  
  3,423Corporate
  
  79
  
  954
  
  9Total capital expenditures
  
  $
  15,636
  
  $
  11,138
  
  $
  5,920Depreciation and amortization expense:Microelectronic Solutions
  
  $
  8,727
  
  $
  7,750
  
  $
  4,321Test Solutions
  
  15,529
  
  14,026
  
  8,123Corporate
  
  156
  
  80
  
  6Total depreciation and amortization expense
  
  $
  24,412
  
  $
  21,856
  
  $
  12,450  S-41


Quarterly
Financial Data
(Unaudited): (In
thousands, except per share amounts and footnotes)  Quarter
  
  Year
  Ended2005
  
  First
  
  Second
  
  Third
  
  Fourth
  
  June 30,Net sales
  
  $
  109,183
  
  $
  112,469
  
  $
  113,754
  
  $
  127,965
  
  $
  463,371Gross profit
  
  51,332
  
  53,481
  
  53,791
  
  60,008
  
  218,612Income from continuing operations
  
  $
  6,400
  
  $
  6,142
  
  $
  3,867
  
  $
  2,235
  
  $
  18,644Income from continuing operations per share:Basic
  
  $
  0.09
  
  $
  0.08
  
  $
  0.05
  
  $
  0.03
  
  $
  0.25Diluted
  
  $
  0.08
  
  $
  0.08
  
  $
  0.05
  
  $
  0.03
  
  $
  0.25  Quarter
  
  Year
  Ended2004
  
  First
  
  Second
  
  Third
  
  Fourth
  
  June 30,Net sales
  
  $
  76,093
  
  $
  99,582
  
  $
  113,117
  
  $
  125,309
  
  $
  414,101Gross profit
  
  33,791
  
  45,708
  
  53,309
  
  59,884
  
  192,692Income from continuing operations
  
  $
  962
  
  $
  3,912
  
  $
  6,617
  
  $
  8,973
  
  $
  20,464Income from continuing operations per share:Basic
  
  $
  0.02
  
  $
  0.06
  
  $
  0.10
  
  $
  0.12
  
  $
  0.30Diluted
  
  $
  0.02
  
  $
  0.06
  
  $
  0.09
  
  $
  0.12
  
  $
  0.29  Since
per share information is computed independently for each quarter and the full
year, based on the respective average number of common and common equivalent
shares outstanding, the sum of the quarterly per share amounts does not
necessarily equal the per share amounts for each year.  S-42


AEROFLEX INCORPORATED AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In thousands)  Column A
  
  Column
  B
  
  Column
  C
  
  Column
  D
  
  Column
  EAdditionsChargedBalance
  at
  
  Charged
  to
  
  to
  other
  
  
  
  Balance
  atbeginning
  of
  
  costs
  and
  
  accounts
  -
  
  Deductions
  -
  
  end
  ofDescription
  
  period
  
  expenses
  
  describe
  
  describe
  
  periodYEAR ENDED JUNE 30, 2005:Allowance for doubtful accounts
  
  $
  1,618
  
  $
  (486
  )
  $
  170
  (A)
  $
  92
  (B)
  $
  1,210YEAR ENDED JUNE 30, 2004:Allowance for doubtful accounts
  
  $
  1,487
  
  $
  87
  
  $
  340
  (A)
  $
  296
  (B)
  $
  1,618YEAR ENDED JUNE 30, 2003:Allowance for doubtful accounts
  
  $
  848
  
  $
  822
  
  $
  
  
  $
  183
  (B)
  $
  1,487  
 Note:(A)  - 
Acquired in purchase of businesses. (B)  -  Net write-offs of uncollectible amounts.  S-43