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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

|(Mark One)                              |                                                                                         
|--------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                       | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended June 30, 2003
|OR                                     
|o                                       | TRANSITION 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(State or other jurisdiction of
incorporation or organization)             |  | 11-1974412(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------------------- |  | ----------------------------------------------
|35 South Service Road, Plainview, New York(Address of Principal Executive Offices) |  | 11803(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 on
|-------------- |  | ------------------------
|Title of Class |  | Which Registered        
|               |  |                         
|None           |  |                         

|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. Yes ý    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-K o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes ý    No o

State
the aggregate market value of the voting stock held by non-affiliates of the registrant. (The aggregate market value shall be computed by reference to the price at
which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing). As of September 26,
2003approximately $530,699,000.

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 26, 200365,977,017 (excluding 4,388 shares held in treasury).

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.

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ITEM 1BUSINESS

Overview

We use our advanced design, engineering and manufacturing abilities to produce microelectronic and testing solutions. Our products are used in the aerospace,
defense and broadband communications markets. We also design and manufacture motion control systems and shock and vibration isolation systems which are used for commercial, industrial and defense
applications.

We
are a Delaware corporation, founded in 1937.

Our
operations are grouped into three segments:



These
segments, their products and the markets they serve are described below.

Microelectronic Solutions

Silicon Integrated Circuits

We have been a designer and supplier of silicon integrated circuits for more than 20 years. Our products include both custom and standard integrated
circuits such as databuses, transceivers, microcontrollers, microprocessors and memories. Many of these circuits are radiation tolerant for satellite and space applications. Our products are on over
100 aerospace platforms. Our standard and semicustom circuits are available in the latest 0.6 and 0.25 micron silicon wafer technologies.

Our
standard circuits include the primary processor, memory and databus functionality, and our semi-custom gate arrays are available with up to three million usable gates.
These gate arrays are available in both radiation tolerant and non-radiation tolerant technologies and have been used frequently to replace field programmable gate array implementations.
We have pioneered the use of commercial foundries to produce radiation tolerant components, known as Commercial RadHard, for the commercial space marketplace.

Our
Colorado Springs Circuit Card Assembly capability consists of full assembly, test and coat in a high mix/low-to-medium volume operation. Our processes and
test capabilities provide for state-of-the-art manufacturing. Our SpaceCard combines best commercial practices of circuit card assembly with our
radiation-hardened integrated circuits to provide CCA solutions for the commercial space industry. Our CCA operation also assembles the UT131 Embedded Controller Card, a Standard Product Card. The
UT131 ECC is ideal for space applications.

Microelectronic Modules

We design, develop and manufacture sub-assemblies and modules for communication systems. Our manufacturing equipment, methods and processes are
designed to maintain the critical tolerances required for aerospace and defense components and high Gigahertz RF and microwave signals. Our manufacturing methods are designed to use automatic
placement equipment and batch processing for maximum cost efficiency and reliability.

We
are one of the world's leading manufacturers of space hybrid microcircuits. We hold several prime space contractor certifications. We offer numerous application specific
multi-function modules and hybrid designs that are highly reliable, small and lightweight; attributes that are significant for space components.

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Thin Film Circuits and Interconnects

We design, develop, manufacture and market advanced integrated interconnect products based on thin film manufacturing technology. Primary product requirements for
this advanced technology include the following attributes:



Due
to the unique dimensional, thermal and electrical capabilities of our PIMIC interconnect technology, our products have become an essential component in:



Our
products also play an important role in the development and expansion of the broadband cable and HFC architecture. Applications in trunk amplifiers, line extenders,
pre-amplifiers, post-amplifiers and power doublers has enabled greater bandwidth, improved loss characteristics and increased channel capability at the systems level.
Additionally, in the wireless marketplace, the advance of dual and tri-mode handsets has resulted in our design of a series of miniaturized diplexers and triplexers for these
communications devices.

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 defense
related applications, as well as throughout mobile and fixed wireless infrastructure equipment and related test equipment applications, MCE products are also used in wireless broadband access, cable
head-end systems, fiber optic networking, and satellite applications. MCE sells products that operate over the full range of frequencies commonly used in wireless communications transmission, known as
RF, including radio frequencies, microwave frequencies and millimeter wave frequencies. MCE's customers use its products to control, condition and enhance RF signals. Typical applications include
power level control, power distribution, signal detection, amplification and impedance matching of defense electronics equipment, and mobile and fixed wireless communications equipment.

Test Solutions

Instrumentation

Our high-speed test equipment provides product enhancements to communications systems manufacturers. Our line of frequency synthesizers offers a
superior combination of high-speed and low phase noise available, covering all communications frequencies. Our FS1000/1200 family of synthesizers are microwave frequency synthesizers that
have been developed to support the requirements of mixed signal test systems used in the semiconductor market. Our test systems are designed to dramatically reduce test time for radio frequency
semiconductors which allows end users to increase throughput without increasing costs. These benefits are derived from a design architecture that yields superior phase noise and switching speed
performancetechnology for which we believe we are well-known in the industry.

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Our
test system products allow communication manufacturers to test communication satellite payloads and transmit/receive modules faster and more economically than ever before. Our
digital signal processing equipment and proprietary software algorithms allow users to simultaneously measure multiple functions, eliminating the need for individual instruments. These testers are
based on our proprietary software, firmware, frequency conversion and high-speed data acquisition technologies and allow for higher throughputs and increased flexibility.

Our
acquisitions, each in October 2000, of Altair Aerospace Corporation and RDL Inc. extended our capabilities in Test Solutions. Altair brought the power and flexibility
of a modern software development platform to provide control and user interface solutions for complex test and control environments. RDL enlarged and enhanced our product offerings in communication
test equipment and allowed us to extend our comprehensive solutions to high speed testing requirements.

IFR
Systems, Inc., which we acquired in May 2002, develops and manufactures test and measurement equipment for the digital and analog communications, wireless and avionics
marketplace. IFR's communication test equipment products are designed to test mobile radio products, such as mobile telephones and cellular telephones, as well as base station equipment. These
products are typically portable and self-contained units which emulate the required system parameters so the systems can be tested for proper frequency transmission, signal modulation,
power levels and other key performance parameters.

IFR
also develops and manufactures sophisticated instruments for the test and maintenance of digital and analog communication systems. In addition, IFR's products support the measurement
of electromagnetic signals and radio frequency data for the aviation and automated test equipment industries. Products include spectrum analyzers, signal generators, counter power meters, microwave
analyzers and modulation analyzers.

IFR's
avionics test instruments include portable and stationary precision simulators that duplicate airborne conditions to test the communications, weather radar, instrument landing
systems and navigational systems that are installed in aircraft and ground stations. IFR offers a line of high volume automated test equipment (ATE), which includes products designed for the
automotive, consumer electronics and communications industries, including products such as manufacturing defect analyzers, in-circuit analyzers and functional analyzers. IFR also offers
calibration, repair and on-site field services for most types and makes of electronic test equipment.

In
July 2003, we acquired Racal Instruments Wireless Solutions Group which provided the world's first test system for GSM (Global System for Mobile Communications) in 1989 and is
committed to maintaining its leading position in the wireless communications test market. Racal Instruments Wireless Solutions is an industry leader in wireless system test for 2G, 2.5G, and 3G
technologies. Through its product development investments and the resulting products, systems and solutions, Racal Instruments Wireless Solutions offers an extensive line of standard test sets for
base stations, mobile, and cell integrity test, as well as protocol test systems and interference analyzers.

Racal
Instruments Wireless Solutions supplies its products primarily to the research and development and verification/validation markets specific to the wireless cellular markets. Racal
Instruments Wireless Solutions supplies its products to the leading manufacturers within the wireless cellular industry. Nokia, Motorola, Ericsson, Samsung and Siemans are just a few select customers
of the Racal Instruments Wireless Solutions team.

Motion Control Systems

Motion control systems includes three divisions: stabilization and tracking devices, magnetic motors and scanning devices. We design, develop and produce
stabilization tracking devices and systems. These products play an important role in high altitude aircraft, as well as in other aircraft, ships and ground

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vehicles
which require precise, highly stable mounting for cameras, antennae and lasers. Magnetic motors are utilized in our stabilization and tracking systems and in other applications where precise
movement is required, such as for positioning antennae, optical systems, mechanical vanes and valves. We make electro-optical scanning devices that are low cost, lightweight thermal imaging devices
that detect targets based on thermal radiation contrasts with the background. These sights are intended for use on standard issue United States Army assault rifles and crew served weapons.

Isolator Products

We design, develop, manufacture and sell shock and vibration isolation systems. These devices include rubber, spring and steel wire rope shock and vibration and
noise control devices. Purchasers of isolators are manufacturers or users of equipment sensitive to shock and vibration who need to reduce shock/vibration to levels compatible with equipment fragility
to extend the useful life of their equipment. There are multiple markets for isolation systems including commercial, industrial and defense.

Customers

We have hundreds of customers in the communications, satellite, aerospace/defense, transportation and construction industries. Except for Lockheed Martin (10.8%)
in fiscal 2002 and Agere (10.8%) in fiscal 2001, 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, 2003.

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 recent
acquisitions of IFR, Racal Instruments Wireless Solutions Group and MCE Technologies, Inc. expanded the number of our sales and distribution locations to include additional offices in
California, Kansas, Maryland, Michigan, New Jersey, Stevenage and Slough, United Kingdom, Scotland, France, Spain, Germany, Denmark, Hong Kong, Beijing, Shenzen and Nanjing, China.

Research and Development

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



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 $31.1 million for fiscal 2003, $23.1 million for fiscal 2002 and

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$18.8 million
for fiscal 2001. The increases are primarily attributable to the addition of the expenses of IFR and our efforts to develop new integrated circuits. Also, in connection with our
acquisition of IFR Systems, Inc. in fiscal 2002, we allocated $1.1 million of the purchase price to incomplete research and development projects. In connection with our acquisition of
RDL, Inc. in fiscal 2001, we allocated $1.5 million of the purchase prices to incomplete research and development projects. Since the research and development projects had not reached
technological feasibility at the time of the acquisition, these amounts were charged to expense, in the respective years of acquisition, in addition to the self-funded research and
development costs, in accordance with accounting principles generally accepted in the United States of America.

Backlog

We include in backlog firm purchase orders or contracts providing for delivery of products and services. At June 30, 2003, our order backlog was
approximately $118.4 million, approximately 78% of which was scheduled to be delivered on or before June 30, 2004. Approximately 44% of this backlog represents commercial contracts and
approximately 56% of this backlog represents defense 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, 2002, our backlog of orders was approximately $120.7 million. Approximately 81% of this backlog was scheduled to be delivered before June 30, 2003.
Approximately 43% of this backlog represented orders for military or national defense purposes.

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 NTK, Texas Instruments, ILC/Data Devices Corp., Honeywell International and Kyocera International. In the manufacture of test products, we believe our primary competitors are Agilent
Technolgies, Rhode & Schwartz, Anritsu, Spirent and Anite. In the manufacture of isolators, we believe our primary competitor is Mason Industries, Inc. 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:



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.

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Government Sales

Approximately 37% of our sales for fiscal 2003, 43% of our sales for fiscal 2002 and 29% of our sales for fiscal 2001 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:



We
have been manufacturing products for defense programs for many years in compliance with stringent military specifications. Our microelectronic module manufacturing is certified to the
status of Class "K," which means qualified for space. We believe we have brought to the commercial market the manufacturing quality and discipline we have demonstrated in the defense market. For
example, many of our manufacturing plants are ISO-9001 or 9002 certified, our Plainview plant is also certified to the more stringent Boeing D1-9000 standard, and our Colorado
Springs plant is also a QML (Qualified Manufacturers List) supplier at V, Q and T levels.

Historically,
our volume production requirements for the defense market did not justify our widespread implementation of highly automated manufacturing processes. Over the last several
years, we have expanded our use of high-volume manufacturing techniques for product assembly and testing. We believe that we have the manufacturing capacity required to meet the growing
demand for our products.

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The
principal materials we use to manufacture and assemble our products are:



Many
of the component parts we use in our products are also purchased, including:



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.

Employees

As of June 30, 2003, we had approximately 1,860 employees, of whom 1,080 were employed in a manufacturing capacity, and 780 were employed in engineering,
sales, administrative or clerical positions. Approximately 200 of our employees are covered by two collective bargaining agreements. One of the collective bargaining agreements expires
October 18, 2003. We are currently engaged in negotiations and expect to renew this agreement. We believe that our employee relations are satisfactory.

Regulation

Our operations are subject to various environmental, health and employee safety laws. We have spent money 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 expert 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.

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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
inquiries 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 the three years in the
period ended June 30, 2003 are set forth in Note 16 of Notes to Consolidated Financial Statements.

Financial Information About Geographic Areas

Most of our customers are located in the United States, but export sales accounted for 34% of our total sales in 2003, 16% in 2002 and 15% in 2001. In fiscal
2003, 66% of our sales were to customers located in the United States, 26% to Europe and the Middle East, 6% to Asia and Australia, and 2% to the rest of the world. In fiscal year 2002, 84% of our
sales were to customers located in the United States, 11% Europe and the Middle East, 4% to Asia and Australia, and 1% to the rest of the world.

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Available Information

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 a website at http://www.sec.govthat 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 athttp://www.aeroflex.comour 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.

ITEM 2PROPERTIES

Following is a description of the properties owned and leased by us at June 30, 2003:



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.

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Legal Proceedings

We are involved in various 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.

PART II

ITEM 5MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)   Our
common stock trades on the Nasdaq National Market 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 Stock
|------------------------------------------ |  | ------------
|
|Fiscal Year Ended June 30, 2002            |  |             
|First Quarter                              |  | $           
|Second Quarter                             |  |             
|Third Quarter                              |  |             
|Fourth Quarter                             |  |             
|                                           |  |             
|Fiscal Year Ended June 30, 2003            |  |             
|First Quarter                              |  | $           
|Second Quarter                             |  |             
|Third Quarter                              |  |             
|Fourth Quarter                             |  |             
|                                           |  |             
|Fiscal Year Ending June 30, 2004           |  |             
|First Quarter (through September 15, 2003) |  | $           

(b)   As
of September 15, 2003, there were approximately 600 record holders of our common stock.

(c)   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 except for a five-for-four stock split, which was paid on July 7, 2000 for record holders as of June 26, 2000 and a two-for-one
stock split, which was paid on November 22, 2000 for record holders as of November 16, 2000. 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.

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ITEM 6SELECTED FINANCIAL DATA

(In thousands, except percentages, footnotes and per share amounts)

(Restated, Note 2 to Consolidated Financial Statements)

|                          |                                                      | Years ended June 30, |  
|------------------------- | ---------------------------------------------------- | -------------------- | -
|
|Operations Statement Data |                                                      |                      |  
|                          | Net sales                                            |                      | $
|                          | Income from continuing operations                    |                      |  
|                          | Discontinued operations                              |                      |  
|                          | Cumulative effect of a change in accounting          |                      |  
|                          | Net income (loss)                                    |                      |  
|                          | Income from continuing operations per common share   |                      |  
|                          |                                                      | Basic                |  
|                          |                                                      | Diluted              |  
|                          | Weighted average number of common shares outstanding |                      |  
|                          |                                                      | Basic                |  
|                          |                                                      | Diluted              |  

|                   |                                                                   | June 30, |  
|------------------ | ----------------------------------------------------------------- | -------- | -
|
|Balance Sheet Data |                                                                   |          |  
|                   | Working capital                                                   |          | $
|                   | Total assets                                                      |          |  
|                   | Long-term debt (including current portion)                        |          |  
|                   | Stockholders' equity                                              |          |  
|Other Statistics   |                                                                   |          |  
|                   | After tax profit margin from continuing operations                |          |  
|                   | Return on average stockholders' equity from continuing operations |          |  
|                   | Stockholders' equity per share (4)                                |          | $

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|Note: |  | All share and per share amounts have been restated to reflect a five-for-four stock split paid on July 7, 2000 and a two-for-one stock split paid on November 22, 2000.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We use our advanced design, engineering and manufacturing abilities to produce microelectronic and testing solutions. Our products are used in the aerospace,
defense, fiber optic, wireless and satellite communications markets. We also design and manufacture motion control systems and shock and vibration isolation systems which are used for commercial,
industrial and defense applications.    Our operations are grouped into three segments:



Our
consolidated financial statements include the accounts of Aeroflex Incorporated and all of our subsidiaries. In October 2000, we merged with Altair Aerospace Corporation. This
transaction was accounted for as a pooling-of-interests and, accordingly, for all periods prior to the business combination, our historical consolidated financial statements
have been restated to include the accounts and results of operations of Altair. All of our subsidiaries are wholly-owned.

Our
microelectronic solutions segment has been designing, manufacturing and selling state-of-the-art microelectronics for the electronics industry
since 1974. In January 1994, we acquired substantially all of the net operating assets of the microelectronics division of Marconi Circuit Technology Corporation, which manufactures a wide
variety of microelectronic assemblies. In March 1996, we acquired MIC Technology Corporation (now Aeroflex Pearl River, Inc.) which designs, develops, manufactures and markets
microelectronic products in the form of passive thin film circuits and interconnects. Effective July 1, 1997, MIC Technology acquired certain equipment, inventory, licenses for technology and
patents of two of Lucent
Technologies' telecommunications component unitsmulti-chip modules and film integrated circuits. These units manufacture microelectronic modules and interconnect products. In
February 1999, we acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc. (now Aeroflex Colorado Springs, Inc.), consisting of UTMC's integrated circuit
business. That operation designs and supplies radiation tolerant integrated circuits for defense and satellite communications. In September 2000, we acquired all of the operating assets of
AmpliComm, Inc. (merged into Aeroflex Plainview, Inc), which designs and develops fiber optic amplifiers and modulator drivers used by manufacturers of advanced fiber optic systems.

Our
test solutions segment consists of two divisions: (1) instruments and (2) motion control products, including the following product lines:



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

In
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.

We
recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and
collectibility of the resulting receivable is reasonably assured. For arrangements other than certain long-term contracts, revenue (including shipping and handling fees) is recognized when
products are shipped and title is passed to the customer. Revenues associated with certain long-term contracts are recognized in accordance with Statement of Position
No. 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"). Under SOP 81-1, we use
the percentage-of-completion method, whereby revenues and associated costs are recognized as work on a contract progresses. We measure the extent of progress toward completion
generally based upon one of the following (based 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

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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.

Approximately
37% of our sales for fiscal 2003, 43% of our sales for fiscal 2002 and 29% of our sales for fiscal 2001 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 defense contracts have customary provisions for termination at the convenience of the government
without cause. In the event of such termination, we are 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:



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

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Statement of Operations

The following table sets forth our net sales and operating income (loss) by business segment for the periods indicated. The special charges represent the
write-offs of in-process research and development acquired in connection with the purchases of businesses of $1.1 million and $1.5 million in the years ended
June 30, 2002 and 2001, respectively, and restructuring charges of $9.1 million in the year ended June 30, 2002.

|                         |                            | Years Ended June 30,    |       
|------------------------ | -------------------------- | ----------------------- | ------
|
|
|Net Sales:               |                            |                         |       
|                         | Microelectronic Solutions  |                         | $     
|                         | Test Solutions             |                         |       
|                         | Isolator Products          |                         |       
|                         |                            |                         |       
|                         |                            | Net Sales               |       
|                         |                            |                         |       
|Operating Income (Loss): |                            |                         |       
|                         | Microelectronic Solutions  |                         | $     
|                         | Test Solutions             |                         |       
|                         | Isolator Products          |                         |       
|                         | General Corporate Expenses |                         |       
|                         |                            |                         |       
|                         |                            |                         | 13,695
|                         | Special Charges            |                         |       
|                         |                            |                         |       
|                         |                            | Operating Income (Loss) |       
|                         |                            |                         |       

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

16

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and
development acquired in connection with the purchases of businesses for the years ended June 30, 2002 and 2001 and restructuring charges for the year ended June 30, 2002.

|                                            |                                           | Years Ended June 30,     |     
|------------------------------------------- | ----------------------------------------- | ------------------------ | ----
|
|Net Sales                                   |                                           | 100.0                    | %   
|Cost of Sales                               |                                           | 61.2                     |     
|                                            |                                           |                          |     
|Gross Profit                                |                                           | 38.8                     |     
|                                            |                                           |                          |     
|Operating Expenses:                         |                                           |                          |     
|                                            | Selling, General and Administrative Costs |                          | 23.4
|                                            | Research and Development Costs            |                          | 10.7
|                                            | Special Charges                           |                          |    
|                                            |                                           |                          |     
|                                            |                                           | Total Operating Expenses |     
|                                            |                                           |                          |     
|Operating Income (Loss)                     |                                           | 4.7                      |     
|Other Expense (Income), Net                 |                                           | 0.3                      |     
|                                            |                                           |                          |     
|Income (Loss) Before Income Taxes           |                                           | 4.4                      |     
|Provision (Benefit) For Income Taxes        |                                           | 1.5                      |     
|                                            |                                           |                          |     
|Income (Loss) From Continuing Operations    |                                           | 2.9                      |     
|Discontinued Operations                     |                                           | (0.7                     | )   
|Cumulative Effect of a Change in Accounting |                                           |                         |     
|                                            |                                           |                          |     
|Net Income (Loss)                           |                                           | 2.2                      | %   
|                                            |                                           |                          |     

Fiscal Year Ended June 30, 2003 Compared to Fiscal Year Ended June 30, 2002

Net Sales.Net sales increased 44.4% to $291.8 million in fiscal 2003 from $202.1 million in fiscal 2002. Net
sales in the microelectronic solutions segment increased 1.7% to $105.6 million in fiscal 2003 from $103.8 million in fiscal 2002 due primarily to an increase in sales volume of our
specialty semiconductor products of $10.7 million, partially offset by a decrease in sales volume of thin film interconnects of $5.4 million. Net sales in the test solutions segment
increased 105.5% to $170.0 million in fiscal 2003 from $82.7 million in fiscal 2002 primarily due to the inclusion of a full year of IFR Systems, Inc. ("IFR") in fiscal 2003
versus only 6 weeks in fiscal 2002. Net sales in the isolator products segment increased 4.1% to $16.2 million in fiscal 2003 from $15.6 million in fiscal 2002 due to increased sales
volume in the commercial and industrial product lines.

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 increased 51.7% to $113.3 million (including a $400,000 charge related to the bankruptcy of Space
Systems Loral) (38.8% of net sales) in fiscal 2003 from $74.7 million (36.9% of net sales) in fiscal 2002 (excluding $900,000 of restructuring charges, see note 4 to the Consolidated
Financial Statements). The increase was primarily due to the inclusion of IFR for a full year in fiscal 2003 compared with only six weeks in fiscal 2002.

Selling, General and Administrative Costs.Selling, general and administrative costs include office and management salaries,
fringe benefits and commissions. Selling, general and administrative costs increased 66.4% to $68.5 million (23.4% of net sales) in fiscal 2003 (including a $700,000 charge related to the Loral
bankruptcy) from $41.1 million (20.3% of net sales) in fiscal 2002 (excluding $8.2 million of restructuring charges, see note 4 to the Consolidated Financial Statements). The
increase was primarily due to higher corporate expenses and the inclusion of IFR for the entire year in fiscal 2003 compared with only six weeks in fiscal 2002.

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Research and Development Costs.Research and development costs include material, engineering labor and allocated overhead.
Our self-funded research and development costs increased 34.4% to $31.1 million (10.7% of net sales) in fiscal 2003 from $23.1 million (11.4% of net sales) in fiscal 2002.
The increase was primarily due to IFR's full year expenses in fiscal 2003 compared with only six weeks in fiscal 2002.

Acquired In-Process Research and Development.In connection with the fiscal 2002 acquisition of IFR, we allocated
$1.1 million of the purchase price to incomplete research and development projects. This allocation represents the estimated fair value based on future cash flows that have been adjusted by the
projects' completion percentage. At the acquisition date, 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 acquisition date.

Other Expense (Income).Interest expense increased to $1.4 million in fiscal 2003 from $1.3 million in fiscal
2002. Other income of $577,000 in fiscal 2003 consists primarily of $945,000 of interest income, partially offset by $547,000 in realized foreign currency transaction losses. Other income of
$1.5 million in fiscal 2002 consists primarily of $1.9 million of interest income offset by $199,000 of realized foreign currency transaction losses and a $185,000 decrease in the fair
value of our interest rate swap agreements. Interest income decreased primarily due to lower levels of cash and cash equivalents, which were used to acquire IFR, and lower market interest rates.

Provision for Income Taxes.The income tax provision was $4.4 million (an effective income tax rate of 33.8%) in
fiscal 2003 and the income tax provision was $50,000 (an effective income tax rate of 13.4%) in fiscal 2002. The income tax provisions 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 in-process R&D, foreign, state and local income taxes and research and development credits.

Income from Continuing Operations.Income from continuing operations for the year ended June 30, 2003 was
$8.5 million or $.14 per diluted share which is net of a $1.1 million charge ($720,000, net of tax) or $.01 per diluted share related to the Loral bankruptcy versus income from
continuing operations of $324,000, or $.01 per diluted share in 2002. Fiscal 2002 income from continuing operations included a $9.1 million charge ($5.8 million, net of tax) or $.09 per
diluted share, for restructuring charges related to the consolidation of certain operations and a $1.1 million charge ($1.1 million, net of tax) or $.02 per diluted share, for
in-process research and development related to the acquisition of IFR Systems, Inc.

Fiscal Year Ended June 30, 2002 Compared to Fiscal Year Ended June 30, 2001

Net Sales.Net sales decreased 13.1% to $202.1 million in fiscal 2002 from $232.6 million in fiscal 2001. Net
sales in the microelectronic solutions segment decreased 28.2% to $103.8 million in fiscal 2002 from $144.6 million in fiscal 2001 due primarily to decreased sales volume in
microelectronic modules and thin film interconnects as a result of the slowdown of the fiber optics market. Net sales in the test solutions segment increased 21.0% to $82.7 million in fiscal
2002 from $68.4 million in fiscal 2001 primarily due to the acquisition of IFR in May 2002 and an increase in sales of satellite test systems partially offset by a decline in sales of
our RDL product line. Net sales in the isolator products segment decreased 20.1% to $15.6 million in fiscal 2002 from $19.5 million in fiscal 2001 due to reduced sales volume in the
commercial and industrial product lines.

Gross Profit.Gross profit decreased 22.3% to $74.7 million (36.9% of net sales) in fiscal 2002 (excluding $900,000 of
restructuring charges, see note 4 to the Consolidated Financial Statements) from $96.1 million (41.3% of net sales) in fiscal 2001. The decreases were primarily a result of the decreased
sales volume and the fixed nature of certain labor and overhead costs in the microelectronic solutions segment.

18

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Selling, General and Administrative Costs.Selling, general and administrative costs decreased 5.2% to $41.1 million
(20.3% of net sales) in fiscal 2002 (excluding $8.2 million of restructuring charges, see note 4 to the Consolidated Financial Statements) from $43.4 million (18.7% of net sales)
in fiscal 2001. The decrease was primarily due to lower corporate expenses and decreased expenses in the microelectronic solutions segment which were partially offset by the addition of the expenses
of IFR.

Research and Development Costs.Our self-funded research and development costs increased 23.1% to
$23.1 million (11.4% of net sales) in fiscal 2002 from $18.8 million (8.1% of net sales) in fiscal 2001. The increase was primarily due to UTMC's efforts toward the development of new
integrated circuits and the additional expenses of IFR.

Acquired In-Process Research and Development.In connection with the acquisition of IFR, we allocated
$1.1 million of the purchase price to incomplete research and development projects. This allocation represents the estimated fair value based on future cash flows that have been adjusted by the
projects' completion percentage. At the acquisition date, 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 acquisition date.

The
value assigned to these assets was determined by identifying significant research projects for which technological feasibility had not been established. At the acquisition date, IFR
was conducting design, development, engineering and testing activities associated with the completion of new technologies for its radio test set and signal sources product lines. The projects under
development at the valuation date
represent technologies which are expected to address emerging market demands in the communications test industry. We intend to continue with these development efforts and, if successfully completed,
release the products to market.

At
its acquisition date, IFR expected to spend approximately $3.5 million to complete all phases of the research and development, with anticipated completion dates ranging from 5
to 10 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 company were estimated based on a detailed forecast, as well as discussions with the finance, marketing and engineering personnel of IFR. Allocation
of total projected revenues to in-process research and development was based on discussions with IFR's 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 forecast and the risks associated with the projected growth and profitability of the development projects, a
discount rate of 30% to 35% was used to discount cash flows from the in-process technology. The discount rate was commensurate with IFR's 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 acquisition. 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.

19

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Remaining development efforts for IFR's 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 IFR's 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 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.

Restructuring Charges.We initiated strategic plans to consolidate three of our manufacturing operations to take advantage of
excess manufacturing capacity in certain of our facilities and reduce operating costs. In connection with this restructuring, we recorded a charge of $9.1 million in the fiscal year ended
June 30, 2002. The restructuring charge includes $218,000 of charges for the impairment of intangibles, $3.9 million for the write-off of excess equipment and leasehold
improvements, $2.4 million for workforce reductions, $1.1 million for buyouts of certain equipment and facility leases, $900,000 for the write-off of inventory and $602,000
relating to facility closing and clean-up. The restructuring charges were allocated $7.0 million to the Microelectronics Solutions Segment and $2.1 million to the Test
Solutions Segment.

Other Expense (Income).Interest expense decreased to $1.3 million in fiscal 2002 from $1.4 million in fiscal
2001, primarily due to reduced levels of borrowings throughout most of 2002. Other income of $1.5 million in fiscal 2002 consists primarily of $1.9 million of interest income offset by
$199,000 of realized foreign currency transaction losses and a $185,000 decrease in the fair value of our interest rate swap agreements. Other income of $3.6 million in fiscal 2001 consisted
primarily of $3.9 million of interest income offset by a $229,000 decrease in the fair value of our interest rate swap agreements. Interest income decreased primarily due to lower interest
rates and decreased levels of cash, cash equivalants and marketable securities as a result of the use of approximately $53.7 million in cash to acquire IFR in May 2002.

Provision for Income Taxes.The income tax provision was $50,000 (an effective income tax rate of 13.4%) in fiscal 2002 and
the income tax provision was $11.8 million (an effective income tax rate of 34.0%) in fiscal 2001. The income tax provisions 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 non-deductible charges for acquired in-process R&D and amortization of goodwill, state and local
income taxes and research and development credits.

Income from Continuing Operations.On a U.S. GAAP basis, income from continuing operations for the year ended June 30,
2002 was $324,000 or $.01 per diluted share versus $22.9 million or $.37 per diluted share. Income from continuing operations for the year ended June 30, 2002 includes a restructuring
charge of $9.1 million ($5.8 million, net of tax) or $.09 per diluted share and a charge of $1.1 million ($1.1 million, net of tax) or $.02 per diluted share for
in-process research and development. Income from continuing operations for the year ended June 30, 2001 includes a charge for in-process research and development of
$1.5 million ($1.0 million, net of tax) or $.02 per diluted share.

20

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Liquidity and Capital Resources

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, continues the mortgage on our Plainview property for $3.3 million and is
secured by the pledge of the stock of certain of our subsidiaries. The interest rate on revolving credit borrowings under this agreement is at various rates depending upon certain financial ratios,
with the current rate substantially equivalent to prime (4.0% at June 30, 2003). The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon
payment of $1.6 million in April 2008. We have entered into interest rate swap agreements for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce
the interest rate risk associated with these borrowings.

The
terms of the loan agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios,
limitations on indebtedness and prohibition of the payment of cash dividends. We are currently in full compliance with all of the covenants contained in our loan agreement. In connection with the
purchase of certain materials for use in manufacturing, we have a letter of credit of $2.0 million.

In
fiscal 2002, we acquired the outstanding stock of IFR. The purchase price was approximately $61.7 million of which $48.8 million was used to fully satisfy IFR's bank
indebtedness. The balance was used to purchase IFR's outstanding shares and for various acquisition related costs. The purchase price was paid from available cash and marketable securities. IFR
designs and manufactures advanced test
solutions for communications, avionics and general test and measurement applications. The acquired company's net sales were approximately $117.8 million for the year ended March 31,
2002.

During
fiscal 2002, we announced certain strategic consolidations of our manufacturing operations. The total restructuring charges were $9.4 million with a cash cost of
$4.3 million. These restructurings are substantially complete and are expected to reduce annual operating costs by approximately $6.3 million and result in annual cash savings of
approximately $5.3 million. The restructuring charges included the elimination of excess equipment capacity (primarily in the microelectronic solutions segment), severance and other employee
related expenses.

In
fiscal 2003, our operations provided cash of $21.4 million primarily from our continued profitability, excluding non-cash charges of depreciation and amortization.
In fiscal 2003, our investing activities used cash of $7.9 million including $6.4 million of capital expenditures. In fiscal 2003, our financing activities used cash of $1.5 consisting
of $2.0 million for payments of debt partially offset by $500,000 of proceeds from the exercise of stock options.

On
September 3, 2003, we acquired MCE Technologies, Inc. ("MCE") for approximately 5.8 million shares of common stock and satisfied MCE obligations of an aggregate
$22.8 million which was funded by cash-on-hand and available credit lines.

On
July 31, 2003, we acquired Racal Instruments Wireless Solutions Group ("WSG") for cash of $38.0 million and a deferred payment of up to $16.5 million in either
cash or Aeroflex common stock, at our option, depending on WSG achieving certain performance goals for the year ending July 31, 2004. This acquisition was funded with available
cash- on-hand.

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, 2003, our available unused line of credit was $46.8 million after consideration of letters of credit. We used 19.0 million of this line to fund the acquisition of MCE on
September 3, 2003.

21

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The
following table summarizes our obligations and commitments to make future payments under debt and operating leases as of June 30, 2003:

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

The
operating lease commitments shown in the above table have not been reduced by future minimum sub-lease rentals of $15.8 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, 2003 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.

We
are undergoing routine audits by various taxing authorities of our Federal and state income tax returns covering periods from 1997 to 2001. We believe that the probable outcome of
these various audits should not materially affect our consolidated financial statements.

Backlog

Our backlog of orders was $118.4 million at June 30, 2003 and $120.7 million at June 30, 2002.

Accounting Policies Involving Significant Estimates

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

Revenue and Cost Recognition Under Long-Term Contracts

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or
determinable and collectibility of the resulting receivable is reasonably assured. For arrangements other than certain long-term contracts, revenue (including shipping and handling fees)
is recognized when products are shipped and title is passed to the customer. Revenues associated with certain long-term contracts are recognized in accordance with Statement of Position
No. 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"). Under SOP 81-1, we use
the percentage-of-completion method, whereby revenues and associated costs are recognized as work on a contract progresses.

22

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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.

Inventories

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

Recoverability of Long-Lived and Intangible Assets

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

Long-lived
assets other than goodwill, are reviewed for impairment periodically 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 differ significantly from actual results, it could have a material effect on our results
of operations and financial condition.

Restructuring Charges

When circumstances warrant 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.

23

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Income Taxes

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

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.

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which was effective
January 1, 2003. SFAS No. 146 provides that an exit cost liability should not always be recorded at the date of an entity's commitment to an exit plan, but instead should be recorded
when the obligation is incurred. An entity's commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Such adoption did not have any impact on our
consolidated financial statements.

In
November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"). Fin 45 requires certain guarantees to be recorded at fair value regardless of the probability of the loss. FIN 45 has been adopted prospectively by us as of January 1,
2003. The adoption resulted in additional disclosure in the consolidated financial statements.

In
November 2002, the Emerging Issues Task Force ("EITF") finalized EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables", which provides guidance on the
timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF Issue 00-21 is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003. We are currently analyzing the impact of its adoption on our consolidated financial statements.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123 "Accounting for Stock-Based
Compensation." Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 in both annual and interim financial statements. We have adopted the disclosure portion of
this statement for the fiscal year ended June 30, 2003. The adoption did not have any impact on our consolidated financial position or results of operations.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The statement is effective (with certain exceptions)
for contracts entered into or modified after June 30, 2003. We do not believe the adoption of this statement will have a material impact on our consolidated financial statements.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The statement establishes
standards for how an issuer clarifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in

24

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some
circumstances). It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. We do not believe the adoption of this statement will have a material impact on our consolidated financial statements.

In
July 2003, the EITF reached a consensus on Issue 03-5, "Applicability of AICPA Statement of Position 97-2 ("SOP 97-2") to
Non-Software Deliverables" ("EITF 03-5"). The consensus was reached that SOP 97-2 is applicable to non-software deliverables if they are included in an
arrangement that contains software that is essential to the non-software deliverables' functionality. This consensus is to be applied to fiscal periods beginning after August 13,
2003. We are currently analyzing the impact of this consensus on our consolidated financial statements.

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, competitive factors and pricing
pressures, the integration of the business of each of MCE Technologies and of the Racal Instruments Wireless Solutions Group with Aeroflex, changes in legal and regulatory requirements, technological
change or difficulties, product development risks, commercialization difficulties and general economic conditions. Such statements reflect our current
views with respect to the future and are subject to these and other risks, uncertainties and assumptions relating to Aeroflex's financial condition, results of operations, growth strategy and
liquidity. Aeroflex does not undertake any obligation to update such forward-looking statements.

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, 2003, the effect on our net income would be a reduction of approximately $17,000 per year. 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, 2003, the effect on our net income would be approximately $36,000. If foreign currency exchange rates (primarily the British
Pound and the Euro) change by 10% from levels at June 30, 2003, the effect on our other comprehensive income would be approximately $4.1 million.

25

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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DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9ACONTROLS AND PROCEDURES

Evaluation and Disclosure Controls and Procedures

Based on their evaluation as of September 26, 2003, a date within 90 days of the filing of this Form 10-K, our management, with
the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as
required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures
were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified by the SEC's rules and forms.

Changes in Internal Controls

There were no significant changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2003 that have material
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met,
and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

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 in November 2003. 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, 2003.

ITEM 15EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



26

---



27

---



28

---



|Name                                   |  | Jurisdiction of
Incorporation
|-------------------------------------- |  | -----------------------------
|Aeroflex Colorado Springs, Inc.        |  | Delaware                     
|Aeroflex International Ltd.            |  | England                      
|Aeroflex Pearl River, Inc.             |  | Delaware                     
|Aeroflex Plainview, Inc.               |  | Delaware                     
|Aeroflex Powell, Inc.                  |  | Ohio                         
|Aeroflex Systems Corp.                 |  | Delaware                     
|Aeroflex Wichita, Inc.                 |  | Delaware                     
|Europtest, S.A.                        |  | France                       
|Vibration Mountings and Controls, Inc. |  | New York                     



29

---



Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on the 29th day of September 2003.

| | Aeroflex Incorporated   
| | ------------------------
| | By:                     
| | Harvey R. Blau, Chairman

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below on September 29th, 2003 by the following persons in the capacities
indicated:

|                                                    |  |                                                                                  
|--------------------------------------------------- |  | ---------------------------------------------------------------------------------
|/s/HARVEY R. BLAUHarvey R. Blau                     |  | Chairman of the Board
(Chief Executive Officer)                                  
|/s/MICHAEL GORINMichael Gorin                       |  | President and Director
(Chief Financial Officer and Principal Accounting Officer)
|/s/LEONARD BOROWLeonard Borow                       |  | Executive Vice President, Secretary and Director
(Chief Operating Officer)       
|/s/PAUL ABECASSISPaul Abecassis                     |  | Director                                                                         
|/s/MILTON BRENNERMilton Brenner                     |  | Director                                                                         
|/s/ERNEST E. COURCHENE, JR.Ernest E. Courchene, Jr. |  | Director                                                                         
|/s/DONALD S. JONESDonald S. Jones                   |  | Director                                                                         
|/s/EUGENE NOVIKOFFEugene Novikoff                   |  | Director                                                                         
|/s/JOHN S. PATTONJohn S. Patton                     |  | Director                                                                         
|/s/JOSEPH E. POMPEOJoseph E. Pompeo                 |  | Director                                                                         

30

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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, 2003 AND 2002    AND FOR THE YEARS    ENDED JUNE 30, 2003, 2002 AND 2001

---

FINANCIAL STATEMENTS AND SCHEDULES

INDEX

| |  | PAGE
| |  | ----

ITEM FIFTEEN(a)

|1. FINANCIAL STATEMENTS:         |                                                                                                                                   | 
|-------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | 
|                                 | Independent auditors' report                                                                                                      | 
|                                 | Consolidated financial statements:                                                                                                | 
|                                 | Balance sheetsJune 30, 2003 and 2002                                                                                             | 
|                                 | Statements of operationseach of the years in the three year period ended June 30, 2003                                           | 
|                                 | Statements of stockholders' equity and comprehensive income (loss)each of the years in the three year period ended June 30, 2003 | 
|                                 | Statements of cash flowseach of the years in the three year period ended June 30, 2003                                           | 
|                                 | Notes (1-17)                                                                                                                      | 
|                                 | 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.

---



Independent Auditors' Report

The
Board of Directors and Stockholders of Aeroflex Incorporated

We
have audited the accompanying consolidated balance sheets of Aeroflex Incorporated and subsidiaries as of June 30, 2003 and 2002, and the related consolidated statements of operations,
stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended June 30, 2003. Our audits also included the financial
statement schedule listed in the Index at item 15(a)2. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We
conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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,
2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the consolidated 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.

|KPMG LLP                           |  | 
|---------------------------------- |  | 
|                                   |  | 
|Melville, New York
August 13, 2003 |  | 

S-1

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AEROFLEX INCORPORATED  AND SUBSIDIARIES    CONSOLIDATED BALANCE SHEETS    (In thousands)

|                                                                                                                                    |                                                                                                                      | June 30,            
|----------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | --------------------
|
|
|ASSETS                                                                                                                             
|Current assets:                                                                                                                     |                                                                                                                      |                     
|                                                                                                                                    | Cash and cash equivalents                                                                                            |                     
|                                                                                                                                    | Accounts receivable, less allowance for doubtful accounts of $1,153 and $636 at June 30, 2003 and 2002, respectively |                     
|                                                                                                                                    | Income taxes receivable                                                                                              |                     
|                                                                                                                                    | Inventories                                                                                                          |                     
|                                                                                                                                    | Deferred income taxes                                                                                                |                     
|                                                                                                                                    | Assets of discontinued operations                                                                                    |                     
|                                                                                                                                    | Prepaid expenses and other current assets                                                                            |                     
|                                                                                                                                    |                                                                                                                      |                     
|                                                                                                                                    |                                                                                                                      | Total current assets
|Property, plant and equipment, net                                                                                                  |                                                                                                                      |                     
|Intangible assets with definite lives, net of accumulated amortization of $9,790 and $6,674 at June 30, 2003 and 2002, respectively |                                                                                                                      |                     
|Goodwill                                                                                                                            |                                                                                                                      |                     
|Deferred income taxes                                                                                                               |                                                                                                                      |                     
|Assets of discontinued operations                                                                                                   |                                                                                                                      |                     
|Other assets                                                                                                                        |                                                                                                                      |                     
|                                                                                                                                    |                                                                                                                      |                     
|                                                                                                                                    |                                                                                                                      | Total assets        
|                                                                                                                                    |                                                                                                                      |                     

See
notes to consolidated financial statements.

S-2

---



|                                                                                     |                                                |                                            |         |       
|------------------------------------------------------------------------------------ | ---------------------------------------------- | ------------------------------------------ | ------- | ------
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                
|Current liabilities:                                                                 |                                                |                                            |         |       
|                                                                                     | Current portion of long-term debt              |                                            | $       | 1,879 
|                                                                                     | Accounts payable                               |                                            |         | 19,694
|                                                                                     | Advance payments by customers                  |                                            |         | 2,826 
|                                                                                     | Liabilities of discontinued operations         |                                            |         | 973   
|                                                                                     | Accrued expenses and other current liabilities |                                            |         | 24,310
|                                                                                     |                                                |                                            |         |       
|                                                                                     |                                                | Total current liabilities                  |         |       
|Long-term debt                                                                       |                                                |                                            | 10,956  |       
|Other long-term liabilities                                                          |                                                |                                            | 11,563  |       
|                                                                                     |                                                |                                            |         |       
|                                                                                     |                                                | Total liabilities                          |         |       
|                                                                                     |                                                |                                            |         |       
|Commitments and contingencies                                                        |                                                |                                            |         |       
|Stockholders' equity:                                                                |                                                |                                            |         |       
|Preferred Stock, par value $.10 per share; authorized 1,000 shares: Series A Junior  |                                                |                                            |         |       
|Participating Preferred Stock, par value $.10 per share; authorized 110 shares; none |                                                |                                            |         |       
|issued                                                                               |                                                |                                            |        |       
|Common Stock, par value $.10 per share; authorized 110,000 shares; issued 60,122 and |                                                |                                            |         |       
|60,006 at June 30, 2003 and 2002, respectively                                       |                                                |                                            | 6,012   |       
|Additional paid-in capital                                                           |                                                |                                            | 222,943 |       
|Accumulated other comprehensive income                                               |                                                |                                            | 3,816   |       
|Retained earnings                                                                    |                                                |                                            | 25,658  |       
|                                                                                     |                                                |                                            |         |       
|                                                                                     |                                                |                                            | 258,429 |       
|Less:    Treasury stock, at cost (4 shares at June 30, 2003 and 2002)                |                                                |                                            | 14      |       
|                                                                                     |                                                |                                            |         |       
|                                                                                     |                                                | Total stockholders' equity                 |         |       
|                                                                                     |                                                |                                            |         |       
|                                                                                     |                                                | Total liabilities and stockholders' equity |         | $     
|                                                                                     |                                                |                                            |         |       

See
notes to consolidated financial statements.

S-3

---



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

|                                                                                |                                                                                                       | Years Ended June 30,                        |        
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------------- | -------
|
|
|Net sales                                                                       |                                                                                                       | $                                           | 291,780
|Cost of sales (including restructuring charges of $900 in 2002, note 4)         |                                                                                                       |                                             | 178,524
|                                                                                |                                                                                                       |                                             |        
|Gross profit                                                                    |                                                                                                       |                                             | 113,256
|                                                                                |                                                                                                       |                                             |        
|Operating costs:                                                                |                                                                                                       |                                             |        
|                                                                                | Selling, general and administrative costs (including restructuring charges of $8,229 in 2002, note 4) |                                             |        
|                                                                                | Research and development costs                                                                        |                                             |        
|                                                                                | Acquired in-process research and development costs (note 3)                                           |                                             |        
|                                                                                |                                                                                                       |                                             |        
|                                                                                |                                                                                                       | Total operating costs                       |        
|                                                                                |                                                                                                       |                                             |        
|Operating income                                                                |                                                                                                       |                                             | 13,695 
|                                                                                |                                                                                                       |                                             |        
|Other expense (income):                                                         |                                                                                                       |                                             |        
|                                                                                | Interest expense                                                                                      |                                             |        
|                                                                                | Other income, net (including interest income and dividends of $945, $1,893 and $3,853)                |                                             |        
|                                                                                |                                                                                                       |                                             |        
|                                                                                |                                                                                                       | Total other expense (income)                |        
|                                                                                |                                                                                                       |                                             |        
|Income from continuing operations before income taxes                           |                                                                                                       |                                             | 12,883 
|Provision for income taxes                                                      |                                                                                                       |                                             | 4,350  
|                                                                                |                                                                                                       |                                             |        
|Income from continuing operations                                               |                                                                                                       |                                             | 8,533  
|Discontinued operations, net of tax benefit of $1,102, $3,000 and $331 (note 2) |                                                                                                       |                                             | (2,138 
|Cumulative effect of a change in accounting, net of tax (note 1)                |                                                                                                       |                                             |       
|                                                                                |                                                                                                       |                                             |        
|Net income (loss)                                                               |                                                                                                       | $                                           | 6,395  
|                                                                                |                                                                                                       |                                             |        
|Net income (loss) per common share:                                             |                                                                                                       |                                             |        
|                                                                                | Basic                                                                                                 |                                             |        
|                                                                                |                                                                                                       | Income from continuing operations           |        
|                                                                                |                                                                                                       | Discontinued operations                     |        
|                                                                                |                                                                                                       | Cumulative effect of a change in accounting |        
|                                                                                |                                                                                                       |                                             |        
|                                                                                |                                                                                                       | Net income (loss)                           |        
|                                                                                |                                                                                                       |                                             |        
|                                                                                | Diluted                                                                                               |                                             |        
|                                                                                |                                                                                                       | Income from continuing operations           |        
|                                                                                |                                                                                                       | Discontinued operations                     |        
|                                                                                |                                                                                                       | Cumulative effect of a change in accounting |        
|                                                                                |                                                                                                       |                                             |        
|                                                                                |                                                                                                       | Net income (loss)                           |        
|                                                                                |                                                                                                       |                                             |        
|Weighted average number of common shares outstanding:                           |                                                                                                       |                                             |        
|                                                                                | Basic                                                                                                 |                                             |        
|                                                                                | Diluted                                                                                               |                                             |        

S-4

---



AEROFLEX INCORPORATED  AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)    Years Ended June 30, 2003, 2002 and 2001  (In thousands)
(Restated, note 2)

|                                                         |  |   |         |   |        |  |   |       |  | Accumulated
Other
Comprehensive
Income
(Loss) |         |   |   |       |   |   |         |   |    
|-------------------------------------------------------- |  | - | ------- | - | ------ |  | - | ----- |  | --------------------------------------------- | ------- | - | - | ----- | - | - | ------- | - | ---
|
|
|
|Balance, July 1, 2000                                    |  | $ | 201,644 |   | 28,110 |  | $ | 2,811 |  | $                                             | 190,141 |   | $ | 82    |   | $ | 8,690   |   | 13 
|Stock and options issued for acquisition of businesses   |  |   | 11,766  |   | 1,153  |  |   | 115   |  |                                               | 11,651  |   |   |      |   |   |        |   |   
|Stock issued upon exercise of stock options and warrants |  |   | 20,390  |   | 1,450  |  |   | 145   |  |                                               | 20,179  |   |   |      |   |   |        |   | (11
|Deferred compensation                                    |  |   | 203     |   |       |  |   |      |  |                                               | 203     |   |   |      |   |   |        |   |   
|Two-for-one stock split                                  |  |   |        |   | 28,961 |  |   | 2,896 |  |                                               | (2,896  | ) |   |      |   |   |        |   | 2  
|Other comprehensive loss                                 |  |   | (236    | ) |       |  |   |      |  |                                               |        |   |   | (236  | ) |   |        |   |   
|Net income                                               |  |   | 21,354  |   |       |  |   |      |  |                                               |        |   |   |      |   |   | 21,354  |   |   
|                                                         |  |   |         |   |        |  |   |       |  |                                               |         |   |   |       |   |   |         |   |    
|Balance, June 30, 2001                                   |  |   | 255,121 |   | 59,674 |  |   | 5,967 |  |                                               | 219,278 |   |   | (154  | ) |   | 30,044  |   | 4  
|                                                         |  |   |         |   |        |  |   |       |  |                                               |         |   |   |       |   |   |         |   |    
|Stock issued upon exercise of stock options              |  |   | 3,055   |   | 332    |  |   | 34    |  |                                               | 3,021   |   |   |      |   |   |        |   |   
|Deferred compensation                                    |  |   | 52      |   |       |  |   |      |  |                                               | 52      |   |   |      |   |   |        |   |   
|Other comprehensive income                               |  |   | 2,035   |   |       |  |   |      |  |                                               |        |   |   | 2,035 |   |   |        |   |   
|Net loss                                                 |  |   | (10,781 | ) |       |  |   |      |  |                                               |        |   |   |      |   |   | (10,781 | ) |   
|                                                         |  |   |         |   |        |  |   |       |  |                                               |         |   |   |       |   |   |         |   |    
|Balance, June 30, 2002                                   |  |   | 249,482 |   | 60,006 |  |   | 6,001 |  |                                               | 222,351 |   |   | 1,881 |   |   | 19,263  |   | 4  
|                                                         |  |   |         |   |        |  |   |       |  |                                               |         |   |   |       |   |   |         |   |    
|Stock issued upon exercise of stock options              |  |   | 591     |   | 116    |  |   | 11    |  |                                               | 580     |   |   |      |   |   |        |   |   
|Deferred compensation                                    |  |   | 12      |   |       |  |   |      |  |                                               | 12      |   |   |      |   |   |        |   |   
|Other comprehensive income                               |  |   | 1,935   |   |       |  |   |      |  |                                               |        |   |   | 1,935 |   |   |        |   |   
|Net income                                               |  |   | 6,395   |   |       |  |   |      |  |                                               |        |   |   |      |   |   | 6,395   |   |   
|                                                         |  |   |         |   |        |  |   |       |  |                                               |         |   |   |       |   |   |         |   |    
|Balance, June 30, 2003                                   |  | $ | 258,415 |   | 60,122 |  | $ | 6,012 |  | $                                             | 222,943 |   | $ | 3,816 |   | $ | 25,658  |   | 4  
|                                                         |  |   |         |   |        |  |   |       |  |                                               |         |   |   |       |   |   |         |   |    

See notes to consolidated financial statements.

S-5

---



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

|                                                             |                                                                                         | Years Ended June 30,                         |                                                                                
|------------------------------------------------------------ | --------------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------------------------------------------------
|
|
|Cash flows from operating activities:                        |                                                                                         |                                              |                                                                                
|                                                             | Net income (loss)                                                                       |                                              | $                                                                              
|                                                             | Loss from discontinued operations                                                       |                                              |                                                                                
|                                                             |                                                                                         |                                              |                                                                                
|                                                             | Income from continuing operations                                                       |                                              |                                                                                
|                                                             | Adjustments to reconcile net income to net cash provided by operating activities:       |                                              |                                                                                
|                                                             |                                                                                         | Acquired in-process research and development |                                                                                
|                                                             |                                                                                         |                                              | Depreciation and amortization                                                  
|                                                             |                                                                                         |                                              | Amortization of deferred gain                                                  
|                                                             |                                                                                         |                                              | Tax benefit from stock option exercises (note 12)                              
|                                                             |                                                                                         |                                              | Deferred income taxes                                                          
|                                                             |                                                                                         |                                              | Non-cash restructuring charges                                                 
|                                                             |                                                                                         |                                              | Other                                                                          
|                                                             | Change in operating assets and liabilities, net of effects from purchase of businesses: |                                              |                                                                                
|                                                             |                                                                                         |                                              | Decrease (increase) in accounts receivable                                     
|                                                             |                                                                                         |                                              | Decrease (increase) in inventories                                             
|                                                             |                                                                                         |                                              | Decrease (increase) in prepaid expenses and other assets                       
|                                                             |                                                                                         |                                              | Increase (decrease) in accounts payable, accrued expenses and other liabilities
|                                                             |                                                                                         |                                              |                                                                                
|Net cash provided by continuing operations                   |                                                                                         |                                              | 21,116                                                                         
|Net cash provided by (used in) discontinued operations       |                                                                                         |                                              | 268                                                                            
|                                                             |                                                                                         |                                              |                                                                                
|Net cash provided by operating activities                    |                                                                                         |                                              | 21,384                                                                         
|                                                             |                                                                                         |                                              |                                                                                
|Cash flows from investing activities:                        |                                                                                         |                                              |                                                                                
|                                                             | Payment for purchase of businesses, net of cash acquired                                |                                              |                                                                                
|                                                             | Capital expenditures                                                                    |                                              |                                                                                
|                                                             | Proceeds from sale of property, plant and equipment                                     |                                              |                                                                                
|                                                             | Purchase of marketable securities                                                       |                                              |                                                                                
|                                                             | Proceeds from sale of marketable securities                                             |                                              |                                                                                
|                                                             |                                                                                         |                                              |                                                                                
|Net cash used in continuing operations                       |                                                                                         |                                              | (7,441                                                                         
|Net cash provided by (used in) discontinued operations       |                                                                                         |                                              | (432                                                                           
|                                                             |                                                                                         |                                              |                                                                                
|Net cash used in investing activities                        |                                                                                         |                                              | (7,873                                                                         
|                                                             |                                                                                         |                                              |                                                                                
|Cash flows from financing activities:                        |                                                                                         |                                              |                                                                                
|                                                             | Borrowings under debt agreements                                                        |                                              |                                                                                
|                                                             | Debt repayments                                                                         |                                              |                                                                                
|                                                             | Proceeds from the exercise of stock options and warrants                                |                                              |                                                                                
|                                                             | Amounts paid for withholding taxes on stock option exercises                            |                                              |                                                                                
|                                                             | Withholding taxes collected for stock option exercises                                  |                                              |                                                                                
|                                                             |                                                                                         |                                              |                                                                                
|Net cash provided by (used in) financing activities          |                                                                                         |                                              | (1,473                                                                         
|                                                             |                                                                                         |                                              |                                                                                
|Effect of exchange rate changes on cash and cash equivalents |                                                                                         |                                              | 710                                                                            
|                                                             |                                                                                         |                                              |                                                                                
|Net increase (decrease) in cash and cash equivalents         |                                                                                         |                                              | 12,748                                                                         
|Cash and cash equivalents at beginning of year               |                                                                                         |                                              | 38,559                                                                         
|                                                             |                                                                                         |                                              |                                                                                
|Cash and cash equivalents at end of year                     |                                                                                         | $                                            | 51,307                                                                         
|                                                             |                                                                                         |                                              |                                                                                

See notes to consolidated financial statements.

S-6

---



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 as of June 30, 2003. 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 inventories and 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 are stated at the lower of cost (first-in, first-out) or market. Inventories related to long-term contracts are
recorded at cost less amounts expensed under percentage-of-completion accounting.

Financial Instruments and Derivatives

The fair values of all on-balance sheet financial instruments, other than long-term debt (see Note 9), approximate book values
because of the short maturity of these instruments.

Effective
July 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. This statement requires companies to record derivatives on the balance sheet as assets or liabilities at their fair value. For derivatives that are deemed effective under SFAS No. 133,
changes in the value of such derivatives are recorded as components of other comprehensive income. For derivatives that are deemed ineffective, the changes are recorded as gains or losses in other
income or expense. The impact of this statement did not have a material effect on the Company's consolidated financial statements. The cumulative effect of the adoption of this accounting policy was a
$132,000, net of tax, credit in the quarter ended September 30, 2000 which represented the net of tax fair value of certain interest rate swap agreements at July 1, 2000.

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

S-7

---

the
resulting receivable is reasonably assured. For arrangements other than certain long-term contracts, revenue (including shipping and handling fees) is recognized when products are
shipped and title is passed to the customer. Revenues associated with certain long-term contracts are recognized in accordance with Statement of Position No. 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"). Under SOP 81-1, 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.

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 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.

Intangible Assets

Intangible assets are carried at cost less accumulated amortization and are being amortized on a straight-line basis over periods ranging from 6 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 the discounted cash flow.

In
July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 specifies criteria
that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 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.

The
Company adopted the provisions of SFAS No. 141 and SFAS No. 142 as of July 1, 2001. The Company has tested goodwill for impairment in accordance with the
provisions of SFAS No. 142 as of

S-8

---

July 1,
2001. Based on its evaluation, the Company was not required to recognize any impairment losses as of July 1, 2001. The Company evaluated its intangible assets and goodwill that
were acquired in prior purchase business combinations and reclassified $2.6 million net carrying value of intangible assets to goodwill in order to conform with the criteria in SFAS
No. 141 for recognition apart from goodwill. In connection with this reclassification, the Company reduced goodwill for the amount of deferred taxes previously recorded on the reclassified
intangible assets that are no longer required. The Company also reassessed the useful lives and residual values of all intangible assets acquired, and determined that no adjustment to these estimates
was necessary.

Earnings Per Share

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

The
per share weighted average fair value of stock options granted during fiscal 2003, 2002 and 2001 was $5.24, $7.64 and $18.68, respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted average assumptions: 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; 2002expected dividend yield of 0%, risk free interest rate of 4.9%, expected stock volatility of 122%, and an expected option life of
4.8 years; 2001expected dividend yield of 0%, risk free interest rate of 5.6%, expected stock volatility of 137%, and an expected option life of 5.1 years. The pro forma
compensation cost before income taxes was $43.2 million, $66.0 million and $66.3 million for the years ended June 30, 2003, 2002 and 2001, respectively, based on the
aforementioned fair value at

S-9

---

the
grant date only for options granted after fiscal year 1995. 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, |        
|--------------------------------------------------------------------------------------------------- | ------- | -------------------- | -------
|
|
|Income from continuing operationsas reported                                                       |         | $                    | 8,533  
|Deduct: Total stock-based compensation expense determined under fair value based method, net of tax |         |                      | (28,491
|                                                                                                    |         |                      |        
|Income (loss) from continuing operationspro forma                                                  |         | $                    | (19,958
|                                                                                                    |         |                      |        
|Income from continuing operations per shareas reported                                             |         |                      |        
|                                                                                                    | Basic   |                      | $      
|                                                                                                    | Diluted |                      |        
|Income (loss) from continuing operations per sharepro forma                                        |         |                      |        
|                                                                                                    | Basic   |                      | $      
|                                                                                                    | Diluted |                      |        

---

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 susidiaries are accumulated in other comprehensive income (loss) and presented as part of
stockholders' equity. Exchange gains or losses from the settlement of foreign currency transactions are reflected in the consolidated statement of operations in other income (loss).

Comprehensive Income

Comprehensive income consists of net income and equity adjustments relating to foreign currency translation, fair value of derivatives, minimum pension liability
and available-for-sale securities and is presented in the Consolidated Statements of Stockholders' Equity and Comprehensive Income.

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Reclassifications

Reclassifications have been made to the 2001 and 2002 consolidated financial statements to conform to the 2003 presentation.

Recent Accounting Pronouncements

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which the Company adopted on
January 1, 2003. SFAS No. 146 provides that an exit cost liability should not always be recorded at the date of an entity's commitment to an exit plan, but instead should be recorded
when the obligation is incurred. An entity's commitment to a plan, by itself,
does not create an obligation that meets the definition of a liability. Such adoption did not have any impact on the Company's consolidated financial statements.

In
November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"). FIN 45 requires certain guarantees to be recorded at fair value regardless of the probability of the loss. FIN 45 has been adopted prospectively by the Company as of
January 1, 2003. The adoption resulted in additional disclosure in the consolidated financial statements (see note 8).

In
November 2002, the Emerging Issues Task Force ("EITF") finalized EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables", which provides guidance on the
timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF Issue 00-21 is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company is currently analyzing the impact of its adoption on its consolidated financial statements. In December 2002,
the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee compensation as originally provided by SFAS No. 123 "Accounting for Stock-Based Compensation." Additionally, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 in both annual and interim financial statements. The Company has adopted the disclosure portion of this statement for the
fiscal year ended June 30, 2003. The adoption did not have any impact on the Company's consolidated financial position or results of operations.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The statement is effective (with certain exceptions)
for contracts entered into or modified after June 30, 2003. The Company does not believe the adoption of this statement will have a material impact on its consolidated financial statements.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The statement establishes
standards for how an issuer clarifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15,

S-11

---

2003.
The Company does not believe the adoption of this statement will have a material impact on its consolidated financial statements.

In
July 2003, the EITF reached a consensus on Issue 03-5, "Applicability of AICPA Statement of Position 97-2 ("SOP 97-2") to
Non-Software Deliverables" ("EITF 03-5"). The consensus was reached that SOP 97-2 is applicable to non-software deliverables if they are included in an
arrangement that contains software that is essential to the non-software deliverables' functionality. This consensus is to be applied to fiscal periods beginning after August 13,
2003. The Company is currently analyzing the impact of this consensus on its consolidated financial statements.

2.    Discontinued Operation

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
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.

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. Net sales from discontinued operations for the years ended June 30, 2003, 2002 and 2001 were $58,000, $505,000 and $255,000, respectively. To
conform with this presentation, all periods have been restated. As a result, the assets and liabilities of the discontinued operation have been reclassified on the balance sheet from the historical
classifications and presented under the captions "assets of discontinued operations" and "liabilities of discontinued operations," respectively. As of June 30, 2003, the liabilities of
discontinued operations consisted primarily of $832,000 of lease commitments. As of June 30, 2002, the net assets of discontinued operations consisted primarily of $779,000 of property, plant
and equipment.

3.    Acquisition of Businesses and Intangible Assets



On May 20, 2002, the Company acquired 75.1% of the outstanding stock of IFR Systems, Inc. ("IFR"). Effective June 19, 2002, IFR was merged
into a wholly-owned subsidiary of the Company, with IFR as the surviving wholly-owned subsidiary. The Company paid $61.7 million from its available cash and
marketable securities, including $48.8 million which was advanced to IFR to satisfy IFR's bank indebtedness. IFR designs and manufactures advanced test solutions for communications, avionics
and general test and measurement applications. As a result of the acquisition, the Company has broadened its Test Solutions Segment product portfolio and its international sales network.

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

S-12

---

costs
of approximately $1.8 million, based on the estimated fair value of the assets acquired and liabilities assumed, as follows:

|                                                |                           | (In thousands) |        
|----------------------------------------------- | ------------------------- | -------------- | -------
|Current assets (excluding cash of $8.0 million) |                           | $              | 44,046 
|Property, plant and equipment                   |                           |                | 20,242 
|Developed technology                            |                           |                | 8,230  
|Goodwill                                        |                           |                | 5,032  
|In-process research and development             |                           |                | 1,100  
|Other                                           |                           |                | 62     
|                                                |                           |                |        
|                                                | Total assets acquired     |                |        
|                                                |                           |                |        
|Current liabilities                             |                           |                | (22,188
|Long-term debt                                  |                           |                | (2,814 
|                                                |                           |                |        
|                                                | Total liabilities assumed |                |        
|                                                |                           |                |        
|                                                | Net assets acquired       |                | $      
|                                                |                           |                |        

The
developed technology is being amortized on a straight-line basis over 6 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, 2002 in operating costs. At the acquisition date, IFR was
conducting design, development, engineering and testing activities associated with the completion of new technologies for its radio test set product line.

Summarized
below are the unaudited pro forma results of operations of the Company as if IFR had been acquired at the beginning of the fiscal periods presented. The $1.1 million
write-off has been included in the June 30, 2002 pro forma loss but not the June 30, 2001 pro forma income in order to provide comparability to the respective historical
periods.

|                                                   |         | Pro Forma
Years Ended
June 30,
|-------------------------------------------------- | ------- | ------------------------------
|
|
|Net sales                                          |         | $                             
|Income (loss) from continuing operations           |         |                               
|Income (loss) from continuing operations per share |         |                               
|                                                   | Basic   |                               
|                                                   | Diluted |                               

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

S-13

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Effective March 23, 2001, the Company acquired all of the outstanding stock of TriLink Communications Corp. ("TriLink") for 1.1 million shares of
Aeroflex common stock. TriLink designed, developed, manufactured and marketed fiber optic components for the communications industry, including Lithium Niobate modulators and optical switches. The
operations of TriLink were discontinued in December 2002. (See Note 2Discontinued Operation).



On October 23, 2000, the Company acquired all of the outstanding stock of RDL, Inc. ("RDL") for $14.0 million of available
cash. RDL designs, develops and manufactures advanced commercial communications test and measurement products and defense subsystems.

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 $100,000, as follows:

|                                    |  | (In thousands)
|----------------------------------- |  | --------------
|Net tangible assets                 |  | $             
|Existing technology                 |  |               
|Goodwill                            |  |               
|In-process research and development |  |               
|                                    |  |               
|                                    |  | $             
|                                    |  |               

The
existing technology is being amortized on a straight-line basis over 7 years. At the acquisition date, the acquired in-process research and development
was not considered to have reached technological feasibility and, in accordance with accounting principles generally accepted in the United States of America, the value of such was expensed in the
quarter ended December 31, 2000. At the acquisition date, RDL was conducting design, development, engineering and testing activities associated with the completion of its defense and commercial
product lines representing next-generation technologies.

S-14

---

Summarized below are the unaudited pro forma results of operations of the Company as if RDL had been acquired at the beginning of the fiscal period presented.

|                                             |         | Pro Forma
Year Ended
June 30, 2001
|-------------------------------------------- | ------- | ----------------------------------
|
|Net sales                                    |         | $                                 
|Income from continuing operations            |         |                                   
|Income from continuing operations per share: |         |                                   
|                                             | Basic   |                                   
|                                             | Diluted |                                   

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



On October 16, 2000, the Company issued 550,000 shares (after adjustment for the 2-for-1 stock split effective in
November 2000) of its common stock for all the outstanding common stock of Altair Aerospace Corporation ("Altair"). Altair designs and develops advanced object-oriented control systems software
based upon a proprietary software engine. This
business combination has been accounted for as a pooling-of-interests and, accordingly, for all periods prior to the business combination, the Company's historical consolidated
financial statements have been restated to include the accounts and results of operations of Altair. Altair's net sales were approximately $2.8 million and its net loss was $21,000 for the year
ended June 30, 2000.

For
periods preceding the combination, there were no intercompany transactions which required elimination from the combined consolidated results of operations and there were no
adjustments necessary to conform the accounting practices of the two companies.



Effective September 7, 2000, Aeroflex Amplicomm, Inc. ("Amplicomm") was formed as a wholly-owned subsidiary of the Company. On September 20,
2000, Amplicomm acquired certain equipment and intellectual property from a third party for approximately $300,000, entered into employment agreements with this third party's former owners and issued
25% of the stock of Amplicomm to them. Effective June 21, 2002, the Company re-acquired the 25% interest for an aggregate $50,000. Amplicomm designs and develops fiber optic
amplifiers and modulator drivers used by manufacturers of advanced fiber optic systems. On a pro forma basis, had the Amplicomm acquisition taken place as of the beginning of the periods presented,
results of operations for those periods would not have been materially affected.

The
acquisitions (except for Altair, as discussed above) have been accounted for as purchases and, accordingly, the acquired assets and liabilities assumed have been recorded at their
estimated fair values at the respective dates of acquisition. The operating results of each acquired company are included in the consolidated statements of operations from the respective acquisition
dates. Further, with respect to Altair, the Company's historical consolidated financial statements have been restated for all periods prior to the business combination.

S-15

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Intangibles with Definite Lives

The components of amortizable intangible assets are as follows:

|                    |       | As of June 30, 2003 |        | As of June 30, 2002
|------------------- | ----- | ------------------- | ------ | -------------------
|
|
|Existing technology |       | $                   | 23,901 |                    
|Tradenames          |       |                     | 1,000  |                    
|                    |       |                     |        |                    
|                    | Total |                     | $      | 24,901             
|                    |       |                     |        |                    

The
aggregate amortization expense for the amortized intangible assets was $3.1 million, $1.8 million and $2.0 million for the years ended June 30, 2003, 2002
and 2001, respectively.

As
a result of the continued slowdown in the fiber optics market, the Company evaluated, as of June 30, 2002, the recoverability of certain of its intangibles for existing
technology. Based on an evaluation of the future cash flows anticipated to be generated by these assets, the Company, as of June 30, 2002, recorded a $218,000 charge to selling, general and
administrative costs for the impairment of intangibles in its microelectronic solutions segment. The Company recognized no such charges in 2003.

The
estimated aggregate amortization expense for each fiscal year is as follows:

|     |  | (In thousands)
|---- |  | --------------
|2004 |  | $             
|2005 |  |               
|2006 |  |               
|2007 |  |               
|2008 |  |               

Goodwill

The carrying amount of goodwill is as follows:

|                                  |  | Balance
as of
July 1,
2002 |        | Acquired
(Note a) |   | Balance
as of
June 30,
2003
|--------------------------------- |  | -------------------------- | ------ | ----------------- | - | ---------------------------
|
|Microelectronic Solutions Segment |  | $                          | 5,367  |                   | $ |                           
|Test Solutions Segment            |  |                            | 14,023 |                   |   | 2,270                      
|Isolator Products Segment         |  |                            | 789    |                   |   |                           
|                                  |  |                            |        |                   |   |                            
|Total                             |  | $                          | 20,179 |                   | $ | 2,270                      
|                                  |  |                            |        |                   |   |                            

---

S-16

---

Goodwill
(including intangible assets reclassified to goodwill in accordance with SFAS No. 141) amortization for the year ended June 30, 2001 was $1.3 million and
generated a tax benefit of $241,000. The following table shows the results of operations as if SFAS No. 141 was applied to prior periods:

|                                            |                                   | For the year ended
June 30, 2001
|------------------------------------------- | --------------------------------- | --------------------------------
|
|Net income, as reported                     |                                   | $                               
|Add Back: Goodwill amortization, net of tax |                                   |                                 
|                                            |                                   |                                 
|Adjusted net income                         |                                   | $                               
|                                            |                                   |                                 
|Income per shareBasic                      |                                   |                                 
|                                            | Net income, as reported           |                                 
|                                            | Goodwill amortization, net of tax |                                 
|                                            |                                   |                                 
|                                            | Adjusted net income               |                                 
|                                            |                                   |                                 
|Income per shareDiluted                    |                                   |                                 
|                                            | Net income, as reported           |                                 
|                                            | Goodwill amortization, net of tax |                                 
|                                            |                                   |                                 
|                                            | Adjusted net income               |                                 
|                                            |                                   |                                 

4.     Restructuring Charges

In February and June 2002, the Company initiated strategic plans to consolidate three of its manufacturing operations to take advantage of excess
manufacturing capacity in certain of its facilities and reduce operating costs. The Company recorded charges to eliminate excess equipment and facility capacity, primarily in its microelectronics
segment, for workforce reductions in both the microelectronics and test solutions segments, and for the impairment of intangibles related to its microelectronic fiber optic acquisition. The last of
these consolidations was completed in March 2003. In connection with this restructuring, the Company recorded a charge of $9.1 million in the fiscal year ended June 30, 2002 or
$5.8 million, net of tax ($.09 per diluted share). The restructuring charge was allocated $900,000 to cost of sales and $8.2 million to selling, general and administrative expenses. In
addition, there were charges of approximately $165,000 directly related to the restructuring plan which could not be accrued in fiscal 2002, but were expensed as incurred in fiscal 2003 in accordance
with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF
94-3").



The $900,000 charge to write-off inventory consisted of two components$750,000 of inventory at the Company's Texas thin-film
manufacturing facility that was not compatible with the manufacturing platform at the New York facility and $150,000 of fiber optic inventory that was not viable for the current plans of the
microelectronics business. These charges were classified as components of cost of sales in accordance with EITF No. 96-9, "Classification of Inventory Markdowns and Other Costs
Associated with a Restructuring."



Due to the slowdown in the fiber optics market, the Company recorded a charge totaling $218,000 for the impairment of an acquisition related intangible. This
non-cash charge was recognized in accordance with SFAS No. 121.

S-17

---



During fiscal 2002, workforce reductions of approximately 120 employees resulted in a charge of $2.4 million. This charge included severance pay, retention
bonuses and fringe benefits for the remaining workforces at the facilities consolidated under the restructuring plans. Approximately $70,000 of post-production payroll costs, related
solely to closing the facilities, was not accrued, but was expensed as incurred, as such costs did not meet the criteria for accrual of EITF No. 94-3.



During fiscal 2002, the Company recognized a charge of $5.6 million for plant shutdown charges. This charge included $3.9 million for the
write-off of excess equipment and leasehold improvements, $1.1 million for buyouts of certain equipment and facility leases and $602,000 relating to facility closing and
clean-up. Approximately $95,000 of additional costs were incurred and expensed in fiscal 2003 related to post-production operating costs.

The
$3.9 million of asset impairment charges were recognized for property, plant and equipment associated with the consolidation of manufacturing facilities. This
non-cash charge was recognized in accordance with SFAS No. 144.

The
following table sets forth the charges and payments related to the restructuring reserve for the year ended June 30, 2003:

|                         |       | Balance
July 1,
2002 |       | Year Ended
June 30, 2003 |   | Balance
June 30,
2003
|------------------------ | ----- | -------------------- | ----- | ------------------------ | - | ---------------------
|
|
|Workforce reduction      |       | $                    | 1,406 |                          | $ | 52                   
|Lease payments           |       |                      | 859   |                          |   | (4                   
|Plant shutdown and other |       |                      | 111   |                          |   | 98                   
|                         |       |                      |       |                          |   |                      
|                         | Total |                      | $     | 2,376                    |   | $                    
|                         |       |                      |       |                          |   |                      

5.     Inventories

Inventories consist of the following:

|                |  | June 30,
|--------------- |  | --------
|
|
|Raw materials   |  | $       
|Work-in-process |  |         
|Finished goods  |  |         
|                |  |         
|                |  | $       
|                |  |         

Inventories
include contracts-in-process of $19.3 million and $15.0 million at June 30, 2003 and 2002, respectively, which consist
substantially of unbilled material, labor and overhead costs that are or were expected to be billed during the succeeding fiscal year.

S-18

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6.     Property, Plant and Equipment

Property, plant and equipment consists of the following:

|                                               |  | June 30, |         | 
|---------------------------------------------- |  | -------- | ------- | 
|
|
|
|Land                                           |  | $        | 9,563   | 
|Building and leasehold improvements            |  |          | 40,794  | 
|Machinery, equipment, tools and dies           |  |          | 60,522  | 
|Furniture and fixtures                         |  |          | 11,432  | 
|Assets recorded under capital leases           |  |          | 6,581   | 
|                                               |  |          |         | 
|                                               |  |          | 128,892 | 
|Less accumulated depreciation and amortization |  |          | 59,812  | 
|                                               |  |          |         | 
|                                               |  | $        | 69,080  | 
|                                               |  |          |         | 

Repairs
and maintenance expense on property, plant and equipment was $3.7 million, $1.6 million and $2.6 million for the years ended June 30, 2003, 2002 and
2001, respectively.

7.     Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities include accrued salaries, wages and other compensation of $8.1 million and $7.2 million at
June 30, 2003 and 2002, respectively.

8.     Product Warranty

The Company warrants its products against defects in design, materials and workmanship, generally for one year from their date of shipment. A provision for
estimated future costs relating to these warranties is recorded when revenue is recognized and is included in cost of goods sold.

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

|                                             |  | Years Ended June 30, |       
|-------------------------------------------- |  | -------------------- | ------
|
|
|Balance at beginning of period               |  | $                    | 1,654 
|Provision for warranty obligations           |  |                      | 1,651 
|Liability assumed in acquisition of business |  |                      |      
|Charges incurred                             |  |                      | (1,965
|                                             |  |                      |       
|Balance at end of period                     |  | $                    | 1,340 
|                                             |  |                      |       

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---

9.     Long-Term Debt and Credit Arrangements

Long-term debt consists of the following:

|                                            |  | June 30,
|------------------------------------------- |  | --------
|
|
|Revolving credit and mortgage agreement (a) |  | $       
|Building mortgage (b)                       |  |         
|Capitalized equipment lease obligations (c) |  |         
|Capitalized building lease obligations (d)  |  |         
|Other                                       |  |         
|                                            |  |         
|                                            |  |         
|Less current maturities                     |  |         
|                                            |  |         
|                                            |  | $       
|                                            |  |         

Aggregate
long-term debt as of June 30, 2003 matures in each fiscal year as follows:

|           |  | (In thousands)
|---------- |  | --------------
|2004       |  | $             
|2005       |  |               
|2006       |  |               
|2007       |  |               
|2008       |  |               
|Thereafter |  |               
|           |  |               
|           |  | $             
|           |  |               

Interest
paid was $1.3 million, $1.1 million and $1.4 million during the years ended June 30, 2003, 2002 and 2001, 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 property for $3.1 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 prime (4.00% at June 30, 2003) 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. The fair market value of the interest rate swap agreement was a liability of $405,000 as of June 30, 2003 and was included in
other long-term liabilities.

The
terms of the loan agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios,
limitations on indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of certain materials for use in manufacturing, the Company has a letter of credit of
$2.0 million. At June 30, 2003, the Company's available unused line of credit was approximately $46.8 million after consideration of this and other letters of credit.

S-20

---

(b)   In
December 1998, the Company financed the acquisition and renovation of the land and building of its Pearl River, NY facility and received proceeds amounting to
$4.2 million. This debt requires a balloon payment of $3.6 million in 2019.

(c)   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 expire through June 2006 and
bear interest at approximately 7.9%.

(d)   In
connection with the acquisition of IFR, the Company assumed a capital lease obligation for $3.0 million on IFR's Wichita, KS facility and certain equipment.
The obligation requires quarterly payments through 2012 and bears interest at approximately 6.3%.

10.   Stockholders' Equity

Common Stock Split

On November 2, 2000, the Company's Board of Directors authorized a two-for-one stock split of its Common Stock, effective
November 16, 2000. The share and per share amounts in the consolidated financial statements give effect to the stock split.

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. During 1990, the Company's shareholders approved the Non-Qualified Stock Option Plan (the "NQSOP"). 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 Opton Plan (the "2002 Directors' Plan"), which provides for options to
non-employee directors which become exercisable in three installments. The NQSOP, 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 and each covers 3.8 million shares of the Company's Common Stock, except for the 1999 Plan which covers
2.3 million shares, the 2000 Plan which covers 6.2 million shares, the Key Employee Plan which covers 4.0 million shares, the 2002 Plan which covers 1.5 million shares and
the 2002 Directors' Plan which covers 525,000 shares. Options under the NQSOP and the 1994 Plan expire five years from the date of grant. Options under all other plans shall expire not later than ten
years from the date of grant.

In
connection with certain of its acquisitions, the Company has also issued to employees, who are not executive officers, options to purchase 1.4 million shares of Common Stock
which were not covered by one of the above plans.

S-21

---

Additional
information with respect to the Company's stock options is as follows:

|                       |           | Weighted
Average
Exercise
Prices |       | Shares
Under
Outstanding
Options |       
|---------------------- | --------- | -------------------------------- | ----- | -------------------------------- | ------
|
|Balance, July 1, 2000  |           | $                                | 8.65  |                                  | 9,566 
|                       | Granted   |                                  |       | 21.22                            |       
|                       | Forfeited |                                  |       | 9.22                             |       
|                       | Exercised |                                  |       | 4.02                             |       
|                       |           |                                  |       |                                  |       
|Balance, June 30, 2001 |           |                                  | 16.02 |                                  | 13,844
|                       | Granted   |                                  |       | 9.44                             |       
|                       | Forfeited |                                  |       | 14.83                            |       
|                       | Exercised |                                  |       | 5.39                             |       
|                       |           |                                  |       |                                  |       
|Balance, June 30, 2002 |           |                                  | 15.08 |                                  | 16,375
|                       | Granted   |                                  |       | 6.81                             |       
|                       | Forfeited |                                  |       | 25.78                            |       
|                       | Exercised |                                  |       | 4.35                             |       
|                       |           |                                  |       |                                  |       
|Balance, June 30, 2003 |           | $                                | 12.85 |                                  | 13,847
|                       |           |                                  |       |                                  |       

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 2003, 2002 and
2001, payroll tax on stock option exercises were withheld from employees in shares of the Company's Common Stock amounting to $0, $0 and $4.2 million, respectively.

Options
to purchase 10.6 million, 8.5 million and 4.4 million shares were exercisable at weighted average exercise prices of $12.57, $14.26 and $10.21 per share as
of June 30, 2003, 2002 and 2001, respectively.

S-22

---

The
options outstanding as of June 30, 2003 are summarized in ranges as follows:

|              |  | Options Outstanding
|------------- |  | -------------------
|
|
|$1.67-$2.50   |  | $                  
|$3.28-$4.65   |  |                    
|$5.38-$8.10   |  |                    
|$9.05-$13.56  |  |                    
|$15.34-$22.53 |  |                    
|$26.00-$34.41 |  |                    
|              |  |                    
|              |  |                    
|              |  |                    

|              |  | Options Exercisable
|------------- |  | -------------------
|
|
|$1.67-$2.50   |  | $                  
|$3.28-$4.65   |  |                    
|$5.38-$8.10   |  |                    
|$9.05-$13.56  |  |                    
|$15.34-$22.53 |  |                    
|$26.00-$34.41 |  |                    
|              |  |                    
|              |  |                    
|              |  |                    

As
of June 30, 2000, the Company had outstanding warrants to purchase 132,000 shares of its Common Stock exercisable between $2.70 and $3.00 per share. All of these warrants were
exercised or expired during fiscal year 2001.

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-23

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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 30,2003

2002

2001(In thousands, except per share amounts)Computation of Adjusted Net Income (Loss):Income from continuing operations

$
8,533

$
324

$
22,864Discontinued operations, net of tax


(2,138
)

(11,105
)

(1,642
)Cumulative effect of a change in accounting, net of tax








132Net income (loss)

$
6,395

$
(10,781
)
$
21,354Computation of Adjusted Weighted Average Shares Outstanding:Weighted average shares outstanding


60,193


59,973


58,124Add: Effect of dilutive options and warrants outstanding


560


2,039


2,917Weighted average shares and common share equivalents used for computation of diluted earnings per common share


60,753


62,012


61,041Income (Loss) Per ShareBasic:Income from continuing operations

$
0.14

$
0.01

$
0.39Discontinued operations


(0.03
)

(0.19
)

(0.02
)Cumulative effect of a change in accounting








Net income (loss)

$
0.11

$
(0.18
)
$
0.37Income (Loss) Per ShareDiluted:Income from continuing operations

$
0.14

$
0.01

$
0.37Discontinued operations


(0.03
)

(0.18
)

(0.02
)Cumulative effect of a change in accounting








Net income (loss)

$
0.11

$
(0.17
)
$
0.35


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 shares.

S-24

---

11.   Comprehensive Income

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

Years Ended June 30,2003

2002

2001(In thousands)Net income (loss)

$
6,395

$
(10,781
)
$
21,354Unrealized gain (loss) on interest rate swap agreement, net of tax


(117
)

(108
)

(43
)Unrealized investment gain (loss), net of tax





42


(124
)Minimum pension liability adjustment, net of tax


(2,115
)

(330
)

Foreign currency translation adjustment


4,167


2,431


(69
)Total comprehensive income (loss)

$
8,330

$
(8,746
)
$
21,118


Accumulated
other comprehensive income (loss) is as follows:

|                       |               | Unrealized
Gain (Loss)
on Interest
Rate Swap
Agreements
(net of tax) |      | Unrealized
Investment
Gain (Loss)
(net of tax) |   | Minimum
Pension
Liability
Adjustment
(net of tax) |      | Foreign
Currency
Translation
Adjustment |        | Total
(net of tax) |  
|---------------------- | ------------- | -------------------------------------------------------------------- | ---- | ---------------------------------------------- | - | ------------------------------------------------- | ---- | --------------------------------------- | ------ | ------------------ | -
|
|Balance, July 1, 2000  |               | $                                                                    |     |                                                | $ | 82                                                |      | $                                       |       |                    | $
|                       | Annual change |                                                                      |      | (43                                            | ) |                                                   | (124 | )                                       |        |                   |  
|                       |               |                                                                      |      |                                                |   |                                                   |      |                                         |        |                    |  
|Balance, June 30, 2001 |               |                                                                      | (43  | )                                              |   | (42                                               | )    |                                         |       |                    |  
|                       | Annual change |                                                                      |      | (108                                           | ) |                                                   | 42   |                                         |        | (330               | )
|                       |               |                                                                      |      |                                                |   |                                                   |      |                                         |        |                    |  
|Balance, June 30, 2002 |               |                                                                      | (151 | )                                              |   |                                                  |      |                                         | (330   | )                  |  
|Annual change          |               |                                                                      | (117 | )                                              |   |                                                  |      |                                         | (2,115 | )                  |  
|                       |               |                                                                      |      |                                                |   |                                                   |      |                                         |        |                    |  
|Balance, June 30, 2003 |               | $                                                                    | (268 | )                                              | $ |                                                  |      | $                                       | (2,445 | )                  | $
|                       |               |                                                                      |      |                                                |   |                                                   |      |                                         |        |                    |  

12.   Income Taxes

The provision (benefit) for income taxes from continuing operations consists of the following:

Years Ended June 30,2003

2002

2001(In thousands)Current:Federal

$
1,909

$
(5,080
)
$
8,665State and local


172


380


550Foreign


159





2,240


(4,700
)

9,215Deferred:Federal


2,106


4,708


2,309State and local


936


42


257Foreign


(932
)




2,110


4,750


2,566$
4,350

$
50

$
11,781


S-25

---

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 30,2003

2002

2001(In thousands)Tax at statutory rate

$
4,380

$
127

$
12,126Non-deductible acquired in-process research and development charge





374


Impairment and amortization of goodwill








210Undistributed earnings of foreign subsidiaries


(1,479
)




Valuation allowance against foreign loss


795





State and local income tax


1,047


11


352Research and development credit


(550
)

(375
)

(650
)Other, net


157


(87
)

(257
)$
4,350

$
50

$
11,781


Deferred
tax assets and liabilities consist of:

June 30,2003

2002(In thousands)Accounts receivable

$
614

$
463Inventories


9,858


9,093Accrued expenses and other current liabilities


3,922


2,703Current assets


14,394


12,259Capital lease obligation


1,081


1,160Other long-term liabilities


3,936


1,492Capital loss carryforwards


673


673Tax loss carryforwards


4,284


10,220Tax credit carryforwards


5,703


3,402Less: valuation allowance


(4,630
)

(4,319
)Non-current assets


11,047


12,628Property, plant and equipment


(4,015
)

(4,830
)Intangibles


(6,030
)

(5,321
)Long-term liabilities


10,045
)

(10,151
)Net non-current assets (liabilities)


1,002


2,477Total

$
15,396

$
14,736


The
Company recorded credits of $90,000, $1.3 million and $20.8 million to additional paid-in capital during the years ended June 30, 2003, 2002 and
2001, respectively, in connection with the tax benefit related to compensation deductions on the exercise of stock options and warrants. The tax loss carryforwards and tax credit carryforwards expire
through 2022.

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 in fiscal 2003, was primarily for

S-26

---

foreign
net operating loss carryforwards, partially offset by a decrease in a valuation allowance against expired credits.

Deferred
taxes have not been provided on undistributed earnings of foreign subsidiaries since 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.

The
Company is undergoing routine audits by various taxing authorities of its Federal and state income tax returns covering periods from 1997 to 2001. Management believes that the
probable outcome of these various audits should not materially affect the consolidated financial statements of the Company.

The
Company made income tax payments of $1.4 million, $1.1 million and $227,000 and received refunds of $5.6 million, $609,000 and $2.3 million during the
years ended June 30, 2003, 2002 and 2001, respectively.

13.   Employment Contracts

As of June 30, 2003, the Company has employment agreements with certain of its officers for periods through June 30, 2007 with annual remuneration
ranging from $238,000 to $398,000, 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 $1.3 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.

14.   Employee Benefit 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, 2003,
2002 and 2001, these 401(k) and profit sharing plans had an aggregate expense of $3.2 million, $2.2 million and $2.3 million, respectively.

Effective
January 1, 1994, the Company established a Supplemental Executive Retirement Plan (the "SERP") which provides retirement, death and disability benefits to certain of its
officers. The SERP expense for the fiscal years ended June 30, 2003, 2002 and 2001 was $1.0 million, $885,000 and $625,000, respectively. The assets of the SERP are held in a Rabbi Trust
and amounted to $4.0 million and $3.3 million at June 30, 2003 and 2002, respectively. The accumulated benefit obligation was $8.8 million and $4.6 million at
June 30, 2003 and 2002, respectively. The projected benefit obligation was $8.8 million and $6.5 million at June 30, 2003 and 2002, respectively. The intangible asset
related to the SERP was $499,000 and $537,000 at June 30, 2003 and 2002, respectively. A discount rate of 6.0%, 7.0% and 7.0% was assumed in the above calculations and a rate of compensation
increase of 0%, 3.0% and 3.0% was assumed for the years ended June 30, 2003, 2002 and 2001, respectively. No participants are currently receiving benefits.

S-27

---

15.   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, 2003 are as follows for the fiscal years:

|                              |  | (In thousands) |        
|----------------------------- |  | -------------- | -------
|2004                          |  | $              | 6,259  
|2005                          |  |                | 5,124  
|2006                          |  |                | 4,146  
|2007                          |  |                | 3,390  
|2008                          |  |                | 2,431  
|Thereafter                    |  |                | 13,347 
|                              |  |                |        
|Future minimum lease payments |  |                | 34,697 
|Sub-lease income              |  |                | (15,768
|                              |  |                |        
|Net minimum lease payments    |  | $              | 18,929 
|                              |  |                |        

Rental
expense was $7.6 million, $4.8 million and $3.7 million during the fiscal years 2003, 2002 and 2001, respectively. Sub-lease rental income was
$965,000, $86,000 and $0 for the fiscal years 2003, 2002 and 2001, respectively.

Legal Matters

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.

16.   Business Segments

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





S-28

---



The
Company is a manufacturer of advanced technology systems and components for commercial industry, government and defense contractors. Approximately 37%, 43% and 29% of the Company's
sales for the fiscal years 2003, 2002 and 2001, respectively, were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. The
only customers which constituted more than 10% of the Company's sales during any year in the period presented were Lockheed Martin which comprised 10.8% of sales in fiscal year 2002, and Agere which
comprised 10.8% of sales in fiscal year 2001. Most of the Company's customers are located in the United States, but export sales accounted for 34%, 16% and 15% of sales in fiscal years 2003, 2002 and
2001, respectively. In fiscal year 2003, 66%, 26%, 6% and 2% of the Company's sales were to customers located in the United States, Europe and the Middle East, Asia and Australia, and the rest of the
world, respectively. In fiscal year 2002, 84%, 11%, 4% and 1% of the Company's sales were to customers located in the United States, Europe and the Middle East, Asia and Australia, and the rest of the
world, respectively.

S-29

---

|                                       |                                                    | Years Ended June 30,                        |       
|-------------------------------------- | -------------------------------------------------- | ------------------------------------------- | ------
|
|
|Business Segment Data:                 |                                                    |                                             |       
|Net sales:                             |                                                    |                                             |       
|                                       | Microelectronic Solutions                          |                                             | $     
|                                       | Test Solutions                                     |                                             |       
|                                       | Isolator Products                                  |                                             |       
|                                       |                                                    |                                             |       
|                                       |                                                    | Net sales                                   |       
|                                       |                                                    |                                             |       
|Operating income:                      |                                                    |                                             |       
|                                       | Microelectronic Solutions                          |                                             | $     
|                                       | Test Solutions                                     |                                             |       
|                                       | Isolator Products                                  |                                             |       
|                                       | General corporate expenses                         |                                             |       
|                                       |                                                    |                                             |       
|                                       |                                                    |                                             | 13,695
|                                       | Restructuring charges(1)                           |                                             |       
|                                       | Acquired in-process research and development(2)(3) |                                             |       
|                                       | Interest expense                                   |                                             |       
|                                       | Other income (expense), net                        |                                             |       
|                                       |                                                    |                                             |       
|                                       | Income before income taxes                         |                                             | $     
|                                       |                                                    |                                             |       
|Total assets:                          |                                                    |                                             |       
|                                       | Microelectronic Solutions                          |                                             | $     
|                                       | Test Solutions                                     |                                             |       
|                                       | Isolator Products                                  |                                             |       
|                                       | Corporate                                          |                                             |       
|                                       | Assets of discontinued operations                  |                                             |       
|                                       |                                                    |                                             |       
|                                       |                                                    | Total assets                                |       
|                                       |                                                    |                                             |       
|Capital expenditures:                  |                                                    |                                             |       
|                                       | Microelectronic Solutions                          |                                             | $     
|                                       | Test Solutions                                     |                                             |       
|                                       | Isolator Products                                  |                                             |       
|                                       | Corporate                                          |                                             |       
|                                       |                                                    |                                             |       
|                                       |                                                    | Total capital expenditures                  |       
|                                       |                                                    |                                             |       
|Depreciation and amortization expense: |                                                    |                                             |       
|                                       | Microelectronic Solutions                          |                                             | $     
|                                       | Test Solutions                                     |                                             |       
|                                       | Isolator Products                                  |                                             |       
|                                       | Corporate                                          |                                             |       
|                                       |                                                    |                                             |       
|                                       |                                                    | Total depreciation and amortization expense |       
|                                       |                                                    |                                             |       

---

S-30

---

17.   Subsequent Events



On July 31, 2003, the Company acquired the Racal Instruments Wireless Solutions Group ("WSG") 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 WSG achieving certain performance goals for the year ending July 31, 2004. WSG develops,
manufactures and integrates digital wireless testing and
measurement solutions. The addition of WSG testing solutions products and technologies will enable the Company to provide a full spectrum of wireless testing solutions from development to production
and services primarily for infrastructure testing and mobile handset testing.

The
Company evaluated the acquired tangible and identifiable assets to serve as a basis for allocation of the preliminary purchase price. The Company preliminarily 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 $6.3 million) |                       | $              | 20,737 
|Property, plant and equipment                   |                       |                | 6,325  
|Developed technology                            |                       |                | 15,600 
|Customer related intangibles                    |                       |                | 1,900  
|Goodwill                                        |                       |                | 11,975 
|In-process research and development             |                       |                | 2,700  
|                                                |                       |                |        
|                                                | Total assets acquired |                |        
|                                                |                       |                |        
|Current liabilities                             |                       |                | (21,606
|Deferred taxes                                  |                       |                | (5,882 
|                                                |                       |                |        
|Total liabilities assumed                       |                       |                | (27,488
|                                                |                       |                |        
|Net assets acquired                             |                       | $              | 31,749 
|                                                |                       |                |        

Summarized
below are the unaudited proforma results of operations of the Company as if WSG had been acquired at the beginning of the fiscal periods presented.

|                                                   |         | Pro forma
Years Ended
June 30, |        
|-------------------------------------------------- | ------- | ------------------------------ | -------
|
|
|Net sales                                          |         | $                              | 339,318
|Income (loss) from continuing operations           |         |                                | 5,385  
|Income (loss) from continuing operations per share |         |                                |        
|                                                   | Basic   |                                | $      
|                                                   | Diluted |                                |        

The
pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the
beginning of the periods presented or of future operating results of the combined companies. The operating results of WSG will be included in the consolidated statement of operations from the
acquisition date and will be included in the Test Solutions segment.

S-31

---





On September 3, 2003, the Company acquired MCE Technologies, Inc. ("MCE") for approximately 5.8 million shares of Aeroflex common stock. In
addition, the Company discharged $22.8 million in MCE outstanding bank, 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. 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 our existing product lines.

The
Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the preliminary purchase price. The Company preliminarily allocated
the purchase price, including acquisition costs of approximately $1.4 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

|                                            |                           | (In thousands) |        
|------------------------------------------- | ------------------------- | -------------- | -------
|Current assets (excluding cash of $250,000) |                           | $              | 18,660 
|Property, plant and equipment               |                           |                | 10,148 
|Developed technology                        |                           |                | 8,850  
|Customer related intangibles                |                           |                | 3,620  
|Goodwill                                    |                           |                | 45,788 
|In-process research and development         |                           |                | 420    
|Other                                       |                           |                | 35     
|                                            |                           |                |        
|                                            | Total assets acquired     |                |        
|Current liabilities                         |                           |                | (11,268
|Long-term debt                              |                           |                | (1,277 
|Other long-term liabilities                 |                           |                | (6,462 
|                                            |                           |                |        
|                                            | Total liabilities assumed |                |        
|                                            |                           |                |        
|                                            | Net assets acquired       |                | $      
|                                            |                           |                |        

Summarized
below are the unaudited proforma results of operations of the Company as if MCE had been acquired at the beginning of the fiscal periods presented.

|                                            |         | Pro forma
Years Ended
June 30,
|------------------------------------------- | ------- | ------------------------------
|
|
|Net sales                                   |         | $                             
|Income from continuing operations           |         |                               
|Income from continuing operations per share |         |                               
|                                            | Basic   |                               
|                                            | Diluted |                               

The
pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisition taken place at the
beginning of the periods presented or of future operating results of the combined companies. The operating results of MCE will
be included in the consolidated statement of operations from the acquisition date and will be included in the Microelectronic Solutions segment.

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Quarterly Financial Data (Unaudited):  (In thousands, except per share amounts and footnotes)

|                                             |         | Quarter |        |     
|-------------------------------------------- | ------- | ------- | ------ | ----
|
|
|Net sales                                    |         | $       | 66,433 |     
|Gross profit                                 |         |         | 24,943 |     
|Income from continuing operations            |         | $       | 874    |     
|                                             |         |         |        |     
|Income from continuing operations per share: |         |         |        |     
|                                             | Basic   |         | $      | 0.01
|                                             |         |         |        |     
|                                             | Diluted |         | $      | 0.01
|                                             |         |         |        |     

|                                                    |               | Quarter |        |  
|--------------------------------------------------- | ------------- | ------- | ------ | -
|
|
|Net sales                                           |               | $       | 39,307 |  
|Gross profit                                        |               |         | 13,146 |  
|Income (loss) from continuing operations(1)(2)      |               | $       | (282   | )
|                                                    |               |         |        |  
|Income (loss) from continuing operations per share: |               |         |        |  
|                                                    | Basic(1)(2)   |         | $      | 
|                                                    |               |         |        |  
|                                                    | Diluted(1)(2) |         | $      | *
|                                                    |               |         |        |  

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S-33

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AEROFLEX INCORPORATED  AND SUBSIDIARIES  SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS  (In thousands)

|Column A                           |  | Column B |       | Column C |   | Column D |  | Column E
|---------------------------------- |  | -------- | ----- | -------- | - | -------- |  | --------
|
|
|YEAR ENDED JUNE 30, 2003:          |  |          |       |          |   |          |  |         
|Allowance for doubtful accounts    |  | $        | 636   |          | $ | 885      |  | $       
|                                   |  |          |       |          |   |          |  |         
|Reserve for inventory obsolescence |  | $        | 4,563 |          | $ | 2,832    |  | $       
|                                   |  |          |       |          |   |          |  |         
|YEAR ENDED JUNE 30, 2002:          |  |          |       |          |   |          |  |         
|Allowance for doubtful accounts    |  | $        | 459   |          | $ | 648      |  | $       
|                                   |  |          |       |          |   |          |  |         
|Reserve for inventory obsolescence |  | $        | 4,066 |          | $ | 2,444    |  | $       
|                                   |  |          |       |          |   |          |  |         
|YEAR ENDED JUNE 30, 2001:          |  |          |       |          |   |          |  |         
|Allowance for doubtful accounts    |  | $        | 509   |          | $ | 58       |  | $       
|                                   |  |          |       |          |   |          |  |         
|Reserve for inventory obsolescence |  | $        | 2,830 |          | $ | 2,032    |  | $       
|                                   |  |          |       |          |   |          |  |         

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Note:



S-34

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