SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended June 30, 1998
                                       or
                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. 1-8037

                              Aeroflex Incorporated
             (Exact name of registrant as specified in its charter)

          Delaware                                  11-1974412

(State or other jurisdiction of                   (I.R.S. Employer
 incorporation or organization)                    Identification No.)

35 South Service Road, Plainview, New York             11803
(Address of Principal Executive Offices)             (Zip Code)

Registrant's telephone number, including area code:  (516) 694-6700

           Securities registered pursuant to Section 12(b) of the Act:

                                          Name of Each Exchange on
          Title of Class                      Which Registered
          --------------                  -------------------------

     Common Stock, $.10 par value            New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

     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  [X]    No   [  ]

     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 [ ].

     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 22, 1998 approximately $147,487,000.

     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 22, 1998 - 17,426,618 (excluding 39,159 shares held in treasury).

     Documents incorporated by reference: Parts II and IV - The Annual Report to
Stockholders for the fiscal year ended June 30, 1998 to the extent  specifically
identified or  incorporated  herein.  Part III - Registrant's  definitive  proxy
statement to be filed pursuant to Regulation 14A of the Securities Act of 1934.

<PAGE>

                                     PART I

ITEM ONE - BUSINESS

     Aeroflex Incorporated,  through its subsidiaries (collectively,  unless the
context  requires  otherwise,  referred  to as  the  "Company"  or  "Aeroflex"),
utilizes its advanced  design,  engineering  and  manufacturing  capabilities to
produce  state-of-the-art   microelectronic  module,  interconnect  and  testing
solutions used in communication applications for commercial and defense markets.
Its products are used in the  satellite,  wireless and wireline  communications,
cable  television  ("CATV")  and  defense   communications   markets.  With  the
acquisition  of MIC  Technology  in 1996 and the  interconnect  assets of Lucent
Technologies  Inc. in 1997,  the Company  believes it is  currently  the largest
merchant supplier of thin film interconnect  products.  The Company also designs
and  manufactures  motion  control  systems,  and shock and vibration  isolation
systems used for commercial,  industrial and defense applications. The Company's
major  customers  include  Lockheed  Martin   Corporation,   Hughes  Electronics
Corporation,  Motorola,  Inc., Lucent  Technologies,  Inc., Raytheon Company and
Northrop Grumman Corporation. The Company currently acts as sole source supplier
under supply agreements with Lucent Technologies and Motorola's RF semiconductor
division for thin film interconnect products.

     Operations  are  grouped  into  three  segments:  Microelectronics;   Test,
Measurement and Other Electronics;  and Isolator Products. These segments, their
products and the markets they serve are described below.

Microelectronics

Thin Film Circuits and Interconnects - (MIC Technology)

     In March 1996,  the Company  acquired MIC  Technology  Corporation  ("MIC")
which designs,  develops,  manufactures and sells passive thin film circuits and
interconnects. Its advanced microcircuit and interconnect technology is emerging
as  a  key  technology  for  miniaturized,   high  frequency,  high  performance
electronic  products  for  rapidly  growing  markets  such as  cellular/PCS  and
microwave  data links.  It continues to be an essential  technology in satellite
based  communication   hardware,  CATV  amplifiers  and  leading  edge  military
electronic products.

     Thin film  products  allow  dramatic  reductions  in the size and weight of
electronic  circuits and provide  superior  electrical and thermal  performance.
Growth in the use of thin film technology is expected to complement the advances
in  semiconductor  speed which have occurred in recent years.  Thin film removes
limitations  imposed  by other  interconnect  technologies  for high  clock rate
digital circuits.  In the digital,  analog RF and microwave  domains,  thin film
allows the  production of hybrid  integrated  circuits  with lumped  elements at
lower cost than full  silicon  or  gallium  arsenide  (GaAs)  integration  while
retaining outstanding performance.

     The Company serves both commercial and military markets. Commercial markets
include satellite, wireless and wireline communications,  CATV, fiber optics and
digital Multi-Chip  Modules ("MCMs").  Military markets include missile Transmit
and Receive ("T/R") modules,  radar T/R modules and advanced  Electronic Counter
Measures.

                                       -2-
<PAGE>

     In its  most  basic  form,  simple  interconnect  incorporates  conductors,
resistors,  plated vias and selective high conductivity  traces for high-volume,
low-cost, DC, RF and microwave products, including applications such as standard
microwave  amplifiers  and  oscillators,  CATV  circuitry,  A/D  converters  and
high-power regulation.  Advanced interconnect  incorporates all passive elements
in solid-state form. Microstrip conductors,  resistors,  inductors,  capacitors,
air-bridges  and  filled  thermal  vias are  integrated  on a single  substrate.
Applications include high-performance, low-noise and power amplifiers for use in
commercial   wireless   products  and  avionics.   To  address  digital  circuit
requirements,  high-density  digital  interconnect  substrates  offer  single or
double-sided,  controlled impedance signal routing.  These substrates also offer
integrated  resistors  and  solid  thermal  vias,  if  required,   for  improved
performance.  Applications  include  Application  Specific  Integrated  Circuits
("ASIC"),  control circuits,  high-density  memory modules and digital switching
networks.  By incorporating  features of advanced  interconnect and high-density
digital  interconnect  in a single design,  the Company has created PIMIC -Mixed
Signal  Interconnect  to address the expanding use of mixed  technologies.  This
unique PIMIC process allows integration of analog and digital  functionality for
use in leading-edge miniaturized military, satellite and commercial electronics.

     In July 1997, MIC entered into a multi-year strategic agreement under which
MIC will supply Lucent Technologies with film integrated circuits which are used
in communications applications. In connection with this agreement, MIC purchased
equipment, inventory and licenses for advanced technologies from two of Lucent's
telecommunications  components  operations which  significantly  increases MIC's
manufacturing capacity and it is expected to enhance its capabilities.

Microelectronic Modules - (Circuit Technology)

     Since 1974,  the Company has been  engaged in the design,  manufacture  and
sale  of  state-of-the-art   microelectronic   assemblies  for  the  electronics
industry.  In January 1994, the Company  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.
This  acquisition  increased  the range of  products  offered and  enhanced  the
Company's engineering capability.

Satellite

     The  Company  has  been   designing  and   manufacturing   hybrid  and  MCM
microelectronic circuits for space applications for over 15 years. The Company's
reputation  and  expertise in these areas  results from  significant  experience
gained on Department of Defense ("DOD") and NASA programs such as MILSTAR, Space
Shuttle,  LANDSAT and most recently,  the Cassini probe to Saturn, as well as on
various  classified  programs.  The  Company's  hybrids  have been  successfully
deployed on commercial programs such as DirecTV and IRIDIUM .

Multichip Modules

     MCMs are a further advancement of hybrid  microcircuit  technology in which
large  digital  devices such as  microprocessors,  SRAM and EEPROM  memories are
combined with  multilayer  ceramic  packages to form complex  digital systems or
subsystems. MCMs perform functions similar to hybrids, except the emphasis is on
miniaturizing and synthesizing digital functions such as microprocessor  systems
and mass  memories.  The Company has been  qualified  on multiple MCM designs on
both the F-16 and F-22 Advanced Tactical Fighter,  V-22, LAMPS,  AWACS and AEGIS
Missile  and  is  participating  in  pre-production  and  production  contracts.
Application  specific  MCMs  have  significant  market  potential  in  avionics,
workstations, telecommunications and satellites.

                                       -3-
<PAGE>

     The Company has expanded its standard  memory module  product line with the
addition of  approximately  50 new memory modules in the past four years.  These
products,  which consist of SRAM and Flash memory modules, take advantage of the
Company's  MCM  expertise.  They are  designed  to be used  for a wide  range of
computer and general purpose circuit board applications.

Data-bus

     The Data-bus  product line has a particularly  broad range of applications.
These microcircuits, which have been adopted by the United States Army, Navy and
Air Force as a standard  interface,  act as a digital  data  communication  link
between various  computer-based  equipment.  A new commercial Data-bus interface
was developed by Boeing for use on its 777 Aircraft.  The Company has production
contracts  for  the  interface  and  coupler  modules  which  provide  the  data
communications  protocol and interface for all of the electronic systems in each
777 Aircraft.

     The Company's  microcircuits are used on numerous avionic systems including
the F-14,  F-15,  F-16 and F-18  aircraft  and the  Tomahawk-cruise  and  AMRAAM
missiles.  They  are  also  qualified  for  possible  use on  upgrades  to older
platforms.  The Data-bus  microcircuits  are used in a wide variety of aerospace
and seaboard navigations, and communication systems.

Application Specific Modules

     The Company  manufactures  hybrids for a  customer's  particular  need that
cannot be fulfilled  with a standard  commercial  product.  This  capability has
historically   been  utilized  to  service  defense  markets   domestically  and
internationally.  The  electronic  content of the  worldwide  defense  market is
growing as  governments  determine  it is more  economical  to upgrade  existing
aircraft and missiles  than to build new aircraft and  missiles.  This  customer
base is  faced  with  continuous  retrofits  to  upgrade  the  ability  of aging
equipment.  The Company benefits from upgrade programs by supplying  hybrids and
MCMs for the C-130,  F-16,  F-18 and AWACS aircraft  programs,  as well as newer
programs such as JAVELIN and AMRAAM missiles.

Test, Measurement and Other Electronics

Instrumentation

Frequency Synthesizers  - (Comstron)

     In November 1989, the Company acquired Comstron Corporation which is now an
operating  division  of  Aeroflex  Laboratories  Incorporated,   a  wholly-owned
subsidiary  of Aeroflex.  Comstron is a leader in radio  frequency and microwave
technology  used in the  manufacture of fast switching  frequency  synthesizers,
signal generators and components.  The Company's synthesizers operate in a broad
frequency range of 10MHz to 40GHz with excellent  spectral  purity.  Their small
size  and  modular  construction  allow  for  easy  systems   configuration  and
facilitation  of repair.  The Company,  together  with Hewlett  Packard,  helped
develop the Modular  Measurement  System standard which has been selected as the
architecture  underlying the RF and microwave  sections of a number of automated
test equipment  ("ATE")  systems,  including CASS, the United States Navy's next
generation  ATE.  The  CASS  program  is a  high  priority  United  States  Navy
initiative  designed to end the  proliferation  of unique ATE and  related  Test
Program Sets for United States Navy electronics.  Historically,  each individual
weapon system had its own testing system which required unique operator  skills,
maintenance and scope of  capabilities.  The Company supplies the fast switching
frequency  synthesizers,  spread  spectrum  modulators  and  arbitrary  waveform
generators for CASS. The Company's  synthesizers also significantly  improve the

                                       -4-
<PAGE>

performance and reliability of existing radars.  Additionally,  the synthesizers
improve the performance of threat simulators, as well as radar cross section and
antenna  measurement  systems.  In Fiscal 1998, the Company introduced its first
low-cost, fast switching,  high-performance frequency synthesizer for commercial
ATE.

High-Speed Automatic Test Systems - (Lintek)

     In January  1995,  the  Company  acquired  Lintek  Inc.  as a  wholly-owned
subsidiary of Aeroflex. Aeroflex Lintek Corp., the successor to Lintek, Inc., is
a leading  provider  of  high-speed  instrumentation  radar  systems and antenna
measurement systems. Instrumentation radar systems are used to measure the radar
cross  sections of aircraft and other objects using both scale models and actual
examples.  These measurements are made in many diverse environments from factory
floor, to laboratory,  to flight lines or aircraft carriers.  In addition to the
radar system hardware,  the Company has developed various analytical  processing
and  display  algorithms  to assist  in the  interpretation  of the radar  data.
Through  expertise gained in high-speed data acquisition and display  techniques
used in instrumentation radar products, the Company produces antenna measurement
systems used in the design,  manufacturing and testing of all types of antennas.
In April 1998,  Lintek was awarded a contract for next generation  communication
satellite  test  equipment  from Hughes Space and  Communications.  This testing
system  combines  Comstron's  patented  synthesizers  with Lintek's  proprietary
response measurement technology to more efficiently test satellite payloads both
on the ground and in space.

Motion Control Systems - (Aeroflex Laboratories)

Stabilization and Tracking Devices

     The  Company  is engaged  in the  design,  development  and  production  of
stabilization  tracking  devices and systems,  including  pedestals.  Pedestals,
through the  continuous  balancing  action of  gyroscopes  and  servo-mechanical
stabilizers  operating in all three  dimensions,  enable equipment  mounted on a
vehicle  to  remain  almost  perfectly  balanced  and  motionless.  The  mounted
equipment can then automatically  track or focus on a target as accurately as if
it were on solid  ground  despite  the  motion  of the  vehicle.  The  Company's
stabilization and tracking devices are used in reconnaissance  and weapon firing
control systems and play an important role in high altitude  aircraft as well as
in other  aircraft,  ships and ground  vehicles  which require  precise,  highly
stable  mounting for cameras,  antennae and lasers.  In addition to military and
aerospace markets,  the Company has delivered commercial units used to stabilize
airborne spectroscopy equipment for terrestrial mapping.

Magnetic Motors

     The Company produces a variety of brushless DC motors.  Brushless DC motors
differ from  conventional  DC motors and are  well-suited  for use under  vacuum
conditions,  such as outer  space  where  lubricants  needed  to slow  brushwear
dissipate  rapidly.  They  are  also  well-suited  for  environments  containing
volatile or explosive materials and gases and applications where clean operation
is  critical.  These  motors are  utilized in the  Company's  stabilization  and
tracking systems and infra-red  scanner modules,  as well as other  applications
where precise movement is required,  such as for positioning  antennae,  optical
systems, mechanical vanes and valves.

Scanning Devices

     Using  its  expertise  gained in over 30 years of  manufacturing  infra-red
night vision scanners,  the Company has developed and started  production of the
next  generation  polygon  rotary  scanner for the United States Army's  thermal
weapons sight, under contract to Hughes Electro-Optical Data Systems Group. This

                                       -5-
<PAGE>

sight is a low cost,  lightweight  thermal  imaging device that detects  targets
based on thermal radiation contrasts with the background and is intended for use
on standard  issue United  States Army assault  rifles and crew served  weapons.
Additionally,  the Company  provides the Common  Module  Scanner used on the M-1
Tank, Bradley fighting vehicle and Comanche helicopter.

Isolator Products - (Aeroflex International, Vibration Mountings & Controls
                     and Korfund Dynamics)

     The Company is engaged in the design, development,  manufacture and sale of
shock and vibration isolation systems.  These devices consist of helically-wound
steel wire rope contained  between rugged metal retainer bars, which are used in
defense applications,  and off-the-shelf rubber and spring shock,  vibration and
noise control devices, which are used in commercial and industrial applications.
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 this  equipment.  Markets for
isolation systems include defense, aerospace, geophysical exploration, aircraft,
communications, transportation and utilities.

Customers

     The Company has  hundreds of customers  in the  communications,  satellite,
aerospace/defense, transportation and construction industries. Except for Lucent
Technologies,  (15.5%),  in fiscal 1998, and Lockheed  Martin (13.3%) and Hughes
(11.7%),  in fiscal  1997,  no one customer  accounted  for more than 10% of the
Company's  net sales.  The Company is  currently a party to three key  strategic
agreements:

     In July 1997, MIC entered into a strategic  agreement  under which MIC will
supply  Lucent  Technologies  with film  integrated  circuits  which are used in
communications  applications.  The  agreement  expires  December 31, 2000 and is
subject  to  annual  renewal  options.  In  addition,  MIC  purchased  automatic
manufacturing   and  test   equipment,   inventory  and  licenses  for  advanced
technologies  from two of Lucent's  microelectronic  component  operations which
significantly  increases  the Company's  manufacturing  capacity to produce film
integrated circuits and MCMs.

     In February  1997, the Company  entered into an outsourcing  agreement with
the RF  Semiconductor  Division of Motorola  under which the Company will supply
virtually all of Motorola's  thin film  interconnects  for its RF  semiconductor
product lines,  supporting component applications in CATV, cellular/PCS and land
mobile communications. This agreement expires in February 1999 and is subject to
annual renewal options.

     In July  1996,  the  Company  entered  into a  multi-year  Volume  Purchase
Agreement with Hughes Electronics to supply  microelectronic  modules for use on
both commercial and military satellites, and missile systems.

Competition

     In all phases of its operations,  the Company  competes in both performance
and  price  with  companies,   some  of  which  are  considerably  larger,  more
diversified and have greater financial  resources and sales than the Company. In
the  manufacture  of   microelectronics,   the  Company   believes  its  primary
competitors  are NTK,  Texas  Instruments  and  ILC/Data  Devices  Corp.  In the
manufacture of instrument products, the Company believes its primary competitors
are Hewlett Packard and Scientific Atlanta. In the manufacture of motion control
products,  the Company  believes its primary  competitors are MPC Products Corp.
and  Schaeffer  Magnetics  Inc.  In the manufacture  of  isolators,  the Company


                                       -6-
<PAGE>

believes its primary  competitors are Barry Controls,  Inc., Lord Kinematics and
Mason Industries.  The Company also experiences significant competition from the
in-house  capabilities  of its  current  and  potential  customers.  The Company
believes that in all of its  operations  it competes  favorably in the principal
competitive areas of technology,  performance,  reliability,  quality,  customer
service  and price.  The  Company  believes  that to remain  competitive  in the
future, it will need to invest significant  financial  resources in research and
development.

     To the extent  that the  Company is engaged in  government  contracts,  its
success or  failure,  to a large  measure,  is based upon its ability to compete
successfully  for contracts and to complete  them at a profit.  Such  government
business is  necessarily  affected by many  factors  such as  variations  in the
military requirements of the government and defense budget allocations.

Government Sales

     Approximately  42% and 50% of the Company's sales for fiscal 1998 and 1997,
respectively,  were to  agencies  of the United  States  Government  or to prime
defense  contractors  or  subcontractors  of the United States  Government.  The
Company's  overall  dependence  on the  military has been  declining  due to the
acquisition  of MIC,  which is more  commercially  oriented,  and a focusing  of
resources towards developing standard products for the commercial  markets.  The
Company's  defense  contracts  have been awarded  either on a bid basis or after
negotiation.  The  contracts  are primarily  fixed price  contracts,  though the
Company  also has  defense  contracts  providing  for cost plus fixed  fee.  The
Company's defense contracts contain customary  provisions for termination at the
convenience of the government  without cause. In the event of such  termination,
the  Company  is  entitled  to  reimbursement  for its  costs  and to  receive a
reasonable  profit, if any, on the work done prior to termination.  Revenues and
costs on government contracts are recognized based upon shipments or billings.

     In certain  product  areas,  the Company has suffered  reductions  in sales
volume due to cutbacks in the  military  budget.  In other  product  areas,  the
Company  has  experienced  increased  sales  volume  due  to  a  realignment  of
government  spending  towards  upgrading  existing systems instead of purchasing
completely new systems.  The overall effect of the cutbacks and  realignment has
not been material to the Company.

Marketing and Distribution

     The Company uses a team-based sales approach to facilitate close management
by Company  personnel  of  relationships  at multiple  levels of the  customer's
organization,  including management,  engineering and purchasing personnel.  The
Company's  integrated  sales  approach  involves a team  consisting  of a senior
executive,  a business  development  specialist  and  members  of the  Company's
engineering  department.  In  particular,  the  use of  experienced  engineering
personnel as part of the sales effort enables close technical collaboration with
the customer  during the design and  qualification  phase of new  communications
equipment  which,  the Company  believes,  is critical to the integration of its
product into its customer's equipment. The Company's executive officers are also
involved in all aspects of the Company's  relationships with its major customers
and work closely with their senior management. In addition, the Company utilizes
manufacturers' representatives and independent sales representatives as needed.

Product Research and Development

     The  Company's   research  and  development   efforts   primarily   involve
engineering  and  design  relating  to  the  development  of new  products,  the
improvement of existing  products  and/or the adaptation of such products to new
applications. The Company's efforts also include developing prototype components
to bid on specific programs. Several of the Company's officers and almost all of

                                       -7-
<PAGE>

its engineers have been involved at varioustimes and to varying degrees in these
activities.  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  Company  sponsored  research  activities  were
approximately $5.2 million,  $3.3 million and $1.3 million for fiscal 1998, 1997
and 1996,  respectively.  The  increase  from  fiscal  1997 to  fiscal  1998 was
primarily due to the costs for development of a new low-cost,  high-speed,  high
performance  frequency  synthesizer  intended for commercial  communication test
systems.  The increase  from fiscal 1996 to fiscal 1997 was primarily due to MIC
which was acquired in March 1996.  Further,  in  connection  with the  Company's
purchase of MIC, the Company  allocated  $23.2 million of the purchase  price to
in-process research and development. Since the research and development projects
had not  reached  technological  feasibility,  the $23.2  million was charged to
expense  in  fiscal  1996  in  accordance  with  generally  accepted  accounting
principles.

Backlog

     The Company includes in backlog firm purchase orders or contracts providing
for delivery of products and services.  At June 30, 1998,  the  Company's  order
backlog  was  approximately  $80.1  million,  approximately  85%  of  which  was
scheduled to be delivered on or before June 30, 1999.  Approximately 58% and 42%
of this  backlog  represents  commercial  and defense  contracts,  respectively.
Generally,  government  contracts are cancellable with payment to the Company of
amounts expended under the contract  together with a reasonable  profit, if any,
while commercial contracts are not cancellable.

     At June 30, 1997, the Company's backlog of orders was  approximately  $53.3
million.  Approximately  90% was scheduled to be delivered before June 30, 1998.
Approximately  65% of this backlog  represented  orders for military or national
defense purposes.

Manufacturing

     The  Company  assembles,   tests,   packages  and  ships  products  at  its
manufacturing facilities located in Farmingdale,  Pearl River and Plainview, New
York; Richardson, Texas; Bloomingdale, New Jersey; Powell, Ohio; and Boca Raton,
Florida.  The Company has been  manufacturing  products for defense programs for
many years in compliance with stringent military  specifications.  The Company's
microelectronic  module  manufacturing  is  certified to the status of Class "K"
(space  qualified)  of which the Company  believes  only seven other vendors are
currently  certified.  The  Company  believes  it has been  able to bring to the
commercial market the  manufacturing  quality and discipline it has demonstrated
in the defense  market.  For example,  the Company's  Plainview and  Farmingdale
manufacturing  plants are ISO-9001  certified,  as well as certified to the more
stringent Boeing D1-9000 standard.

     Historically,  the volume of the Company's  production  requirements in the
defense market was not sufficient to justify the  widespread  implementation  of
highly  automated  manufacturing  processes.  Over the last several  years,  the
Company has expanded the use of high volume manufacturing techniques for product
assembly and testing.  Recently,  the Company purchased film integrated  circuit
automatic  manufacturing and test equipment from Lucent Technologies,  which the
Company  believes was the largest volume  manufacturer  of thin film  integrated
circuits,  and the Company is currently  expanding  its Pearl River  facility to
accommodate this equipment. After its completion, the Company believes the Pearl
River  facility  will have the  capacity  required to handle  additional  future
outsourcing by captive  suppliers of thin film  communications  products and the
growing demand for communication interconnect products.

                                       -8-

<PAGE>

Principal Materials

     The principal materials used by the Company in manufacturing and assembling
its products are ceramic,  magnetic materials,  gold, steel,  aluminum,  rubber,
iron and copper. Many of the component parts used by the Company in its products
are also  purchased,  including  semiconductors,  transformers,  amplifiers  and
bearings.  Although  the Company has several sole source  arrangements,  all the
materials and components  used by the Company,  including those purchased from a
sole source, are readily available and are or can be purchased from time to time
in the open market. The Company has no long-term commitments for their purchase.
No supplier provides more than 10% of the Company's raw materials.

Patents and Trademarks

     The Company owns several patents, patent licenses and trademarks.  In order
to protect its intellectual property rights, the Company relies on a combination
of  trade  secret,  copyright,  patent  and  trademark  laws  and  employee  and
third-party  nondisclosure  agreements,  as  well  as  limiting  access  to  and
distribution of proprietary information. While the Company considers that in the
aggregate its patents and  trademarks are important in its  operations,  it does
not  consider  that  one or  any  group  of  them  is of  such  importance  that
termination could materially affect its business.

Employees

     As of June 30, 1998 the Company had 842 employees, of whom 422 were engaged
in a  manufacturing  capacity,  and 420  were  engaged  in  engineering,  sales,
administrative or clerical  positions.  238 employees of the Company are covered
by two  collective  bargaining  agreements.  The Company  considers its employee
relations to be satisfactory.

Seasonality

     Although  the   Company's   business  is  not   affected  by   seasonality,
historically  its revenues and earnings  increase  sequentially  from quarter to
quarter  within a fiscal year,  but the first  quarter is less than the previous
year's fourth quarter.

Regulation

     The Company's activities are subject to various  environmental,  health and
employee  safety laws.  The Company has expended  resources,  both financial and
managerial,  to comply with applicable  environmental,  health and worker safety
laws  in its  operations  and at its  facilities  and  anticipates  that it will
continue to do so in the future.  The Company does not require any  governmental
approval of its principal  products or services.  Compliance with  environmental
laws  has not  historically  had a  material  effect  on the  Company's  capital
expenditures,  earnings  or  competitive  position,  and the  Company  does  not
anticipate  that such  compliance  will have a material effect on the Company in
the future.

     Because  of its  participation  in the  defense  industry,  the  Company is
subject  to  audit  from  time  to  time  for  its  compliance  with  government
regulations by various  agencies,  including the Defense  Contract Audit Agency,
the Defense  Investigative  Service and the Defense Logistics Agency.  These and
other  governmental  agencies may also, from time to time,  conduct inquiries or
investigations  that may cover a broad range of Company activity.  Responding to
any such audits, inquiries or investigations may involve significant expense and
divert management attention. Also, an adverse finding in any such audit, inquiry
or investigation could involve penalties that may have a material adverse effect
on the Company's business, results of operations or financial condition.

                                       -9-
<PAGE>

     The Company believes that it is generally in compliance with all applicable
environmental,  health  and worker  safety  laws and  governmental  regulations.
Nevertheless,  there can be no assurance  that  additional  costs for compliance
will not be incurred in the future or that such 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,  1998 are set forth in Note 14 of Notes to
Consolidated Financial Statements.

ITEM TWO - PROPERTIES

     The executive  offices of the Company and the  manufacturing  facilities of
Aeroflex Laboratories  Incorporated,  a subsidiary of the Company,  occupying an
aggregate of approximately 69,000 square feet, are located in premises which the
Company owns in Plainview, Long Island, New York.

     Aeroflex Laboratories  Incorporated also leases manufacturing facilities in
Farmingdale,  Long  Island,  New York and Boca Raton,  Florida of  approximately
20,000  and  11,000  square  feet,  respectively.  The  annual  rental  of these
properties is approximately $116,000 and $81,000 respectively.

     The Company's subsidiary,  MIC Technology Corporation ("MIC"), acquired its
manufacturing  facility in Pearl River, New York of approximately  63,000 square
feet in July 1998.  MIC also leases a  manufacturing  facility of  approximately
29,000  square feet in  Richardson,  Texas with an annual rent of  approximately
$167,000.

     The Company's subsidiary,  Vibration Mountings and Controls, Inc., conducts
manufacturing  operations at a plant located in  Bloomingdale,  New Jersey.  The
plant, which the Company owns, consists of approximately 72,000 square feet.

     The Company's  subsidiary,  Aeroflex Lintek Corp.,  occupies  approximately
8,500  square  feet  of  space  in  Powell,  Ohio,  with  an  annual  rental  of
approximately $54,000.

     The Company  believes that its  facilities are adequate for its current and
presently foreseeable needs.

ITEM THREE - LEGAL PROCEEDINGS

     Filtron Co. Inc.,  ("Filtron") a subsidiary of the Company whose operations
were  discontinued  in October 1991,  was one of several  defendants  named in a
personal  injury action  initiated in 1994 by several  plaintiffs in the Supreme
Court of the State of New York, County of Kings.

     According  to  the  allegations  of the  Amended  Verified  Complaint,  the
plaintiffs,  who are current or former  employees  of a company to whom  Filtron
sold RFI  filters/capacitors,  and their  dependents,  are  seeking to  recover,
respectively,  directly and  derivatively,  on diverse  theories of  negligence,
strict liability and breach of warranty,  for injuries  allegedly  suffered from
exposure to a liquid  substance or material  which  Filtron  incorporated  for a
period  of  time  in the  RFI  filters/capacitors  which  it  manufactured.  The
plaintiffs are seeking damages which cumulatively may exceed $500 million.

     This action is still in the early stages of discovery. Based upon available
information  and  considering  its various  defenses,  together with its product
liability insurance, in the opinion of management of the Company, the outcome of
the action against its subsidiary  will not have a materially  adverse effect on
the Company's consolidated financial statements.

                                      -10-
<PAGE>

     The Company is involved in various other routine legal matters.  Management
believes the outcome of these matters will not have a material adverse effect on
the Company.


ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.













































                                 -11-

<PAGE>


                               PART II

ITEM FIVE - MARKET FOR THE COMPANY'S COMMON EQUITY
            AND RELATED STOCKHOLDER MATTERS


     (a) The Common Stock trades on the New York Stock Exchange under the symbol
ARX. The following  table shows the quarterly  range of the high and low closing
prices for the Common  Stock,  as  reported  by the  National  Quotation  Bureau
Incorporated, for the calendar periods indicated.

                                                 Common Stock

                                             High             Low
                                             ----             ---   

1996
     First Quarter........................  $5.13             $3.50
     Second Quarter.......................   6.63              4.38
     Third Quarter .......................   6.13              4.63
     Fourth Quarter.......................   4.75              4.13

1997
     First Quarter........................   4.88              3.50
     Second Quarter.......................   5.13              3.25
     Third Quarter........................  11.25              4.44
     Fourth Quarter.......................  12.06              7.13

1998
     First Quarter......................... 14.63              7.88
     Second Quarter........................ 14.31              8.50
     Third Quarter(through September 8).... 11.56              6.69


     (b) As of September 8, 1998, there were approximately  1,150 record holders
of the Company's Common Stock.

     (c) The Company has never declared or paid any cash dividends on its Common
Stock. There have been no stock dividends declared or paid by the Company on its
Common  Stock  during the past three  years.  The Company  currently  intends to
retain any future  earnings  for use in the  operation  and  development  of its
business and for acquisitions and, therefore,  does not intend to declare or pay
any cash dividends on its Common Stock in the foreseeable  future.  In addition,
the Company's Revolving Credit Agreement,  as amended,  prohibits it from paying
cash dividends.

                                      -12-

<PAGE>


ITEM SIX - SELECTED FINANCIAL DATA

(In thousands except percentages and per share data)
<TABLE>
<CAPTION>
                                                        Year ended June 30,
                                    --------------------------------------------------------
                                    1998         1997         1996         1995         1994
                                    --------------------------------------------------------
<S>                               <C>          <C>          <C>          <C>          <C>     
Earnings Statement Data
-----------------------
  Net Sales...................... $118,861     $ 94,299     $ 74,367     $ 71,113     $ 65,602
  Income (Loss) from
    Continuing Operations........    8,406        4,420      (17,420)(1)(2) 6,587(4)(5)  5,850(6)
  Income from
    Discontinued Operations......     -            -            -             462          187
  Net Income (Loss)..............    8,406        4,420      (17,420)       7,049        6,037(6)
  Income (Loss) from Continuing
    Operations Per Common Share
    and Common Share Equivalent
      Basic...................... $  .57       $  .36       $(1.46)(1)(2)$  .56(4)(5) $  .59(6)
      Diluted....................    .51          .34              (3)      .52(4)(5)    .50(6)
  Net Income (Loss) Per Common
    Share and Common Share
    Equivalent
      Basic......................    .57          .36        (1.46)         .60          .61
      Diluted....................    .51          .34              (3)      .56          .52
  Weighted Average Number of
    Common Shares and Common
    Share Equivalents Outstanding
      Basic......................   14,802       12,446       11,971       11,733        9,962
      Diluted....................   16,527       14,620            (3)     14,052       12,235

                                                            June 30,
                                    -------------------------------------------------------- 
                                    1998         1997         1996         1995         1994
                                    --------------------------------------------------------
Balance Sheet Data
------------------
  Working Capital................ $ 53,965     $ 25,872     $ 25,300     $ 31,721     $ 28,572
  Total Assets...................  124,101       81,047       81,169       71,936       71,016
  Long-term Debt
    (including current portion)..   11,481       28,916       34,577       13,787       18,408
  Stockholders' Equity...........   87,036       35,040       30,472       46,344       39,571
Other Statistics
----------------
  After Tax Profit Margin (Loss)
    (from continuing operations)..   7.1%         4.7%       (23.4)%(1)(2)   9.3%(4)(5)   8.9%(6)
  Return on Average Stockholders'
    Equity (from continuing
    operations)..................   13.8%        13.5%       (45.4)%(1)(2)  15.3%(4)(5)  17.5%(6)
  Stockholders' Equity
    Per Share (7)                 $   5.01     $   2.81     $   2.49     $   3.95     $   3.37
<FN>
(1)  Includes  $23.2  million  ($1.94 per share) for the write-off of in-process
     research and  development  acquired in connection  with the purchase of MIC
     Technology Corporation in March 1996.
(2)  Includes  a  $437,000,  net of tax,  gain  ($.04 per  share) on the sale of
     securities.  
(3)  As a result of the loss, all options,  warrants and convertible  debentures
     are anti-dilutive.
(4)  Includes  $2.0 million ($.14 per diluted share and $.17 basic) of insurance
     proceeds received on the death of the former chairman.
(5)  Includes a $1.5 million, net of tax, restructuring charge ($.11 per diluted
     share and $.13 basic) for the  consolidation  of the Company's Puerto Rican
     operations into its domestic facilities.
(6)  Includes an income tax benefit of $1.7 million, ($.14 per diluted share and
     $.17  basic),  relating to the  recognition  of a portion of the  Company's
     unrealized net operating loss  carryforward in accordance with Statement of
     Financial Accounting Standards No. 109.
(7)  Calculated by dividing stockholders' equity, at the end of the year, by the
     number of shares outstanding at the end of the year.
</FN>
</TABLE>
                                      -13-


<PAGE>

ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

    Aeroflex  Incorporated,  founded  in 1937,  utilizes  its  advanced  design,
engineering  and   manufacturing   capabilities   to  produce   state-of-the-art
microelectronic,  interconnect  and  testing  solutions  used  in  communication
applications  for  commercial  and defense  markets.  Its  products  are used in
satellite,  wireless and wireline communications,  cable television ("CATV") and
defense communications  markets. It also designs and manufactures motion control
systems  and  shock  and  vibration   isolation  systems  used  for  commercial,
industrial and defense  applications.  The Company's operations are grouped into
three segments:  Microelectronics;  Test, Measurement and Other Electronics; and
Isolator Products.  The Company's  consolidated financial statements include the
accounts of Aeroflex Incorporated and its wholly-owned subsidiaries.

   The Microelectronics segment has been engaged in the design,  manufacture and
sale of  state-of-the-art  microelectronics  for the electronics  industry since
1974.  In  January  1994,  the  Company  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,  the Company  acquired  MIC  Technology  Corporation  ("MIC")  which
designs,  develops,  manufactures and markets  microelectronics  products in the
form of passive thin film circuits and  interconnects.  Effective  July 1, 1997,
MIC 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.  The  Company has also signed a  multi-year
supply agreement to provide Lucent with film integrated  circuits for use in the
telecommunications industry.

   The  Test,   Measurement  and  Other  Electronics  segment  consists  of  two
divisions:  Instruments and Motion Control  Products.  The Instruments  division
consists of: (i) Comstron , a leader in radio frequency and microwave technology
used in the  manufacture  of fast  switching  frequency  signal  generators  and
components,  which was  acquired in November  1989 and is currently an operating
division of Aeroflex  Laboratories  Incorporated,  a wholly-owned  subsidiary of
Aeroflex;  and (ii)  Lintek,  a leader  in high  speed  instrumentation  antenna
measurement systems and radar systems.  The Motion Control Products division has
been engaged in the  development  and  manufacture of  electro-optical  scanning
devices used in infra-red night vision systems since 1975. Additionally,  it has
been engaged in the design, development and production of stabilization tracking
devices and systems and magnetic motors since 1961.

   The Isolator  Products  segment has been engaged in the design,  development,
manufacture  and sale of severe  service shock and vibration  isolation  systems
since 1961.  These devices  include a product line of helically wound steel wire
rope  contained  between  rugged metal retainer bars which are used to store and
dissipate potentially  destructive vibration and shock and are primarily used in
defense applications.  In October 1983, the Company acquired Vibration Mountings
& Controls,  Inc. (VMC), which  manufactures a line of off-the-shelf  rubber and
spring  shock,  vibration  and  structure  borne noise  control  devices used in
commercial  applications.  In December 1986, the Company  acquired the operating
assets of Korfund  Dynamics  Corporation  (KDC), a manufacturer of an industrial
line of heavy duty spring and rubber shock mounts.

                                       -14-
<PAGE>

   Revenue is recognized  based upon shipments or billings.  The Company records
costs on its long-term contracts using percentage-of-completion accounting under
which costs are recognized on revenues in the same relation that total estimated
manufacturing costs bear to total contract value.  Estimated costs at completion
are based upon  engineering and production  estimates.  Provisions for estimated
losses or revisions in estimated profits on contracts-in-process are recorded in
the period in which such losses or revisions are first determined.

   Approximately  42%, 50% and 65% of the Company's  sales for fiscal 1998, 1997
and 1996,  respectively,  were to agencies of the United States Government or to
prime defense contractors or subcontractors of the United States Government. The
Company's  overall  dependence  on the  military has been  declining  due to the
acquisition  of MIC,  which is more  commercially  oriented,  and a focusing  of
resources towards developing standard products for the commercial  markets.  The
Company's  government contracts have been awarded either on a bid basis or after
negotiation.  The  contracts  are primarily  fixed price  contracts,  though the
Company also has  government  contracts  providing  for cost plus fixed fee. The
Company's defense contracts contain customary  provisions for termination at the
convenience of the government  without cause. In the event of such  termination,
the  Company  is  entitled  to  reimbursement  for its  costs  and to  receive a
reasonable profit, if any, on the work done prior to termination.

   Management  believes that potential  reductions in defense  spending will not
materially  affect its  operations.  In certain  product areas,  the Company has
suffered  reductions in sales volume due to cutbacks in the military budget.  In
other product areas, the Company has experienced increased sales volume due to a
realignment of government spending towards upgrading existing systems instead of
purchasing  completely  new  systems.  The overall  effect of the  cutbacks  and
realignment has not been material to the Company.

   The Company's product  development  efforts primarily involve engineering and
design relating to the development of new products,  the improvement of existing
products or the adaption of such  products to new  applications.  The  Company's
efforts  also  include  developing  prototype  components  to  bid  on  specific
programs.  Some  of the  Company's  development  efforts  are  reimbursed  under
contractual arrangements.  Product development and similar costs not recoverable
under contractual arrangements are expensed in the period incurred.

   In June 1997, the Financial  Accounting  Standards  Board (the "FASB") issued
Statement of Financial  Accounting Standards ("SFAS") No. 131, "Disclosure About
Segments of an  Enterprise  and Related  Information,"  which is  effective  for
fiscal years  beginning  after  December 15, 1997.  This  statement  establishes
standards  for  reporting  information  about  operating  segments  and  related
disclosures  about products and services,  geographic areas and major customers.
The  Company  has not  determined  the  impact  that  the  adoption  of this new
accounting   standard  will  have  on  its  consolidated   financial   statement
disclosures.  The Company will adopt this  standard  effective  July 1, 1998, as
required.

   In June 1998,  the FASB  issued  SFAS No.  133,  "Accounting  for  Derivative
Instruments  and  Hedging  Activities,"  which is  effective  for  fiscal  years
beginning  after June 15,  1999.  This  statement  requires  companies to record
derivatives  on the balance sheet as assets or  liabilities at their fair value.
In  certain  circumstances  changes  in the  value  of such  derivatives  may be
required to be recorded as gains or losses.  Management believes that the impact
of this statement will not have a material effect on the Company's  consolidated
financial statements.


                                      -15-

<PAGE>

Market Risk

   The  Company is exposed to market risk  related to changes in interest  rates
and, to an immaterial  extent,  to foreign currency  exchange rates. Most of the
Company's  debt is at fixed  rates of  interest  or at a  variable  rate with an
interest rate swap  agreement to  effectively  make it a fixed rate of interest.
That debt which is subject to a floating rate of interest  (30-day LIBOR) and is
not hedged by an interest  rate swap  amounts to  approximately  $5.6 million at
June 30, 1998. If market  interest  rates  increase by 10 percent from levels at
June 30, 1998,  the effect on the Company's  results of operations  would not be
material.

Year 2000 Compliance

   Management  has initiated a  company-wide  program and has developed a formal
plan of  implementation  to prepare the Company for the Year 2000. This includes
taking  actions  designed to ensure that the  Company's  information  technology
("IT") systems, products and infrastructure are Year 2000 compliant and that its
customers,  suppliers  and service  providers  have taken  similar  action.  The
Company is in the  process of  evaluating  its  internal  issues - all of its IT
systems, products,  equipment and other facilities systems - and modifying items
that are not compliant. With respect to its external issues customers, suppliers
and service  providers - the Company is surveying them primarily through written
correspondence.

   The Company  expects to incur internal staff costs, as well as consulting and
other  expenses,  and  believes  the total costs to be incurred for all internal
Year 2000  compliance  related  projects will not have a material  impact on the
Company's  business,  results of operations or financial  condition.  Management
expects to complete its  investigation,  remediation  and  contingency  planning
activities  for all mission  critical  systems and areas by December  31,  1998,
although  there  can be no  assurance  that it will.  At this  time,  Management
believes that the Company does not have any internal  mission critical Year 2000
issues that it cannot remedy. With respect to mission critical third parties, in
some  instances  the  Company has  protection  under  contracts  and the Company
intends to create  contingency  plans to mitigate its exposure in the event such
third  parties  are not Year 2000  compliant.  Despite its efforts to survey its
customers,  suppliers and service providers,  Management cannot be certain as to
the actual Year 2000  readiness  of these  third  parties or the impact that any
non-compliance  on their  part may have on the  Company's  business,  results of
operations or financial condition.


                                      -16-

<PAGE>
Statement of Operations

   The following table sets forth certain items from the Company's  statement of
operations  as a  percentage  of net sales and in  dollars  by  segment  for the
periods indicated:
<TABLE>
<CAPTION>
                                        Year Ended June 30,
                                    ----------------------------  
                                    1998       1997       1996
                                    ----       ----       ----   
<S>                                <C>        <C>        <C>   
Net Sales                          100.0%     100.0%     100.0%

Cost of Sales                       65.0       66.9       68.7
                                   ------     ------     ------
Gross Profit                        35.0       33.1       31.3
                                   ------     ------     ------
Operating Expenses:
  Selling, General and
    Administrative costs            18.1       19.3       19.0
  Research and Development costs     4.4        3.5        1.6
  Special Charge (1)                  -          -        31.2
                                   ------     ------     ------
      Total Operating Expenses      22.5       22.8       51.8
                                   ------     ------     ------
Operating Income (Loss)             12.5       10.3      (20.5)

Other Expense, net                   1.4        3.0        1.2
                                   ------     ------     ------
Income (Loss) Before Income Taxes   11.1        7.3      (21.7)
Provision For Income Taxes           4.0        2.6        1.7
                                   ------     ------     ------
Net Income (Loss)                    7.1%       4.7%     (23.4)%
                                   ======     ======     ======

Business Segment Data (in thousands):

                                        Year Ended June 30,
                                    ----------------------------  
                                    1998       1997       1996
                                    ----       ----       ----   
Net Sales:
  Microelectronics                $ 74,263    $ 48,462   $28,414
  Test, Measurement
    and Other Electronics           25,685      28,144    30,109
  Isolator Products                 18,913      17,693    15,844
                                  --------    --------   ------- 
    Net Sales                     $118,861    $ 94,299   $74,367
                                  ========    ========   ======= 
Operating Profit (Loss):
  Microelectronics                $ 14,147    $  6,644   $ 3,282
  Test, Measurement
    and Other Electronics              996       2,762     4,830
  Isolator Products                  3,063       2,844     2,150
  General Corporate
    Expenses                        (3,348)     (2,514)   (2,344)
                                  --------    --------   ------- 
                                    14,858       9,736     7,918
  Special Charge (1)                   -           -     (23,200)
                                  --------    --------   ------- 
    Operating Profit (Loss)       $ 14,858    $  9,736  $(15,282)
                                  ========    ========   ======= 
<FN>
(1)  Write-off of  in-process  research and  development  acquired in connection
     with the purchase of MIC.
</FN>
</TABLE>

                                     -17-


<PAGE>

Fiscal Year Ended June 30, 1998 Compared to Fiscal Year Ended June 30, 1997

     Net Sales.  Net sales increased 26.0% to $118.9 million in fiscal 1998 from
$94.3  million  in  fiscal  1997.  Net  sales  in the  Microelectronics  segment
increased  53.2% to $74.3  million for fiscal 1998 from $48.5 million for fiscal
1997  due to  increased  sales  volume  in  both  thin  film  interconnects  and
microelectronic  modules.  Sales of thin film interconnects  increased primarily
due to the commencement of a strategic supply contract with Lucent  Technologies
effective July 1, 1997. Net sales in the Test, Measurement and Other Electronics
segment  decreased  8.7% to $25.7  million in fiscal 1998 from $28.1 million for
fiscal  1997  primarily  as a  result  of  reduced  sales  volume  of  frequency
synthesizers  partially offset by increased sales of high speed  instrumentation
test systems. Net sales in the Isolator Products segment increased 6.9% to $18.9
million for fiscal 1998 from $17.7  million  for fiscal  1997  primarily  due to
higher sales volume of industrial and commercial isolators.

     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 33.3% to $41.6
million in fiscal 1998 from $31.2 million in fiscal 1997. Gross margin increased
to 35.0% in fiscal 1998 from 33.1% in fiscal 1997.  This  increase was primarily
as a result of increased margins in the Microelectronics  segment reflecting the
greater efficiency of higher volume.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses  consist  of office  and  management  salaries,  fringe
benefits, commissions and advertising costs. Selling, general and administrative
expenses  increased  18.5% to $21.5 million  (18.1% of net sales) in fiscal 1998
from  $18.2  million  (19.3% of net  sales) in fiscal  1997.  The  increase  was
primarily due to labor related expenses including salaries for additional hires,
recruitment and relocation costs in connection with the Company's growth.

     Research and Development Costs.  Research and development costs consists of
material,  engineering labor and allocated overhead.  Company sponsored research
and  development  costs  increased 57.7% to $5.2 million (4.4% of net sales) for
the year ended June 30, 1998 from $3.3 million  (3.5% of net sales) for the year
ended June 30, 1997.  This increase was primarily  attributable to the costs for
development  of  a  new  low-cost,   high  speed,  high  performance   frequency
synthesizer intended for commercial communication test systems.

     Other  Expense  (Income).  Other  expense  was $1.7  million in fiscal 1998
compared to $2.9 million in fiscal 1997. Net interest expense decreased 43.9% to
$1.6 million in fiscal 1998 from $2.9  million in fiscal  1997.  The decrease in
net interest  expense was  primarily  due to reduced  levels of  borrowings  and
increased  levels of cash  equivalents due to the conversion of $10.0 million of
debentures  and net  proceeds  of $31.3  million  from stock  issued in a public
offering.  Other  expense  included  $102,000 of debenture  redemption  costs in
fiscal 1998.

     Provision for Income Taxes.  Income taxes recorded by the Company increased
95.1% to $4.8  million  (an  effective  income tax rate of 36.1%) in fiscal 1998
from $2.4 million (an  effective  income tax rate of 35.5%) in fiscal 1997.  The
income tax  provisions for the years ended June 30, 1998 and 1997 were different
from the amounts computed by applying the U.S. Federal income tax rate to income
before income taxes  primarily due to state and local income taxes,  and for the
year ended June 30, 1998, due to research and development credits.

                                      -18-
<PAGE>

Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996

     Net Sales.  Net sales increased 26.8% to $94.3 million for fiscal 1997 from
$74.4  million  in  fiscal  1996.  Net  sales  in the  Microelectronics  segment
increased  70.6% to $48.5  million for fiscal 1997 from $28.4 million for fiscal
1996 due to the  acquisition  of MIC in March  1996 and  increased  sales in the
existing  product lines.  MIC sales for fiscal 1997 and from  acquisition  until
June 30, 1996 were approximately  $21.9 million and $6.2 million,  respectively.
Net sales in the Test,  Measurement and Other Electronics segment decreased 6.5%
to $28.1 million for fiscal 1997 from $30.1 million for fiscal 1996 primarily as
a result of reduced  frequency  synthesizer  sales partially offset by increased
sales  of  stabilization  and  tracking  devices.  The  reduction  in  frequency
synthesizer  sales was due to the early  completion of the current CASS contract
and the transition from custom to commercial markets.  Net sales in the Isolator
Products  segment  increased  11.7% to $17.7  million for fiscal 1997 from $15.8
million for fiscal 1996. The increase reflects higher sales volume of industrial
and commercial  isolators partially offset by decreased sales volume of military
isolators.

     Gross Profit.  Gross profit increased 33.9% to $31.2 million in fiscal 1997
from $23.3  million in fiscal 1996.  Gross  margin  increased to 33.1% in fiscal
1997 from 31.3% in fiscal  1996.  This  increase  was  primarily  as a result of
increased  margins  in  the  Microelectronics  and  Isolator  Products  segments
reflecting the greater  efficiencies of higher volumes and because MIC generally
has higher margins than the balance of the Company.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative expenses increased 28.7% to $18.2 million (19.3% of net sales) in
fiscal  1997 from  $14.1  million  (19.0% of net  sales)  in fiscal  1996.  This
increase was  primarily  as a result of the addition of MIC,  which has a higher
selling,  general  and  administrative  cost  structure  than the balance of the
Company.

     Research and Development Costs.  Company sponsored research and development
costs  increased  160.2% to $3.3 million  (3.5% of net sales) for the year ended
June 30, 1997 from $1.3 million  (1.6% of net sales) for the year ended June 30,
1996.  This  increase was  primarily  attributable  to MIC which was acquired in
March 1996.

     Special  Charge.  In  connection  with the  Company's  purchase of MIC, the
Company allocated $23.2 million of the purchase price to in-process research and
development.  Since  the  research  and  development  projects  had not  reached
technological  feasibility,  the $23.2  million was charged to expense in fiscal
1996 in accordance with generally accepted accounting principles.

     Other Expense  (Income).  Other expense increased 233.4% to $2.9 million in
fiscal 1997 from $864,000 in fiscal 1996. Net interest expense  increased 100.3%
to $2.9 million in fiscal 1997 from $1.4 million in fiscal 1996. The increase in
net interest  expense was primarily due to the increased level of borrowings and
lower interest  income on reduced cash amounts due to the purchase of MIC. Other
income decreased in fiscal 1997 due to a securities related gain in fiscal 1996.

     Provision for Income Taxes.  Income taxes recorded by the Company increased
91.1% to $2.4  million  (an  effective  income tax rate of 35.5%) in fiscal 1997
from $1.3 million on a loss before income taxes of $16.1 million in fiscal 1996.
The  income  tax  provisions  for the years  ended  June 30,  1997 and 1996 were
different from amounts  computed by applying the U.S. Federal income tax rate to
income before income taxes  primarily due to state and local income taxes,  and,
for the year ended June 30, 1996, because of the  non-deductibility of the $23.2
million  special  charge  and  the tax  benefits  of  loss  carryforwards  (both
unrealized and realized).

                                     -19-

<PAGE>

Seasonality

     Although  the   Company's   business  is  not   affected  by   seasonality,
historically  its revenues and earnings  increase  sequentially  from quarter to
quarter  within a fiscal year,  but the first  quarter is less than the previous
year's fourth quarter.

Liquidity and Capital Resources

      As of June 30, 1998, the Company had $54.0 million in working capital. The
current ratio was 3.3 to 1 at June 30, 1998.  As of March 31, 1998,  the Company
replaced a previous agreement with a revised revolving credit agreement with two
banks  which  is  secured  by  substantially  all of the  Company's  assets  not
otherwise  encumbered.  The  agreement  provides for a revolving  credit line of
$27.0 million which expires in March 2001. The interest rate on borrowings under
this agreement is at various rates depending upon certain financial ratios, with
the current rate  substantially  equivalent  to the prime rate (8.5% at June 30,
1998).  The terms of the agreement  require  compliance  with certain  covenants
including  minimum  consolidated   tangible  net  worth  and  pre-tax  earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. At June 30, 1998,
the outstanding  borrowings  under the revolving  credit line were $4.7 million.
The Company  has  entered  into an  interest  rate swap  agreement  for the $4.7
million then  outstanding  under the  revolving  credit line at 7.6% in order to
reduce the interest rate risk associated with these outstanding borrowings.

     During June 1994, the Company  completed a sale of $10.0 million  principal
amount of 7-1/2% Senior Subordinated Convertible Debentures to non-U.S. persons.
On  September  8, 1997,  the  Company  called for the  redemption  of all of its
outstanding 7-1/2% Senior Subordinated Convertible Debentures at 104-1/2% of the
principal  amount.  The Debentures were  convertible  into the Company's  Common
Stock at a price of  $5-5/8  per  share  through  October  6,  1997.  All of the
principal amount was converted. In connection with the conversions,  $599,000 of
deferred bond issuance costs were charged to additional paid-in capital.

     Effective March 19, 1996, the Company acquired all of the outstanding stock
of MIC for approximately  $36.0 million of cash,  300,000 shares of common stock
and warrants to purchase  400,000  shares of common  stock (at  exercise  prices
ranging  from  $7.05 to $7.50  per  share).  The  purchase  price  was paid with
available  cash of $9.0 million and  borrowings  under the  Company's  bank loan
agreement of $27.0 million.  MIC manufactures  high frequency thin film circuits
and interconnects for miniaturized,  high frequency, high performance electronic
products for growing commercial markets such as wireless  communications,  cable
communications,  satellite  based  communications  hardware and high  technology
military electronics.  The acquired company's net sales were approximately $25.0
million for its fiscal year ended October 31, 1995.

     Effective July 1, 1997, the Company's  subsidiary,  MIC,  acquired  certain
equipment,  inventory,  licenses  for  technology  and  patents of two of Lucent
Technologies'  telecommunications  component units - multi-chip modules and film
integrated  circuits  - for  approximately  $4.4  million in cash.  These  units
manufacture  microelectronic  modules and interconnect products. The Company has
also signed a multi-year supply agreement to provide Lucent with film integrated
circuits for use in the telecommunications industry. The purchase price has been
allocated  to the assets  acquired,  based on their  fair  values,  and  certain
obligations assumed relating to the various agreements.

                                      -20-
<PAGE>

     In fiscal 1998,  the  Company's  operations  provided cash of $13.7 million
from the continued  profitability of the Company,  collection of receivables and
an  increase  in  current  liabilities   partially  offset  by  an  increase  in
inventories.  In fiscal 1998, the Company's  investing  activities  used cash of
$15.0 million  primarily for capital  expenditures,  including the renovation of
MIC's Pearl River  facility  and the purchase of equipment  and  inventory  from
Lucent Technologies. In fiscal 1998, the Company's financing activities provided
cash of $25.1 million  primarily from the public offering of stock and equipment
financing offset, in part, by debt payments.

     In March 1998, the Company sold 2.6 million shares of its Common Stock in a
public  offering  for $31.3  million,  net of an  underwriting  discount of $2.0
million and issuance costs of $496,000. Of these net proceeds,  $9.6 million was
used to repay  bank  indebtedness.  The  balance of the net  proceeds,  which is
included  in cash  and cash  equivalents,  will be used  for  general  corporate
purposes,   including  working  capital,  capital  expenditures  and  facilities
expansion and may be used for potential acquisitions.

     Management of the Company  believes  that  internally  generated  funds and
available   lines  of  credit  will  be  sufficient  for  its  working   capital
requirements,  capital  expenditure  needs and the  servicing of its debt for at
least the next twelve months.  At June 30, 1998, the Company's  available unused
line of credit was approximately $20.0 million.

          A subsidiary  of the Company whose  operations  were  discontinued  in
1991, is one of several  defendants  named in a personal injury action initiated
in August,  1994, by a group of plaintiffs.  The plaintiffs are seeking  damages
which cumulatively may exceed $500 million.  The complaint alleges,  among other
things,  that the  plaintiffs  suffered  injuries  from  exposure to  substances
contained  in products  sold by the  subsidiary  to one of its  customers.  This
action is in the early stages of discovery. Based upon available information and
considering its various defenses, together with its product liability insurance,
in the opinion of management of the Company,  the outcome of the action  against
its  subsidiary  will not have a  materially  adverse  effect  on the  Company's
consolidated financial statements.

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

     The Company is undergoing  routine audits by various taxing  authorities of
its state and local  income  tax  returns  covering  periods  from 1994 to 1996.
Management believes that the probable outcome of these various audits should not
materially affect the consolidated financial statements of the Company.

     The Company's backlog of orders at June 30, 1998 and 1997 was $80.1 million
and $53.3 million, respectively.

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,  1998 are set forth in Note 14 of Notes to
Consolidated Financial Statements.

                                   -21-
<PAGE>

ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial  statements and supplementary data listed in the accompanying
Index to Financial Statements and Schedules is attached as part of this report.

ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

      None.

                                    PART III

     The  information  required by Part III is  incorporated by reference to the
Company's  definitive  proxy  statement in connection with its Annual Meeting of
Stockholders  scheduled  to be held in  November  1998,  to be  filed  with  the
Securities  and Exchange  Commission  within 120 days  following  the end of the
Company's fiscal year ended June 30, 1998.

                                     PART IV

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

     (a)  See Index to Financial  Statements  at beginning of attached  
          financial statements.

     (b)  Reports on Form 8-K:

               None

     (c)  Exhibits

     3.1  Certificate of Incorporation, as amended.

     3.2  By-Laws, as amended (Exhibit 3 to Quarterly Report on Form 10-Q for 
          the quarter ended March 31, 1998).

     4.1  Third  Amended and Restated  Loan and Security  Agreement  dated as of
          March 15,  1996 among the  Registrant,  certain  of its  subsidiaries,
          Chemical Bank and NatWest Bank, N.A. (Exhibit 10 of Report on Form 8-K
          dated March 19, 1996).

     4.2  Second  Amendment to the Third  Amended and Restated Loan and Security
          Agreement dated as of April 30, 1998 among the Registrant,  certain of
          its  subsidiaries,  The Chase Manhattan Bank (as successor to Chemical
          Bank) and Fleet Bank, N.A. (as successor to NatWest Bank, N.A.)

     10.1 1989  Non-Qualified  Stock Option Plan,  as amended  (Exhibit  10.8 of
          Annual Report on Form 10-K for the year ended June 30, 1990).

     10.2 1994 Non-Qualified Stock Option Plan. (Exhibit 10.2 of Annual Report 
          on Form 10-K for the year ended June 30, 1994).

     10.3 1994 Outside Directors Stock Option Plan.  (Exhibit 10.3 of Annual 
          Report on Form 10-K for the year ended June 30, 1994).

                                      -22-
<PAGE>

    10.4  Amendment No. 1 to Employment Agreement between Aeroflex  Incorporated
          and Harvey R. Blau  (Exhibit  10.1 to Report on Form 8-K dated May 17,
          1997).

    10.5  Amendment No. 1 to Employment Agreement between Aeroflex  Incorporated
          and Michael  Gorin  (Exhibit  10.2 to Report on Form 8-K dated May 17,
          1997).

    10.6  Amendment No. 1 to Employment Agreement between Aeroflex  Incorporated
          and Leonard  Borow  (Exhibit  10.3 to Report on Form 8-K dated May 17,
          1997).

    10.7  Deferred  Compensation  Agreement  between  Aeroflex  Incorporated and
          Harvey  R.  Blau  (Exhibit  10.4 to  Report  on Form 8-K dated May 17,
          1997).

    10.8  Employment  Agreement  between  Aeroflex  Incorporated and Carl Caruso
          (Exhibit 10.5 to Report on Form 8-K dated May 17, 1997).

    10.9  1996 Stock  Option Plan  (Exhibit A to  Definitive  Schedule 14A filed
          September  30,  1996).  

    10.10 1998 Stock  Option  Plan  (Exhibit 10 to Quarterly Report on Form 
          10-Q for the quarter ended March 31, 1998).

    10.11 Amendment No. 2 to Employment Agreement between Aeroflex Incorporated
          and Harvey R. Blau.  

    10.12 Amendment  No. 2 to  Employment  Agreement between Aeroflex 
          Incorporated and Michael Gorin.

    10.13 Amendment No. 2 to Employment Agreement between Aeroflex Incorporated 
          and Leonard Borow.

    22    The following is a list of the Company's subsidiaries:

                                                        State of
                     Name                               Incorporation
                     ----                               -------------    

          Aeroflex Laboratories Incorporated             Delaware
          Aeroflex Lintek Corp.                          Ohio
          Aeroflex Systems Corp.                         Delaware
          MIC Technology Corporation                     Texas
          Vibration Mountings and Controls, Inc.         New York

    23   Consent of Independent Auditors

    27   Financial Data Schedule

    99   Additional Exhibit

  The following  undertakings  are  incorporated by reference into the Company's
Registration  Statements on Form S-8 and Form S-3 (Registration  Nos.  33-75496,
33-88868, 33-88878, 333-42399, 333-42405, 333- 15339, 333-21803 and 333-46689).

                                      -23-
<PAGE>

(a)    The undersigned registrant hereby undertakes:

  (1) To file,  during any  period in which  offers or sales are being  made,  a
post-effective amendment to this registration statement:

       (i)  To include any prospectus required by section 10(a)(3) of the 
  Securities Act of 1933;

       (ii) To reflect in the  prospectus  any facts or events arising after the
  effective   date  of  the   registration   statement   (or  the  most   recent
  post-effective  amendment  thereof)  which,  individually or in the aggregate,
  represent  a  fundamental   change  in  the   information  set  forth  in  the
  registration statement;

       (iii) To include any  material  information  with  respect to the plan or
  distribution  not previously  disclosed in the  registration  statement or any
  material change to such information in the registration statement;

  Provided,  however,  that paragraphs  (a)(1)(i) and (a)(1)(ii) do not apply if
the  registration  statement  is on Form S-3 or Form  S-8,  and the  information
required to be included in a  post-effective  amendment by those  paragraphs  is
contained in periodic reports filed by the registrant  pursuant to Section 13 or
Section 15(d) of the Securities  Exchange Act of 1934 that are  incorporated  by
reference in the registration statement.

  (2) For the purpose of determining  any liability  under the Securities Act of
1933,  each  such  post-effective   amendment  shall  be  deemed  to  be  a  new
registration  statement  relating to the  securities  offered  therein,  and the
offering of such  securities at that time shall be deemed to be the initial bona
fide offering thereof.

  (3) To remove from registration by means of a post-effective  amendment any of
the securities  being  registered  which remain unsold at the termination of the
offering.

  (b) The  undersigned  registrant  hereby  undertakes  that,  for  purposes  of
determining  any liability  under the Securities Act of 1933, each filing of the
registrant's  annual  report  pursuant to Section  13(a) or Section 15(d) of the
Securities  Exchange  Act of 1934  (and,  where  applicable,  each  filing of an
employee  benefit  plan's  annual  report  pursuant  to  Section  15(d)  of  the
Securities  Exchange  Act of 1934)  that is  incorporated  by  reference  in the
registration  statement  relating to the  securities  offered  therein,  and the
offering of such  securities at that time shall be deemed to be the initial bona
fide offering thereof.

  (f) (1) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus to each employee to whom the prospectus is sent or
given a copy of the  registrant's  annual  report to  stockholders  for its last
fiscal year, unless such employee  otherwise has received a copy of such report,
in which case the registrant shall state in the prospectus that it will promptly
furnish,  without  charge,  a copy of such  report  on  written  request  of the
employee.  If the last fiscal year of the  registrant  has ended within 120 days
prior to the use of the prospectus,  the annual report of the registrant for the
preceding  fiscal year may be so  delivered,  but within such 120 day period the
annual report for the last fiscal year will be furnished to each such employee.

  (2) The undersigned  registrant  hereby  undertakes to transmit or cause to be
transmitted  to all  employees  participating  in the plan who do not  otherwise
receive such material as stockholders of the registrant,  at the time and in the
manner such material is sent to its stockholders,  copies of all reports,  proxy
statements and other communications distributed to its stockholders generally.

                                   -24-
<PAGE>

  (3)  Where  interests  in a plan  are  registered  herewith,  the  undersigned
registrant  and plan hereby  undertake  to  transmit or cause to be  transmitted
without charge,  to any participant in the plan who makes a written  request,  a
copy of the then latest annual  report of the plan filed  pursuant to Section 15
(d) of the Securities  Exchange Act of 1934 (Form 11-K). If such report is filed
separately on Form 11-K, such form shall be delivered upon written  request.  If
such report is filed as a part of the  registrant's  annual report on Form 10-K,
that entire report (excluding exhibits) shall be delivered upon written request.
If  such  report  is  filed  as a part  of the  registrant's  annual  report  to
stockholders  delivered  pursuant to paragraph  (1) or (2) of this  undertaking,
additional delivery shall not be required.

  (4) If the registrant is a foreign private issuer,  eligible to use Form 20-F,
then the registrant shall undertake to deliver or cause to be delivered with the
prospectus to each employee to whom the  prospectus is sent or given,  a copy of
the  registrant's  latest  filing on Form 20-F in lieu of the  annual  report to
stockholders.

       (i)  Insofar  as  indemnification   for  liabilities  arising  under  the
  Securities Act of 1933 may be permitted to directors, officers and controlling
  persons of the registrant pursuant to the foregoing provisions,  or otherwise,
  the  registrant  has been  advised that in the opinion of the  Securities  and
  Exchange Commission such indemnification is against public policy as expressed
  in the act and is,  therefore,  unenforceable.  In the event  that a claim for
  indemnification  against  such  liabilities  (other  than the  payment  by the
  registrant of expenses incurred or paid by a director,  officer or controlling
  person of the  registrant  in the  successful  defense of any action,  suit or
  proceeding)  is asserted by such director,  officer or  controlling  person in
  connection with the securities being  registered,  the registrant will, unless
  in the  opinion of its  counsel  the matter  has been  settled by  controlling
  precedent,  submit to a court of appropriate jurisdiction the question whether
  such  indemnification  by it is against  public policy as expressed in the Act
  and will be governed by the final adjudication of such issue.


                                      -25-

<PAGE>
     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 25th day of
September 1998.
                                Aeroflex Incorporated
                                             
                                By:  /s/ Harvey R. Blau
                                   ------------------------
                                   Harvey R. Blau, Chairman
                                 
     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below on September 25th, 1998 by the following persons in
the capacities indicated:

/s/ Harvey R. Blau                        
-------------------------                 Chairman of the Board   
Harvey R. Blau                            (Chief Executive Officer)

/s/ Michael Gorin                         
-------------------------                 President and Director
Michael Gorin                             (Chief Financial Officer and
                                          Principal Accounting Officer)

/s/ Leonard Borow                         
-------------------------                 Executive Vice President, Secretary
Leonard Borow                             and Director(Chief Operating Officer)


-------------------------                 Director
Paul Abecassis

/s/ Robert Bradley, Sr.                   
-------------------------                 Director
Robert Bradley, Sr.

/s/ Milton Brenner
-------------------------                 Director
Milton Brenner

/s/ Ernest E. Courchene, Jr.
-------------------------                 Director
Ernest E. Courchene, Jr.

/s/ Donald S. Jones                        
-------------------------                 Director  
Donald S. Jones

/s/ Eugene Novikoff                       
-------------------------                 Director  
Eugene Novikoff

/s/ John S. Patton                        
-------------------------                 Director
John S. Patton

                                      -26-

<PAGE>



                              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, 1998 AND 1997

                                AND FOR THE YEARS

                       ENDED JUNE 30, 1998, 1997 AND 1996







<PAGE>


                       FINANCIAL STATEMENTS AND SCHEDULES


                                    I N D E X

                                                                  PAGE
                                                                  ---- 

  ITEM FOURTEEN (a)

1.  FINANCIAL STATEMENTS:

     Independent auditors' report                                S-1

     Consolidated financial statements:

      Balance sheets - June 30, 1998 and 1997                    S-2-3

     Statements of operations - each of the three years
        in the period ended June 30, 1998                        S-4

     Statements of stockholders' equity - each of the
        three years in the period ended June 30, 1998            S-5

     Statements of cash flows - each of the three years
        in the period ended June 30, 1998                        S-6
   
     Notes (1-15)                                                S-7-21

     Quarterly financial data (unaudited)                        S-22


2.   FINANCIAL STATEMENT SCHEDULES:

     II - Valuation and qualifying accounts                      S-23



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.

<PAGE>


                          Independent Auditors' Report


The Board of Directors and Stockholders of Aeroflex Incorporated
Plainview, New York

We have  audited  the  accompanying  consolidated  balance  sheets  of  Aeroflex
Incorporated  and  subsidiaries  as of June 30,  1998  and 1997 and the  related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the years in the three year period ended June 30, 1998.  Our audits also
included the financial  statement  schedule  listed in the Index at item 14(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  audits  in  accordance  with  generally   accepted  auditing
standards.  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, 1998 and 1997 and the results of
their  operations  and their  cash flows for each of the years in the three year
period ended June 30, 1998, in conformity  with  generally  accepted  accounting
principles.  Also,  in our  opinion,  the  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 PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP

Jericho, New York
August 13, 1998







                                       S-1
<PAGE>

                              AEROFLEX INCORPORATED
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                    (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                     June 30,
                                                            ------------------------
                                      ASSETS                     1998         1997
                                                                 ----         ----     
<S>                                                           <C>          <C>     
Current assets:
  Cash and cash equivalents...............................    $ 24,408     $    600

 Accounts receivable,  less allowance for doubtful accounts 
    of $317 and $417 at June 30, 1998 and 1997,
    respectively..........................................      19,853       21,843

  Inventories.............................................      29,851       20,319

  Deferred income taxes...................................       1,861        2,043

  Prepaid expenses and other current assets...............       1,197          812
                                                              --------     --------

       Total current assets...............................      77,170       45,617


Property, plant and equipment, net........................      26,994       14,487


Intangible assets acquired in connection with the purchase 
  of businesses, net of accumulated amortization of $1,993 
  and $1,224 at June 30, 1998 and 1997, respectively......       7,578        8,046

Cost in  excess  of fair  value of net  assets of  
  businesses  acquired,  net of accumulated amortization 
  of $2,724 and $2,399 at June 30, 1998 and 1997,
  respectively............................................       9,827        9,903

Other assets..............................................       2,532        2,994
                                                              --------     --------  
Total assets..............................................    $124,101     $ 81,047
                                                              ========     ========  
<FN>
               See notes to consolidated financial statements.
</FN>
</TABLE>

                                       S-2
<PAGE>

                              AEROFLEX INCORPORATED
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                       June 30,
                                                                --------------------- 
          LIABILITIES AND STOCKHOLDERS' EQUITY                      1998       1997
                                                                    ----       ----
<S>                                                              <C>         <C>     
Current liabilities:
  Current portion of long-term debt.......................       $  1,755    $  4,247
  Accounts payable........................................          6,668       5,093
  Accrued expenses and other current liabilities..........         12,932       8,564
  Income taxes payable....................................          1,850       1,841
                                                                 --------    --------
       Total current liabilities..........................         23,205      19,745
Long-term debt............................................          9,726      14,688
Deferred income taxes.....................................          1,156         334
Other long-term liabilities...............................          2,978       1,259
Senior subordinated convertible debentures................           -          9,981
                                                                 --------     -------
Total liabilities.........................................         37,065      46,007
                                                                 --------    --------
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 150 shares;
    none issued...........................................           -           -
  Common Stock, par value $.10 per share; authorized
    25,000 shares; issued 17,378 and 12,658 shares at
    June 30, 1998 and 1997, respectively..................          1,738       1,266
  Additional paid-in capital..............................        100,481      58,110
  Accumulated deficit.....................................        (15,178)    (23,584)
                                                                 --------    --------
                                                                   87,041      35,792
    Less:  Treasury stock, at cost (1 and 169 shares at
    June 30, 1998 and 1997, respectively..................              5         752
                                                                 --------    --------

 Total stockholders' equity................................        87,036      35,040
                                                                 --------    --------

Total liabilities and stockholders' equity................       $124,101    $ 81,047
                                                                 ========    ========
<FN>
                 See notes to consolidated financial statements.
</FN>
</TABLE>

                                       S-3

<PAGE>

                     AEROFLEX INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                        Years Ended June 30,
                                          ---------------------------------------------
                                               1998            1997             1996
                                               ----            ----             ----   
<S>                                         <C>             <C>             <C>     
Net sales................................   $118,861        $ 94,299        $ 74,367
 Cost of sales...........................     77,286          63,109          51,070
                                            --------        --------        ---------
    Gross profit.........................     41,575          31,190          23,297
                                            --------        --------        ---------    
Operating costs:
  Selling, general and administrative
    costs................................     21,545          18,175          14,119
   Research and development costs........      5,172           3,279           1,260
    Special charge (note 2)..............       -               -             23,200
                                            --------        --------        ---------    
           Total operating costs.........     26,717          21,454          38,579
                                            --------        --------        ---------    
Operating income (loss)..................     14,858           9,736         (15,282)
                                            --------        --------        ---------    
    Other expense (income):
  Interest expense.......................      2,011           2,974           1,939
   Other expense (income) (including
   interest income and dividends of
   $389, $84 and $496)...................       (309)            (93)         (1,075)
                                             --------        --------       ---------
        Total other expense (income)......      1,702           2,881            864
                                             --------        --------       ---------    
Income (loss) before income taxes........      13,156           6,855        (16,146)
 Provision for income taxes...............      4,750           2,435          1,274
                                             --------        --------       ---------
  Net income (loss)........................   $ 8,406        $  4,420        (17,420)
                                             ========        ========       =========
Income (loss) per common share and common 
 share equivalent:
    Basic...............................       $  .57          $  .36          $(1.46)
                                             ========        ========       =========
                              
    Diluted...............................     $  .51          $  .34            *
                                             ========        ========       

Weighted  average   number  of  common  
  shares  and  common  share   equivalents
  outstanding:
   Basic.................................      14,802          12,446          11,971
   Diluted...............................      16,527          14,620            *
<FN>
*As a result of the loss, all options, warrants and convertible debentures are
  anti-dilutive.

                 See notes to consolidated financial statements.
</FN>
</TABLE>

                                      S-4
                                   
<PAGE>

                              AEROFLEX INCORPORATED
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                    Years Ended June 30, 1998, 1997 and 1996

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                                                  
                                                           Common Stock        Additional                     
                                                           ------------         Paid-in      Accumulated        Treasury Stock
                                          Total        Shares    Par Value      Capital        Deficit       Shares        Cost
                                          -----        ------    ---------     -----------   -----------     ------        ----
<S>                                      <C>           <C>        <C>          <C>           <C>              <C>       <C>     
Balance, July 1, 1995...............     $ 46,344      11,818     $ 1,182      $  56,101     $ (10,584)        92        $  (355)

Stock issued upon
  conversion of
  debentures........................           19           3         -               19          -            -              -
Treasury stock received
  from the employee
  stock ownership plan..............         (285)         -          -              -            -            56           (285)

Stock issued upon exercise
  of stock options..................          440         159          16            366          -           (19)            58

Stock and warrants issued
  to acquire business...............        1,074         300          30          1,044          -            -              -
Stock issued in connection
  with bank refinancing.............          300         100          10            290          -            -              -
Net loss............................      (17,420)         -          -              -        (17,420)         -              -
                                          -------     -------      ------        -------      --------     -------       --------
Balance, June 30, 1996..............       30,472      12,380       1,238         57,820      (28,004)        129           (582)

Stock issued upon exercise
  of stock options..................          586         278          28            290          -           (69)           268

Purchase of treasury
  stock.............................         (438)       -           -              -             -           109           (438)
Net income..........................        4,420        -           -              -            4,420         -              -
                                          -------     -------      ------        -------      --------     -------       --------
Balance, June 30, 1997..............       35,040      12,658       1,266         58,110       (23,584)       169           (752)

Stock issued in public offering.....       31,285       2,597         260         31,025          -            -              -
Stock issued upon exercise
  of stock options and warrants.....        2,923         349          35          2,141          -          (168)           747

Stock issued upon conversion
  of debentures.....................        9,382       1,774         177          9,205          -            -              -    
Net income..........................        8,406        -           -              -            8,406         -              -
                                          -------     -------     ------       ---------     ---------    --------       --------
Balance, June 30, 1998..............     $ 87,036      17,378     $ 1,738      $ 100,481     $ (15,178)         1        $    (5)
                                          =======     =======     =======      =========     =========    ========       ========
<FN>
                                     See notes to consolidated financial statements.
</FN>
</TABLE>

                                                           S-5
<PAGE>
                     AEROFLEX INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                            Years Ended June 30,
                                                                 -----------------------------------------
                                                                       1998         1997           1996
                                                                       ----         ----           ---- 
<S>                                                                 <C>           <C>           <C>       
Cash flows from operating activities:
  Net income (loss)............................................     $  8,406      $  4,420      $ (17,420)
  Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
      Special charge...........................................          -            -            23,200
      Depreciation and amortization............................        4,884         4,322          3,091
      Amortization of deferred gain............................         (588)         -              -
      Gain on sale of securities...............................          -            -              (533)
      Deferred income taxes....................................        1,004           (10)          (461)
      Other....................................................          (10)           57           (112)
  Change in operating  assets and  liabilities,  net of 
    effects from purchase of businesses:
      Decrease (increase) in accounts receivable...............        1,975         1,421         (2,220)
      Decrease (increase) in inventories.......................       (8,397)       (3,403)        (2,654)
      Decrease (increase) in prepaid
        expenses and other assets..............................         (633)          879             (6)
      Increase (decrease) in accounts
        payable, accrued expenses and
        other long-term liabilities............................        5,374           375            434
      Increase (decrease) in income taxes payable..............        1,648           668          1,189
                                                                    --------      --------       --------
Net cash provided by operating activities......................       13,663         8,729          4,508
                                                                    --------      --------       --------
Cash flows from investing activities:
  Payment for purchase of businesses,
    net of cash acquired.......................................         (249)         (162)       (35,190)
  Purchase of equipment, inventory and technology rights
    from Lucent Technolgies....................................       (4,435)          -              -
  Capital expenditures.........................................      (10,613)       (2,931)        (1,687)
  Proceeds from sale of property,
    plant and equipment........................................          209            16          2,318
  Net proceeds from sale of securities.........................          110            81          1,242
                                                                    --------      --------       --------
Net cash used in investing activities..........................      (14,978)       (2,996)       (33,317)
                                                                    --------      --------       --------
Cash flows from financing activities:
  Proceeds from issuance of common shares in public offering...       31,781           -              -
  Costs in connection with public offering.....................         (496)          -              -
  Borrowings under debt agreements.............................        6,231            58         27,250
  Debt repayments..............................................      (13,685)       (5,719)        (9,210)
  Bank debt financing costs....................................         -             -              (403)
  Purchase of treasury stock...................................         -              (438)          -
  Proceeds from the exercise of stock options and warrants.....        1,292            305           503
                                                                    --------       --------      --------
Net cash provided by (used in)
  financing activities.........................................       25,123         (5,794)       18,140
                                                                    --------       --------      --------
Net increase (decrease) in cash and
  cash equivalents.............................................       23,808            (61)      (10,669)
Cash and cash equivalents at beginning of period...............          600            661        11,330
                                                                    --------       --------      --------
Cash and cash equivalents at end of period.....................     $ 24,408       $    600      $    661
                                                                    ========       ========      ========
<FN>
                            See notes to consolidated financial statements.
</FN>
</TABLE>

                                       S-6

<PAGE>

                     AEROFLEX INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 1. Summary of Significant Accounting Principles and Policies

   Principles of Consolidation
   The accompanying  consolidated  financial  statements include the accounts of
   Aeroflex Incorporated and its subsidiaries (the "Company"),  all of which are
   wholly-owned.  All significant  intercompany  balances and transactions  have
   been eliminated.

   Use of Estimates
   The preparation of financial statements in conformity with generally accepted
   accounting  principles  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 financial  statements are the
   estimated costs to complete contracts in process.
   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
   The fair values of all financial  instruments,  other than long-term debt and
   the  convertible  debentures  (see Notes 7 and 8),  approximate  book  values
   because of the short maturity of these instruments.

   Revenue and Cost Recognition on Contracts
   Revenue is recognized  based upon shipments or billings.  The Company records
   gross  profit  on  its  long-term  contracts  using  percentage-of-completion
   accounting  under which costs are recognized on revenues in the same relation
   that  total  estimated  manufacturing  costs  bear to total  contract  value.
   Estimated  costs at  completion  are based upon  engineering  and  production
   estimates.  Provisions for estimated losses or revisions in estimated profits
   on  contracts-in-process  are  recorded in the period in which such losses or
   revisions are first determined.

   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 2 for a discussion of purchased in-process research and development.

                                       S-7

<PAGE>

   Intangible Assets
   Intangible  assets are recorded at cost, less accumulated  amortization.  The
   excess of purchase price over the fair value of tangible  assets  acquired is
   being amortized on a  straight-line  basis over periods ranging from 20 to 40
   years except for certain costs  allocated to existing  technology,  workforce
   in-place,  customer  relationships and patents which are amortized over 13 to
   15 years,  the estimated  remaining lives of the intangibles at the time they
   were  acquired  by  the  Company.  The  Company  periodically  evaluates  the
   recoverability of the carrying value of its intangible assets and the related
   amortization  periods. The Company assesses the recoverability of unamortized
   goodwill based on the  undiscounted  projected future earnings of the related
   businesses.  As of June 30,  1998,  the cost in excess  of fair  value of net
   assets of businesses acquired consists substantially of $8,398,000 related to
   the 1989  acquisition of Comstron  Corporation,  a manufacturer  of frequency
   synthesizers, subsystems and components.

   Long-Lived Assets
   Effective July 1, 1996 the Company adopted Statement of Financial  Accounting
   Standards  ("SFAS") No. 121,  "Accounting  for the  Impairment  of Long-Lived
   Assets and for  Long-Lived  Assets to Be Disposed  Of",  which  requires that
   long-lived assets and certain identifiable intangibles to be held and used or
   disposed of by an entity be reviewed for possible  impairment whenever events
   or changes in circumstances indicate that the carrying amount of an asset may
   not be  recoverable.  The adoption of SFAS No. 121 did not have any impact on
   the Company's consolidated financial position or results of operations.

   Income (Loss) Per Share
   For the year  ended June 30,  1998,  the  Company  has  adopted  SFAS No. 128
   "Earnings  Per Share." In accordance  with SFAS No. 128,  earnings per common
   share  ("Basic  EPS") is computed by dividing net income by weighted  average
   common  shares  outstanding.  Earnings  per common  share  assuming  dilution
   ("Diluted  EPS") is computed by dividing net income plus a pro forma  addback
   of debenture  interest by weighted  average  common shares  outstanding  plus
   potential  dilution from the  conversion  of  debentures  and the exercise of
   stock options and warrants. Income (loss) per share amounts for prior periods
   have been restated to conform to the provisions of SFAS No. 128.

   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  earnings  and pro forma  earnings  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.

   Income Taxes
   In accordance with SFAS No. 109,  "Accounting for Income Taxes",  the Company
   measures  deferred  tax assets  and  liabilities  based upon the  differences
   between the financial accounting and tax bases of assets and liabilities.

   Reclassifications
   Reclassifications  have been made to the 1997 and 1996 consolidated financial
   statements to conform to the 1998 presentation.

                                       S-8


<PAGE>

 2.Acquisition of Businesses
   MIC
   Effective March 19, 1996, the Company  acquired all of the outstanding  stock
   of MIC Technology Corporation ("MIC") for approximately  $36,000,000 of cash,
   300,000  shares of common  stock and warrants to purchase  400,000  shares of
   common stock (at exercise prices ranging from $7.05 to $7.50 per share).  The
   purchase price was paid with available cash of  approximately  $9,000,000 and
   borrowings   under  the  Company's  bank  loan  agreement  of   approximately
   $27,000,000.   MIC  manufactures   high  frequency  thin  film  circuits  and
   interconnects for miniaturized,  high frequency,  high performance electronic
   products  for growing  commercial  markets  such as wireless  communications,
   satellite  based   communications   hardware  and  high  technology  military
   electronics.  The acquired company's net sales were approximately $25,000,000
   for its fiscal year ended October 31, 1995.

   The Company  commissioned  an independent  asset  valuation study of acquired
   tangible  and  identifiable  intangible  assets  to  serve  as  a  basis  for
   allocation of the purchase price.  Based on this study, the Company allocated
   the purchase price as follows:

<TABLE>
<CAPTION>
                                                    (In thousands)
                                                    -------------- 
          <S>                                          <C>     
          Net tangible assets.......................   $  6,190
          Identifiable intangible assets............      8,453
          In-process research and development.......     23,200
                                                       -------- 
                                                       $ 37,843
                                                       ========
</TABLE>

   The  identifiable   intangible  assets  which  include  existing  technology,
   customer  relationships  and  assembled  work force are being  amortized on a
   straight-line  basis over thirteen years based on the study described  above.
   The acquired  in-process  research and development was not considered to have
   reached technological  feasibility and, in accordance with generally accepted
   accounting principles, the value of such was expensed in the third quarter of
   fiscal 1996.

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

<TABLE>
<CAPTION>
                                                 Pro Forma Year Ended
                                                    June 30, 1996
                                          -------------------------------------
                                          (In thousands, except per share data)

     <S>                                              <C>     
     Net sales........................                $ 90,097
     Net loss.........................                 (19,392)
 
     Loss per share
       Basic..........................                $  (1.62)
       Diluted........................                      *
<FN>
     * Due to the loss,  all options,  warrants and  convertible  debentures are
       anti-dilutive.
</FN>
</TABLE>

   The pro forma financial  information  presented above for the MIC acquisition
   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.


                                       S-9
<PAGE>
    Lintek
    In January 1995, the Company acquired substantially all of the net operating
    assets of Lintek, Inc. ("Lintek") for $537,000 plus contingent consideration
    based on the  next  five  years'  earnings  to a  maximum  of an  additional
    $675,000.  Additional  consideration  of $249,000,  $162,000 and $63,000 was
    earned as of  December  31,  1997,  1996 and 1995 and paid in March 1998 and
    February  1997  and  1996,  respectively.  Such  amounts,  and  any  further
    contingent  consideration  earned, will be treated as cost in excess of fair
    value of net assets  acquired.  Lintek  designs,  develops and  manufactures
    radar cross section and antenna pattern  measurement  systems for commercial
    and military applications, as well as surface penetrating radars.
    The acquisitions 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 MIC and Lintek are  included in the  consolidated  statements  of
    operations from the respective acquisition dates.

 3. Acquisition of Assets From Lucent Technologies
    Effective  July 1, 1997, the Company's  subsidiary,  MIC,  acquired  certain
    equipment,  inventory,  licenses for technology and patents of two of Lucent
    Technologies'  microelectronics  components  units - multi-chip  modules and
    film integrated circuits - for approximately $4,400,000 in cash. These units
    manufacture  microelectronic  modules and interconnect products. The Company
    has also signed a multi-year  supply  agreement to provide  Lucent with film
    integrated circuits for use in telecommunications applications. The purchase
    price has been allocated to the assets acquired, based on their fair values,
    and certain obligations assumed relating to the agreements.

 4. Inventories
    Inventories consist of the following:
<TABLE>
<CAPTION>
                                                    June 30,
                                            ------------------------ 
                                               1998          1997
                                            ----------    ----------        
                                                 (In thousands)
    <S>                                     <C>             <C>     
    Raw materials....................       $ 12,012        $ 11,191
    Work-in-process..................         12,737           6,642
    Finished goods...................          5,102           2,486
                                            --------        -------- 
                                            $ 29,851        $ 20,319
                                            ========        ========
</TABLE>
    Inventories  include  contracts-in-process  of $13,227,000 and $3,318,000 at
    June  30,  1998 and  1997,  respectively,  which  consist  substantially  of
    unbilled material,  labor and overhead costs that are or were expected to be
    billed during the succeeding fiscal year.

 5. Property, Plant and Equipment
    Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
                                               June 30,
                                      ----------------------------  
                                          1998           1997
                                      ------------  --------------
                                              (In thousands)
    <S>                                <C>             <C>     
    Land............................   $     725       $    725
    Building and leasehold
      improvements..................      17,479          11,742
    Machinery, equipment, tools
      and dies......................      29,285          19,583
    Furniture and fixtures..........       5,968           5,196
    Assets recorded under
      capital leases................       2,334           2,392
    Transportation equipment........         115              85
                                       ---------       --------- 
                                          55,906          39,723
    Less accumulated depreciation
      and amortization..............      28,912          25,236
                                       ---------       ---------  
                                       $  26,994       $  14,487
                                       =========       ========= 
</TABLE>
                                     S-10
 

<PAGE>
   Repairs  and  maintenance  expense  on  property,  plant  and  equipment  was
   $1,384,000,  $1,131,000 and $481,000 for the years ended June 30, 1998,  1997
   and 1996, respectively.

 6.Accrued Expenses and Other Current Liabilities
   Accrued  expenses and other current  liabilities  include  accrued  salaries,
   wages and other  compensation  of $4,311,000  and $2,874,000 at June 30, 1998
   and 1997, respectively.

 7.Long-Term  Debt  and  Credit  Arrangements  Long-term  debt  consists  of the
   following:
<TABLE>
<CAPTION>
                                             June 30,
                                     ------------------------            
                                        1998           1997
                                     ----------     --------- 
                                           (In thousands)
<S>                                  <C>             <C> 
   Revolving credit and term
     loan agreement (a)..........    $  4,720        $ 17,150
   Equipment loans (b)...........       5,624             -
   Capitalized lease
     obligations (c).............       1,019           1,536
   Other.........................         118             249
                                     --------        --------        
                                       11,481          18,935
   Less current maturities.......       1,755           4,247
                                     --------        --------   
                                     $  9,726        $ 14,688
                                     ========        ========     
</TABLE>
       Aggregate long-term debt as of June 30, 1998 matures in each fiscal year
       as follows:
<TABLE>
<CAPTION>
                                       (In thousands)
                     <S>                 <C>
                     1999............... $  1,755
                     2000...............      938
                     2001...............    5,591
                     2002...............      941
                     2003...............    1,681
                     Thereafter.........      575
                                         --------
                                         $ 11,481
                                         ========
</TABLE>
   Interest paid was  $2,099,000,  $2,647,000  and  $1,584,000  during the years
   ended June 30, 1998, 1997 and 1996, respectively.

   (a) As of March 31, 1998,  the Company  replaced a previous  agreement with a
   revised  revolving  credit  agreement  with two  banks  which is  secured  by
   substantially  all of the  Company's  assets.  The  agreement  provides for a
   revolving  credit line of  $27,000,000,  which expires on March 31, 2001. The
   interest  rate  on  borrowings  under  this  agreement  is at  various  rates
   depending upon certain financial ratios,  with the present rate substantially
   equivalent to the prime rate (8.5% at June 30, 1998). The Company has entered
   into an interest rate swap  agreement  for the  $4,720,000  then  outstanding
   under the revolving  credit line at 7.6% in order to reduce the interest rate
   risk  associated  with  these  outstanding  borrowings.  The  Company  paid a
   facility fee of $20,000 and is required to pay a  commitment  fee of 1/4% per
   annum of the average unused portion of the credit line.

   The  terms  of  the  agreement  require  compliance  with  certain  covenants
   including  minimum  consolidated  tangible  net  worth and  pretax  earnings,
   maintenance of certain financial ratios,  limitations on capital expenditures
   and  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 facility of $2,000,000.  At June 30, 1998,
   the Company's  available unused line of credit was approximately  $20,000,000
   after  consideration  of the letter of credit.  The Company believes that the
   carrying amount of this debt  approximates  fair value after  considering the
   interest  rate swap  agreement  discussed  above,  since the interest rate is
   effectively  fixed at a rate commensurate with rates available to the Company
   under similar terms.
                                      S-11


<PAGE>

   (b) During the year ended June 30, 1998,  the Company  entered into equipment
   loans with two banks  totaling  $6,232,000.  The loans are repayable  monthly
   through July 2004 and bear interest at a floating rate 200 basis points above
   the 30-day London Interbank Offered Rate (7.6 and 7.7% at June 30, 1998). The
   Company  believes  that the carrying  amount of this debt  approximates  fair
   value since the interest rate is variable and the margins are consistent with
   those available to the Company under similar terms.

   (c) The Company has various  capitalized  lease  obligations  with  financial
   institutions which have various terms through 2000 and interest rates ranging
   from 7.1% to 9.5%.

 8.Senior Subordinated Convertible Debentures
   During June 1994,  the  Company  completed  a sale of  $10,000,000  principal
   amount of 7-1/2%  Senior  Subordinated  Convertible  Debentures  to  non-U.S.
   persons.  The net proceeds  from the offering  were used  initially to retire
   certain  bank  indebtedness  and for  general  working  capital  with  excess
   proceeds  placed in  temporary  short  term bank  related  investments  until
   ultimately used for the purchase of MIC. The debentures were convertible into
   the  Company's  common stock at a price of $5.625 per share.  On September 8,
   1997, the Company called for the redemption of all outstanding  7-1/2% Senior
   Subordinated Convertible Debentures at 104.5% of the principal amount. All of
   the principal amount of the Company's 7-1/2% Senior Subordinated  Convertible
   Debentures was converted.  In connection  with the  conversions,  $599,000 of
   deferred bond issuance costs were charged to additional paid-in capital.

 9.  Stockholders' Equity

   (a)  Common Stock Offering
   In March 1998,  the Company  sold  2,597,000  shares of its Common Stock in a
   public  offering  for  $31,285,000,   net  of  an  underwriting  discount  of
   $1,973,000 and issuance costs of $496,000. Of these net proceeds,  $9,639,000
   was used to repay bank indebtedness.  The balance of the net proceeds,  which
   is included in cash and cash equivalents,  will be used for general corporate
   purposes,  including  working  capital,  capital  expenditures and facilities
   expansion and may be used for potential acquisitions.

   (b)  Stock Option Plans
   Under the Company's  stock option  plans,  options may be granted to purchase
   shares of the Company's common stock  exercisable at prices 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 and expire ten years from the
   date of grant. The Directors' Plan, as amended,  covers 500,000 shares of the
   Company's Common Stock. In November 1994, the shareholders approved this 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").  The  NQSOP,  the 1994  Plan,  the 1996 Plan and the 1998 Plan
   provide for options which become  exercisable in one or more installments and
   each covers 1,500,000 shares of the Company's Common Stock. Options under the
   NQSOP and the 1994 Plan  expire  five years  from the date of grant.  Options
   under the 1996 Plan and the 1998 Plan  shall  expire not later than ten years
   from the date of grant.

   The Company has also issued to  employees,  who are not  executive  officers,
   options to purchase  275,000 shares of common stock  exercisable at $4.00 per
   share. Such grants were not covered by one of the above plans.

                                      S-12


<PAGE>
   Additional  information  with respect to the  Company's  stock  options is as
follows:
<TABLE>
<CAPTION>
                                     Weighted       Shares
                                      Average        Under
                                     Exercise     Outstanding
                                      Prices        Options
                                    ----------   -------------   
                                                (In thousands)
<S>                                    <C>          <C>
                 Balance, July 1,
                  1995.........        $3.11         2,592
                 Granted.......         3.93           960
                 Forfeited.....         2.98           (68)
                 Exercised.....         2.77          (191)
                                                     ------  
                 Balance, June 30,
                  1996.........         3.38         3,293
                 Granted.......         4.47           668
                 Forfeited.....         3.17           (71)
                 Exercised.....         2.04          (570)
                                                     ------  
                 Balance, June 30,
                  1997.........         3.83         3,320
                 Granted.......         9.94         1,043
                 Forfeited.....         3.65           (35)
                 Exercised.....         3.17          (436)
                                                     ------  
                 Balance, June 30,
                  1998.........     $   5.54         3,892
                                                     ======  
</TABLE>
   Options  to  purchase   2,317,000,   2,168,000  and  2,092,000   shares  were
   exercisable at weighted average exercise prices of $3.90,  $3.61 and $3.06 as
   of June 30, 1998, 1997 and 1996, respectively.

   The  options  outstanding  as of June 30,  1998 are  summarized  in ranges as
follows:
<TABLE>
<CAPTION>
                   Options Outstanding
     ----------------------------------------------
                   Weighted               Weighted
       Range of    Average                Average
       Exercise    Exercise  Options      Remaining
        Prices     Price     Outstanding  Life
     ------------  --------  -----------  ---------     
                            (In thousands)
     <S>            <C>        <C>        <C> 
     $2.00-$ 3.50   $2.85       305       0.3 years
     $3.75-$ 5.38    4.07     2,552       4.0
     $8.19-$13.44    9.98     1,035       9.4
                              -----
                              3,892
                              =====
</TABLE>
<TABLE>
<CAPTION>
                    Options Exercisable
       ------------------------------------------              
                      Weighted
       Range of       Average
       Exercise       Exercise    Options
        Prices        Price       Exercisable
       ---------      ---------   ----------- 
                                (In thousands)
      <S>              <C>          <C>
      $2.00-$ 3.50     $2.85          305
      $3.75-$ 5.38      3.99        1,992
      $8.19-$13.44     10.81           20
                                    -----
                                    2,317
                                    =====
</TABLE>
                                      S-13
<PAGE>
   The per share  weighted  average fair value of stock options  granted  during
   fiscal 1998, 1997 and 1996 was $7.39, $2.37 and $1.31,  respectively,  on the
   date of grant using the Black Scholes option-pricing model with the following
   weighted average assumptions: 1998 - expected dividend yield of 0%, risk free
   interest  rate of 5.8%,  expected  stock  volatility  of 80%, and an expected
   option  life of 7.4 years;  1997 - expected  dividend  yield of 0%, risk free
   interest  rate of 6.3%,  expected  stock  volatility  of 40%, and an expected
   option  life of 7.4 years;  1996 - expected  dividend  yield of 0%, risk free
   interest  rate of 5.4%,  expected  stock  volatility  of 30%, and an expected
   option life of 4.3 years.

   (c) Accounting for Stock-Based Compensation.
   In October 1995,  the Financial  Accounting  Standards  Board issued SFAS No.
   123, "Accounting for Stock-Based  Compensation," which the Company adopted in
   fiscal  1997.  The Company has chosen not to  implement  the fair value based
   accounting method for employee and director stock options, but has elected to
   disclose  the pro forma net income and  earnings  per share as if such method
   had been used to account for  stock-based  compensation  cost as described in
   SFAS No. 123. The pro forma  compensation cost before income taxes,  based on
   the fair value at the grant date for  options  granted  only in fiscal  years
   1998, 1997 and 1996 was $2,021,000, $783,000 and $429,000 for the years ended
   June 30, 1998, 1997 and 1996,  respectively.  The Company's net income (loss)
   and net income (loss) per share using this pro forma  compensation cost would
   have been:
<TABLE>
<CAPTION>
                                    Years Ended
                        ------------------------------------- 
                        (In thousands, except per share data)
                                     June 30, 1996
                               --------------------------
                               As Reported      Pro Forma
                               -----------      ---------   
      <S>                        <C>            <C>      
      Net Loss...............    $(17,420)      $(17,772)
      Net Loss Per Share
          - Basic............    $  (1.46)        $(1.48)
          - Diluted..........        *              *
</TABLE>
<TABLE>
<CAPTION>
                                      June 30, 1997
                               --------------------------
                               As Reported      Pro Forma
                               -----------      ---------
      <S>                      <C>            <C>     
      Net Income.............   $ 4,420        $ 3,919
      Net Income Per Share
           -Basic.............  $  0.36        $  0.31
           -Diluted...........     0.34           0.30
</TABLE>
<TABLE>
<CAPTION>
                                      June 30, 1998
                               --------------------------
                               As Reported     Pro Forma
                               -----------     ----------   
      <S>                      <C>            <C>     
      Net Income.............  $  8,406        $ 7,112
      Net Income Per Share
           -Basic............. $   0.57        $  0.48
           -Diluted........... $   0.51        $  0.44
</TABLE>
       *  As a result of the loss, all options, warrants and convertible 
          debentures are anti-dilutive.

   Since the pro forma compensation cost reflects only options granted in fiscal
   years  1998,  1997 and  1996,  the full  impact  of  calculating  stock-based
   compensation  costs under SFAS No. 123 is not  reflected in the pro forma net
   income (loss)  because  compensation  cost is recognized  over the respective
   vesting period and compensation cost for options granted prior to fiscal year
   1996 was not reflected.

                                      S-14

<PAGE>


   (d) Shareholders' Rights Plan
   In August 1988,  the Company's  Board of Directors  approved a  Shareholders'
   Rights Plan which  provided  for rights  which would have become  exercisable
   only in the event a person or group  accumulated  20  percent  or more of the
   Company's  common  shares.  The rights  expired on August 30,  1998 and a new
   Shareholders' Rights Plan was approved.  See Note 15 for a discussion of this
   new plan.

   (e) Earnings Per Share
   A  reconciliation  of the  numerators and  denominators  of the Basic EPS and
   Diluted EPS calculations is as follows:

<TABLE>
<CAPTION>
                                                         Years Ended June 30,
                                                   --------------------------------
                                                   1998          1997          1996
                                                   ----          ----          ----     
                                                 (In thousands, except per share data)
<S>                                             <C>            <C>          <C>
   Computation of Adjusted Net Income (Loss):
   Net income (loss) for basic earnings per
     common share.............................   $  8,406       $  4,420     $(17,420)
                                                                             =========
     Add: Debenture interest and amortization
     expense, net of income taxes.............        103            504         *
                                                 --------       --------     
   Adjusted net income for diluted
     earnings per common share................   $  8,509       $  4,924         *
                                                 ========       ========  
   Computation of Adjusted Weighted Average
     Shares Outstanding:
   Weighted average shares outstanding........     14,802         12,446       11,971
                                                                              ======= 
   Add: Shares assumed to be issued upon
     conversion of debentures.................        392            400         *
   Add: Effect of dilutive options and
     warrants outstanding.....................      1,333          1,774         *
                                                 --------        ------- 
   Weighted average shares and common share
     equivalents used for computation of
     diluted earnings per common share........     16,527         14,620         *
                                                 ========       ======== 
   Net Income (Loss) Per Common Share:
     Basic....................................       $.57          $ .36       $(1.46)
                                                 ========       ========      =======
     Diluted..................................       $.51          $ .34          *
                                                 ========       ========      
   -----------
<FN>
* As a result of the loss in fiscal 1996, all options, warrants and convertible
  debentures are anti-dilutive.
</FN>
</TABLE>

   Options to purchase  290,000  shares at an exercise price of $13.44 per share
   were outstanding as of June 30, 1998 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-15


<PAGE>

10.  Income Taxes
   The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
                                          Years Ended June 30,
                                ----------------------------------------
                                     1998          1997          1996
                                     ----          ----          ----   
                                              (In thousands)
<S>                              <C>           <C>           <C>    
       Current:   
         Federal...............  $ 3,178       $ 1,752       $ 1,166
         State and local.......      568           693           569
                                 -------       -------       -------  
                                   3,746         2,445         1,735
                                 -------       -------       -------     
       Deferred:
         Federal...............      932           404          (776)
         State and local.......       72          (414)          201
         U.S. Territory........        -             -           114
                                 -------       -------       -------     
                                   1,004           (10)         (461)
                                 -------       -------       -------     
                                 $ 4,750       $ 2,435       $ 1,274
                                 =======       =======       =======
</TABLE>
     

   The  provision  for income taxes varies from the amount  computed by applying
   the U.S.  Federal  income tax rate to income  (loss) before income taxes as a
   result of the following:

<TABLE>
<CAPTION>
                                          Years Ended June 30,
                                   ----------------------------------
                                     1998          1997          1996
                                     ----          ----          ----
                                              (In thousands)

       <S>                         <C>           <C>           <C>     
       Tax at statutory rate...    $  4,505      $ 2,331       $(5,490)
       Non-deductible special
        charge (Note 2)........         -             -          7,888
       Utilization of net
        operating loss
        carryforwards..........         -             -         (1,437)
       State, local and U.S.
        Territory income tax...         416          184           376
       Research and Development
        credit.................        (250)          -             -
       Other, net..............          79          (80)          (63)
                                   ---------     --------      --------   
                                   $  4,750      $ 2,435       $ 1,274
                                   =========     ========      ========
</TABLE>
 

                                      S-16

<PAGE>
   Deferred tax assets and liabilities consist of:

<TABLE>
<CAPTION>
                                                             June 30,
                                                   ---------------------------
                                                      1998             1997
                                                      ----             ---- 
                                                           (In thousands)
       <S>                                         <C>               <C>     
       Accounts receivable.......................  $    106          $    148
       Inventories...............................     1,671             1,676
       Accrued expenses..........................        84               219
                                                   --------          -------- 
         Current assets..........................     1,861             2,043
                                                   --------          -------- 
       Other long-term liabilities...............       781                 -
       Capital loss carryforwards................     2,493             2,684
       Tax loss carryforwards....................       238             1,737
       Tax credit carryforwards..................     3,737             3,477
       Less valuation allowance..................    (3,379)           (3,569)
                                                   --------          -------- 
         Non-current assets......................     3,870             4,329
                                                   --------          -------- 
       Property, plant and equipment.............    (1,848)             (955)
       Intangibles...............................    (3,125)           (3,654)
       Other.....................................       (53)              (54)
                                                   --------          -------- 
         Long-term liabilities...................    (5,026)           (4,663)
                                                   --------          -------- 
         Net non-current liabilities.............    (1,156)             (334)
                                                   --------          -------- 
           Total.................................  $    705          $  1,709
                                                   ========          ========
</TABLE>
 
   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 asset will not be realized.

   The Company is undergoing routine audits by various taxing authorities of its
   state  and local  income  tax  returns  covering  periods  from 1994 to 1996.
   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  $2,123,000,  $1,468,000 and $588,000
   and received  refunds of $26,000,  $1,117,000  and $268,000  during the years
   ended June 30, 1998, 1997 and 1996, respectively.

   A tax benefit of $1,641,000 was credited to additional paid-in capital during
   the year ended June 30, 1998 in connection with the exercise of stock options
   and warrants.

11.  Employment Contracts

   In February 1997, the Company entered into employment agreements, as amended,
   with  certain of its  officers  for periods  through  December  31, 2002 with
   annual  remuneration  ranging from $180,000 to $289,000,  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
   $1,007,000 per year. In addition, these officers have the option to terminate
   their  employment  agreements  upon  change in  control  of the  Company,  as
   defined,   and  receive  lump  sum  payments  equal  to  three  times  annual
   compensation,  as defined,  or, in one case, a lump sum payment  equal to the
   salary for the remainder of the term.

                                      S-17
<PAGE>

12.  Employee Benefit Plans

   The  Aeroflex  Incorporated  Employees'  401(k) Plan (the "ARX  401(k)")  was
   established  pursuant to Section  401(k) of the Internal  Revenue  Code.  All
   employees  of the Company and certain  subsidiaries  who are not members of a
   collective  bargaining  agreement  may  participate  in the ARX 401(k).  Each
   participant   has  the  option  to   contribute  a  portion  of  his  or  her
   compensation.  For each of the 1998, 1997 and 1996 calendar years,  the Board
   of  Directors  has elected to provide an employer  contribution,  which vests
   immediately,  equal  to 30% of  employee  contributions  subject  to  certain
   limitations. The ARX 401(k) expense for the fiscal years ended June 30, 1998,
   1997 and 1996 was $298,000, $263,000 and $230,000, respectively.

   Employees  of MIC  Technology,  who are  excluded  from the ARX  401(k),  are
   eligible to  participate  in the MIC 401(k) Plan and MIC Profit  Sharing Plan
   (the "MIC  Plans").  In  addition  to  contributing  a portion  of his or her
   compensation and receiving an employer contribution,  eligible employees also
   receive an allocation of a discretionary share of the MIC Technology profits.
   The MIC Plans'  expense was  $512,000,  $450,000  and $104,000 for the fiscal
   years  ended June 30, 1998 and 1997 and for the period  from  acquisition  to
   June 30, 1996, 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,  1998,  1997 and 1996 was  $324,000,  $300,000  and  $217,000,
   respectively.  The assets of the SERP are held in a Rabbi Trust and  amounted
   to  $744,000  and  $386,000  at June 30,  1998 and  1997,  respectively.  The
   accumulated benefit obligation was $1,695,000 and $1,259,000 at June 30, 1998
   and 1997, respectively. No participants are currently receiving benefits.

13.  Commitments and Contingencies

   a.  Operating Leases

   Several of the  Company's  operating  facilities  and certain  machinery  and
   equipment are leased under  agreements  expiring through 2005. 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, 1998 are as 
follows for the fiscal years:

<TABLE>
<CAPTION>
                                    (In thousands)
                                    --------------
                    <S>                 <C>    
                    1999............... $ 1,404
                    2000...............   1,118
                    2001...............   1,046
                    2002...............     808
                    2003...............     760
                    Thereafter.........     402
                                        -------
                                        $ 5,538
                                        =======
</TABLE>

   These future minimum payments exclude payments under a lease of the Company's
   Pearl  River,  New York  facility  which was  terminated  upon the  Company's
   purchase of the facility in July 1998 as further described in Note 15.

   Rental  expense was  $1,869,000,  $1,560,000  and $790,000  during the fiscal
   years 1998, 1997 and 1996, respectively.

                                      S-18

<PAGE>

   b.  Legal Matters

   A subsidiary of the Company whose  operations  were  discontinued in 1991, is
   one of several  defendants  named in a personal  injury  action  initiated in
   August,  1994, by a group of plaintiffs.  The plaintiffs are seeking  damages
   which cumulatively  exceed $500 million.  The complaint alleges,  among other
   things,  that the  plaintiffs  suffered  injuries from exposure to substances
   contained in products sold by the  subsidiary to one of its  customers.  This
   action is in the early stages of discovery.  Based upon available information
   and considering  its various  defenses,  together with its product  liability
   insurance,  in the  opinion of  management  of the Company the outcome of the
   action  against its subsidiary  will not have a materially  adverse effect on
   the Company's consolidated financial statements.

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

14.  Business Segments

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

     Microelectronics:            Isolator Products:
     a)Microelectronic Modules    a)Commercial spring and rubber isolators (VMC)
        (Circuit Technology)      b)Industrial spring and rubber isolators
     b)Thin Film Interconnects        (Korfund)
        (MIC Technology)          c)Military wire-rope isolators
                                      (Aeroflex International)
     Test, Measurement and
      Other Electronics:
     a)Instrument products
        (Comstron and Lintek)
     b)Motion Control Systems
        - Scanning devices
        - Stabilization and tracking
            devices
        - Magnetic devices



                                      S-19

<PAGE>


    The Company is a manufacturer of advanced  technology systems and components
    for commercial industry,  government and defense contractors.  Approximately
    42%, 50% and 65% of the Company's  sales for the fiscal years 1998, 1997 and
    1996,  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  Lucent  Technologies  which
    comprised  15.5% of sales in fiscal year 1998 and Lockheed Martin and Hughes
    which comprised 13.3% and 11.7% of sales in fiscal year 1997, respectively.
<TABLE>
<CAPTION>
                                                           Years Ended June 30,
                                                  ----------------------------------
                                                     1998         1997        1996
                                                     ----         ----        ----
                                                               (In thousands)

    <S>                                          <C>          <C>         <C>
    Business Segment Data:
     Net sales:
       Microelectronics.......................   $  74,263    $ 48,462     $ 28,414
       Test, Measurement and
         Other Electronics....................      25,685      28,144       30,109
       Isolator Products......................      18,913      17,693       15,844
                                                 ---------   ---------    ---------        
         Net sales............................   $ 118,861    $ 94,299     $ 74,367
                                                 =========   =========    =========        
     Operating income (loss):
       Microelectronics.......................   $  14,147    $  6,644     $  3,282
       Test, Measurement and
         Other Electronics....................         996       2,762        4,830
       Isolator Products......................       3,063       2,844        2,150
       General corporate expenses.............      (3,348)     (2,514)      (2,344)
                                                 ---------   ---------    ---------        
                                                    14,858       9,736        7,918
       Special charge (1).....................            -           -     (23,200)
       Interest expense.......................      (2,011)     (2,974)      (1,939)
       Other income, net......................         309          93        1,075
                                                 ---------   ---------    ---------        
         Income (loss) before income taxes....   $  13,156    $  6,855     $(16,146)
                                                 =========   =========    =========        
     Identifiable assets:
       Microelectronics.......................   $  58,053    $ 37,741     $ 35,445
       Test, Measurement and
         Other Electronics....................      27,522      28,603       31,354
       Isolator Products......................      10,163       9,700        9,752
       Corporate..............................      28,363       5,003        4,618
                                                 ---------   ---------    ---------        
         Total assets.........................   $ 124,101    $ 81,047     $ 81,169
                                                 =========   =========    =========        
     Capital expenditures:
       Microelectronics.......................   $   8,792    $  1,637     $    766
       Test, Measurement and
         Other Electronics....................         848         996          597
       Isolator Products......................         970         293          315
       Corporate..............................           3           5            9
                                                 ---------   ---------    ---------        
         Total capital expenditures...........   $  10,613    $  2,931     $  1,687
                                                 =========   =========    =========        
     Depreciation and amortization
      expense:
       Microelectronics.......................   $   2,802    $  2,230     $    996
       Test, Measurement and
         Other Electronics....................       1,553       1,528        1,530
       Isolator Products......................         500         532          535
       Corporate..............................          29          32           30
                                                 ---------   ---------    ---------        
         Total depreciation and
          amortization........................   $   4,884    $  4,322     $  3,091
                                                 =========   =========    ========= 
<FN>
 (1) The special charge for the write-off of in-process research and development
     acquired  in the  purchase  of MIC  Technology  is  allocable  fully to the
     microelectronics segment.
</FN>
</TABLE>
                                      S-20

<PAGE>
15.  Subsequent Events

 a.  Purchase of MIC's Pearl River Facility
 In July 1998, the Company purchased a previously  leased operating  facility in
 Pearl River, New York for $2,500,000 in cash.

 b.  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 will 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 will expire on August
 31,  2008.  Each right will entitle the holder to buy one  one-thousandth  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 value.

 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-21

<PAGE>

Quarterly Financial Data (Unaudited):
(In thousands except per share data)

<TABLE>
<CAPTION>
                                             Quarter  
                            ------------------------------------------   Year Ended 
 1998                          First     Second     Third      Fourth      June 30
 ----                       --------------------------------------------------------   

<S>                         <C>        <C>        <C>        <C>          <C>     
Net Sales                   $ 23,885   $ 29,325   $ 31,221   $ 34,430     $118,861
Gross Profit                   8,212      9,919     10,883     12,561       41,575
Net Income                  $  1,152   $  1,686   $  2,057   $  3,511     $  8,406
                            ========   ========   ========   ========     ========   
Income Per Share:
  Basic                     $  .09     $  .12     $  .14     $  .20       $  .57
                            ======     ======     ======     ======       ======        
  Diluted                   $  .08     $  .11     $  .13     $  .19       $  .51
                            ======     ======     ======     ======       ======    
</TABLE>

<TABLE>
<CAPTION>
                                             Quarter  
                            ------------------------------------------   Year Ended 
 1998                          First     Second     Third      Fourth      June 30
 ----                       ----------------------------------------------------

<S>                         <C>        <C>        <C>        <C>        <C>     
Net Sales                   $ 19,061   $ 22,914   $ 22,937   $ 29,387   $ 94,299
Gross Profit                   6,278      7,257      7,759      9,896     31,190
Net Income                  $    651   $    893   $    917   $  1,959   $  4,420
                            --------   --------   --------   --------   --------  
Income Per Share:
  Basic                     $    .05   $    .07   $    .07   $    .16   $    .36
                            ========   ========   ========   ========   ========  
                              
  Diluted                   $    .05   $    .07   $    .07   $    .15     $  .34
                            ========   ========   ========   ========   ========  
</TABLE>


Since per share  information is computed  independently for each quarter and the
full  year,  based  on the  respective  average  number  of  common  and  common
equivalent shares  outstanding,  the sum of the quarterly per share amounts does
not necessarily equal the per share amounts for each year.


                                      S-22

<PAGE>

                              AEROFLEX INCORPORATED
                                AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (In thousands)

<TABLE>
<CAPTION>
Column A             Column B          Column C           Column D    Column E
                                       Additions
                                ----------------------
                                                 Charged
                      Balance at   Charged to    to other                Balance at
                      beginning    costs and     accounts    Deductions    end of
Description           of period    expenses   -  describe  - describe      period
-----------           -----------  -----------   --------    ----------- ----------

<S>                     <C>          <C>         <C>         <C>            <C>   
YEAR ENDED JUNE 30, 1998:

Allowance for doubtful
  accounts              $  417       $   15      $    -      $  115  (A)    $  317
                        ======       ======      ======      ======         ====== 
Reserve for inventory
  obsolescence          $4,055       $  150      $    -      $  613  (B)    $3,592
                        ======       ======      ======      ======         ====== 
YEAR ENDED JUNE 30, 1997:

Allowance for doubtful
  accounts              $  354       $   72      $    -      $    9  (A)    $  417
                        ======       ======      ======      ======         ====== 
Reserve for inventory
  obsolescence          $4,260       $  100      $    -      $  305  (B)    $4,055
                        ======       ======      ======      ======         ====== 

YEAR ENDED JUNE 30, 1996:

Allowance for doubtful
  accounts              $  437       $  (55)     $     -     $   28  (A)   $  354
                        ======       ======      ======      ======         ====== 
Reserve for inventory
  obsolescence          $4,380       $  497      $     -     $  617  (B    $4,260
                        ======       ======      ======      ======         ====== 


Note:  (A) - Net write-offs of uncollectible amounts.
       (B) - Write-off of inventory.

</TABLE>
                                      S-23
<PAGE>
                         INDEPENDENT AUDITORS' CONSENT

Board of Directors
Aeroflex Incorporated:

     We consent to  incorporation  by reference in the  registration  statements
(Nos.  33-75496,  33-88868,  33-88878,  333-42399 and 333-42405) on Form S-8 and
(Nos.  333-15339,  333-21803 and 333-46689) on Form S-3 of Aeroflex Incorporated
of our report dated August 13,1998,  relating to the consolidated balance sheets
of Aeroflex  Incorporated  and  subsidaries as of June 30, 1998 and 1997 and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows and related schedule for each of the years in the three-year  period ended
June 30, 1998 which  report  appears in the June 30, 1998 annual  report on Form
10-K of Aeroflex Incorporated.

                                   /s/ KPMG Peat Marwick LLP
                                   KPMG PEAT MARWICK LLP

Jericho, New York
September 25, 1998