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

FORM 10-K

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

|(Mark One)                                                       |                                                                                         
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended June 30, 2004                         
|OR                                                              
|o                                                                | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                to

Commission File No. 000-02324

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

|Delaware(State or Other Jurisdiction of
Incorporation or Organization)             |  | 11-1974412(I.R.S. Employer
Identification No.)
|---------------------------------------------------------------------------------- |  | ----------------------------------------------
|35 South Service Road, Plainview, New York(Address of Principal Executive Offices) |  | 11803(Zip Code)                               
|Registrant's telephone number, including area code:(516) 694-6700                 

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

| |  | Title of Class |  | Name of Each Exchange on
Which Registered |  | 
| |  | -------------- |  | ----------------------------------------- |  | 
| |  | None           |  |                                           |  | 

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

Common Stock, $.10 par value(Title of Class)


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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No

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 ý.

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the stock was last sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter.
As of December 31, 2003approximately $763,004,000.

Indicate
the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date (applicable only to corporate registrants).
Common Stock, par value $.10 per share; outstanding as of September 9, 200474,404,194 (excluding 4,388 shares held in treasury).

Documents
incorporated by reference: Part III (Items 10, 11, 12, 13 and 14)Registrant's definitive proxy statement to be filed pursuant to Regulation 14A of
the Securities Act of 1934.



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ITEM 1BUSINESS

Overview

We use our advanced design, engineering and manufacturing capabilities to produce microelectronic and test solutions that we sell primarily into the broadband
communications, aerospace and defense markets. We also design and manufacture motion control systems which are used for industrial and defense applications.

Our
operating strategy is based on the following key objectives:



Microelectronic Solutions

We have been a designer and supplier of microelectronics for more than 20 years. Our products include (i) custom and standard integrated circuits,
such as databuses, transceivers, microcontrollers, microprocessors and memories and (ii) components, sub-assemblies and modules for military and commercial communication systems.

Our
design, engineering and manufacturing know-how allow us to achieve the critical tolerances required for aerospace and defense components and high Gigahertz RF and
microwave signals. We are one of the world's leading manufacturers of application specific multi-function modules and space hybrid microcircuits that are highly reliable, small and
lightweightattributes that are significant for space components.

In
addition, many of our integrated circuits are radiation tolerant for satellite and space applications. We have pioneered the use of commercial foundries to produce radiation tolerant
integrated circuits, known as Commercial RadHard. Our products are on over 100 aerospace platforms.

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

Test Solutions

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



2

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We
recently acquired two businesses in this segment:



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

We
are incorporated under the laws of the state of Delaware. Our executive offices are located at 35 South Service Road, Plainview, New York, 11803, our telephone number is
(516) 694-6700 and our website is located atwww.aeroflex.com.

Customers

We have hundreds of customers in the communications, satellite and aerospace/defense industries. No one customer accounted for more than 10% of our net sales in
each of the years in the three year period ended June 30, 2004.

Marketing and Distribution

We use a team-based sales approach to assist our personnel to closely manage relationships at multiple levels of the customer's organization,
including management, engineering and purchasing personnel. Our integrated sales approach involves a team consisting of a senior executive, a business development specialist and members of our
engineering department. Our use of experienced engineering personnel as part of the sales effort enables close technical collaboration with our customers during the design and qualification phase of
new communications equipment. We believe that this is critical to the integration of our product into our customers' equipment. Some of our executive officers are also involved in all aspects of our
relationships with our major customers and work closely with their senior management. We also use manufacturers' representatives and independent sales representatives as needed. Our acquisitions since
fiscal 2002 expanded the number of our sales and distribution locations to include additional offices in California, Kansas, Maryland,

3

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Michigan,
New Jersey, Stevenage and Burnham, United Kingdom, Scotland, France, Spain, Germany, Denmark, Hong Kong, Beijing, Shenzen and Nanjing, China.

Research and Development

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



Certain
product development and similar costs are recoverable under contractual arrangements and those that are not recoverable are expensed in the year incurred. The costs of our
self-funded research activities were approximately $50.0 million for fiscal 2004, $29.5 million for fiscal 2003 and $21.0 million for fiscal 2002. The increase from
fiscal 2003 is primarily attributable to the addition of the expenses of MCE, RIWS and Celerity. Also, in connection with our acquisitions of MCE, RIWS and Celerity in fiscal 2004, we allocated
$420,000, $2.7 million and $1.1 million, respectively, of the purchase price to in-process research and development projects. In connection with our acquisition of IFR
Systems, Inc. in fiscal 2002, we allocated $1.1 million of the purchase price to in-process research and development projects.

Backlog

We include in backlog firm purchase orders or contracts providing for delivery of products and services. At June 30, 2004, our order backlog was
approximately $172.9 million, approximately 87% of which was scheduled to be delivered on or before June 30, 2005. Approximately 30% of this backlog represents commercial contracts and
approximately 70% of this backlog represents government contracts. Generally, government contracts are cancelable with payment to us of amounts which we have spent under the contract together with a
reasonable profit, if any, while commercial contracts are not cancelable.

At
June 30, 2003, our backlog of orders was approximately $112.1 million. Approximately 81% of this backlog was scheduled to be delivered before June 30, 2004.
Approximately 80% of this backlog represented orders for government contracts.

Competition

In all phases of our operations, we compete primarily on the basis of both performance and price. In the manufacture of microelectronics, we believe our primary
competitors are ILC/Data Devices Corp., BAE Systems and Honeywell International. In the manufacture of test products, we believe our primary competitors are Agilent Technolgies, Rohde &
Schwartz, Anritsu, Spirent and Anite. We also experience significant competition from the in-house capabilities of our current and potential customers. We believe that in all of our
operations we compete favorably in the principal competitive areas of:



4

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We
believe that to remain competitive in the future, we will need to invest significant financial resources in research and development.

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

Government Sales

Approximately 34% of our sales for fiscal 2004, 39% of our sales for fiscal 2003 and 50% of our sales for fiscal 2002 were to agencies of the United States
Government or to prime defense contractors or subcontractors of the United States Government. Our defense contracts have been awarded either on a bid basis or after negotiation. The contracts are
primarily fixed price contracts, though we also have or
had defense contracts providing for cost plus fixed fee. Our defense contracts contain customary provisions for termination at the convenience of the government without cause. In the event of such
termination, we are generally entitled to reimbursement for our costs and to receive a reasonable profit, if any, on the work done prior to termination.

Manufacturing

We assemble, test, package and ship products at our manufacturing facilities located in:



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

Historically,
our volume production requirements for the defense market did not justify our widespread implementation of highly automated manufacturing processes. Over the last several
years, we have expanded our use of high-volume manufacturing techniques for product assembly and testing.

5

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We
believe that we have the manufacturing capacity required to meet the growing demand for our products.

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



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



Although
we have several sole source arrangements, all the materials and components we use, including those purchased from a sole source, are readily available and are or can be
purchased from time to time in the open market. We have no long-term commitments for their purchase. No supplier provides more than 10% of our raw materials.

Patents and Trademarks

We own several patents, patent licenses and trademarks. In order to protect our intellectual property rights, we rely on a combination of trade secret, copyright,
patent and trademark laws and employee and third-party nondisclosure agreements. We also limit access to and distribution of our proprietary information. While we believe that in the aggregate our
patents and trademarks are important to our operations, we do not believe that one or any group of them is so important that its termination could materially affect us.

Seasonality

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

Employees

As of June 30, 2004, we had approximately 2,398 employees, of whom 1,423 were employed in a manufacturing capacity, and 975 were employed in engineering,
sales, administrative or clerical positions. Approximately 120 of our employees are covered by a collective bargaining agreement. The collective bargaining agreement expires September 30, 2004.
We are currently engaged in negotiations and expect to renew this agreement. We believe that our employee relations are satisfactory.

Regulation

Our operations are subject to various environmental, health and employee safety laws. We have expended funds and management has spent time complying with
environmental, health and worker safety laws which apply to our operations and facilities and we expect that we will continue to do so. Our principal products or services do not require any
governmental approval except for the requirement that we obtain export licenses for certain of our products. Compliance with environmental laws has not historically materially affected our capital
expenditures, earnings or competitive position. We do not expect compliance with environmental laws to have a material effect on us in the future.

Because
we participate in the defense industry, we are subject to audit from time to time for our compliance with government regulations by various agencies, including (1) the
Defense Contract Audit

6

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Agency,
(2) the Defense Investigative Service and (3) the Defense Logistics Agency. These and other governmental agencies may also, from time to time, conduct inquiries or investigations
regarding a broad range of our activities. Responding to any audits, inquiries or investigations may involve significant expense and divert management attention. Also, an adverse finding in any audit,
inquiry or investigation could involve penalties that may have a material adverse effect on our business, results of operations or financial condition.

We
believe that we generally comply with all applicable environmental, health and worker safety laws and governmental regulations. Nevertheless, we cannot guarantee that in the future we
will not incur additional costs for compliance or that those costs will not be material.

Financial Information About Industry Segments

The sales and operating profits of each industry segment and the identifiable assets attributable to each industry segment for each of the three years in the
period ended June 30, 2004 are set forth in Note 15 of Notes to Consolidated Financial Statements.

Financial Information About Geographic Areas

Most of our customers are located in the United States, but sales to foreign countries accounted for 36% of our total sales in 2004, 35% in 2003 and 16% in 2002.
In fiscal year 2004, 64% of our sales were to customers located in the United States, 26% to Europe and the Middle East, 9% to Asia and Australia, and 1% to the rest of the world. In fiscal year 2003,
65% of our sales were to customers located in the United States, 27% to Europe and the Middle East, 7% to Asia and Australia, and 1% to the rest of the world.

Available Information

We file reports with the SEC. The public may read and copy any materials filed by us with the SEC at the SEC's public reference room at 450 Fifth Street, NW,
Washington D.C., 20549. The public may obtain information about the operation of the SEC's public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet site athttp://www.sec.govthat contains reports, proxy and information statements and other information about issuers like us
that file electronically with the SEC.

In
addition, we make available free of charge on our website athttp://www.aeroflex.comour annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) under the
Exchange Act as soon as reasonably practical after we electronically file such material with, or furnish it to, the SEC.

ITEM 2PROPERTIES

Following is a description of the properties owned and leased by us at June 30, 2004:



7

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We
believe that our facilities are adequate for our current and presently foreseeable needs and that we will be able to renew or replace our expiring leases on our rental properties on
commercially reasonable terms.

ITEM 3LEGAL PROCEEDINGS

We are involved in various routine legal matters. We believe the outcome of these matters will not have a material adverse effect on us.

ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II

ITEM 5MARKET FOR THE COMPANY'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market information

Our common stock trades on the Nasdaq National Market under the symbol "ARXX". The following table sets forth, for the fiscal periods indicated, the high and low
closing sales prices of our common stock as reported by the Nasdaq National Market.

Common StockHigh

LowFiscal Year Ended June 30, 2003First Quarter

$
8.01

$
3.36Second Quarter


8.20


4.50Third Quarter


8.41


5.03Fourth Quarter


7.87


4.82Fiscal Year Ended June 30, 2004First Quarter

$
10.38

$
7.41Second Quarter


13.02


8.76Third Quarter


16.39


11.85Fourth Quarter


15.70


11.78Fiscal Year Ending June 30, 2005First Quarter (through September 9, 2004)

$
13.95

$
9.06


Holders

As of September 9, 2004, there were approximately 600 record holders of our common stock.

Dividends

We have never declared or paid any cash dividends on our common stock. There have been no stock dividends declared or paid on our common stock during the past
three years. We currently intend to retain any future earnings for use in the operation and development of our business and for acquisitions and, therefore, do not intend to declare or pay any cash
dividends on our common stock in the foreseeable future. In addition, our bank loan and security agreement, as amended, prohibits us from paying cash dividends.

Equity Compensation Plan Information as of June 30, 2004

|                                                           |       | Number of securities
to be issued upon
exercise of
outstanding options |            | Weighted-average
exercise price of
outstanding options |       | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected column (a))
|---------------------------------------------------------- | ----- | ---------------------------------------------------------------------- | ---------- | ------------------------------------------------------ | ----- | ----------------------------------------------------------------------------------------------------------------------------------------
|
|Plan Category                                              |       |                                                                        |            |                                                        |       |                                                                                                                                         
|Equity compensation plans approved by security holders     |       | 7,631,949                                                              |            | $                                                      | 12.17 |                                                                                                                                         
|Equity compensation plans not approved by security holders |       | 8,902,968                                                              |            | $                                                      | 13.11 |                                                                                                                                         
|                                                           | Total |                                                                        | 16,534,917 |                                                        | $     | 12.78                                                                                                                                   

Issuer Purchases

None

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ITEM 6SELECTED FINANCIAL DATA

(In
thousands, except percentages, footnotes and per share amounts)
(Restated, Note 2 to Consolidated Financial Statements)

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

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

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10

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

Overview

We use our advanced design, engineering and manufacturing capabilities to produce microelectronic and test solutions that we sell primarily into the broadband
communications, aerospace and defense markets. We also design and manufacture motion control systems which are used for industrial and defense applications.

We
have been a designer and supplier of microelectronics for more than 20 years. Our products include (i) custom and standard integrated circuits, such as databuses,
transceivers, microcontrollers, microprocessors and memories and (ii) components, sub-assemblies and modules for military and commercial communication systems.

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



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

Our
operating strategy is based on the following key objectives:



In
December 2002, our Board of Directors approved a formal plan to discontinue our fiber optic lithium niobate modulator operation which was acquired in March 2001. The
plan called for an immediate cessation of operations and disposal of existing assets. The abandonment of the operation resulted in a charge of $2.6 million ($1.7 million, net of tax) in
the quarter ended December 31, 2002. The charge included a cash requirement of $1.4 million, primarily for equipment leases and payroll costs, and a non-cash charge of
$1.2 million, primarily for the write-off of owned equipment. In accordance with SFAS No. 144, the abandonment has been reported as a discontinued operation and, accordingly,
losses from operations and the loss on abandonment have been reported separately from continuing operations.

In
addition, our Aeroflex Pearl River subsidiary designs, develops, manufactures and markets microelectronic products in the form of passive thin film circuits and interconnects. As a
result of continued operating losses, in February 2004, our Board of Directors approved a plan to divest our thin film interconnect manufacturing operation and to seek a strategic buyer. As a
result of this decision, we recorded a $9.1 million ($5.9 million, net of tax) loss on disposal. This charge included a cash

11

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requirement
of $2.6 million primarily for existing equipment leases, and a non-cash charge of $6.5 million for the write down of goodwill, other intangibles and owned
equipment. In accordance with SFAS 144, we have reported the loss on disposal and the results of operations of this business as income (loss) from discontinued operations and all prior periods
have been restated in order to conform to this presentation.

In
June 2004, our Board of Directors approved a formal plan to divest our shock and vibration control device manufacturing business ("VMC"), and to seek a strategic buyer. We have
not recorded a loss on disposal as management believes VMC can be sold for a price in excess of its carrying value. This operation had previously comprised the Isolator Products segment. In accordance
with SFAS 144, we have reported the results of operations of this business as income (loss) from discontinued operations and all prior periods have been restated in order to conform to this
presentation.

Approximately
34% of our sales for fiscal 2004, 39% of our sales for fiscal 2003 and 50% of our sales for fiscal 2002 were to agencies of the United States government or to prime defense
contractors or subcontractors of the United States government. Our government contracts have been awarded either on a bid basis or after negotiation. Our government contracts are primarily fixed price
contracts, although we also have or had government contracts providing for cost plus fixed fee. Our government contracts have customary provisions for termination at the convenience of the government
without cause. In the event of such termination, we are entitled to reimbursement for our costs and to receive a reasonable profit, if any, on the work done prior to termination.

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



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

Statement of Operations

The following table sets forth our net sales and operating income by business segment for the periods indicated. The special charges represent the
write-offs of in-process research and development acquired in connection with the purchases of businesses of $4.2 million and $1.1 million in the years

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ended
June 30, 2004 and 2002, respectively, and restructuring charges of $3.1 million in the year ended June 30, 2002.

Years Ended June 30,2004

2003

2002(In thousands)Net Sales:Microelectronic Solutions

$
164,526

$
95,820

$
88,793Test Solutions


249,575


169,987


82,738Net Sales

$
414,101

$
265,807

$
171,531Operating Income:Microelectronic Solutions

$
40,062

$
19,264

$
18,636Test Solutions


12,930


4,683


975General Corporate Expenses


(12,737
)

(7,045
)

(4,555
)40,255


16,902


15,056Special Charges


(4,220
)




(4,168
)Operating Income

$
36,035

$
16,902

$
10,888


The
following table sets forth certain items from our statement of operations as a percentage of net sales for the periods indicated. The special charges represent the
write-offs of in-process research and development for the years ended June 30, 2004 and 2002 and restructuring charges for the year ended June 30, 2002.

Years Ended June 30,2004

2003

2002Net Sales

100.0
%
100.0
%
100.0
%Cost of Sales

53.5

59.3

59.8Gross Profit

46.5

40.7

40.2Operating Expenses:Selling, General and Administrative Costs

22.9

22.2

18.4Research and Development Costs

12.0

11.1

12.2Amortization of acquired intangibles

1.9

1.0

0.8Special Charges

1.0



2.5Total Operating Expenses

37.8

34.3

33.9Operating Income

8.7

6.4

6.3Other Expense (Income), Net

0.8

0.3

(0.3
)Income Before Income Taxes

7.9

6.1

6.6Provision For Income Taxes

3.0

2.0

2.2Income From Continuing Operations

4.9

4.1

4.4Discontinued Operations

(2.0
)
(1.7
)
(10.7
)Net Income (Loss)

2.9
%
2.4
%
(6.3
)%


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Fiscal Year Ended June 30, 2004 Compared to Fiscal Year Ended June 30, 2003

Net Sales.Net sales increased 56% to $414.1 million in fiscal 2004 from $265.8 million in fiscal 2003. Net
sales in the microelectronic solutions ("AMS") segment increased 72% to $164.5 million in fiscal 2004 from $95.8 million in fiscal 2003 due primarily to the acquisition of MCE in
September 2003. Net sales in the test solutions ("ATS") segment increased 47% to $249.6 million in fiscal 2004 from $170.0 million in fiscal 2003 due primarily to the acquisition
of RIWS in July 2003 and increased sales in our communication test products business.

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.

Fiscal Year Ended June 30,

AMS

% of
sales

ATS

% of
sales

Total

% of
sales2004

$
83,264

51
%
$
109,428

44
%
$
192,692

47
%2003


45,723

48
%

62,364

37
%

108,087

41
%


Gross
profit increased $37.5 million, or 82%, in the AMS segment primarily as a result of the effect of the acquisition of MCE in September 2003 and increased margins in
our integrated circuits business due to a favorable sales mix which included more high margin standard products. Gross profit increased $47.1 million, or 75%, in the ATS segment primarily as a
result of the effect of the acquisition of RIWS in July 2003 and increased sales and margins in our communications test products business due to improved factory utilization.

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

Fiscal Year Ended June 30,

AMS

% of
sales

ATS

% of
sales

Corporate

Total

% of
sales2004

$
25,810

16
%
$
56,188

23
%
$
12,737

$
94,735

23
%2003


13,468

14
%

38,436

23
%

7,045


58,949

22
%


Selling,
general and administrative costs increased $12.3 million, or 92%, in the AMS segment due primarily to the addition of the expenses of MCE. Selling, general and
administrative costs increased $17.8 million, or 46% in the ATS segment due primarily to the addition of the expenses of RIWS and Celerity. Corporate selling, general and administrative
expenses increased $5.7 million due primarily to increased compensation expense, professional fees and insurance expense.

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

Fiscal Year Ended June 30,

AMS

% of
sales

ATS

% of
sales

Total

% of
sales2004

$
15,409

9
%
$
34,563

14
%
$
49,972

12
%2003


12,369

13
%

17,146

10
%

29,515

11
%


Self-funded
research and development costs increased $3.0 million, or 25%, in the AMS segment primarily due to the addition of the expenses of MCE offset, in part, by
reduced expenses in our microelectronic modules business. Research and development costs increased $17.4 million, or 102%, in the ATS segment primarily due to the addition of the expenses of
RIWS, which historically had, and is expected to continue to have higher research and development costs.

Amortization of Acquired Intangibles.Amortization increased $5.0 million, or 184%, due to the acquisitions of MCE,
RIWS and Celerity.

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Acquired In-Process Research and Development.In connection with the acquisition of RIWS, we allocated
$2.7 million of the purchase price to incomplete research and development projects. In connection with the acquisition of MCE, we allocated $420,000 of the purchase price to incomplete research
and development projects. In connection with the acquisition of Celerity, we allocated $1.1 million of the purchase price to incomplete research and development projects.    These
allocations represent the estimated fair value of such incomplete research and development, at the acquisition date, based on future cash flows that have been adjusted by the respective projects'
completion percentage. At the respective acquisition dates, the development of these projects had not yet reached technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, we expensed these costs as of the respective acquisition dates in accordance with accounting principles generally accepted in the United States of America.

The
values assigned to these projects were determined by identifying significant research projects for which technological feasibility had not been established. At the acquisition date,
RIWS was conducting design, development, engineering and testing activities associated with the completion of new 2.5G and 3G protocol and conformance testers. At the acquisition date, MCE was
conducting development activities associated with the completion of certain high frequency component technology. At the acquisition date, Celerity was conducting development activities associated with
the completion of its next generation modular technology. These projects under development at the valuation date represent technologies which are expected to address emerging market demands. We intend
to continue with these development efforts and, if successfully completed, release the products to market.

At
its acquisition date, RIWS expected to spend approximately $8.9 million to complete all phases of the research and development, with completion anticipated in 2004. At its
acquisition date, MCE expected to spend approximately $100,000 to complete all phases of the research and development, with anticipated completion dates ranging from 6 to 12 months from that
date. At its acquisition date, Celerity expected to spend approximately $700,000 to complete all phases of the research and development, with anticipated completion dates ranging from 6 to
18 months from that date.

We
determined the value assigned to purchased in-process technology by estimating the contribution of the purchased in-process technology in developing a
commercially viable product, estimating the resulting net cash flows from the expected sales of such a product, and discounting the net cash flows to their present value using an appropriate discount
rate.

Revenue
growth rates for the acquired company were estimated based on a detailed forecast, as well as discussions with the finance, marketing and engineering personnel of the acquired
companies. Allocation of total projected revenues to in-process research and development were based on discussions with the acquired companies' management. Selling, general and
administrative expenses and profitability estimates were determined based on forecasts as well as an analysis of comparable companies' margin expectations.

The
projections utilized in the transaction pricing and purchase price allocation exclude the potential synergetic benefits related specifically to our ownership. Due to the stage of the
development and reliance on future, unproven products and technologies, the nature of the forecast and the risks associated with the projected growth and profitability of the development projects, a
discount rate of 35% was used to discount RIWS's cash flows from the in-process technology, 30% was used to discount MCE's cash flows and 35% was used to discount Celerity's cash flows.
The discount rate was commensurate with the acquired companies' market position, the uncertainties in the economic estimates described above, the inherent uncertainty surrounding the successful
development of the purchased in-process technology, the useful lives of such technology, the profitability levels of such technology, and the uncertainty related to technological advances
that could render development stage technologies obsolete.

15

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We
believe that the foregoing assumptions used in the forecasts were reasonable at the time of the acquisitions. No assurance can be given, however, that the underlying assumptions used
to estimate sales, development costs or profitability, or the events associated with such projects will transpire as estimated. For these reasons, actual results may vary from projected results.

Remaining
development efforts for the acquired companies' research and development included various phases of design, development and testing. Funding for such projects is expected to
come primarily from internally generated sources.

As
evidenced by the continued support of the development of these projects, we believe we have a reasonable chance of successfully completing the research and development programs.
However, as with all of our technology development, there is risk associated with the completion of the research and development projects, and there is no assurance that technological or commercial
success will be achieved.

If
the development of these in-process research and development projects is unsuccessful, our sales and profitability may be adversely affected in future periods. Commercial
results are also subject to certain market events and risks, which are beyond our control, such as trends in technology, changes in government regulation, market size and growth, and product
introduction or other actions by competitors.

Other Expense (Income).Interest expense was $1.4 million in fiscal 2004 and $1.1 million in fiscal 2003. Other
expense of $1.7 million in fiscal 2004 consisted primarily of $2.0 million of foreign currency transaction losses, offset by interest income of $455,000. Other income of $459,000 in
fiscal 2003 consisted of $945,000 of interest income partially offset by foreign currency transaction losses of $605,000. Interest income decreased primarily due to lower average levels of cash and
marketable securities, which were used to acquire MCE, RIWS and Celerity, and lower market interest rates.

Provision for Income Taxes.The income tax provision was $12.5 million (an effective income tax rate of 37.8%) in
fiscal 2004 and $5.4 million (an effective income tax rate of 33.0%) in fiscal 2003. The effective income tax rate for the two periods differed from the amount computed by applying the U.S.
Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes and research and development credits and, for the fiscal year ended June 30, 2004,
non-deductible in-process research and development costs.

Income from Continuing Operations.Income from continuing operations for the year ended June 30, 2004 was
$20.5 million or $.29 per diluted share versus $10.9 million, or $.18 per diluted share in 2003. Fiscal 2004 income from continuing operations included a $4.2 million charge
($2.7 million, net of tax) or $.04 per diluted share, for in-process research and development related to the acquisitions of MCE, RIWS and Celerity.

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

Net Sales.Net sales increased 55% to $265.8 million in fiscal 2003 from $171.5 million in fiscal 2002. Net
sales in the microelectronic solutions segment increased 8% to $95.8 million in fiscal 2003 from $88.8 million in fiscal 2002 due primarily to increased sales volume of integrated
circuits. Net sales in the test solutions segment increased 105% to $170.0 million in fiscal 2003 from $82.7 million in fiscal 2002 primarily due to the acquisition of IFR in
May 2002.

16

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Fiscal Year Ended June 30,

AMS

% of
sales

ATS

% of
sales

Total

% of
sales2003

$
45,723

48
%
$
62,364

37
%
$
108,087

41
%2002


43,880

49
%

24,992

30
%

68,872

40
%


Gross
profit increased $1.8 million, or 4%, in the AMS segment. Gross profit increased $37.4 million, or 150%, in the ATS segment primarily as a result of the effect of the
acquisition of IFR in May 2002.



Fiscal Year Ended June 30,

AMS

% of
sales

ATS

% of
sales

Corporate

Total

% of
sales2003

$
13,468

14
%
$
38,436

23
%
$
7,045

$
58,949

22
%2002


12,832

14
%

14,231

17
%

4,556


31,619

18
%


Selling,
general and administrative costs increased $636,000, or 5%, in the AMS segment, excluding $792,000 of restructuring costs in fiscal 2002. Selling, general and administrative
costs increased $24.2 million, or 170%, in the ATS segment excluding $2.1 million of restructuring costs in fiscal 2002. This increase was primarily as a result of the acquisition of IFR
in May 2002. Corporate selling, general and administrative expenses increased $2.5 million due primarily to increased compensation expense, professional fees and insurance expense.



Fiscal Year Ended June 30,

AMS

% of
sales

ATS

% of
sales

Total

% of
sales2003

$
12,369

13
%
$
17,146

10
%
$
29,515

11
%2002


11,903

13
%

9,082

11
%

20,985

12
%


Self-funded
research and development costs increased $467,000, or 4%, in the AMS segment. Research and development costs increased $8.1 million, or 89%, in the ATS
segment primarily as a result of the acquisition of IFR in May 2002.

Amortization of Acquired Intangibles.Amortization increased $1.4 million, or 100%, due to the acquisition of IFR in
May 2002.

Acquired In-Process Research and Development.In connection with the acquisition of IFR, we allocated
$1.1 million of the purchase price to incomplete research and development projects for fiscal 2002. This allocation represents the estimated fair value based on future cash flows that have been
adjusted by the projects' completion percentage. At the acquisition date, the development of these projects had not yet reached technological feasibility and the research and development in progress
had no alternative future uses. Accordingly, we expensed these costs as of the acquisition date.

Restructuring Charges.We initiated strategic plans to consolidate our manufacturing operations to take advantage of excess
manufacturing capacity in certain of our facilities and reduce operating costs. In connection with this restructuring, we recorded a charge of $3.1 million in the fiscal year ended
June 30, 2002. The restructuring charge includes $218,000 of charges for the impairment of intangibles, $1.4 million for the write-off of excess equipment and leasehold
improvements and for buyouts of certain equipment and facility leases, $1.3 million for workforce reductions and $150,000 for the write-off of inventory. The restructuring charges
were allocated $1.0 million to the AMS segment and $2.1 million to the ATS segment.

17

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Other Expense (Income).Interest expense increased to $1.1 million in fiscal 2003 from $958,000
in fiscal 2002. Other
income of $459,000 in fiscal 2003 consists primarily of $945,000 of interest income partially offset by $605,000 of realized foreign currency transaction losses. Other income of $1.4 million in
fiscal 2002 consisted primarily of $1.9 million of interest income partially offset by $199,000 of realized foreign currency transaction losses. Interest income decreased primarily due to lower
interest rates and decreased levels of cash, cash equivalents and marketable securities as a result of the use of approximately $53.7 million in cash to acquire IFR in May 2002.

Provision for Income Taxes.The income tax provision was $5.4 million (an effective income tax rate of 33.0%) in
fiscal 2003 and the income tax provision was $3.8 million (an effective income tax rate of 33.0%) in fiscal 2002. The income tax provisions for the two periods differed from the amount computed
by applying the U.S. Federal income tax rate to income before income taxes primarily due to non-deductible charges for acquired in-process R&D and amortization of goodwill,
state and local income taxes and research and development credits.

Income from Continuing Operations.On a U.S. GAAP basis, income from continuing operations for the year ended June 30,
2003 was $10.9 million or $.18 per diluted share versus $7.6 million or $.12 per diluted share. Income from continuing operations for the year ended June 30, 2002 includes a
charge for in-process research and development of $1.1 million ($1.1 million, net of tax) or $.02 per diluted share and a restructuring charge of $3.1 million
($2.1 million, net of tax) or $.03 per diluted share.

Liquidity and Capital Resources

As of June 30, 2004, we had $237.9 million of working capital. Our current ratio was 3.7 to 1 at June 30, 2004. On February 14, 2003,
we executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and restated loan agreement increased the line of
credit to $50 million through February 2007, continues the mortgage on our Plainview property for $2.8 million and is secured by the pledge of the stock of certain of our
subsidiaries. The interest rate on revolving credit borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to prime
(4% at June 30, 2004). The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. We
have entered into interest rate swap agreements for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these
borrowings.

The
terms of our loan agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios,
limitations on indebtedness and prohibition of the payment of cash dividends. We are currently in full compliance with all of the covenants contained in our loan agreement. In connection with the
purchase of certain materials for use in manufacturing, we have a letter of credit of $1.5 million.

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

During
fiscal 2002, we announced certain strategic consolidations of our manufacturing operations. The total restructuring charges were $3.1 million with a cash cost of
$1.6 million. These restructurings are substantially complete and are expected to reduce annual operating costs by approximately $3.3 million and result in annual cash savings of
approximately $2.8 million. The restructuring charge

18

---



included
the elimination of excess equipment capacity (primarily in the microelectronic solutions segment), severance and other employee related expenses.

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

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

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

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

In
fiscal 2004, our operations provided cash of $25.9 million primarily from our continued profitability. In fiscal 2004, our investing activities used cash of
$72.7 million due primarily to $61.8 million used for the acquisitions of businesses and $11.1 million for capital expenditures.

In
fiscal 2004, our financing activities provided cash of $94.4 million consisting of $91.2 million of proceeds from a public offering, $5.2 million of proceeds from
the exercise of stock options partially offset by $1.9 million in net repayments of debt.

We
believe that existing cash and unused lines of credit coupled with internally generated funds will be sufficient for our working capital requirements, capital expenditure needs and
the servicing of our debt for the foreseeable future.    Our cash and lines of credit are available to fund acquisitions and other potential large cash needs that may arise. At
June 30, 2004, our available unused line of credit was $44.1 million after consideration of letters of credit.



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

Payments due by periodTotal

Less Than
1 Year

1-3 Years

4-5 Years

After
5 Years(In thousands)Long-term debt

$
10,275

$
4,770

$
1,923

$
2,487

$
1,095Operating leases


43,655


7,973


12,794


7,276


15,612Total

$
53,930

$
12,743

$
14,717

$
9,763

$
16,707


The
operating lease commitments shown in the above table have not been reduced by future minimum sub-lease rentals of $17.0 million.

In
the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment.
None of these obligations are individually significant. We do not expect that these commitments as of June 30, 2004 will materially adversely affect our liquidity.

19

---



Legal Proceedings

We are involved in various routine legal matters. We believe the outcome of these matters will not have a materially adverse effect on our consolidated financial
statements.

We
are undergoing routine audits by various taxing authorities of our Federal and state income tax returns covering periods from 2000 to 2003. We believe that the probable outcome of
these various audits should not materially affect our consolidated financial statements.

Backlog

Our backlog of orders was $172.9 million at June 30, 2004 and $112.1 million at June 30, 2003.

Accounting Policies Involving Significant Estimates

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

Revenue and Cost Recognition Under Long-Term Contracts

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or
determinable and collectibility of the resulting receivable is reasonably assured. For arrangements other than certain long-term contracts, revenue (including shipping and handling fees)
is recognized when products are shipped and title is passed to the customer. Revenues associated with certain long-term contracts are recognized in accordance with Statement of Position
No. 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"). Under SOP 81-1, we use
the percentage-of-completion method, whereby revenues and associated costs are recognized as work on a contract progresses. We measure the extent of progress toward completion
generally based upon one of the following (based upon an assessment of which method most closely aligns to the underlying earnings process): (i) the units-of-delivery
method, (ii) the cost-to-cost method, using the ratio of contract costs incurred as a percentage of total estimated costs at contract completion (based upon engineering
and production estimates), or (iii) the achievement of contractual milestones. Provisions for anticipated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such anticipated losses or revisions become evident. Revenue from software support and maintenance contracts is
recognized ratably over the term of the contract in accordance with SOP-97-2, "Software Revenue Recognition."

Inventories

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

20

---



balances
may be over or under valued, which could have a material effect on our results of operations and financial condition.

Recoverability of Long-Lived and Intangible Assets

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

Long-lived
assets other than goodwill, are reviewed for impairment not less than annually and whenever events or changes in circumstances indicate that the carrying value of
any such asset may be impaired. We evaluate the recoverability of such assets by estimating future cash flows. If the sum of the undiscounted cash flows expected to result from the use of the assets
and their eventual disposition is less than the carrying amount of the assets, we will recognize an impairment loss to the extent of the excess of the carrying amount of the assets over the discounted
cash flow.

SFAS
No. 142 requires that we perform an assessment of whether there is an indication that goodwill is impaired on an annual basis unless events or circumstances warrant a more
frequent assessment. The impairment assessment involves, among other things, an estimation of the fair value of each of our reporting units (as defined in SFAS No. 142). Such estimations are
inherently subjective, and subject to change in future periods.

If
the impairment review of goodwill, intangible assets and other long-lived assets differ significantly from actual results, it could have a material effect on our results
of operations and financial condition.

Restructuring Charges

When circumstances warrant a restructuring charge, we estimate and record all appropriate expenses. These expenses include severance, retention bonuses, fringe
benefits, asset impairment, buyout of leases and inventory write-downs. To the extent that our estimates differ from actual expenses, there could be significant additional expenses or reversals of
previously recorded charges in the future.

Income Taxes

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

Risks Relating to Our Business

General economic conditions could adversely affect our revenues, gross margins and expenses.

Our
revenues and gross margins will depend significantly on the overall demand for microelectronic products and testing solutions, particularly in the product and service segments in
which we compete. Weaker demand for our products and services caused by economic weakness may result in decreased revenues, earnings levels or growth rates and problems with the saleability of
inventory and realizability of customer receivables. In the past, we have observed effects of the global economic

21

---



downturn
in many areas of our business. Delays or reductions in spending for our products could have a material adverse effect on our business, results of operations and financial condition.

Our operating results may fluctuate significantly on a quarterly basis.

Our
sales and other operating results have fluctuated significantly in the past, and we expect this trend will continue. Factors which affect our results include:



Many
of these factors are beyond our control. Our performance in any one fiscal quarter is not necessarily indicative of any financial trends or future performance.

In the event that any of our customers encounter financial difficulties and fails to pay us, it could adversely effect our results of operations and financial
condition.

We
manufacture products to customer specifications and purchase products in response to customer orders. In addition, we may commit significant amounts to maintain inventory in
anticipation of customer orders. In the event that any customer for whom we maintain inventory experiences financial difficulties, we may be unable to sell such inventory at its current profit margin,
if at all. In such event, our gross margins would decline. In addition, if the financial condition of any customer deteriorates resulting in an impairment of that customer's ability to pay to us
amounts owed in respect of a significant amount of outstanding receivables, our financial condition would be adversely effected.

If we cannot continue to develop, manufacture and market innovative products and services rapidly that meet customer requirements for performance and reliability,
we may lose market share and our revenues may suffer.

The
process of developing new high technology products and services is complex and uncertain, and failure to anticipate customers' changing needs and emerging technological trends
accurately and to develop or obtain appropriate intellectual property could significantly harm our results of operations. We must make long-term investments and commit significant
resources before knowing whether our predictions will eventually result in products that the market will accept. We must accurately forecast volumes, mix of products and configurations that meet
customer requirements, and we may not succeed.

Due to the international nature of our business, political or economic changes could harm our future revenues, costs and expenses and financial
condition.

Our
future revenues, costs and expenses could be adversely affected by a variety of international factors, including:



22

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A
portion of our product and component manufacturing, along with key suppliers, is located outside of the United States, and also could be disrupted by some of the international factors
described above.

We are exposed to foreign currency exchange rate risks that could adversely affect our business, results of operations and financial
condition.

We
are exposed to foreign currency exchange rate risks that are inherent in our sales commitments, anticipated sales, and assets and liabilities that are denominated in currencies other
than the United States dollar. Failure to sufficiently hedge or otherwise manage foreign currency risks properly could adversely affect our business, results of operations and financial condition.

As part of our business strategy, we may complete acquisitions or divest non-strategic businesses and product lines. These actions could adversely
affect our business, results of operations and financial condition.

As
part of our business strategy, we engage in discussions with third parties regarding, and enter into agreements relating to, possible acquisitions, strategic alliances, ventures and
divestitures in order to manage our product and technology portfolios and further our strategic objectives. In order to pursue this strategy successfully, we must identify suitable acquisition,
alliance or divestiture candidates, complete these transactions, some of which may be large and complex, and integrate acquired companies. Integration and other risks of acquisitions and strategic
alliances can be more pronounced for larger and more complicated transactions, or if multiple acquisitions are pursued simultaneously.
The integration of our recent acquisitions of the Racal Instruments Wireless Solutions Group and MCE Technologies, Inc. may make the completion and integration of subsequent acquisitions more
difficult. However, if we fail to identify and complete these transactions, we may be required to expend resources to internally develop products and technology or may be at a competitive disadvantage
or may be adversely affected by negative market perceptions, which may have a material effect on our revenues and selling, general and administrative expenses taken as a whole.

Acquisitions
and strategic alliances may require us to integrate with a different company culture, management team and business infrastructure and otherwise manage integration risks.
Even if an acquisition or alliance is successfully integrated, we may not receive the expected benefits of the transaction. Managing acquisitions, alliances and divestitures requires varying levels of
management resources, which may divert management's attention from other business operations. Acquisitions, including abandoned acquisitions, also may result in significant costs and expenses and
charges to earnings. As a result, any completed, pending or future transactions may contribute to our financial results differing from the investment community's expectations in a given quarter.

In order to be successful, we must retain and motivate key employees, and failure to do so could seriously harm us.

In
order to be successful, we must retain and motivate executives and other key employees, including those in managerial, technical, marketing and information technology support
positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Attracting and retaining skilled workers and qualified sales representatives is also
critical to us. Experienced management and technical, marketing and support personnel in the microelectronics and test solutions industries are in demand and competition for their talents is intense.
Employee retention may be a particularly challenging issue following our recent acquisitions since we also must continue to motivate employees and keep them focused on our strategies and goals, which
may be particularly difficult due to the potential distractions related to integrating the acquired operations.

23

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Terrorist acts and acts of war may seriously harm our business, results of operations and financial condition.

Terrorist
acts or acts of war (wherever located around the world) may cause damage or disruption to us, our employees, facilities, partners, suppliers, distributors and resellers, and
customers, which could significantly impact our revenues, expenses and financial condition. The terrorist attacks that took place in the United States on September 11, 2001 were unprecedented
events that have created many economic and political uncertainties. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or
hostility have created many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot presently be predicted. In addition, as a
company with headquarters and significant
operations located in the United States, we may be impacted by actions against the United States. We will be predominantly uninsured for losses and interruptions caused by terrorist acts and acts of
war.

Our stock price has historically fluctuated and may continue to fluctuate.

Our stock price, like that of other technology companies, can be volatile. Some of the factors that can affect our stock price are:



General
market conditions and domestic or international macroeconomic and geopolitical factors unrelated to our performance may also affect our stock price. In addition, following
periods of volatility in a company's securities, securities class action litigation against a company is sometimes instituted. This type of litigation could result in substantial costs and the
diversion of management time and resources.

Forward-Looking Statements

All statements other than statements of historical fact included in this Annual Report, including without limitation statements under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding our financial position, business strategy and plans and objectives of our management for future operations, are forward-looking
statements. When used in this Annual
Report, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking
statements are based on the current beliefs of our management, as well as assumptions made by and information currently available to our management. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors, including but not limited to those set forth above. Such statements reflect our current views with respect to the future
and are subject to these and other risks, uncertainties and assumptions relating to Aeroflex's financial condition, results of operations, growth strategy and liquidity. Aeroflex does not undertake
any obligation to update such forward-looking statements.

24

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ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates and to foreign currency exchange rates. Most of our debt is at fixed rates of interest or at a
variable rate with an interest rate swap agreement which effectively converts the variable rate debt into fixed rate debt. Therefore, if market interest rates increase by 10% from levels at
June 30, 2004, the effect on our net income would be insignificant. Most of our invested cash and cash equivalents are at variable rates of interest. If market interest rates decrease by
10 percent from levels at June 30, 2004, the effect on our net income would be approximately $57,000. If foreign currency exchange rates (primarily the British Pound and the Euro) change
by 10% from levels at June 30, 2004, the effect on our other comprehensive income would be approximately $8.8 million. We periodically enter into forward contracts to hedge against
changes in foreign currency rates with respect to certain foreign accounts receivable. As of June 30, 2004, there were no such contracts outstanding.

ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9ACONTROLS AND PROCEDURES

Evaluation and Disclosure Controls and Procedures

Based on their evaluation as of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, except as set forth below, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's
rules and forms.

Changes in Internal Controls

There were no significant changes in our internal controls over financial reporting that occurred during the quarter ended June 30, 2004 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Following
the end of the fiscal quarter ended June 30, 2004, in connection with the audit of our financial results for the fiscal year ended June 30, 2004, certain internal
control issues were identified which management believes need to be improved. Our auditors have advised us that they believe that, in the aggregate, these internal control issues constitute a
"reportable condition" as defined by the AICPA. These internal control issues are, in large part, the result of our recent acquisitions. Although these issues are not a "material weakness in internal
control," as defined by the AICPA, because we understand the critical importance of the effectiveness of internal controls over financial reporting, we have made improvements in our internal controls
over financial reporting as a result of the identification of these control issues and will continue to do so. These improvements include the strengthening of controls over the accounting for
non-routine transactions and certain accounting

25

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estimates,
formalization of policies and procedures, improved segregation of duties at certain subsidiaries and establishment of additional monitoring controls.

Limitations on the Effectiveness of Controls

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met,
and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Chief Financial Officer have concluded that, except as otherwise described above, such
controls and procedures are effective at the "reasonable assurance" level.

PART III

The information required by items 10, 11, 12, 13 and 14 of Part III is incorporated by reference to our definitive proxy statement in connection with our
Annual Meeting of Stockholders scheduled to be held in November 2004. The proxy statement is to be filed with the Securities and Exchange Commission within 120 days following the end of
our fiscal year ended June 30, 2004.

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

| | 3.1  |  | Certificate of Incorporation, as amended. (Exhibit 3.1 to Form 10-Q for the quarter ended September 30, 2001).                                                                                                                                           
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.2  |  | By-Laws, as amended. (Exhibit 3.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).                                                                                                                                            
| | 4.1  |  | Fifth Amended and Restated Loan and Security Agreement dated as of February 14, 2003 among the Registrant, certain of its subsidiaries, JPMorgan Chase Bank and Fleet National Bank. (Exhibit 10.1 to Form 10-Q for the quarter ended
December 31, 2002).
| | 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).                                                                                                                                 
| | 10.4 |  | Employment Agreement between Aeroflex Incorporated and Harvey R. Blau. (Exhibit 10.1 to Report on Form 10-Q for the quarter ended March 31, 1999).                                                                                                       
| |      |  |                                                                                                                                                                                                                                                          

26

---



| | 10.5  |  | Employment Agreement between Aeroflex Incorporated and Michael Gorin. (Exhibit 10.2 to Report on Form 10-Q for the quarter ended March 31, 1999).                                           
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.6  |  | Employment Agreement between Aeroflex Incorporated and Leonard Borow. (Exhibit 10.3 to Report on Form 10-Q for the quarter ended March 31, 1999).                                           
| | 10.7  |  | 1996 Stock Option Plan. (Exhibit A to Definitive schedule 14A filed September 30, 1996).                                                                                                    
| | 10.8  |  | 1998 Stock Option Plan. (Exhibit 10 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).                                                                                 
| | 10.9  |  | 1999 Stock Option Plan. (Exhibit 4.1 to Registration Statement on Form S-8, Registration Statement #333-31654).                                                                             
| | 10.10 |  | Key Employee Stock Option Plan. (Exhibit 4.1 to Registration Statement on Form S-8, Registration Statement #333-53622).                                                                     
| | 10.11 |  | 2000 Stock Option Plan, as amended. (Exhibit 4 to Registration Statement on Form S-8, #333-97027).                                                                                          
| | 10.12 |  | 2002 Stock Option Plan. (Exhibit 4 to Registration Statement on Form S-8, #333-97029).                                                                                                      
| | 10.13 |  | Amendment No. 1 to Employment Agreement between Aeroflex Incorporated and Harvey R. Blau, effective September 1, 1999. (Exhibit 10.17 to Form 10-K for the fiscal year ended June 30, 2000).
| | 10.14 |  | Amendment No. 1 to Employment Agreement between Aeroflex Incorporated and Michael Gorin, effective September 1, 1999. (Exhibit 10.18 to Form 10-K for the fiscal year ended June 30, 2000). 
| | 10.15 |  | Amendment No. 1 to Employment Agreement between Aeroflex Incorporated and Leonard Borow, effective September 1, 1999. (Exhibit 10.19 to Form 10-K for the fiscal year ended June 30, 2000). 
| | 10.16 |  | Amendment No. 2 to Employment Agreement between Aeroflex Incorporated and Harvey R. Blau, effective August 13, 2001. (Exhibit 10.16 to Form 10-K for the fiscal year ended June 30, 2001).  
| | 10.17 |  | Amendment No. 2 to Employment Agreement between Aeroflex Incorporated and Michael Gorin, effective August 13, 2001. (Exhibit 10.17 to Form 10-K for the fiscal year ended June 30, 2001).   
| | 10.18 |  | Amendment No. 2 to Employment Agreement between Aeroflex Incorporated and Leonard Borow, effective August 13, 2001. (Exhibit 10.18 to Form 10-K for the fiscal year ended June 30, 2001).   
| | 10.19 |  | Aeroflex Incorporated Key Employee Deferred Compensation Plan. (Exhibit 10.19 to Form 10-K for the fiscal year ended June 30, 2001).                                                        
| | 10.20 |  | Trust Under Deferred Compensation Plan. (Exhibit 10.20 to Form 10-K for the fiscal year ended June 30, 2001).                                                                               
| | 10.21 |  | Amendment No. 3 to Employment Agreement between Aeroflex Incorporated and Harvey R. Blau, effective November 8, 2001. (Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2001). 
| | 10.22 |  | Amendment No. 3 to Employment Agreement between Aeroflex Incorporated and Michael Gorin, effective November 8, 2001. (Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2001).  
| |       |  |                                                                                                                                                                                             

27

---



| | 10.23 |  | Amendment No. 3 to Employment Agreement between Aeroflex Incorporated and Leonard Borow, effective November 8, 2001. (Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2001).                                                                                   
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.24 |  | Agreement and Plan of Merger, dated as of June 27, 2003, among Aeroflex Incorporated, Acquisition, MCE and Michael J. Endres (incorporated by reference to Exhibit 99.1 of Report on Form 8-K filed July 2, 2003).                                                           
| | 10.25 |  | Form of Warrant Exchange Agreement (incorporated by reference to Exhibit 99.2 of Report on Form 8-K filed July 2, 2003).                                                                                                                                                     
| | 10.26 |  | Form of MCE Shareholders' Agreement (incorporated by reference to Exhibit 99.3 of Report on Form 8-K filed July 2, 2003).                                                                                                                                                    
| | 10.27 |  | Stock Purchase Agreement dated as of July 31, 2003, by and among Racal Instruments Group Limited, Aeroflex and IFR Systems Limited, a wholly-owned subsidiary of Aeroflex Incorporated (incorporated by reference to Exhibit 99.1 to Report on
Form 8-K dated July 31, 2003).
| | 10.28 |  | Asset Purchase Agreement dated as of July 31, 2003, by and between Racal Instruments Inc. and Aeroflex Incorporated (incorporated by reference to Exhibit 99.2 to Report on Form 8-K dated July 31, 2003).                                                                   
| | 10.29 |  | Asset Purchase Agreement dated as of July 31, 2003, by and among Racal Instruments Group Limited and Aeroflex Incorporated (incorporated by reference to Exhibit 99.3 to Report on Form 8-K dated July 31, 2003).                                                            
| | 10.30 |  | Employment Agreement between Aeroflex Incorporated and Carl Caruso dated November 6, 2003 (Exhibit 10.2 to Report on Form 10-Q for the quarter ended December 31, 2003).                                                                                                     
| | 10.31 |  | Employment Agreement between Aeroflex Incorporated and Charles Badlato dated November 6, 2003. (Exhibit 10.1 to Report on Form 10-Q for the quarter ended December 31, 2003).                                                                                                
| | 10.32 |  | Amendment No. 4 to Employment Agreement between Aeroflex Incorporated and Harvey R. Blau dated as of May 13, 2004 (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2004).                                                             
| | 10.33 |  | Amendment No. 4 to Employment Agreement between Aeroflex Incorporated and Michael Gorin dated as of May 13, 2004 (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended March 31, 2004).                                                              
| | 10.34 |  | Amendment No. 4 to Employment Agreement between Aeroflex Incorporated and Leonard Borow dated as of May 13, 2004 (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended March 31, 2004).                                                              
| | 22    |  | The following is a list of the Company's subsidiaries as of June 30, 2004:                                                                                                                                                                                                   

28

---



Name

Jurisdiction of
IncorporationAeroflex Colorado Springs, Inc.

DelawareAeroflex International Ltd.

EnglandAeroflex Pearl River, Inc.

DelawareAeroflex Plainview, Inc.

DelawareAeroflex Powell, Inc.

OhioAeroflex Systems Corp.

DelawareAeroflex Wichita, Inc.

DelawareEuroptest, S.A.

FranceVibration Mountings and Controls, Inc.

New YorkAeroflex Microelectronics Solutions, Inc.

MichiganRacal Instruments Wireless Solutions Limited

EnglandAeroflex Inmet, Inc.

MichiganAeroflex Weinschel, Inc.

MichiganAeroflex KDI, Inc.

MichiganAeroflex Metelics, Inc.

California


| | 23   |  | Consent of Independent Registered Public Accounting Firm                                       
| | ---- |  | -----------------------------------------------------------------------------------------------
| | 31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
| | 31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
| | 31.3 |  | Certification of Chief Operating Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
| | 32.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
| | 32.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

29

---



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on the 13th day of September 2004.

| |  | Aeroflex Incorporated
| |  | ---------------------
| |  |                      
| |  | By:                  

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below on September 13th, 2004 by the following persons in the capacities
indicated:

|                                                    |  |                                                                                      
|--------------------------------------------------- |  | -------------------------------------------------------------------------------------
|/s/HARVEY R. BLAUHarvey R. Blau                     |  | Chairman of the Board
(Chief Executive Officer)                                      
|/s/MICHAEL GORINMichael Gorin                       |  | Vice Chairman and Director
(Chief Financial Officer and Principal Accounting Officer)
|/s/LEONARD BOROWLeonard Borow                       |  | Vice Chairman, Secretary and Director
(Chief Operating Officer)                      
|/s/PAUL ABECASSISPaul Abecassis                     |  | Director                                                                             
|/s/MILTON BRENNERMilton Brenner                     |  | Director                                                                             
|/s/ERNEST E. COURCHENE, JR.Ernest E. Courchene, Jr. |  | Director                                                                             
|/s/ERIC EDELSTEINEric Edelstein                     |  | Director                                                                             
|/s/DONALD S. JONESDonald S. Jones                   |  | Director                                                                             
|                                                    |  |                                                                                      

30

---



|/s/MICHAEL A. NELSONMichael A. Nelson |  | Director
|------------------------------------- |  | --------
|/s/EUGENE NOVIKOFFEugene Novikoff     |  | Director
|/s/JOSEPH E. POMPEOJoseph E. Pompeo   |  | Director

31

---



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, 2004 AND 2003        AND FOR THE YEARS        ENDED JUNE 30, 2004, 2003 AND 2002

---



FINANCIAL STATEMENTS AND SCHEDULES        INDEX

|                                  |                                                                                                                                   | PAGE
|--------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ----
|ITEM FIFTEEN(a)                   |                                                                                                                                   |     
|1.  FINANCIAL STATEMENTS:         |                                                                                                                                   |     
|                                  | Report of Independent Registered Public Accounting Firm                                                                           |     
|                                  | Consolidated financial statements:                                                                                                |     
|                                  | Balance sheetsJune 30, 2004 and 2003                                                                                             |     
|                                  | Statements of operationseach of the years in the three year period ended June 30, 2004                                           |     
|                                  | Statements of stockholders' equity and comprehensive income (loss)each of the years in the three year period ended June 30, 2004 |     
|                                  | Statements of cash flowseach of the years in the three year period ended June 30, 2004                                           |     
|                                  | Notes (1-15)                                                                                                                      |     
|                                  | Quarterly financial data (unaudited)                                                                                              |     
|2.  FINANCIAL STATEMENT SCHEDULE: |                                                                                                                                   |     
|                                  | IIValuation and qualifying accounts                                                                                              |     

All
other schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the financial statements or notes thereto.

---





Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
Aeroflex Incorporated

We
have audited the accompanying consolidated balance sheets of Aeroflex Incorporated and subsidiaries as of June 30, 2004 and 2003, and the related consolidated statements of
operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended June 30, 2004. Our audits also included the
financial statement schedule listed in the Index at item 15(a)2. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aeroflex Incorporated and subsidiaries as of
June 30, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2004, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG
LLP

Melville,
New York
September 8, 2004

S-1

---





AEROFLEX INCORPORATED  AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In thousands)

|                                                                                                                                     |                                                                                                                        | June 30,            
|------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------- | --------------------
|
|
|ASSETS                                                                                                                               |                                                                                                                        |                     
|Current assets:                                                                                                                      |                                                                                                                        |                     
|                                                                                                                                     | Cash and cash equivalents                                                                                              |                     
|                                                                                                                                     | Accounts receivable, less allowance for doubtful accounts of $1,618 and $1,487 at June 30, 2004 and 2003, respectively |                     
|                                                                                                                                     | Inventories                                                                                                            |                     
|                                                                                                                                     | Deferred income taxes                                                                                                  |                     
|                                                                                                                                     | Assets of discontinued operations                                                                                      |                     
|                                                                                                                                     | Prepaid expenses and other current assets                                                                              |                     
|                                                                                                                                     |                                                                                                                        |                     
|                                                                                                                                     |                                                                                                                        | Total current assets
|Property, plant and equipment, net                                                                                                   |                                                                                                                        |                     
|Deferred income taxes                                                                                                                |                                                                                                                        |                     
|Assets of discontinued operations                                                                                                    |                                                                                                                        |                     
|Other assets                                                                                                                         |                                                                                                                        |                     
|Intangible assets with definite lives, net of accumulated amortization of $14,620 and $6,767 at June 30, 2004 and 2003, respectively |                                                                                                                        |                     
|Goodwill                                                                                                                             |                                                                                                                        |                     
|                                                                                                                                     |                                                                                                                        |                     
|                                                                                                                                     |                                                                                                                        | Total assets        
|                                                                                                                                     |                                                                                                                        |                     

See
notes to consolidated financial statements.

S-2

---



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

|                                       |                                                                                                                                                                                 | June 30,                                  
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------
|
|
|LIABILITIES AND STOCKHOLDERS' EQUITY   |                                                                                                                                                                                 |                                           
|Current liabilities:                   |                                                                                                                                                                                 |                                           
|                                       | Current portion of long-term debt                                                                                                                                               |                                           
|                                       | Accounts payable                                                                                                                                                                |                                           
|                                       | Advance payments by customers                                                                                                                                                   |                                           
|                                       | Income taxes payable                                                                                                                                                            |                                           
|                                       | Liabilities of discontinued operations                                                                                                                                          |                                           
|                                       | Accrued payroll expenses                                                                                                                                                        |                                           
|                                       | Accrued expenses and other current liabilities                                                                                                                                  |                                           
|                                       |                                                                                                                                                                                 |                                           
|                                       |                                                                                                                                                                                 | Total current liabilities                 
|Long-term debt                         |                                                                                                                                                                                 |                                           
|Deferred income taxes                  |                                                                                                                                                                                 |                                           
|Liabilities of discontinued operations |                                                                                                                                                                                 |                                           
|Other long-term liabilities            |                                                                                                                                                                                 |                                           
|                                       |                                                                                                                                                                                 |                                           
|                                       |                                                                                                                                                                                 | Total liabilities                         
|                                       |                                                                                                                                                                                 |                                           
|Commitments and contingencies          |                                                                                                                                                                                 |                                           
|Stockholders' equity:                  |                                                                                                                                                                                 |                                           
|                                       | Preferred Stock, par value $.10 per share; authorized 1,000 shares: Series A Junior Participating Preferred Stock, par value $.10 per share; authorized 110 shares; none issued |                                           
|                                       | Common Stock, par value $.10 per share; authorized 110,000 shares; issued 74,282 and 60,122 at June 30, 2004 and 2003, respectively                                             |                                           
|                                       | Additional paid-in capital                                                                                                                                                      |                                           
|                                       | Accumulated other comprehensive income                                                                                                                                          |                                           
|                                       | Retained earnings                                                                                                                                                               |                                           
|                                       |                                                                                                                                                                                 |                                           
|                                       |                                                                                                                                                                                 |                                           
|                                       | Less: Treasury stock, at cost (4 shares at June 30, 2004 and 2003)                                                                                                              |                                           
|                                       |                                                                                                                                                                                 |                                           
|                                       |                                                                                                                                                                                 | Total stockholders' equity                
|                                       |                                                                                                                                                                                 |                                           
|                                       |                                                                                                                                                                                 | Total liabilities and stockholders' equity
|                                       |                                                                                                                                                                                 |                                           

See
notes to consolidated financial statements.

S-3

---





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

|                                                                        |                                                                                                      | Years Ended June 30,              |        
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | --------------------------------- | -------
|
|
|Net sales                                                               |                                                                                                      | $                                 | 414,101
|Cost of sales (including restructuring charges of $150 in 2002, note 4) |                                                                                                      |                                   | 221,409
|                                                                        |                                                                                                      |                                   |        
|                                                                        | Gross profit                                                                                         |                                   |        
|                                                                        |                                                                                                      |                                   |        
|Operating costs:                                                        |                                                                                                      |                                   |        
|                                                                        | Selling, general and administrative costs (including restructuring charges of $2,918 in 2002,note 4) |                                   |        
|                                                                        | Research and development costs                                                                       |                                   |        
|                                                                        | Amortization of acquired intangibles                                                                 |                                   |        
|                                                                        | Acquired in-process research and development costs (note 3)                                          |                                   |        
|                                                                        |                                                                                                      |                                   |        
|                                                                        |                                                                                                      | Total operating costs             |        
|                                                                        |                                                                                                      |                                   |        
|Operating income                                                        |                                                                                                      |                                   | 36,035 
|                                                                        |                                                                                                      |                                   |        
|Other expense (income):                                                 |                                                                                                      |                                   |        
|                                                                        | Interest expense                                                                                     |                                   |        
|                                                                        | Other expense (income), net (including interest income and dividends of $456, $945 and $1,897)       |                                   |        
|                                                                        |                                                                                                      |                                   |        
|                                                                        |                                                                                                      | Total other expense (income)      |        
|                                                                        |                                                                                                      |                                   |        
|Income from continuing operations before income taxes                   |                                                                                                      |                                   | 32,921 
|Provision for income taxes                                              |                                                                                                      |                                   | 12,457 
|                                                                        |                                                                                                      |                                   |        
|Income from continuing operations                                       |                                                                                                      |                                   | 20,464 
|                                                                        |                                                                                                      |                                   |        
|Discontinued operations                                                 |                                                                                                      |                                   |        
|                                                                        | Loss from discontinued operations, net of tax benefit of $1,030, $1,525 and $6,704 (note 2)          |                                   |        
|                                                                        | Loss on disposal/abandonment of operations, net of tax benefit of $2,941, $590 and $0 (note 2)       |                                   |        
|                                                                        |                                                                                                      |                                   |        
|Loss from discontinued operations, net of tax                           |                                                                                                      |                                   | 8,317  
|                                                                        |                                                                                                      |                                   |        
|Net income (loss)                                                       |                                                                                                      | $                                 | 12,147 
|                                                                        |                                                                                                      |                                   |        
|Income (loss) per common share:                                         |                                                                                                      |                                   |        
|                                                                        | Basic                                                                                                |                                   |        
|                                                                        |                                                                                                      | Income from continuing operations |        
|                                                                        |                                                                                                      | Discontinued operations           |        
|                                                                        |                                                                                                      |                                   |        
|                                                                        |                                                                                                      | Net income (loss)                 |        
|                                                                        |                                                                                                      |                                   |        
|                                                                        | Diluted                                                                                              |                                   |        
|                                                                        |                                                                                                      | Income from continuing operations |        
|                                                                        |                                                                                                      | Discontinued operations           |        
|                                                                        |                                                                                                      |                                   |        
|                                                                        |                                                                                                      | Net income (loss)                 |        
|                                                                        |                                                                                                      |                                   |        
|Weighted average number of common shares outstanding:                   |                                                                                                      |                                   |        
|                                                                        | Basic                                                                                                |                                   |        
|                                                                        | Diluted                                                                                              |                                   |        

See
notes to consolidated financial statements.

S-4

---



AEROFLEX INCORPORATED  AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)        Years Ended June 30, 2004, 2003 and 2002    
   (In thousands)

|                                                                            |  |   |         | Common Stock |        |  |   | Accumulated
Other
Comprehensive
Income (Loss) |  |   |         | Treasury Stock |   |        |  
|--------------------------------------------------------------------------- |  | - | ------- | ------------ | ------ |  | - | --------------------------------------------- |  | - | ------- | -------------- | - | ------ | -
|
|
|Balance, July 1, 2001                                                       |  | $ | 255,121 |              | 59,674 |  | $ | 5,967                                         |  | $ | 219,278 |                | $ | (154   | )
|Stock issued upon exercise of stock options including tax benefit (Note 11) |  |   | 3,055   |              | 332    |  |   | 34                                            |  |   | 3,021   |                |   |       |  
|Deferred compensation                                                       |  |   | 52      |              |       |  |   |                                              |  |   | 52      |                |   |       |  
|Other comprehensive income                                                  |  |   | 2,035   |              |       |  |   |                                              |  |   |        |                |   | 2,035  |  
|Net loss                                                                    |  |   | (10,781 | )            |       |  |   |                                              |  |   |        |                |   |       |  
|                                                                            |  |   |         |              |        |  |   |                                               |  |   |         |                |   |        |  
|Balance, June 30, 2002                                                      |  |   | 249,482 |              | 60,006 |  |   | 6,001                                         |  |   | 222,351 |                |   | 1,881  |  
|                                                                            |  |   |         |              |        |  |   |                                               |  |   |         |                |   |        |  
|Stock issued upon exercise of stock options including tax benefit (Note 11) |  |   | 591     |              | 116    |  |   | 11                                            |  |   | 580     |                |   |       |  
|Deferred compensation                                                       |  |   | 12      |              |       |  |   |                                              |  |   | 12      |                |   |       |  
|Other comprehensive income                                                  |  |   | 1,935   |              |       |  |   |                                              |  |   |        |                |   | 1,935  |  
|Net income                                                                  |  |   | 6,395   |              |       |  |   |                                              |  |   |        |                |   |       |  
|                                                                            |  |   |         |              |        |  |   |                                               |  |   |         |                |   |        |  
|Balance, June 30, 2003                                                      |  |   | 258,415 |              | 60,122 |  |   | 6,012                                         |  |   | 222,943 |                |   | 3,816  |  
|                                                                            |  |   |         |              |        |  |   |                                               |  |   |         |                |   |        |  
|Stock issued upon exercise of stock options including tax benefit (Note 11) |  |   | 7,639   |              | 910    |  |   | 91                                            |  |   | 7,548   |                |   |       |  
|Stock and options issued for acquisition of businesses                      |  |   | 50,151  |              | 6,250  |  |   | 625                                           |  |   | 49,526  |                |   |       |  
|Stock issued in public offering                                             |  |   | 91,170  |              | 7,000  |  |   | 700                                           |  |   | 90,470  |                |   |       |  
|Deferred compensation                                                       |  |   | 4       |              |       |  |   |                                              |  |   | 4       |                |   |       |  
|Other comprehensive income                                                  |  |   | 7,571   |              |       |  |   |                                              |  |   |        |                |   | 7,571  |  
|Net income                                                                  |  |   | 12,147  |              |       |  |   |                                              |  |   |        |                |   |       |  
|                                                                            |  |   |         |              |        |  |   |                                               |  |   |         |                |   |        |  
|Balance, June 30, 2004                                                      |  | $ | 427,097 |              | 74,282 |  | $ | 7,428                                         |  | $ | 370,491 |                | $ | 11,387 |  
|                                                                            |  |   |         |              |        |  |   |                                               |  |   |         |                |   |        |  

See notes to consolidated financial statements.

S-5

---





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

|                                                             |                                                                                         | Years Ended June 30,                                                            |        
|------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------
|
|
|Cash flows from operating activities:                        |                                                                                         |                                                                                 |        
|                                                             | Net income (loss)                                                                       |                                                                                 | $      
|                                                             | Loss from discontinued operations                                                       |                                                                                 |        
|                                                             |                                                                                         |                                                                                 |        
|                                                             | Income from continuing operations                                                       |                                                                                 |        
|                                                             | Adjustments to reconcile net income to net cash provided by operating activities:       |                                                                                 |        
|                                                             |                                                                                         | Acquired in-process research and development                                    |        
|                                                             |                                                                                         | Depreciation and amortization                                                   |        
|                                                             |                                                                                         | Amortization of deferred gain                                                   |        
|                                                             |                                                                                         | Deferred income taxes                                                           |        
|                                                             |                                                                                         | Non-cash restructuring charges                                                  |        
|                                                             |                                                                                         | Other                                                                           |        
|                                                             | Change in operating assets and liabilities, net of effects from purchase of businesses: |                                                                                 |        
|                                                             |                                                                                         | Decrease (increase) in accounts receivable                                      |        
|                                                             |                                                                                         | Decrease (increase) in inventories                                              |        
|                                                             |                                                                                         | Decrease (increase) in prepaid expenses and other assets                        |        
|                                                             |                                                                                         | Increase (decrease) in accounts payable, accrued expenses and other liabilities |        
|                                                             |                                                                                         |                                                                                 |        
|Net cash provided by continuing operations                   |                                                                                         |                                                                                 | 25,940 
|Net cash provided by (used in) discontinued operations       |                                                                                         |                                                                                 | (1,840 
|                                                             |                                                                                         |                                                                                 |        
|Net cash provided by operating activities                    |                                                                                         |                                                                                 | 24,100 
|                                                             |                                                                                         |                                                                                 |        
|Cash flows from investing activities:                        |                                                                                         |                                                                                 |        
|                                                             | Payment for purchase of businesses, net of cash acquired                                |                                                                                 |        
|                                                             | Capital expenditures                                                                    |                                                                                 |        
|                                                             | Proceeds from sale of property, plant and equipment                                     |                                                                                 |        
|                                                             | Purchase of marketable securities                                                       |                                                                                 |        
|                                                             | Proceeds from sale of marketable securities                                             |                                                                                 |        
|                                                             |                                                                                         |                                                                                 |        
|Net cash used in continuing operations                       |                                                                                         |                                                                                 | (72,678
|Net cash provided by (used in) discontinued operations       |                                                                                         |                                                                                 | (389   
|                                                             |                                                                                         |                                                                                 |        
|Net cash used in investing activities                        |                                                                                         |                                                                                 | (73,067
|                                                             |                                                                                         |                                                                                 |        
|Cash flows from financing activities:                        |                                                                                         |                                                                                 |        
|                                                             | Net proceeds from issuance of common stock                                              |                                                                                 |        
|                                                             | Borrowings under debt agreements                                                        |                                                                                 |        
|                                                             | Debt repayments                                                                         |                                                                                 |        
|                                                             | Proceeds from the exercise of stock options and warrants                                |                                                                                 |        
|                                                             | Amounts paid for withholding taxes on stock option exercises                            |                                                                                 |        
|                                                             | Withholding taxes collected for stock option exercises                                  |                                                                                 |        
|                                                             |                                                                                         |                                                                                 |        
|Net cash provided by (used in) continuing operations         |                                                                                         |                                                                                 | 94,421 
|Net cash provided by (used in) discontinued operations       |                                                                                         |                                                                                 |       
|                                                             |                                                                                         |                                                                                 |        
|Net cash provided by (used in) financing activities          |                                                                                         |                                                                                 | 94,421 
|                                                             |                                                                                         |                                                                                 |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                                         |                                                                                 | 1,741  
|                                                             |                                                                                         |                                                                                 |        
|Net increase (decrease) in cash and cash equivalents         |                                                                                         |                                                                                 | 47,195 
|Cash and cash equivalents at beginning of year               |                                                                                         |                                                                                 | 51,307 
|                                                             |                                                                                         |                                                                                 |        
|Cash and cash equivalents at end of year                     |                                                                                         | $                                                                               | 98,502 
|                                                             |                                                                                         |                                                                                 |        

See notes to consolidated financial statements.

S-6

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AEROFLEX INCORPORATED  AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Summary of Significant Accounting Principles and Policies



The accompanying consolidated financial statements include the accounts of Aeroflex Incorporated and its subsidiaries (the "Company"), all of which are
wholly-owned as of June 30, 2004. All intercompany balances and transactions have been eliminated.



The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America
requires that management of the Company make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities. Among
the more significant estimates included in the consolidated financial statements are revenue and cost recognition under long-term contracts, the valuation of inventories and the
recoverability of long-lived and intangible assets and goodwill. Actual results could differ from those estimates.



The Company considers all highly liquid investments having maturities of three months or less at the date of acquisition to be cash equivalents.



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.



The fair values of all financial instruments, other than long-term debt (see Note 8), approximate book values because of the short maturity of
these instruments.

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



The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed
or determinable and collectibility of the resulting receivable is reasonably assured.

For
arrangements other than certain long-term contracts, revenue (including shipping and handling fees) is recognized when products are shipped and title is passed to the
customer. Revenues associated

S-7

---



with
certain long-term contracts are recognized in accordance with Statement of Position No. 81-1 "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts" ("SOP 81-1"). Under SOP 81-1, the Company uses the percentage-of-completion method, whereby revenues and
associated costs are recognized as work on a contract progresses. The Company measures the extent of progress toward completion generally based upon one of the following (based upon an assessment of
which method most closely aligns to the underlying earnings process): (i) the units-of-delivery method, (ii) the cost-to-cost method,
using the ratio of contract costs incurred as a percentage of total estimated costs at contract completion (based upon engineering and production estimates), or (iii) the achievement of
contractual milestones. Provisions for anticipated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such anticipated losses
or revisions become evident. Revenue from software support and maintenance contracts is recognized ratably over the term of the contract in accordance with SOP-97-2, "Software
Revenue Recognition."



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.



All research and development costs are charged to expense as incurred. See Note 3 for a discussion of acquired in-process research and
development. For our software products, costs incurred between the date of technological feasibility and the date that the software is available for general release are capitalized. Historically, such
costs have been insignificant.



Intangible assets are carried at cost less accumulated amortization and are being amortized on a straight-line basis over periods ranging from 1 to
16 years. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," whenever events or changes in circumstances indicate that the
carrying value of its intangible assets may be impaired, the Company evaluates the recoverability of such assets by estimating the future cash flows. If the sum of the undiscounted cash flows expected
to result from the use of the asset, and its eventual disposition, is less than the carrying amount of the asset, the Company will recognize an impairment loss to the extent of the excess of the
carrying amount of the asset over the discounted cash flow.

In
July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets."SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart
from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives, and reviewed
for impairment in accordance with SFAS No. 144.

The
Company adopted the provisions of SFAS No. 141 and SFAS No. 142 as of July 1, 2001. The Company has tested goodwill for impairment in accordance with the
provisions of SFAS No. 142 as of July 1, 2001. Based on its evaluation, the Company was not required to recognize any impairment

S-8

---



losses
as of July 1, 2001. The Company evaluated its intangible assets and goodwill that were acquired in prior purchase business combinations and reclassified $493,000 net carrying value of
intangible assets to goodwill in order to conform with the criteria in SFAS No. 141 for recognition apart from goodwill. In connection with this reclassification, the Company reduced goodwill
for the amount of deferred taxes previously recorded on the reclassified intangible assets that are no longer required. The Company also reassessed the useful lives and residual values of all
intangible assets acquired, and determined that no adjustment to these estimates was necessary.



In accordance with SFAS No. 128 "Earnings Per Share," net income per common share ("Basic EPS") is computed by dividing net income by the weighted average
common shares outstanding. Net income per common share assuming dilution ("Diluted EPS") is computed by dividing net income by the weighted average common shares outstanding plus potential dilution
from the exercise of stock options. The effect of options in a loss period would be anti-dilutive, therefore Basic EPS and Diluted EPS are the same in a loss period.



The Company records compensation expense for employee and director stock options only if the current market price of the underlying stock exceeds the exercise
price on the date of the grant. Effective July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected not to implement the fair
value based accounting method for employee and director stock options, but instead has elected to disclose the pro forma net income and pro forma net income per share for employee and director stock
option grants made beginning in fiscal 1996 as if such method had been used to account for stock-based compensation cost as described in SFAS No. 123.

The
per share weighted average fair value of stock options granted during fiscal 2004, 2003 and 2002 was $6.99, $5.24 and $7.64, respectively, on the date of grant using the Black
Scholes option-pricing model with the following weighted average assumptions: 2004expected dividend yield of 0%, risk free interest rate of 4.56%, expected stock volatility of 76%, and an
expected option life of 5.2 years; 2003expected dividend yield of 0%, risk free interest rate of 3.5%, expected stock volatility of 108%, and an expected option life of
5.4 years; 2002expected dividend yield of 0%, risk free interest rate of 4.9%, expected stock volatility of 122%, and an expected option life of 4.8 years. The pro forma
compensation cost before income taxes was $20.1 million, $43.2 million and $66.0 million for the years ended June 30, 2004, 2003 and 2002, respectively, based on the
aforementioned fair value at

S-9

---



the
grant date only for options granted after fiscal year 1995. The Company's net income (loss) and net income (loss) per share using this pro forma compensation cost would have been:

|                                                                                                    |         | Years Ended June 30, |        
|--------------------------------------------------------------------------------------------------- | ------- | -------------------- | -------
|
|
|Income from continuing operationsas reported                                                       |         | $                    | 20,464 
|Deduct: Total stock-based compensation expense determined under fair value based method, net of tax |         |                      | (12,524
|                                                                                                    |         |                      |        
|Income (loss) from continuing operationspro forma                                                  |         | $                    | 7,940  
|                                                                                                    |         |                      |        
|Income from continuing operations per shareas reported                                             |         |                      |        
|                                                                                                    | Basic   |                      | $      
|                                                                                                    | Diluted |                      |        
|Income (loss) from continuing operations per sharepro forma                                        |         |                      |        
|                                                                                                    | Basic   |                      | $      
|                                                                                                    | Diluted |                      |        

---



Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date.



The financial statements of the Company's foreign subsidiaries are measured in their local currency and then translated into U.S. dollars using the current rate
method. Under the current rate method, assets and liabilities are translated using the exchange rate at the balance sheet date. Revenues and expenses are translated at average rates prevailing
throughout the year. Gains and losses resulting from the translation of financial statements of the foreign subsidiaries are accumulated in other comprehensive income (loss) and presented as part of
stockholders' equity. Realized and unrealized exchange gains or losses from the settlement of foreign currency transactions are reflected in the consolidated statement of operations in other income
(loss).



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

S-10

---





Reclassifications have been made to the 2002 and 2003 consolidated financial statements to conform to the 2004 presentation.



In November 2002, the Emerging Issues Task Force ("EITF") finalized EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables", which
provides guidance on the timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF Issue 00-21 is effective
prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. Such adoption did not have any impact on the Company's consolidated financial statements.

In
May 2003, the FASB issued SFAS No. 150,"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity."The statement establishes standards for how an issuer clarifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this
statement did not have any impact on the Company's consolidated financial statements.

In
July 2003, the EITF reached a consensus on Issue 03-5, "Applicability of AICPA Statement of Position 97-2 ("SOP 97-2") to
Non-Software Deliverables" ("EITF 03-5"). The consensus was reached that SOP 97-2 is applicable to non-software deliverables if they are included in an
arrangement that contains software that is essential to the non-software deliverables' functionality. This consensus is to be applied to fiscal periods beginning after August 13,
2003. Such adoption did not have a material impact on the Company's consolidated financial statements.

In
December 2003, the FASB issued FASB Interpretation Number 46-R ("FIN 46-R"), "Consolidation of Variable Interest Entities." FIN 46-R, which
modifies certain provisions and effective dates of FIN 46, sets forth criteria to be used in determining whether an interest in a variable interest entity should be consolidated. These provisions are
based on the general premise that if a company controls another entity through interests other than voting interests, that company should consolidate the controlled entity. FIN 46-R
modification did not have any impact on the Company's consolidated financial statements.

2.     Discontinued Operations

In December 2002, the Board of Directors of the Company approved a formal plan to discontinue the Company's fiber optic lithium niobate modulator operation
("TriLink") due to the continued weakness in the fiber optic end-user market and reductions in pricing. This operation had previously been included in the Microelectronic Solutions
segment.The plan called for an immediate cessation of operations and disposal of existing assets. The abandonment of the operation resulted in a charge
of $2.6 million ($1.7 million, net of tax) in the quarter ended December 31, 2002. The charge included a cash requirement of $1.4 million, primarily for existing equipment
leases and payroll costs, and a non-cash charge of $1.2 million primarily for the write-off of owned equipment.

S-11

---



As a result of continued operating losses,in February 2004, the Board of Directors of the Company approved a formal plan to divest
the Company's thin film interconnect manufacturing operation ("MIC") and to seek a strategic buyer. This operation had previously been included in the Microelectronic Solutions segment. As a result of
this decision, the Company recorded a $9.1 million ($5.9 million, net of tax) loss on disposal based upon recent third party offers for the business. This charge included a cash
requirement of $2.6 million primarily for existing equipment leases, and a non-cash charge of $6.5 million for the write down of goodwill, other intangibles and owned
equipment.

In
June 2004, the Board of Directors of the Company approved a formal plan to divest its shock and vibration control device manufacturing business ("VMC"), and to seek a strategic
buyer. The Company has not recorded a loss on disposal as management believes VMC can be sold for a price in excess of its carrying value. This operation had previously comprised the Isolator Products
segment.

In
accordance with SFAS No. 144, these business units have been reported as discontinued operations and, accordingly, income and losses from operations and the losses on
disposal/abandonment have been reported separately from continuing operations. Net sales and income (loss) from discontinued operations (including loss on disposal/abandonment) for the years ended
June 30, 2004, 2003 and 2002 were as follows:

Years Ended June 30,2004

2003

2002(In thousands)Net salesTriLink

$


$
58

$
505MIC


10,689


10,141


15,963VMC


16,025


16,245


15,729$
26,714

$
26,444

$
32,197Income (loss) from discontinued operationsTriLink

$


$
(2,138
)
$
(11,105
)MIC


(8,599
)

(2,905
)

(7,976
)VMC


282


543


679$
(8,317
)
$
(4,500
)
$
(18,402
)


To
conform with this presentation, all prior periods have been restated. As a result, the assets and liabilities of the discontinued operations have been reclassified on the balance
sheet from the historical classifications and presented under the captions "assets of discontinued operations" and "liabilities of

S-12

---



discontinued
operations," respectively. As of June 30, 2004 and 2003, the net assets of the discontinued operations consisted of the following:

June 30,
2004

June 30,
2003(In thousands)Accounts receivable

$
5,133

$
4,361Inventory


5,247


5,373Prepaid and other current assets


1,530


1,076Current assets


11,910


10,810Property, plant, & equipment, net


5,543


13,075Intangibles


1,550


4,236Other assets


2,624


253Non-current assets


9,717


17,564Total assets


21,627


28,374Accounts payable


704


541Accrued expenses


3,869


3,567Current liabilities


4,573


4,108Long term debt


3,565


3,565Other long term liabilities


48


1,172Long term liabilities


3,613


4,737Total liabilities


8,186


8,845Net assets

$
13,441

$
19,529


3.     Acquisition of Businesses and Intangible Assets



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

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

S-13

---



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

(In thousands)Current assets (excluding cash of $8.0 million)

$
44,046Property, plant and equipment


20,242Developed technology


8,230Goodwill


4,663In-process research and development


1,100Other


62Total assets acquired


78,343Current liabilities


(21,819
)Long-term debt


(2,814
)Total liabilities assumed


(24,633
)Net assets acquired

$
53,710


The
developed technology is being amortized on a straight-line basis over 6 years. The goodwill is not deductible for tax purposes. At the acquisition date, the
acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. At the acquisition date, IFR was conducting
design, development, engineering and testing activities associated with the completion of new technologies for its radio test set product line.



On July 31, 2003, the Company acquired the Racal Instruments Wireless Solutions Group ("RIWS") for cash of $38 million and a deferred payment of up
to $16.5 million in either cash or Aeroflex common stock, at the Company's option, depending on RIWS achieving certain performance goals for the year
ending July 31, 2004. The Company has not included this contingent consideration in its initial purchase price allocation as the payment of this consideration has not been finally determined
and is not considered to be certain beyond a reasonable doubt. As a result, the Company will adjust goodwill for any contingent consideration in the future if and when it is earned. RIWS develops,
manufactures and integrates digital wireless testing and measurement solutions. The addition of RIWS testing solutions products and technologies is expected to enable the Company to provide a full
spectrum of wireless testing solutions from development to production and services primarily for infrastructure testing and mobile handset testing.

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

S-14

---



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

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

$
19,303Property, plant and equipment


8,672Developed technology


15,600Customer related intangibles


1,700Tradenames


200Goodwill


21,655In-process research and development


2,700Total assets acquired


69,830Current liabilities


(29,887
)Deferred taxes


(5,250
)Total liabilities assumed


(35,137
)Net assets acquired

$
34,693


As
of June 30, 2004, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized
upon the receipt and completion of additional information and analysis during the first quarter of fiscal 2005.

The
developed technology, tradenames and customer related intangibles are being amortized on a straight-line basis over a range of 1 to 8 years. Approximately
$5.4 million of the goodwill is deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached
technological feasibility and had no alternative future uses. At the acquisition date, RIWS was conducting design, development, engineering and testing activities associated with the completion of new
2.5G and 3G protocol and conformance testers.



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

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

S-15

---



acquisition
costs of approximately $2.0 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

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

$
19,020Property, plant and equipment


12,517Developed technology


8,850Tradenames


1,100Customer related intangibles


2,520Goodwill


42,321In-process research and development


420Other


459Total assets acquired


87,207Current liabilities


(12,234
)Long-term debt


(89
)Deferred taxes


(5,963
)Other long-term liabilities


(11
)Total liabilities assumed


(18,297
)Net assets acquired

$
68,910


As
of June 30, 2004, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized
upon the receipt and completion of additional information and analysis during the first quarter of fiscal 2005.

The
developed technology, customer related intangibles, and tradenames are being amortized on a straight-line basis over a range of 1 to 15 years. The goodwill is not
deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached technological feasibility and had no alternative
future uses. At the acquisition date, MCE was conducting development activities associated with the completion of certain high frequency component technology.



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

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

S-16

---



acquisition
costs of approximately $106,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

(In thousands)Current assets

$
2,152Property, plant and equipment


737Developed technology


3,405Goodwill


2,209In-process research and development


1,100Total assets acquired


9,603Current liabilities assumed


(1,295
)Net assets acquired

$
8,308


As
of June 30, 2004, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized
upon the receipt and completion of additional information and analysis during the first quarter of fiscal 2005.

The
developed technology is being amortized on a straight-line basis over 7 years. The goodwill is fully deductible for tax purposes. At the acquisition date, the
acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. At the acquisition date, Celerity was
conducting development activities associated with the completion of its next generation modular technology.

Summarized
below are the unaudited pro forma results of operations of the Company as if RIWS, MCE and Celerity had been acquired at the beginning of the fiscal periods presented. The
in-process research and development write-offs for RIWS, MCE and Celerity have been included in the June 30, 2004 pro forma income but not the June 30, 2003 pro
forma income in order to provide comparability to the respective historical periods.

Pro Forma Years Ended June 30,2004

2003(In thousands, except per share data)Net sales

$
427,447

$
378,183Income from continuing operations


17,361


6,155Income from continuing operations per shareBasic

$
.25

$
.09Diluted


.24


.09


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

S-17

---





The components of amortizable intangible assets are as follows:

As of June 30, 2004

As of June 30, 2003Gross Carrying
Amount

Accumulated
Amortization

Gross Carrying
Amount

Accumulated
Amortization(In thousands)Existing technology

$
48,474

$
12,901

$
18,747

$
6,334Tradenames


2,324


912


1,000


433Customer related


4,424


807





Total

$
55,222

$
14,620

$
19,747

$
6,767


The
aggregate amortization expense for the amortized intangible assets was $7.7 million, $2.7 million and $1.4 million for the years ended June 30, 2004, 2003
and 2002, respectively.

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

(In thousands)2005

$
8,8952006


7,5062007


6,5802008


5,7732009


3,886




The carrying amount of goodwill is as follows:

Balance
as of
July 1, 2003

Acquisitions

Effect of
foreign
currency

Balance
as of
June 30, 2004(In thousands)Microelectronic Solutions Segment

$
4,050

$
42,321

$


$
46,371Test Solutions Segment


15,924


23,864


2,129


41,917Total

$
19,974

$
66,185

$
2,129

$
88,288




Balance
as of
July 1, 2002

Acquired
(note a)

Effect of
foreign
currency

Balance
as of
June 30, 2003(In thousands)Microelectronic Solutions Segment

$
4,050

$


$


$
4,050Test Solutions Segment


14,023


1,901





15,924Total

$
18,073

$
1,901

$


$
19,974


---

|Note a |  | Goodwill recorded during the period as a result of the final purchase price allocation of IFR and contingent payments pursuant to purchase agreements.
|------ | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

S-18

---



4.     Restructuring Charges

In fiscal 2002, the Company initiated strategic plans to consolidate its manufacturing operations to take advantage of excess manufacturing capacity in certain of
its facilities and reduce operating costs. The Company recorded charges to eliminate excess equipment in both the test solutions and microelectronics segments and for workforce reductions primarily in
the test solutions segment. The last of these consolidations was completed in March 2003. In connection with this restructuring, the Company recorded a charge of $3.1 million in the
fiscal year ended June 30, 2002 or $2.1 million, net of tax ($.03 per diluted share). The restructuring charge was allocated $150,000 to cost of sales and $2.9 million to selling,
general and administrative expenses. In addition, there were charges of approximately $165,000 directly related to the restructuring plan which could not be accrued in fiscal 2002, but were expensed
as incurred in fiscal 2003 in accordance with EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring)" ("EITF 94-3").



The $150,000 charge to write-off inventory consisted of fiber optic inventory that was not viable for the current plans of the microelectronics
business. These charges were classified as components of cost of sales in accordance with EITF No. 96-9, "Classification of Inventory Markdowns and Other Costs Associated with a
Restructuring."



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



During fiscal 2002, workforce reductions of approximately 80 employees resulted in a charge of $1.3 million. This charge included severance pay, retention
bonuses and fringe benefits for the remaining workforces at the facilities consolidated under the restructuring plans. Approximately $70,000 of post-production payroll costs, related
solely to closing the facilities, was not accrued, but was expensed as incurred, as such costs did not meet the criteria for accrual of EITF No. 94-3.



During fiscal 2002, the Company recognized a charge of $1.4 million for plant shutdown charges. This charge included the write-off of excess
equipment and leasehold improvements, buyouts of certain equipment and facility leases and costs relating to facility closing and clean-up. Approximately $95,000 of additional costs were
incurred and expensed in fiscal 2003 related to post-production operating costs.

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

S-19

---



The
following tables set forth the charges and payments related to the restructuring reserve for the years ended June 30, 2004 and 2003:

Balance
July 1, 2003

Year Ended
June 30, 2004

Balance
June 30, 2004Restructuring
Reserve

Adjustments
to
Restructuring
Reserve

Cash
Payments

Restructuring
Reserve(In thousands)Work force reduction

$
91

$


$
(88
)
$
3Lease payments


14





(14
)

Plant shutdown and other


120








120Total

$
225

$


$
(102
)
$
123




Balance
July 1, 2002

Year Ended
June 30, 2003

Balance
June 30, 2003Restructuring
Reserve

Adjustments
to
Restructuring
Reserve

Cash
Payments

Restructuring
Reserve(In thousands)Work force reduction

$
1,265

$
(161
)
$
(1,013
)
$
91Lease payments


24


5


(15
)

14Plant shutdown and other


136


9


(25
)

120Total

$
1,425

$
(147
)
$
(1,053
)
$
225


5.     Inventories

Inventories consist of the following:

June 30,2004

2003(In thousands)Raw materials

$
35,228

$
29,836Work-in-process


40,248


25,456Finished goods


19,141


14,074$
94,617

$
69,366


Inventories
include contracts-in-process of $23.9 million and $16.1 million at June 30, 2004 and 2003, respectively, which consist
substantially of unbilled material, labor and overhead costs that are or were expected to be billed during the succeeding fiscal year.

S-20

---



6.     Property, Plant and Equipment

Property, plant and equipment consists of the following:

June 30,Estimated
Useful Life
In Years2004

2003(In thousands)Land

$
11,255

$
8,590Building and leasehold improvements


28,679


27,950

2 to 40Machinery, equipment, tools and dies


76,994


51,783

2 to 10Furniture and fixtures


12,685


8,267

5 to 10Assets recorded under capital leases


4,756


4,424

2 to 30134,369


101,014Less accumulated depreciation and amortization


59,997


45,009$
74,372

$
56,005


Repairs
and maintenance expense on property, plant and equipment was $5.5 million, $3.3 million and $931,000 for the years ended June 30, 2004, 2003 and 2002,
respectively.

7.     Product Warranty

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

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

Years Ended June 30,2004

2003(In thousands)Balance at beginning of period

$
1,308

$
1,544Provision for warranty obligations


1,455


1,462Liability assumed in acquisition of businesses


334


Charges incurred


(1,395
)

(1,698
)Balance at end of period

$
1,702

$
1,308


8.     Long-Term Debt and Credit Arrangements

Long-term debt consists of the following:

June 30,2004

2003(In thousands)Revolving credit and mortgage agreement(a)

$
2,780

$
3,094Capitalized equipment lease obligations(b)


2,077


3,183Capitalized building lease obligations(c)


2,510


2,750Building mortgage(d)


2,759


Other


149


24310,275


9,270Less current maturities


4,770


1,879$
5,505

$
7,391


S-21

---



Aggregate
long-term debt as of June 30, 2004 matures in each fiscal year as follows:

(In thousands)2005

$
4,7702006


1,1592007


7642008


6302009


1,857Thereafter


1,095$
10,275


Interest
paid was $1.2 million, $1.0 million and $792,000 during the years ended June 30, 2004, 2003 and 2002, respectively.

---



S-22

---



9.     Stockholders' Equity



On March 10, 2004, the Company completed the sale of 7.0 million shares of its Common Stock in a public offering at $13.75 per share. The Company
received $91.2 million, net of commission and
expenses. These net proceeds are intended to be used for working capital and other general corporate purposes including research and development and potential acquisitions.



Under the Company's stock option plans, options may be granted to purchase shares of the Company's Common Stock exercisable at prices generally equal to the fair
market value on the date of grant. During 1990, the Company's shareholders approved the Non-Qualified Stock Option Plan (the "NQSOP"). In December 1993, the Board of Directors
adopted the Outside Director Stock Option Plan (the "Directors' Plan") which provides for options to non-employee directors, which become exercisable in three installments. The Directors'
Plan, as amended, covers 1.3 million shares of the Company's Common Stock. In November 1994, the shareholders approved the Directors' Plan and the 1994 Non-Qualified Stock
Option Plan (the "1994 Plan"). In November 1996, the shareholders approved the 1996 Stock Option Plan (the "1996 Plan"). In April 1998, the Board of Directors adopted the 1998 Stock
Option Plan (the "1998 Plan"). In January 2000, the shareholders approved the 1999 Stock Option Plan (the "1999 Plan"). In March 2000, the Board of Directors adopted the 2000 Stock
Option Plan (the "2000 Plan"). In November 2000, the shareholders approved the Key Employee Stock Option Plan (the "Key Employee Plan"). In June 2002, the Board of Directors adopted the
2002 Stock Option Plan (the "2002 Plan"). In November 2002, the shareholders approved the 2002 Outside Directors' Stock Option Plan (the "2002 Directors' Plan"), which provides for options to
non-employee directors which become exercisable in three installments. The NQSOP, the 1994 Plan, the 1996 Plan, the 1998 Plan, the 1999 Plan, the 2000 Plan, the Key Employee Plan and the
2002 Plan provide for options which become exercisable in one or more installments. The NQSP, the 1994 Plan, the 1996 Plan and the 1998 Plan each cover 3.8 million shares of the Company's
Common Stock. The 1999 Plan covers 2.3 million shares, the 2000 Plan covers 6.2 million shares, the Key Employee Plan covers 4.0 million shares, the 2002 Plan covers
1.5 million shares and the 2002 Directors' Plan covers 525,000 shares. Options under the NQSOP and the 1994 Plan expire five years from the date of grant. Options under all other plans shall
expire not later than ten years from the date of grant.

During
fiscal 2004,in connection with certain of its acquisitions, the Company has also issued to employees, who are not executive officers, options to purchase 710,000 shares of Common
Stock which were not covered by one of the above plans.

S-23

---



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

Weighted
Average
Exercise
Prices

Shares
Under
Outstanding
Options(In thousands)Balance, July 1, 2001

$
16.02

13,844Granted


9.44

2,896Forfeited


14.83

(28
)Exercised


5.39

(337
)Balance, June 30, 2002


15.08

16,375Granted


6.81

327Forfeited


25.78

(2,739
)Exercised


4.35

(116
)Balance, June 30, 2003


12.85

13,847Granted


10.58

3,964Forfeited


14.04

(366
)Exercised


5.69

(910
)Balance, June 30, 2004

$
12.68

16,535


The
Company's stock option plans allow employees to use shares received from the exercise of the option to satisfy the tax withholding requirements. During fiscal years 2004, 2003 and
2002, no payroll tax on stock option exercises was withheld from employees in shares of the Company's Common Stock.

Options
to purchase 11.9 million, 10.6 million and 8.5 million shares were exercisable at weighted average exercise prices of $13.20, $12.57 and $14.26 per share as
of June 30, 2004, 2003 and 2002, respectively.

S-24

---



The options outstanding as of June 30, 2004 are summarized in ranges as follows:

Options OutstandingRange of Exercise Prices

Weighted
Average
Exercise
Price

Options
Outstanding

Weighted
Average
Remaining
Life(In thousands)$  1.67 - $  2.50

$
1.78

172

1.8 years$  3.28 - $  4.65


4.08

1,275

4.2$  5.38 - $  8.10


6.98

3,680

6.2$  8.16 - $13.56


11.66

5,977

8.4$14.02 - $22.53


17.70

4,373

6.3$26.00 - $34.41


29.64

1,058

6.316,535


Options ExercisableRange of Exercise Prices

Weighted
Average
Exercise
Price

Options
Exercisable(In thousands)$  1.67 - $  2.50

$
1.78

172$  3.28 - $  4.65


4.08

1,258$  5.38 - $  8.10


6.87

3,205$  8.16 - $13.56


12.51

2,231$14.02 - $22.53


17.70

3,981$26.00 - $34.41


29.64

1,05811,905




On August 13, 1998, the Company's Board of Directors approved a Shareholders' Rights Plan which provides for a dividend distribution of one right for each
share to holders of record of the Company's Common Stock on August 31, 1998 and the issuance of one right for each share of Common Stock that shall be subsequently issued. The rights become
exercisable only in the event a person or group ("Acquiring Person") accumulates 15% or more of the Company's Common Stock, or if an Acquiring Person announces an offer which would result in it owning
15% or more of the Common Stock. The rights expire on August 31, 2008. Each right will entitle the holder to buy 1/2500 of a share of Series A Junior Participating Preferred Stock, as
amended, of the Company at a price of $65. In addition, upon the occurrence of a merger or other business combination, or the acquisition by an Acquiring Person of 50% or more of the Common Stock,
holders of the rights, other than the Acquiring Person, will be entitled to purchase either Common Stock of the Company or common stock of the Acquiring Person at half their respective market values.
The Company will be entitled to redeem the rights for $.01 per right at any time prior to a person becoming an Acquiring Person.

S-25

---





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

Years Ended June 30,2004

2003

2002(In thousands, except per share amounts)Computation of Adjusted Net Income (Loss):Income from continuing operations

$
20,464

$
10,895

$
7,621Discontinued operations, net of tax


(8,317
)

(4,500
)

(18,402
)Net income (loss)

$
12,147

$
6,395

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


67,917


60,193


59,973Add: Effect of dilutive options outstanding


2,014


560


2,039Weighted average shares and common share equivalents used for computation of diluted earnings per common share


69,931


60,753


62,012Income (Loss) Per ShareBasic:Income from continuing operations

$
0.30

$
0.18

$
0.13Discontinued operations


(0.12
)

(0.07
)

(0.31
)Net income (loss)

$
0.18

$
0.11

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

$
0.29

$
0.18

$
0.12Discontinued operations


(0.12
)

(0.07
)

(0.29
)Net income (loss)

$
0.17

$
0.11

$
(0.17
)


Options
to purchase 6.8 million shares at exercise prices ranging between $13.48 and $34.41 per share were outstanding as of June 30, 2004 but were not included in the
computation of Diluted EPS because the exercise prices of these options were greater than the average market price of the common shares. Options to purchase 11.2 million shares at exercise
prices ranging between $6.56 and $34.41 per share were outstanding as of June 30, 2003 but were not included in the computation of Diluted EPS because the exercise prices of these options were
greater than the average market price of the common shares. Options to purchase 9.3 million shares at exercise prices ranging between $13.48 and $34.41 per share were outstanding as of June 30,
2002 but were not included in the computation of Diluted EPS because the exercise prices of these options were greater than the actual market price of the common shares.

S-26

---



10.   Comprehensive Income

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

Years Ended June 30,2004

2003

2002(In thousands)Net income (loss)

$
12,147

$
6,395

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


139


(117
)

(108
)Unrealized investment gain (loss), net of tax








42Minimum pension liability adjustment, net of tax


237


(2,115
)

(330
)Foreign currency translation adjustment


7,195


4,167


2,431Total comprehensive income (loss)

$
19,718

$
8,330

$
(8,746
)


Accumulated
other comprehensive income (loss) is as follows:

|                       |               | Unrealized
Gain (Loss)
on Interest
Rate Swap
Agreements
(net of tax) |      | Unrealized
Investment
Gain (Loss)
(net of tax) |   | Minimum
Pension
Liability
Adjustment
(net of tax) |    | Foreign
Currency
Translation
Adjustment |        | Total
(net of tax) |  
|---------------------- | ------------- | -------------------------------------------------------------------- | ---- | ---------------------------------------------- | - | ------------------------------------------------- | -- | --------------------------------------- | ------ | ------------------ | -
|
|Balance, July 1, 2001  |               | $                                                                    | (43  | )                                              | $ | (42                                               | )  | $                                       |       |                    | $
|                       | Annual change |                                                                      |      | (108                                           | ) |                                                   | 42 |                                         |        | (330               | )
|                       |               |                                                                      |      |                                                |   |                                                   |    |                                         |        |                    |  
|Balance, June 30, 2002 |               |                                                                      | (151 | )                                              |   |                                                  |    |                                         | (330   | )                  |  
|                       | Annual change |                                                                      |      | (117                                           | ) |                                                   |   |                                         |        | (2,115             | )
|                       |               |                                                                      |      |                                                |   |                                                   |    |                                         |        |                    |  
|Balance, June 30, 2003 |               |                                                                      | (268 | )                                              |   |                                                  |    |                                         | (2,445 | )                  |  
|                       | Annual change |                                                                      |      | 139                                            |   |                                                   |   |                                         |        | 237                |  
|                       |               |                                                                      |      |                                                |   |                                                   |    |                                         |        |                    |  
|Balance, June 30, 2004 |               | $                                                                    | (129 | )                                              | $ |                                                  |    | $                                       | (2,208 | )                  | $
|                       |               |                                                                      |      |                                                |   |                                                   |    |                                         |        |                    |  

11.   Income Taxes

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

Years Ended June 30,2004

2003

2002(In thousands)Current:Federal

$
10,827

$
2,261

$
(1,592
)State and local


2,076


161


663Foreign


23


159


12,926


2,581


(929
)Deferred:Federal


1,637


2,879


4,925State and local


(493
)

834


(242
)Foreign


(1,613
)

(932
)

(469
)

2,781


4,683$
12,457

$
5,362

$
3,754


S-27

---



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

Years Ended June 30,2004

2003

2002(In thousands)Tax at statutory rate

$
11,523

$
5,689

$
3,981Non-deductible acquired in-process research and development charge


1,092





374Undistributed earnings of foreign subsidiaries


(1,283
)

(1,479
)

Valuation allowance against foreign loss





795


State and local income tax


1,185


1,140


237Research and development credit


(534
)

(550
)

(375
)Other, net


474


(233
)

(463
)$
12,457

$
5,362

$
3,754


Deferred
tax assets and liabilities consist of:

June 30,2004

2003(In thousands)Accounts receivable

$
510

$
534Inventories


11,260


9,166Accrued expenses and other current liabilities


5,004


3,759Current assets


16,774


13,459Capital lease obligation


227


1,081Other long-term liabilities


4,304


3,878Capital loss carryforwards


678


673Tax loss carryforwards


4,087


3,862Tax credit carryforwards


651


5,055Less: valuation allowance


(3,210
)

(3,560
)Non-current assets


6,737


10,989Property, plant and equipment


(2,967
)

(3,770
)Intangibles


(13,215
)

(5,202
)Long-term liabilities


(16,182
)

(8,972
)Net non-current assets (liabilities)


(9,445
)

2,017Total

$
7,329

$
15,476


The
Company recorded credits of $2.5 million, $90,000 and $1.3 million to additional paid-in capital during the years ended June 30, 2004, 2003 and 2002,
respectively, in connection with the tax benefit related to compensation deductions on the exercise of stock options. The tax loss carryforwards and tax credit carryforwards expire through 2023.

In
accordance with SFAS No. 109, the Company records a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets
will not be realized. The Company has recorded a valuation allowance primarily against foreign and state net operating loss carryforwards and certain other tax credit carryforwards which may expire
before they can be utilized. The decrease in the valuation allowance of $350,000 in fiscal 2004, was primarily related to a valuation

S-28

---



allowance
over certain state tax loss carryforwards which became utilizable in fiscal 2004 as a result of an internal restructuring of certain entities.

Deferred
taxes have not been provided on undistributed earnings of foreign subsidiaries since substantially all of these earnings are expected to be permanently reinvested in foreign
operations. Determination of the amount of unrecognized deferred U.S. income tax liabilities and potential foreign tax credits is not practical to calculate because of the complexity of this
hypothetical calculation.

The
Company is undergoing routine audits by various taxing authorities of its Federal, state and foreign income tax returns covering periods from 2000 to 2003. 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 $12.7 million, $1.4 million and $1.1 million and received refunds of $202,000, $5.6 million and $609,000 during the
years ended June 30, 2004, 2003 and 2002, respectively.

12.   Employment Contracts

As of June 30, 2004, the Company has employment agreements with its officers for periods through December 31, 2009 with annual remuneration ranging
from $185,000 to $417,000, 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
$1.6 million per year. Certain of the contracts provide for a three-year consulting period at the expiration of the employment term at two-thirds of salary. In addition,
these officers have the option to terminate their employment agreements upon a change in control of the Company, as defined, and receive lump sum payments equal to the salary and bonus, if any, for
the remainder of the term.

13.   Employee Benefit Plans



All employees of the Company and certain subsidiaries who are not members of a collective bargaining agreement are eligible to participate in a company sponsored
401(k) plan. Each participant has the option to contribute a portion of his or her compensation and receive a discretionary employer matching contribution. Furthermore, employees of a certain
subsidiary are eligible to participate in a qualified profit sharing plan and receive an allocation of a discretionary share of their subsidiary's profits. For fiscal years ended June 30, 2004,
2003 and 2002, these 401(k) and profit sharing plans had an aggregate expense of $3.3 million, $2.2 million and $1.9 million, respectively.



Effective January 1, 1994, the Company established a Supplemental Executive Retirement Plan (the "SERP") which provides retirement, death and disability
benefits to certain of its officers. The SERP is currently unfunded,however there are funds being held in a Rabbi Trust for the SERP consisting primarily of cash surrender value of life insurance
policies. Those assets totaled $4.7 million and $4.0 million at June 30, 2004 and 2003, respectively. The measurement date for the SERP is June 30. The Company acquired MCE
on September 3, 2003, including its defined benefit pension plan (the "MCE Plan"). The MCE Plan has been frozen since December 31, 1993. The measurement date for the MCE Plan is
March 31.

S-29

---





June 30,2004

2003(In thousands)Change in benefit obligationBenefit obligation at beginning of year

$
8,761

$
6,466Service cost


417


358Interest cost


653


487Plan participants contributions





Amendments





Actuarial (gain) loss


(163
)

1,450Acquisition


2,539


Benefits paid


(62
)

Benefit obligation at end of year

$
12,145

$
8,761Change in plan assetsFair value of plan assets at beginning of year

$


$
Actual return on plan assets


111


Acquisitions


1,498


Employer contributions


292


Plan participants contributions





Benefits paid


(62
)

Fair value of plan assets at end of year

$
1,839

$
Funded status

$
(10,306
)
$
(8,761
)Unrecognized net transition asset


461


499Unrecognized net actuarial loss (gain)


3,356


3,704Unrecognized prior service cost (benefit)





Net amount recognized

$
(6,489
)
$
(4,558
)




June 30,2004

2003(In thousands)Prepaid cost

$


$
Accrued benefit cost (included in other long-term liabilities)


(10,306
)

(8,761
)Intangible assets


461


499Accumulated other comprehensive income


3,356


3,704Net amount recognized

$
(6,489
)
$
(4,558
)


The
accumulated benefit obligation for all defined benefit pension plans was $12.1 million and $8.8 million at June 30, 2004 and 2003, respectively.

S-30

---







Fiscal years ended
June 30,2004

2003(In thousands)Service cost

$
417

$
358Interest cost


653


486Expected return on plan assets


(104
)

Amortization of net transition (asset) obligation


38


38Amortization of prior service cost





Recognized actuarial (gain) loss


200


146Net periodic benefit cost

$
1,204

$
1,028




June 30,2004

2003(In thousands)Increase (decrease) in minimum liability included in other comprehensive income

$
(348
)
$
3,205




SERP

MCE PlanJune 30,

June 30,2004

2003

2004

2003Discount rate

6.25
%
6.00
%
5.75
%
N/ARate of compensation increase

3.00
%
3.00
%
N/A

N/A




SERP

MCE PlanYears ended June 30,

Years ended June 30,2004

2003

2004

2003Discount rate

6.00
%
7.00
%
6.25
%
N/AExpected long-term return on plan assets

N/A

N/A

7.75
%
N/ARate of compensated increase

3.00
%
3.00
%
N/A

N/A


S-31

---





The Company's pension plan weighted-average asset allocations at June 30, 2004 and 2003, by asset category are as follows:

June 30,2004

2003(In thousands)Asset CategoryEquity securities

60.41
%
N/ADebt securities

33.99
%
N/AOther

5.60
%
N/ATotal

100.00
%
N/A




The Company expects to contribute approximately $253,000 to its pension plan in the fiscal year ending June 30, 2005.



The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

Fiscal Years Ending June 30,

(In thousands)2005

$
1442006


4702007


7022008


7012009


713Years 2010-2014


4,848


14.   Commitments and Contingencies



Several of the Company's operating facilities and certain machinery and equipment are leased under agreements expiring through 2020. The leases for machinery and
equipment generally contain options to purchase at the then fair market value of the related leased assets.

S-32

---



Future
minimum payments under operating leases as of June 30, 2004 are as follows for the fiscal years:

(In thousands)2005

$
7,9732006


7,0632007


5,7312008


4,1212009


3,155Thereafter


15,612Future minimum lease payments


43,655Sub-lease income


17,017Net minimum lease payments

$
26,638


Rental
expense was $8.7 million, $6.2 million and $2.8 million during the fiscal years 2004, 2003 and 2002, respectively. Sub-lease rental income was
$1.1 million, $965,000 and $86,000 for the fiscal years 2004, 2003 and 2002, respectively.



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

15.   Business Segments

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



The
Company is a manufacturer of advanced technology systems and components for commercial industry, government and defense contractors. Approximately 34%, 39% and 50% of the Company's
sales for the fiscal years 2004, 2003 and 2002, respectively, were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. No
one customer constituted more than 10% of the Company's sales during any year in the periods presented. Inter-segment sales were not material and have been eliminated from the tables below.

Most
of the Company's operations are located in the United States, however, it also has operations in Europe and Asia. Both IFR, which we acquired in May 2002, and RIWS, which we
acquired in July 2003 have significant operations in the United Kingdom. Specifically, net sales from facilities located in the United Kingdom were approximately $121 million,
$68 million and $8 million for the fiscal years 2004, 2003 and 2002, respectively. Total assets of the United Kingdom operations were $107 million, $66 million and
$57 million for the fiscal years 2004, 2003 and 2002, respectively.

S-33

---



The
Company's sales to customers by geographic region were:

Years Ended June, 302004

2003

2002United States

64
%
65
%
84
%Europe and the Middle East

26

27

11Asia and Australia

9

7

4Rest of the World

1

1

1100
%
100
%
100
%


Years Ended June 30,2004

2003

2002(In thousands)Business Segment Data:Net sales:Microelectronic Solutions

$
164,526

$
95,820

$
88,793Test Solutions


249,575


169,987


82,738Net sales

$
414,101

$
265,807

$
171,531Operating income:Microelectronic Solutions

$
40,062

$
19,264

$
18,636Test Solutions


12,930


4,683


975General corporate expenses


(12,737
)

(7,045
)

(4,555
)40,255


16,902


15,056Restructuring charges(1)








(3,068
)Acquired in-process research and development(2)


(4,220
)




(1,100
)Interest expense


(1,403
)

(1,104
)

(958
)Other income (expense), net


(1,711
)

459


1,445Income before income taxes

$
32,921

$
16,257

$
11,375Total assets:Microelectronic Solutions

$
180,072

$
75,099

$
83,141Test Solutions


253,039


163,954


154,196Corporate


96,653


63,835


48,986Assets of discontinued operations


21,627


28,374


31,773Total assets

$
551,391

$
331,262

$
318,096Capital expenditures:Microelectronic Solutions

$
3,793

$
2,488

$
1,573Test Solutions


6,391


3,423


2,342Corporate


954


9


7Total capital expenditures

$
11,138

$
5,920

$
3,922Depreciation and amortization expense:Microelectronic Solutions

$
7,750

$
4,321

$
4,718Test Solutions


14,026


8,123


3,491Corporate


80


6


18Total depreciation and amortization expense

$
21,856

$
12,450

$
8,227


---

S-34

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

|                                             |         | Quarter |        |    
|-------------------------------------------- | ------- | ------- | ------ | ---
|
|
|Net sales                                    |         | $       | 76,093 |    
|Gross profit                                 |         |         | 33,791 |    
|Income from continuing operations            |         | $       | 962    |    
|                                             |         |         |        |    
|Income from continuing operations per share: |         |         |        |    
|                                             | Basic   |         | $      | .02
|                                             |         |         |        |    
|                                             | Diluted |         | $      | .02
|                                             |         |         |        |    



|                                             |         | Quarter |        |    
|-------------------------------------------- | ------- | ------- | ------ | ---
|
|
|Net sales                                    |         | $       | 60,159 |    
|Gross profit                                 |         |         | 23,549 |    
|Income from continuing operations            |         | $       | 1,449  |    
|                                             |         |         |        |    
|Income from continuing operations per share: |         |         |        |    
|                                             | Basic   |         | $      | .02
|                                             |         |         |        |    
|                                             | Diluted |         | $      | .02
|                                             |         |         |        |    

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-35

---





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

|Column A                        |  | Column B |       | Column C |   | Column D |  | Column E
|------------------------------- |  | -------- | ----- | -------- | - | -------- |  | --------
|
|
|YEAR ENDED JUNE 30, 2004:       |  |          |       |          |   |          |  |         
|Allowance for doubtful accounts |  | $        | 1,487 |          | $ | 87       |  | $       
|                                |  |          |       |          |   |          |  |         
|YEAR ENDED JUNE 30, 2003:       |  |          |       |          |   |          |  |         
|Allowance for doubtful accounts |  | $        | 848   |          | $ | 822      |  | $       
|                                |  |          |       |          |   |          |  |         
|YEAR ENDED JUNE 30, 2002:       |  |          |       |          |   |          |  |         
|Allowance for doubtful accounts |  | $        | 226   |          | $ | 483      |  | $       
|                                |  |          |       |          |   |          |  |         

---

Note: (A)Acquired
in purchase of businesses.

(B)Net
write-offs of uncollectibile amounts.

S-36

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