10-Q

QuickLinks -- Click here to rapidly navigate through this document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarter ended March 31, 2004

Commission File Number 000-02324

AEROFLEX INCORPORATED
(Exact name of Registrant as specified in its Charter)

DELAWARE (State or other jurisdiction of incorporation or organization)	11-1974412 (I.R.S. Employer Identification No.)
35 South Service Road P.O. Box 6022 Plainview, N.Y. (Address of principal executive offices)	11803-0622 (Zip Code)
(516) 694-6700 (Registrant's telephone number, including area code)

*  Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes ý                                  No o

*  Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ý                                  No o

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

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

AEROFLEX INCORPORATED
AND SUBSIDIARIES

INDEX

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

2

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

			March 31, 2004		June 30, 2003
			(Unaudited)		(Note 3)
			(In thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	93,808	$	51,307
	Accounts receivable, less allowance for doubtful accounts of $1,088,000 and $1,095,000			87,163		63,783
	Inventories			101,152		71,574
	Deferred income taxes			21,307		13,960
	Assets of discontinued operations			5,167		5,117
	Prepaid expenses and other current assets			9,622		5,497
		Total current assets		318,219		211,238
Property, plant and equipment, net				73,489		57,695
Intangible assets with definite lives, net				43,127		12,980
Goodwill				94,208		21,133
Deferred income taxes				—		1,423
Assets of discontinued operations				4,946		14,643
Other assets				12,497		11,504
		Total assets	$	546,486	$	330,616

See notes to consolidated financial statements.

3

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(continued)

				March 31, 2004		June 30, 2003
				(Unaudited)		(Note 3)
				(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt			$	4,776	$	1,879
	Accounts payable				27,202		19,613
	Advance payments by customers				9,777		2,826
	Income taxes payable				1,933		1,802
	Liabilities of discontinued operations				2,849		2,770
	Accrued payroll expenses				9,349		7,821
	Accrued expenses and other current liabilities				33,321		12,971
		Total current liabilities			89,207		49,682
Long-term debt					6,198		7,391
Deferred income taxes					13,638		—
Liabilities of discontinued operations					3,632		3,722
Other long-term liabilities					14,077		11,406
		Total liabilities			126,752		72,201
Stockholders' equity:
	Preferred Stock, par value $.10 per share; authorized 1,000,000 shares:
			Series A Junior Participating Preferred Stock, par value $.10 per share, authorized 110,000; none issued		—		—
	Common Stock, par value $.10 per share; authorized 110,000,000 shares; issued 74,206,000 and 60,122,000 shares				7,421		6,012
Additional paid-in capital					369,580		222,943
Accumulated other comprehensive income					13,220		3,816
Retained earnings					29,527		25,658
					419,748		258,429
Less: Treasury stock, at cost (4,000 shares)					14		14
	Total stockholders' equity				419,734		258,415
	Total liabilities and stockholders' equity			$	546,486	$	330,616

See notes to consolidated financial statements.

4

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

			Nine Months Ended March 31,
			2004			2003
						(Note 3)
			(Unaudited)
Net sales			$	300,183		$	205,497
Cost of sales				164,489			124,529
	Gross profit			135,694			80,968
Selling, general and administrative costs				69,349			45,641
Research and development costs				34,987			21,534
Amortization of acquired intangibles				5,448			2,038
Acquired in-process research and development (Note 2)				4,220			—
				114,004			69,213
Operating income				21,690			11,755
Other expense (income)
	Interest expense			1,075			810
	Other expense (income), net			2,108			(285	)
		Total other expense (income)		3,183			525
Income from continuing operations before income taxes				18,507			11,230
Provision for income taxes				6,723			3,873
Income from continuing operations				11,784			7,357
Discontinued operations
	Loss from discontinued operations			1,968			2,278
	Loss on disposal of operations			5,947			1,734
	Loss from discontinued operations, net of tax			7,915			4,012
Net income			$	3,869		$	3,345
Income (loss) per common share:
	Basic
		Continuing operations	$	.18		$	.12
		Discontinued operations		(.12	)		(.06	)
	Net income		$	.06		$	.06
Diluted
	Continuing operations		$	.17		$	.12
	Discontinued operations			(.12	)		(.06	)
	Net income		$	.05		$	.06
Weighted average number of common shares outstanding:
	Basic			65,773			60,180
	Diluted			67,689			60,739

See notes to consolidated financial statements.

5

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

			Three Months Ended March 31,
			2004			2003
						(Note 3)
			(Unaudited)
Net sales			$	116,846		$	72,509
Cost of sales				62,722			42,950
	Gross profit			54,124			29,559
Selling, general and administrative costs				25,999			16,217
Research and development costs				13,342			7,332
Amortization of acquired intangibles				2,132			687
				41,473			24,236
	Operating income			12,651			5,323
Other expense (income)
	Interest expense			343			246
	Other expense (income), net			1,906			(294	)
		Total other expense (income)		2,249			(48	)
Income from continuing operations before income taxes				10,402			5,371
Provision for income taxes				3,805			1,852
Income from continuing operations				6,597			3,519
Loss from discontinued operations, net of tax				732			602
Net income			$	5,865		$	2,917
Income (loss) per common share:
	Basic
		Continuing operations	$	.10		$	.06
		Discontinued operations		(.01	)		(.01	)
		Net income	$	.09		$	.05
	Diluted
		Continuing operations	$	.09		$	.06
		Discontinued operations		(.01	)		(.01	)
		Net income	$	.08		$	.05
Weighted average number of common shares outstanding:
	Basic			68,804			60,229
	Diluted			71,436			60,831

See notes to consolidated financial statements.

6

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

			Nine Months Ended March 31,
			2004			2003
						(Note 3)
			(Unaudited)
Cash Flows From Operating Activities:
	Net income		$	3,869		$	3,345
	Loss from discontinued operations			7,915			4,012
	Income from continuing operations			11,784			7,357
	Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
		Acquired in-process research and development		4,220			—
		Depreciation and amortization		15,915			10,076
		Deferred income taxes		(1,460	)		1,191
		Other, net		(128	)		(58	)
	Change in operating assets and liabilities, net of effects from purchases of businesses:
		Decrease (increase) in accounts receivable		(7,572	)		(359	)
		Decrease (increase) in inventories		(9,345	)		(2,230	)
		Decrease (increase) in prepaid expenses and other assets		(1,124	)		(1,497	)
		Increase (decrease) in accounts payable, accrued expenses and other liabilities		3,730			(3,397	)
Net Cash Provided By (Used In) Continuing Operations				16,020			11,083
Net Cash Provided By (Used In) Discontinued Operations				1,721			(1,260	)
Net Cash Provided By Operating Activities				17,741			9,823
Cash Flows From Investing Activities:
	Payment for purchase of businesses, net of cash acquired			(61,462	)		(1,039	)
	Capital expenditures			(7,557	)		(3,852	)
	Other, net			30			38
Net Cash Provided By (Used In) Continuing Operations				(68,989	)		(4,853	)
Net Cash Provided By (Used In) Discontinued Operations				—			(680	)
Net Cash Used In Investing Activities				(68,989	)		(5,533	)
Cash Flows From Financing Activities:
	Net proceeds from issuance of common stock			91,251			—
	Borrowings under debt agreements			26,115			—
	Debt repayments			(27,341	)		(1,363	)
	Proceeds from the exercise of stock options			4,393			486
Net Cash Provided By (Used In) Financing Activities				94,418			(877	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents				(669	)		733
Net Increase (Decrease) In Cash And Cash Equivalents				42,501			4,146
Cash And Cash Equivalents At Beginning Of Period				51,307			38,559
Cash And Cash Equivalents At End Of Period			$	93,808		$	42,705

See notes to consolidated financial statements.

7

AEROFLEX INCORPORATED

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    Basis of Presentation

        The consolidated balance sheet of Aeroflex Incorporated and Subsidiaries ("the Company") as of March 31, 2004, the related consolidated statements of operations for the nine and three months ended March 31, 2004 and 2003, and the consolidated statements of cash flows for the nine months ended March 31, 2004 and 2003 have been prepared by the Company and are unaudited. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 2004 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's June 30, 2003 annual report to shareholders. There have been no changes of significant accounting policies since June 30, 2003. Certain reclassifications have been made to previously reported financial statements to conform to current classifications and properly reflect discontinued operations (see Note 3).

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

2.    Acquisition of Businesses and Intangible Assets

Acquisition of Racal Instruments Wireless Solutions Group

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

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

8

acquisition costs of approximately $2.5 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

	(In thousands)
Current assets (excluding cash of $5.9 million)	$	15,769
Property, plant and equipment		8,672
Developed technology		15,600
Customer related intangibles		1,700
Tradenames		200
Goodwill		20,766
In-process research and development		2,700
Total assets acquired		65,407
Current liabilities		(25,524	)
Deferred taxes		(5,250	)
Total liabilities assumed		(30,774	)
Net assets acquired	$	34,633

        As of March 31, 2004, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized upon the receipt and completion of additional information and analysis during the fourth quarter.

        The developed technology, tradenames and customer related intangibles are being amortized on a straight-line basis over a range of 1 to 8 years. Approximately $5.7 million of the goodwill is deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. Therefore, in accordance with accounting principles generally accepted in the United States of America, the value of such has been expensed in the quarter ended September 30, 2003 in operating costs. At the acquisition date, RIWS was conducting design, development, engineering and testing activities associated with the completion of new 2.5G and 3G protocol and conformance testers.

Acquisition of MCE Technologies, Inc.

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

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

9

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

		(In thousands)
Current assets (excluding cash of $1.8 million)		$	18,481
Property, plant and equipment			9,761
Developed technology			8,850
Tradenames			1,100
Customer related intangibles			2,520
Goodwill			47,957
In-process research and development			420
Other			543
Total assets acquired			89,632
Current liabilities			(8,203	)
Long-term debt			(2,895	)
Deferred taxes			(7,811	)
Other long-term liabilities			(1,835	)
	Total liabilities assumed		(20,744	)
	Net assets acquired	$	68,888

        As of March 31, 2004, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized upon the receipt and completion of additional information and analysis during the fourth quarter.

        The developed technology, customer related intangibles, and tradenames are being amortized on a straight-line basis over a range of 1 to 15 years. The goodwill is not deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. Therefore, in accordance with accounting principles generally accepted in the United States of America, the value of such has been expensed in the quarter ended September 30, 2003 in operating costs. At the acquisition date, MCE was conducting development activities associated with the completion of certain high frequency component technology.

Acquisition of the Business of Celerity Systems Inc. (CA)

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

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

10

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

	(In thousands)
Current assets	$	3,959
Property, plant and equipment		729
Developed technology		3,400
Goodwill		2,174
In-process research and development		1,100
Other		49
Total assets acquired		11,411
Current liabilities assumed		(1,296	)
Net assets acquired	$	10,115

        As of March 31, 2004, the Company is completing its assessment of the fair value of certain assets and liabilities as of the date of acquisition which is expected to be finalized upon the receipt and completion of additional information and analysis during the fourth quarter.

        The developed technology is being amortized on a straight-line basis over 7 years. The goodwill is fully deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. Therefore, in accordance with accounting principles generally accepted in the United States of America, the value of such has been expensed in the quarter ended December 31, 2003 in operating costs. At the acquisition date, Celerity was conducting development activities associated with the completion of its next generation modular technology.

Pro Forma Results of Operations—RIWS, MCE and Celerity

        Summarized below are the unaudited pro forma results of operations of the Company as if RIWS, MCE and Celerity had been acquired at the beginning of the fiscal periods presented. The $4.2 million write-off of in-process research and development has been included in the March 31, 2004 pro forma loss, but not the March 31, 2003 pro forma income in order to provide comparability to the respective historical periods.

		Pro forma Nine Months Ended March 31,
		2004		2003
		(In thousands)
Net sales		$	313,529	$	292,663
Income from continuing operations			8,678		5,576
Income from continuing operations per share
	Basic	$	.13	$	.08
	Diluted	$	.13	$	.08

        The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the acquisitions taken place at the beginning of the periods presented or of future operating results of the combined companies. The operating results of RIWS, MCE and Celerity have been included in the consolidated statement of operations from their respective acquisition dates. RIWS and Celerity are included in the Test Solutions segment and MCE is included in the Microelectronic Solutions segment.

11

Intangibles with Definite Lives

        The components of amortizable intangible assets are as follows:

		As of March 31, 2004
		Gross Carrying Amount		Accumulated Amortization		Net Book Value
		(In thousands)
Existing technology		$	48,735	$	11,024	$	37,711
Tradenames			2,327		776		1,551
Customer related intangibles			4,452		587		3,865
	Total	$	55,514	$	12,387	$	43,127

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

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

	(In thousands)
2005	$	7,987
2006		7,736
2007		7,061
2008		6,464
2009		4,482

Goodwill

        The carrying amount of goodwill is as follows:

		Balance as of July 1, 2003		Adjustment (Note a)		Adjustment (Note b)		Balance as of March 31, 2004
		(In thousands)
Microelectronic solutions segment		$	4,050	$	47,957	$	—	$	52,007
Test solutions segment			16,294		22,940		2,178		41,412
Isolator products segment			789		—		—		789
	Total	$	21,133	$	70,897	$	2,178	$	94,208

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

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

12

3.    Discontinued Operations

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

        In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company has reported the results of operations of this business as income (loss) from discontinued operations. Net sales from this discontinued operation were $7.2 million and $7.9 million for the nine months ended March 31, 2004 and 2003, respectively.

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

4.    Earnings Per Share

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

		Nine Months Ended March 31,
		2004		2003
		(In thousands, except per share data)
Income from continuing operations		$	11,784	$	7,357
Computation of adjusted weighted average shares outstanding:
Weighted average shares outstanding			65,773		60,180
Add: Effect of dilutive options outstanding			1,916		559
Weighted average shares and common share equivalents used for computation of diluted earnings per common share			67,689		60,739
Income from continuing operations per share:
	—Basic	$	.18	$	.12
	—Diluted	$	.17	$	.12

13

		Three Months Ended March 31,
		2004		2003
		(In thousands, except per share data)
Income from continuing operations		$	6,597	$	3,519
Computation of adjusted weighted average shares outstanding:
Weighted average shares outstanding			68,804		60,229
Add: Effect of dilutive options outstanding			2,632		602
Weighted average shares and common share equivalents used for computation of diluted earnings per common share			71,436		60,831
Income from continuing operations per share:
	—Basic	$	.10	$	.06
	—Diluted	$	.09	$	.06

        Options to purchase 5.3 million shares at exercise prices ranging between $15.11 and $34.41 per share were outstanding as of March 31, 2004 but were not included in the computation of diluted EPS because the exercise prices of these options were greater than the average market price of the common shares.

5.    Accounting for Stock-Based Compensation

        The Company records compensation expense for employee and director stock options only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. The Company has chosen not to implement the fair value based accounting method for employee and director stock options, but has elected to disclose the pro forma income and income per share as if such method had been used to account for stock-based compensation costs as described in SFAS No. 123.

        The per share weighted average fair value of stock options granted during the nine months ended March 31, 2004 was $6.82 on the date of grant. The fair value was determined using the Black Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk free interest rate of 4.4%, expected volatility of 77%, and an expected life of 5.2 years. The per share weighted average fair value of stock options granted during the nine months ended March 31, 2003 was $5.36 on the date of grant. The fair value was determined using the Black Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk free interest rate of 3.9%, expected volatility of 112% and an expected life of 5.4 years. The Company's

14

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

		Nine Months Ended March 31,						Three Months Ended March 31,
		2004			2003			2004			2003
		(In thousands, except per share data)
Income from continuing operations		$	11,784		$	7,357		$	6,597		$	3,519
Deduct: Total stock-based employee compensation expense determined under fair value based method for all grants, net of tax			(8,539	)		(23,588	)		(3,241	)		(5,850	)
Pro forma income (loss) from continuing operations		$	3,245		$	(16,231	)	$	3,356		$	(2,331	)
Earnings (loss) per share:
	Basic—as reported	$	0.18		$	0.12		$	0.10		$	0.06
	Basic—pro forma	$	0.05		$	(0.27	)	$	0.05		$	(0.04	)
	Diluted—as reported	$	0.17		$	0.12		$	0.09		$	0.06
	Diluted—pro forma	$	0.05			*		$	0.05			*

*

As a result of the loss, all options are anti-dilutive.

6.    Comprehensive Income

        The components of comprehensive income are as follows:

	Nine Months Ended March 31,
	2004		2003
	(In thousands)
Net income	$	3,869	$	3,345
Unrealized gain (loss) on interest rate swap agreements, net of tax		63		(97	)
Foreign currency translation adjustment		9,341		1,795
Total comprehensive income	$	13,273	$	5,043

	Three Months Ended March 31,
	2004			2003
	(In thousands)
Net income	$	5,865		$	2,917
Unrealized gain (loss) on interest rate swap agreements, net of tax		(15	)		7
Foreign currency translation adjustment		6,066			109
Total comprehensive income	$	11,916		$	3,033

15

        Accumulated other comprehensive income (loss) is as follows:

	Unrealized Gain (Loss) on Interest Rate Swap Agreements (net of tax)			Minimum Pension Liability Adjustment (net of tax)			Foreign Currency Translation Adjustment		Total (net of tax)
	(In thousands)
Balance, June 30, 2003	$	(268	)	$	(2,445	)	$	6,529	$	3,816
Nine months activity		63			—			9,341		9,404
Balance, March 31, 2004	$	(205	)	$	(2,445	)	$	15,870	$	13,220

7.    Bank Loan Agreements

        On February 14, 2003, the Company executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and restated loan agreement increased the line of credit to $50 million through February 2007, continued the mortgage on the Company's Plainview property for $3.3 million and is secured by the pledge of the stock of certain of the Company's subsidiaries. The interest rate on revolving credit borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to the LIBOR (1.1% at March 31, 2004) plus 150 basis points. The Company paid a facility fee of $125,000 and is required to pay a commitment fee of ..25% per annum of the average unused portion of the credit line.

        The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. The Company has entered into interest rate swap agreements for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings. The fair market value of the interest rate swap agreements was $287,000 as of March 31, 2004 in favor of the banks.

        The terms of the loan agreement require compliance with certain covenants including minimum consolidated tangible net worth and pretax earnings, maintenance of certain financial ratios, limitations on indebtedness and prohibition of the payment of cash dividends. In connection with the purchase of certain materials for use in manufacturing, the Company has a letter of credit of $2.0 million. At March 31, 2004, the Company's available unused line of credit was approximately $44.9 million after consideration of this and other letters of credit.

8.    Inventories

        Inventories consist of the following:

	March 31, 2004		June 30, 2003
	(In thousands)
Raw materials	$	34,774	$	31,478
Work in process		45,895		25,461
Finished goods		20,483		14,635
	$	101,152	$	71,574

16

9.    Product Warranty

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

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

	Nine Months Ended March 31,
	2004			2003
	(In thousands)
Balance at beginning of period	$	1,308		$	1,390
Provision for warranty obligations		1,045			1,266
Charges incurred		(1,061	)		(1,386	)
Acquired warranty obligations		187			—
Balance at end of period	$	1,479		$	1,270

10.    Defined Benefit Plan

        Effective January 1, 1994, the Company established a Supplemental Executive Retirement Plan (the "SERP") which provides retirement, death and disability benefits to certain of its officers. The SERP expense for the nine months ended March 31, 2004 and 2003 was $900,000 and $887,000, respectively.

11.    Income Taxes

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

12.    Contingencies

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

13.    Business Segments

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

Microelectronic Solutions:	Test Solutions:
a) Microelectronic Modules and Components	a) Instrument Products
b) Integrated Circuits	b) Motion Control Systems
Isolator Products
a) Commercial Spring and Rubber Isolators
b) Industrial Spring and Rubber Isolators
c) Military Wire-Rope Isolators

17

Business Segment Data:

			For The Nine Months Ended March 31,
			2004			2003
			(In thousands)
Net sales:
	Microelectronic solutions		$	114,083		$	69,026
	Test solutions			174,708			124,616
	Isolator products			11,392			11,855
		Net sales	$	300,183		$	205,497
Segment adjusted operating income:
	Microelectronic solutions		$	27,069		$	13,176
	Test solutions			6,747			2,928
	Isolator products			479			424
	General corporate expenses			(8,385	)		(4,773	)
				25,910			11,755
	Acquired in-process research and development(1)			4,220			—
	Interest expense			1,075			810
	Other expense (income), net			2,108			(285	)
	Income from continuing operations before income taxes		$	18,507		$	11,230

Business Segment Data:

			For The Three Months Ended March 31,
			2004			2003
			(In thousands)
Net sales:
	Microelectronic solutions		$	45,364		$	24,377
	Test solutions			67,753			43,934
	Isolator products			3,729			4,198
		Net sales	$	116,846		$	72,509
Segment adjusted operating income:
	Microelectronic solutions		$	11,434		$	5,095
	Test solutions			4,939			1,909
	Isolator products			3			204
	General corporate expenses			(3,725	)		(1,885	)
				12,651			5,323
	Interest expense			343			246
	Other expense (income), net			1,906			(294	)
Income from continuing operations before income taxes			$	10,402		$	5,371

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

(1)

For the nine months ended March 31, 2004, the charges for the write-off of in- process research and development acquired in the purchase of RIWS ($2.7 million) and Celerity ($1.1 million) are allocable to the Test Solutions segment and the charge for MCE ($420,000) is allocable to the Microelectronic Solutions segment.

18

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

	For The Nine Months Ended March 31,
	2004		2003
	(In thousands)
United States of America	$	194,804	$	132,855
Europe and Middle East		76,886		55,704
Asia and Australia		23,596		13,061
Rest of World		4,897		3,877
	$	300,183	$	205,497

19

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

Overview

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

•

Aeroflex Microelectronic Solutions ("AMS")



•

Aeroflex Test Solutions ("ATS")



•

Aeroflex Isolator Products ("AIP")

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

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

•

In January 1994, we acquired substantially all of the net operating assets of the microelectronics division of Marconi Circuit Technology Corporation, which manufactures a wide variety of microelectronic assemblies.



•

In February 1999, we acquired all of the outstanding stock of UTMC Microelectronic Systems, Inc. (now Aeroflex Colorado Springs, Inc.), consisting of UTMC's integrated circuit business. That operation designs and supplies radiation tolerant integrated circuits for defense and satellite communications.



•

In September 2000, we acquired all of the operating assets of AmpliComm, Inc. (merged into Aeroflex Plainview, Inc.), which designs and develops amplifiers used by aerospace/defense and communications systems manufacturers.



•

In September 2003, we acquired MCE Technologies, Inc. MCE designs, manufactures and markets a broad range of devices, components and subsystems that are used in defense related applications, as well as throughout mobile and fixed wireless infrastructure equipment and related test equipment applications. MCE's products are also used in wireless broadband access, cable head-end systems, fiber optic networking, and satellite applications.

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

•

Comstron, a leader in radio frequency and microwave technology used in the manufacture of fast switching frequency signal generators and components, which we acquired in November 1989. Comstron is currently an operating division of Aeroflex Plainview, Inc., one of our wholly-owned subsidiaries.



•

Lintek (now Aeroflex Powell, Inc.), a leader in high speed synthetic instrumentation antenna measurement systems, radar systems, transmit/receive module test systems and satellite test systems, which we acquired in January 1995.

20

•

Europtest, S.A. (France), which we acquired in September 1998. Europtest develops and sells specialized software-driven test equipment used primarily in cellular, satellite and other communications applications.



•

Altair, which we merged with in October 2000 in a pooling-of-interest business combination. Altair (merged into Aeroflex Powell, Inc.) designs and develops advanced object-oriented control systems software based upon a proprietary software engine.



•

RDL, which we acquired in October 2000. RDL (merged into Aeroflex Plainview, Inc.) designs, develops and manufactures advanced commercial communications test and measurement products and defense subsystems.



•

IFR, which we acquired in May 2002. IFR (now Aeroflex Wichita, Inc. and Aeroflex International Ltd.) designs and manufactures advanced test solutions for communications, avionics and general test and measurement applications.



•

Racal Instrument Wireless Solutions Group, which we acquired in July 2003. RIWS is a leading developer, manufacturer and integrator of digital wireless testing and measurement solutions. Its products address two primary wireless applications—infrastructure testing and mobile handset testing.



•

In October 2003, Aeroflex Powell acquired the business of Celerity Systems Inc. (CA), a company engaged in the development, manufacture and sale of test and measurement systems.

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

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

        In addition, our Aeroflex Pearl River subsidiary designs, develops, manufactures and markets microelectronic products in the form of passive thin film circuits and interconnects. As a result of continued operating losses,in February 2004, our Board of Directors approved a plan to divest our thin film interconnect manufacturing operation and to seek a strategic buyer. As a result of this decision, we recorded a $9.1 million ($5.9 million, net of tax) loss on disposal. This charge included a cash requirement of $2.6 million primarily for existing equipment leases, and a non-cash charge of $6.5 million for the write down of goodwill, other intangibles and owned equipment. In accordance with SFAS 144, we have reported the results of operations of this business as income (loss) from discontinued operations and all prior periods have been restated in order to conform to this presentation.

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

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

21

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

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

        Gross Profit.    Cost of sales includes materials, direct labor and overhead expenses such as engineering labor, fringe benefits, allocable occupancy costs, depreciation and manufacturing supplies.

Nine Months Ended March 31,	AMS		% of sales		ATS		% of sales		AIP		% of sales		Total		% of sales
2004	$	57,271	50	%	$	75,536	43	%	$	2,887	25	%	$	135,694	45	%
2003		32,228	47	%		45,561	37	%		3,179	27	%		80,968	39	%

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

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

Nine Months Ended March 31,	AMS		% of sales		ATS		% of sales		AIP		% of sales		Corporate		Total		% of sales
2004	$	17,681	15	%	$	40,876	23	%	$	2,407	21	%	$	8,385	$	69,349	23	%
2003		9,237	13	%		28,876	23	%		2,755	23	%		4,773		45,641	22	%

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

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

Nine Months Ended March 31,	AMS		% of sales		ATS		% of sales		AIP		% of sales		Total		% of sales
2004	$	10,744	9	%	$	24,243	14	%	$	0	0	%	$	34,987	12	%
2003		9,203	13	%		12,331	10	%		0	0	%		21,534	10	%

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

22

the ATS segment primarily due to the addition of the expenses of RIWS, which historically had, and is expected to continue to have, a higher percentage of research and development costs.

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

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

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

        Provision for Income Taxes.    The income tax provision was $6.7 million (an effective income tax rate of 36%) for the nine months ended March 31, 2004 and the income tax provision was $3.9 million (an effective income tax rate of 34%) for the nine months ended March 31, 2003. The effective income tax rate for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes and research and development credits and, for the nine months ended March 31, 2004, non-deductible in-process research and development costs.

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

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

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

23

Gross Profit.

Three Months Ended March 31,	AMS		% of sales		ATS		% of sales		AIP		% of sales		Total		% of sales
2004	$	23,253	51	%	$	30,055	44	%	$	816	22	%	$	54,124	46	%
2003		11,786	48	%		16,626	38	%		1,147	27	%		29,559	41	%

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

Selling, General and Administrative Costs.

Three Months Ended March 31,	AMS		% of sales		ATS		% of sales		AIP		% of sales		Corporate		Total		% of sales
2004	$	6,933	15	%	$	14,527	21	%	$	814	22	%	$	3,725	$	25,999	22	%
2003		3,190	13	%		10,199	23	%		943	22	%		1,885		16,217	22	%

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

Research and Development Costs.

Three Months Ended March 31,	AMS		% of sales		ATS		% of sales		AIP		% of sales		Total		% of sales
2004	$	4,202	9	%	$	9,140	13	%	$	0	0	%	$	13,342	11	%
2003		3,226	13	%		4,106	9	%		0	0	%		7,332	10	%

        Our self-funded research and development costs increased $976,000, or 30%, in the AMS segment primarily due to the addition of the expenses of MCE, partially offset by reduced expenses at our microelectronic modules business. Research and development costs increased $5.0 million, or 123%, in the ATS segment due primarily to the addition of the expenses of RIWS, which historically had, and is expected to continue to have, a higher percentage of research and development costs.

        Amortization of Acquired Intangibles.    Amortization increased $1.4 million, or    210%, due to the acquisitions of MCE, RIWS and Celerity.

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

24

        Provision for Income Taxes.    The income tax provision was $3.8 million (an effective income tax rate of 37%) for the three months ended March 31, 2004 and the income tax provision was $1.9 million (an effective income tax rate of 34%) for the three months ended March 31, 2003. The effective income tax rate for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes and research and development credits and, for the three months ended March 31, 2004, non-deductible in-process research and development costs.

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

Off-Balance Sheet Arrangements

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

Liquidity and Capital Resources

        As of March 31, 2004, we had $229.0 million in working capital. Our current ratio was 3.6 to 1 at March 31, 2004. On February 14, 2003, we executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and restated loan agreement increased the line of credit to $50 million through February 2007, continued the mortgage on our Plainview property for $3.3 million and is secured by the pledge of the stock of certain of our subsidiaries. The interest rate on revolving credit borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to LIBOR (1.1% at March 31, 2004) plus 150 basis points. The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. We have entered into interest rate swap agreements for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings.

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

        We are currently in full compliance with all of the covenants contained in our loan agreement, as amended to date. We expect to be in compliance with all covenants for the foreseeable future.

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

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

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

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

25

        On March 10, 2004, we completed the sale of 7,000,000 shares of our common stock at $13.75 per share. We received $91.3 million, net of commission and expenses. These net proceeds are intended to be used for working capital and other general corporate purposes including research and development and potential acquisitions.

        We believe that existing cash and cash equivalents coupled with internally generated funds and available lines of credit will be sufficient for our working capital requirements, capital expenditure needs and the servicing of our debt for the foreseeable future. Our cash and cash equivalents, coupled with our available lines of credit, are available to fund acquisitions and other potential large cash needs that may arise. At March 31, 2004, our available unused line of credit was $44.9 million after consideration of letters of credit.

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

	Payments due by period
	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
	(In thousands)
Long-term debt	$	10,974	$	4,776	$	2,249	$	2,531	$	1,418
Operating leases		47,251		9,121		14,057		7,553		16,520
Total	$	58,225	$	13,897	$	16,306	$	10,084	$	17,938

        The operating lease commitments shown in the above table have not been reduced by future minimum sub-lease rentals of $17.7 million.

        In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. None of these obligations are individually significant. We do not expect that these commitments as of March 31, 2004 will materially adversely affect our liquidity.

Accounting Policies Involving Significant Estimates

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

Revenue and Cost Recognition Under Long-Term Contracts

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

26

upon an assessment of which method most closely aligns to the underlying earnings process): (i) the units-of-delivery method, (ii) the cost-to-cost method, using the ratio of contract costs incurred as a percentage of total estimated costs at contract completion (based upon engineering and production estimates), or (iii) the achievement of contractual milestones. Provisions for anticipated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such anticipated losses or revisions become evident.

Inventories

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

Recoverability of Long-Lived and Intangible Assets

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

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

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

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

Income Taxes

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

27

Forward-Looking Statements

        All statements other than statements of historical fact included in this Report on Form 10-Q, including without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our financial position, business outlook, business strategy and plans and objectives of our management for future operations, are forward-looking statements. When used in this Report on Form 10-Q, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the current beliefs of our management, as well as assumptions made by and information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements, as a result of certain factors, including but not limited to, competitive factors and pricing pressures, the divestiture of the thin film interconnect manufacturing business, the integration of the business of each of MCE, RIWS and Celerity, changes in legal and regulatory requirements, technological change or difficulties, product development risks, commercialization difficulties and general economic conditions. Such statements reflect our current views with respect to the future and are subject to these and other risks, uncertainties and assumptions relating to our financial condition, results of operations, growth strategy and liquidity. We undertake no obligation to update such forward-looking statements which are made as of the date of this Report.

ITEM 3—QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to market risk related to changes in interest rates and to foreign currency exchange rates. Some of our debt is at fixed rates of interest or at a variable rate with an interest rate swap agreement which effectively converts the variable rate debt into fixed rate debt. Therefore, if market interest rates increase by 10 percent from levels at March 31, 2004, the effect on our net income would be insignificant. Most of our invested cash and cash equivalents are at variable rates of interest. If market interest rates decrease by 10 percent from levels at March 31, 2004, the effect on our net income would be a decrease of approximately $54,000 per year.

        We operate businesses that are located outside of the United States, which exposes us to the fluctuation of foreign currency exchange rates (primarily the British Pound and the Euro). If foreign currency exchange rates change by 10% from levels at March 31, 2004, the effect on our other comprehensive income would be approximately $8.4 million.

ITEM 4—CONTROLS AND PROCEDURES

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

Changes in Internal Controls

        There were no significant changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

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

28

AEROFLEX INCORPORATED
AND SUBSIDIARIES
PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

        None

Item 3. Defaults upon Senior Securities

        None

Item 4. Submission of Matters to a Vote of Security Holders

        None

Item 5. Other Information

        None

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits



10.1

Amendment No. 4 to Employment Agreement between Registrant and Harvey R. Blau.



10.2

Amendment No. 4 to Employment Agreement between Registrant and Michael Gorin.



10.3

Amendment No. 4 to Employment Agreement between Registrant and Leonard Borow.



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 and of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.



(b)

Reports on Form 8-K

None

29

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AEROFLEX INCORPORATED (REGISTRANT)
May 17, 2004	By:	/s/  MICHAEL GORIN Michael Gorin Vice Chairman, Chief Financial Officer and Principal Accounting Officer

30

QuickLinks

AEROFLEX INCORPORATED AND SUBSIDIARIES INDEX

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

ITEM 3—QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4—CONTROLS AND PROCEDURES

PART II – OTHER INFORMATION

Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K

EX-10.1

Exhibit 10.1

AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT

        AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT made as of the 13^th day of May, 2004, by and between AEROFLEX INCORPORATED, a Delaware corporation (hereinafter the "Company") and HARVEY R. BLAU (hereinafter the "Executive").

W I T N E S S E T H:

        WHEREAS, the Company and Executive entered into an Employment Agreement dated March 1, 1999, as amended subsequently by Amendment Agreements dated September 1, 1999, August 13, 2001 and November 8, 2001 (hereinafter the "Employment Agreement"); and

        WHEREAS, the Company and Executive desire to further modify the said Employment Agreement.

        NOW, THEREFORE, the parties hereto agree as follows:

1.

Paragraph 2(b) shall be amended and restated as follows, effective as of the date hereof:

"(b) Employment Term. The Employment Term shall commence on the Effective Date and shall terminate on December 31, 2009."

2.

Except as specifically provided in this Amendment, the Employment Agreement is in all other respects hereby ratified and confirmed without amendment.

        IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the day and year first above written.

AEROFLEX INCORPORATED
By:	/s/  MICHAEL GORIN Michael Gorin, Vice Chairman
	/s/  HARVEY R. BLAU Harvey R. Blau

EX-10.2

Exhibit 10.2

AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT

        AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT made as of the 13^th day of May, 2004 by and between AEROFLEX INCORPORATED, a Delaware corporation (hereinafter the "Company") and MICHAEL GORIN (hereinafter the "Executive").

W I T N E S S E T H:

        WHEREAS, the Company and Executive entered into an Employment Agreement dated March 1, 1999, as amended subsequently by Amendment Agreements dated September 1, 1999, August 13, 2001 and November 8, 2001 (hereinafter the "Employment Agreement"); and

        WHEREAS, the Company and Executive desire to further modify the said Employment Agreement.

        NOW, THEREFORE, the parties hereto agree as follows:

2.

Paragraph 2(b) shall be amended and restated as follows, effective as of the date hereof:

"(b)    Employment Term.    The Employment Term shall commence on the Effective Date and shall terminate on December 31, 2009."

2.

Except as specifically provided in this Amendment, the Employment Agreement is in all other respects hereby ratified and confirmed without amendment.

        IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the day and year first above written.

AEROFLEX INCORPORATED
By:	/s/  HARVEY R. BLAU Harvey R. Blau, Chairman & CEO
	/s/  MICHAEL GORIN Michael Gorin

EX-10.3

Exhibit 10.3

AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT

        AMENDMENT NO. 4 TO EMPLOYMENT AGREEMENT made as of the 13^th day of May, 2004 by and between AEROFLEX INCORPORATED, a Delaware corporation (hereinafter the "Company") and LEONARD BOROW (hereinafter the "Executive").

W I T N E S S E T H:

        WHEREAS, the Company and Executive entered into an Employment Agreement dated March 1, 1999, as amended subsequently by Amendment Agreements dated September 1, 1999, August 13, 2001 and November 8, 2001(hereinafter the "Employment Agreement"); and

        WHEREAS, the Company and Executive desire to further modify the said Employment Agreement.

        NOW, THEREFORE, the parties hereto agree as follows:

1.

Paragraph 2(b) shall be amended and restated as follows, effective as of the date hereof:

"(b)    Employment Term.    The Employment Term shall commence on the Effective Date and shall terminate on December 31, 2009."

2.

Except as specifically provided in this Amendment, the Employment Agreement is in all other respects hereby ratified and confirmed without amendment.

        IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the day and year first above written.

AEROFLEX INCORPORATED
By:	/s/  MICHAEL GORIN Michael Gorin, Vice Chairman
	/s/  LEONARD BOROW Leonard Borow

EX-31.1

Exhibit 31.1

CERTIFICATION

        I, Harvey R. Blau, Chairman of the Board and Chief Executive Officer of Aeroflex Incorporated, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Aeroflex Incorporated;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 17, 2004

/s/  HARVEY R. BLAU Harvey R. Blau, Chairman of the Board and
and Chief Executive Officer
(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

        I, Michael Gorin, Chief Financial Officer of Aeroflex Incorporated, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Aeroflex Incorporated;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 17, 2004
	/s/  MICHAEL GORIN Michael Gorin Chief Financial Officer (Principal Financial Officer)

EX-31.3

Exhibit 31.3

CERTIFICATION

        I, Leonard Borow, Chief Operating Officer of Aeroflex Incorporated, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Aeroflex Incorporated;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 17, 2004
	/s/  LEONARD BOROW Leonard Borow Chief Operating Officer

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

        I, Harvey R. Blau, Chief Executive Officer of Aeroflex Incorporated, hereby certify that the Form 10-Q of Aeroflex Incorporated for the period ended March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Aeroflex Incorporated.

/s/  HARVEY R. BLAU Name: Harvey R. Blau
Date: May 17, 2004

        I, Michael Gorin, Chief Financial Officer of Aeroflex Incorporated, hereby certify that the Form 10-Q of Aeroflex Incorporated for the period ended March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Aeroflex Incorporated.

/s/  MICHAEL GORIN Name: Michael Gorin
Date: May 17, 2004

This certification is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and, except to the extent required by the Sarbanes-Oxley Act, shall not be deemed to be filed as part of the periodic report described herein nor shall it be deemed filed by Aeroflex Incorporated for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided to Aeroflex Incorporated and will be retained by Aeroflex Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.