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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

Commission File No. 000-02324

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

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o

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

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

        Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date (applicable only to corporate registrants). Common Stock, par value $.10 per share; outstanding as of September 26, 2003—65,977,017 (excluding 4,388 shares held in treasury).

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

ITEM 1—BUSINESS

Overview

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

        We are a Delaware corporation, founded in 1937.

        Our operations are grouped into three segments:

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Microelectronic Solutions



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Test Solutions



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Isolator Products

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

Microelectronic Solutions

Silicon Integrated Circuits

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

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

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

Microelectronic Modules

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

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

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Thin Film Circuits and Interconnects

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

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miniaturization;



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ease of assembly;



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improved thermal management;



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reduced power consumption; and



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critical component (laser) alignment.

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

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high-frequency military airborne modules;



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fiber optic transmitters, receivers and amplifiers;



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cable trunk amplifiers, line extenders, pre-amplifiers and power doublers; and



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point-to-point and point-to-multipoint microwave radios.

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

        In September 2003, we acquired MCE Technologies, Inc. MCE designs, manufactures and markets a broad range of devices, components and subsystems that are used in defense related applications, as well as throughout mobile and fixed wireless infrastructure equipment and related test equipment applications, MCE products are also used in wireless broadband access, cable head-end systems, fiber optic networking, and satellite applications. MCE sells products that operate over the full range of frequencies commonly used in wireless communications transmission, known as RF, including radio frequencies, microwave frequencies and millimeter wave frequencies. MCE's customers use its products to control, condition and enhance RF signals. Typical applications include power level control, power distribution, signal detection, amplification and impedance matching of defense electronics equipment, and mobile and fixed wireless communications equipment.

Test Solutions

Instrumentation

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

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

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

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

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

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

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

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

Motion Control Systems

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

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

Isolator Products

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

Customers

        We have hundreds of customers in the communications, satellite, aerospace/defense, transportation and construction industries. Except for Lockheed Martin (10.8%) in fiscal 2002 and Agere (10.8%) in fiscal 2001, no one customer accounted for more than 10% of our net sales in each of the years in the three year period ended June 30, 2003.

Marketing and Distribution

        We use a team-based sales approach to assist our personnel to closely manage relationships at multiple levels of the customer's organization, including management, engineering and purchasing personnel. Our integrated sales approach involves a team consisting of a senior executive, a business development specialist and members of our engineering department. Our use of experienced engineering personnel as part of the sales effort enables close technical collaboration with our customers during the design and qualification phase of new communications equipment. We believe that this is critical to the integration of our product into our customers' equipment. Some of our executive officers are also involved in all aspects of our relationships with our major customers and work closely with their senior management. We also use manufacturers' representatives and independent sales representatives as needed. Our recent acquisitions of IFR, Racal Instruments Wireless Solutions Group and MCE Technologies, Inc. expanded the number of our sales and distribution locations to include additional offices in California, Kansas, Maryland, Michigan, New Jersey, Stevenage and Slough, United Kingdom, Scotland, France, Spain, Germany, Denmark, Hong Kong, Beijing, Shenzen and Nanjing, China.

Research and Development

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

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developing new products



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improving existing products



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adapting such products to new applications



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developing prototype components to bid on specific programs

        Certain product development and similar costs are recoverable under contractual arrangements and those that are not recoverable are expensed in the year incurred. The costs of our self-funded research activities were approximately $31.1 million for fiscal 2003, $23.1 million for fiscal 2002 and

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

Backlog

        We include in backlog firm purchase orders or contracts providing for delivery of products and services. At June 30, 2003, our order backlog was approximately $118.4 million, approximately 78% of which was scheduled to be delivered on or before June 30, 2004. Approximately 44% of this backlog represents commercial contracts and approximately 56% of this backlog represents defense contracts. Generally, government contracts are cancelable with payment to us of amounts which we have spent under the contract together with a reasonable profit, if any, while commercial contracts are not cancelable.

        At June 30, 2002, our backlog of orders was approximately $120.7 million. Approximately 81% of this backlog was scheduled to be delivered before June 30, 2003. Approximately 43% of this backlog represented orders for military or national defense purposes.

Competition

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

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technology



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performance



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reliability



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quality



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customer service



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price

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

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

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Government Sales

        Approximately 37% of our sales for fiscal 2003, 43% of our sales for fiscal 2002 and 29% of our sales for fiscal 2001 were to agencies of the United States Government or to prime defense contractors or subcontractors of the United States Government. Our defense contracts have been awarded either on a bid basis or after negotiation. The contracts are primarily fixed price contracts, though we also have or had defense contracts providing for cost plus fixed fee. Our defense contracts contain customary provisions for termination at the convenience of the government without cause. In the event of such termination, we are generally entitled to reimbursement for our costs and to receive a reasonable profit, if any, on the work done prior to termination.

Manufacturing

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

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Sunnyvale, California,



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Colorado Springs, Colorado,



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Boca Raton, Florida,



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Wichita, Kansas,



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Bloomingdale, New Jersey,



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Whippany, New Jersey,



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Frederick, Maryland,



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Ann Arbor, Michigan



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Hauppauge, New York,



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Pearl River, New York,



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Plainview, New York,



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Powell, Ohio,



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Elancourt, France,



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Slough, United Kingdom, and



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Stevenage, United Kingdom.

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

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

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

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ceramic,



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magnetic materials,



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gold,



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steel,



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aluminum,



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rubber,



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iron and



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copper.

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

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semiconductors,



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transformers and



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amplifiers.

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

Patents and Trademarks

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

Employees

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

Regulation

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

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        Because we participate in the defense industry, we are subject to audit from time to time for our compliance with government regulations by various agencies, including (1) the Defense Contract Audit Agency, (2) the Defense Investigative Service and (3) the Defense Logistics Agency. These and other governmental agencies may also, from time to time, conduct inquiries or investigations regarding a broad range of our activities. Responding to any audits, inquiries or investigations may involve significant expense and divert management attention. Also, an adverse finding in any audit, inquiry or investigation could involve penalties that may have a material adverse effect on our business, results of operations or financial condition.

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

Financial Information About Industry Segments

        The sales and operating profits of each industry segment and the identifiable assets attributable to each industry segment for each of the three years in the period ended June 30, 2003 are set forth in Note 16 of Notes to Consolidated Financial Statements.

Financial Information About Geographic Areas

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

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Available Information

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

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

ITEM 2—PROPERTIES

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

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Our executive offices and the manufacturing facilities of Aeroflex Plainview, Inc. (formerly Aeroflex Laboratories, Inc.), one of our subsidiaries, are an aggregate of approximately 69,000 square feet and are located in premises which we own in Plainview, Long Island, New York.



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Aeroflex Plainview, Inc., also leases manufacturing facilities in Hauppauge, Long Island, New York of approximately 47,000 square feet and Boca Raton, Florida of approximately 11,000 square feet. The annual rental of these properties is approximately $279,000 for Hauppauge and $170,000 for Boca Raton. The Hauppauge lease expires in 2010 and the Boca Raton lease expires in November 2003.



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Our subsidiary, Aeroflex Pearl River, Inc. (formerly Aeroflex MIC Technology Corporation), owns its manufacturing facility in Pearl River, New York consisting of approximately 66,000 square feet.



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Our subsidiary, Vibration Mountings and Controls, Inc., conducts manufacturing operations at a plant located in Bloomingdale, New Jersey. The plant, which we own, is approximately 72,000 square feet.



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Our subsidiary, Aeroflex Powell, Inc. (formerly Aeroflex Lintek Corp.), leases approximately 20,000 square feet of space in Powell, Ohio, with an annual rental of approximately $220,000. The lease expires in 2008.



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Our subsidiary, Aeroflex Colorado Springs, Inc. (formerly Aeroflex UTMC Microelectronic Systems, Inc.), conducts manufacturing operations at a plant located in Colorado Springs, Colorado. The plant, which we own, is approximately 102,000 square feet.



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Our subsidiary, Aeroflex Wichita, Inc. (formerly IFR Systems, Inc.), conducts manufacturing operations at a plant located in Wichita, Kansas. The plant, which we own, is approximately 156,000 square feet.



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Our subsidiary, Aeroflex International Ltd. (formerly IFR Systems Inc.), conducts manufacturing operations at three owned facilities in Stevenage, England comprising approximately 81,000, 34,000 and 27,000 square feet.

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

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Legal Proceedings

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

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

        Not applicable.

PART II

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

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

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

        (c)   We have never declared or paid any cash dividends on our common stock. There have been no stock dividends declared or paid on our common stock during the past three years except for a five-for-four stock split, which was paid on July 7, 2000 for record holders as of June 26, 2000 and a two-for-one stock split, which was paid on November 22, 2000 for record holders as of November 16, 2000. We currently intend to retain any future earnings for use in the operation and development of our business and for acquisitions and, therefore, do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. In addition, our bank loan and security agreement, as amended, prohibits us from paying cash dividends.

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ITEM 6—SELECTED FINANCIAL DATA

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

(Restated, Note 2 to Consolidated Financial Statements)

(1)

Includes $9.1 million ($5.8 million, net of tax, or $.09 per diluted share) for the consolidation of three of our manufacturing operations in order to take advantage of excess manufacturing capacity and reduce operating costs including charges related to excess equipment capacity primarily in our microelectronic segment and impairments to intangibles related to our microelectronics fiber optic acquisition. Also includes $1.1 million ($1.1 million, net of tax, or $.02 per diluted share) for the write-off of in-process research and development acquired in connection with the purchase of IFR Systems, Inc. in May 2002.

(2)

Includes $1.5 million ($990,000, net of tax, or $.02 or diluted share) for the write-off of in-process research and development acquired in connection with the purchase of RDL, Inc. in October 2000.

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(3)

Includes $3.5 million ($3.5 million, net of tax, or $.07 per diluted share) for the write-off of in-process research and development acquired in connection with the purchase of UTMC Microelectronic Systems, Inc. in February 1999.

(4)

Calculated by dividing stockholders' equity, at the end of the year, by the number of shares outstanding at the end of the year.

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

Overview

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

•

microelectronic solutions



•

test solutions



•

isolator products

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

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

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

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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.

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•

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



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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.



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



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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.



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



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

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

14

estimates), or (iii) the achievement of contractual milestones. Provisions for anticipated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such anticipated losses or revisions become evident.

        Approximately 37% of our sales for fiscal 2003, 43% of our sales for fiscal 2002 and 29% of our sales for fiscal 2001 were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. Our government contracts have been awarded either on a bid basis or after negotiation. Our government contracts are primarily fixed price contracts, although we also have or had government contracts providing for cost plus fixed fee. Our defense contracts have customary provisions for termination at the convenience of the government without cause. In the event of such termination, we are entitled to reimbursement for our costs and to receive a reasonable profit, if any, on the work done prior to termination.

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

•

developing new products



•

improving existing products



•

adapting existing products to new applications



•

developing prototype components to bid on specific programs

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

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Statement of Operations

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

        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

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

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

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

        Gross Profit.    Cost of sales includes materials, direct labor and overhead expenses such as engineering labor, fringe benefits, allocable occupancy costs, depreciation and manufacturing supplies. Gross profit increased 51.7% to $113.3 million (including a $400,000 charge related to the bankruptcy of Space Systems Loral) (38.8% of net sales) in fiscal 2003 from $74.7 million (36.9% of net sales) in fiscal 2002 (excluding $900,000 of restructuring charges, see note 4 to the Consolidated Financial Statements). The increase was primarily due to the inclusion of IFR for a full year in fiscal 2003 compared with only six weeks in fiscal 2002.

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

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

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

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

        Provision for Income Taxes.    The income tax provision was $4.4 million (an effective income tax rate of 33.8%) in fiscal 2003 and the income tax provision was $50,000 (an effective income tax rate of 13.4%) in fiscal 2002. The income tax provisions for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to in-process R&D, foreign, state and local income taxes and research and development credits.

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

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

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

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

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

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

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

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

        At its acquisition date, IFR expected to spend approximately $3.5 million to complete all phases of the research and development, with anticipated completion dates ranging from 5 to 10 months from that date.

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

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

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

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

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

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

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

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

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

        Provision for Income Taxes.    The income tax provision was $50,000 (an effective income tax rate of 13.4%) in fiscal 2002 and the income tax provision was $11.8 million (an effective income tax rate of 34.0%) in fiscal 2001. The income tax provisions for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to non-deductible charges for acquired in-process R&D and amortization of goodwill, state and local income taxes and research and development credits.

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

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Liquidity and Capital Resources

        On February 14, 2003, we executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and restated loan agreement increased the line of credit to $50 million through February 2007, continues the mortgage on our Plainview property for $3.3 million and is secured by the pledge of the stock of certain of our subsidiaries. The interest rate on revolving credit borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to prime (4.0% at June 30, 2003). The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. We have entered into interest rate swap agreements for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings.

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

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

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

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

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

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

        We believe that existing cash and unused lines of credit coupled with internally generated funds will be sufficient for our working capital requirements, capital expenditure needs and the servicing of our debt for the foreseeable future.    Our cash and lines of credit are available to fund acquisitions and other potential large cash needs that may arise. At June 30, 2003, our available unused line of credit was $46.8 million after consideration of letters of credit. We used 19.0 million of this line to fund the acquisition of MCE on September 3, 2003.

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

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

        In the normal course of business, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. None of these obligations are individually significant. We do not expect that these commitments as of June 30, 2003 will materially adversely affect our liquidity.

Legal Proceedings

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

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

Backlog

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

Accounting Policies Involving Significant Estimates

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

Revenue and Cost Recognition Under Long-Term Contracts

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

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

Inventories

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

Recoverability of Long-Lived and Intangible Assets

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

        Long-lived assets other than goodwill, are reviewed for impairment periodically and whenever events or changes in circumstances indicate that the carrying value of any such asset may be impaired. We evaluate the recoverability of such assets by estimating future cash flows. If the sum of the undiscounted cash flows expected to result from the use of the assets and their eventual disposition is less than the carrying amount of the assets, we will recognize an impairment loss to the extent of the excess of the carrying amount of the assets over the discounted cash flow.

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

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

Restructuring Charges

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

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Income Taxes

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

Seasonality

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

Recent Accounting Pronouncements

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

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

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

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

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

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

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

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

Forward-Looking Statements

        All statements other than statements of historical fact included in this Annual Report, including without limitation statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our financial position, business strategy and plans and objectives of our management for future operations, are forward-looking statements. When used in this Annual Report, words such as "anticipate," "believe," "estimate," "expect," "intend" and similar expressions, as they relate to us or our management, identify forward-looking statements. Such forward-looking statements are based on the current beliefs of our management, as well as assumptions made by and information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to, competitive factors and pricing pressures, the integration of the business of each of MCE Technologies and of the Racal Instruments Wireless Solutions Group with Aeroflex, changes in legal and regulatory requirements, technological change or difficulties, product development risks, commercialization difficulties and general economic conditions. Such statements reflect our current views with respect to the future and are subject to these and other risks, uncertainties and assumptions relating to Aeroflex's financial condition, results of operations, growth strategy and liquidity. Aeroflex does not undertake any obligation to update such forward-looking statements.

ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        We are exposed to market risk related to changes in interest rates and to foreign currency exchange rates. Most of our debt is at fixed rates of interest or at a variable rate with an interest rate swap agreement which effectively converts the variable rate debt into fixed rate debt. Therefore, if market interest rates increase by 10% from levels at June 30, 2003, the effect on our net income would be a reduction of approximately $17,000 per year. Most of our invested cash and cash equivalents are at variable rates of interest. If market interest rates decrease by 10 percent from levels at June 30, 2003, the effect on our net income would be approximately $36,000. If foreign currency exchange rates (primarily the British Pound and the Euro) change by 10% from levels at June 30, 2003, the effect on our other comprehensive income would be approximately $4.1 million.

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ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9—DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A—CONTROLS AND PROCEDURES

Evaluation and Disclosure Controls and Procedures

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

Changes in Internal Controls

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

Limitations on the Effectiveness of Controls

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

PART III

        The information required by items 10, 11, 12, 13 and 14 of Part III is incorporated by reference to our definitive proxy statement in connection with our Annual Meeting of Stockholders scheduled to be held in November 2003. The proxy statement is to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year ended June 30, 2003.

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

(a)

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



(b)

Reports on Form 8-K:

•

Report on Form 8-K/A filed on August 2, 2002—Item 7—Amendment to Report dated May 21, 2002—Consolidated Financial Statements of IFR Systems, Inc. and Subsidiaries and Pro Forma Combined Balance Sheet and Statement of Operations for IFR Systems, Inc. and Aeroflex Incorporated.



•

Report on Form 8-K filed on December 23, 2002—Item 5—Extension of Existing Credit Facility

26

(c)

Exhibits



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).



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

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



10.8

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



10.9

Amendment No 1. to Employment Agreement between Aeroflex Incorporated and Carl Caruso dated November 17, 1998. (Exhibit 10.9 to Report on Form 10-K for the fiscal year ended June 30, 2002).



10.10

Amendment No 2. to Employment Agreement between Aeroflex Incorporated and Carl Caruso dated November 17, 1999. (Exhibit 10.10 to Report on Form 10-K for the fiscal year ended June 30, 2002).



10.11

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



10.12

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



10.13

1999 Stock Option Plan. (Exhibit 4.1 to Registration Statement on Form S-8, Registration Statement #333-31654).



10.14

Key Employee Stock Option Plan. (Exhibit 4.1 to Registration Statement on Form S-8, Registration Statement #333-53622).



10.15

2000 Stock Option Plan, as amended. (Exhibit 4 to Registration Statement on Form S-8, #333-97027).



10.16

2002 Stock Option Plan. (Exhibit 4 to Registration Statement on Form S-8, #333-97029).

27

10.17

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).



10.18

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).



10.19

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).



10.20

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).



10.21

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).



10.22

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).



10.23

Aeroflex Incorporated Key Employee Deferred Compensation Plan. (Exhibit 10.19 to Form 10-K for the fiscal year ended June 30, 2001).



10.24

Trust Under Deferred Compensation Plan. (Exhibit 10.20 to Form 10-K for the fiscal year ended June 30, 2001).



10.25

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).



10.26

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).



10.27

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).



10.28

Agreement and Plan of Merger among Aeroflex Incorporated, Testco Acqusition Corp. and IFR Systems, Inc. dated as of April 13, 2002. (Exhibit 99.1 to Form 8-K filed April 15, 2002).



10.29

Agreement and Plan of Merger, dated as of June 27, 2003, among Registrant, Acquisition, MCE and Michael J. Endres (incorporated by reference to Exhibit 99.1 of Report on Form 8-K filed July 2, 2003).



10.30

Form of Warrant Exchange Agreement (incorporated by reference to Exhibit 99.2 of Report on Form 8-K filed July 2, 2003).



10.31

Form of Shareholders' Agreement (incorporated by reference to Exhibit 99.3 of Report on Form 8-K filed July 2, 2003).

28

22

The following is a list of the Company's subsidiaries as of June 30, 2003:

23

Consent of Independent Auditors



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.



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 29th day of September 2003.

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

30

AEROFLEX INCORPORATED

AND SUBSIDIARIES

FINANCIAL STATEMENTS AND SCHEDULES

COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K

TO SECURITIES AND EXCHANGE COMMISSION

AS OF JUNE 30, 2003 AND 2002

AND FOR THE YEARS

ENDED JUNE 30, 2003, 2002 AND 2001

FINANCIAL STATEMENTS AND SCHEDULES

INDEX

ITEM FIFTEEN(a)

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

Independent Auditors' Report

The Board of Directors and Stockholders of Aeroflex Incorporated

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

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aeroflex Incorporated and subsidiaries as of June 30, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

S-1

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

See notes to consolidated financial statements.

S-2

See notes to consolidated financial statements.

S-3

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

S-4

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

Years Ended June 30, 2003, 2002 and 2001
(In thousands)
(Restated, note 2)

See notes to consolidated financial statements.

S-5

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)