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UNITED STATES
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

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

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 

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

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

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

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

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

ITEM 1—BUSINESS

Overview

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

        Our operating strategy is based on the following key objectives:

•

to strengthen and expand our portfolio of proprietary technologies;



•

to broaden the applications and target markets for our existing products;



•

to expand the scope of our content in our customers' products;



•

to increase our operating efficiencies;



•

to maintain a conservative capital structure; and



•

to opportunistically pursue strategic acquisitions.

Microelectronic Solutions

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

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

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

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

Test Solutions

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

•

Wireless Test Equipment.  We offer an extensive line of standard test platforms for research and development, conformance testing, base station and handset testing, as well as protocol test systems and interference analyzers. We supply products and customized solutions to both leading manufacturers within the wireless cellular industry and to wireless service providers.



•

Frequency Synthesizers.  Our line of frequency synthesizers offers a superior combination of high-speed and low phase noise, covering all communications frequencies. These synthesizers are used in various applications such as automatic test systems, radar systems and semiconductor test systems.

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•

Radio Test Equipment.  We offer test systems for both military and private mobile radio test systems. Our products are used to test radio communications for military, police, fire and emergency response units, which we expect to be increasingly important in homeland defense programs.



•

Synthetic Test Systems.  We have developed a new concept in test systems which significantly reduces test time by replacing the traditional single instrument concept of a "rack and stack" system with a modular system that uses our synthesizer and receiver technology, together with proprietary software algorithms, to make multiple complex measurements simultaneously. These systems are easily reconfigurable and upgradable and are used in satellite testing, transmit receive module testing and base station testing.



•

Avionics Test Equipment.  Our extensive line of avionics test equipment is used in the design, manufacture, test and maintenance of both commercial and military avionics systems.



•

Other General Purpose Test Equipment.  We also offer a wide range of general purpose test equipment for a variety of applications including broadcast testing, spectrum analysis and production test.

        We recently acquired two businesses in this segment:

•

In July 2003, we acquired Racal Instruments Wireless Solutions Group ("RIWS") which added the bulk of the wireless test equipment capabilities referred to above.



•

In October 2003, we acquired the business of Celerity Systems, Inc. (CA), which designs, develops and manufactures modular digital test and measurement solutions for the communications, satellite, wireless and broadband test markets, including broadband signal generators.

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

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

Customers

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

Marketing and Distribution

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

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

Research and Development

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

•

developing new products



•

improving existing products



•

adapting such products to new applications



•

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 $50.0 million for fiscal 2004, $29.5 million for fiscal 2003 and $21.0 million for fiscal 2002. The increase from fiscal 2003 is primarily attributable to the addition of the expenses of MCE, RIWS and Celerity. Also, in connection with our acquisitions of MCE, RIWS and Celerity in fiscal 2004, we allocated $420,000, $2.7 million and $1.1 million, respectively, of the purchase price to in-process research and development projects. In connection with our acquisition of IFR Systems, Inc. in fiscal 2002, we allocated $1.1 million of the purchase price to in-process research and development projects.

Backlog

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

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

Competition

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

•

technology



•

performance



•

reliability



•

quality



•

customer service



•

price

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

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

Government Sales

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

Manufacturing

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

•

Cupertino, California,



•

Sunnyvale, California,



•

Colorado Springs, Colorado,



•

Wichita, Kansas,



•

Frederick, Maryland,



•

Ann Arbor, Michigan



•

Whippany, New Jersey,



•

Hauppauge, New York,



•

Plainview, New York,



•

Powell, Ohio,



•

Elancourt, France,



•

Burnham, United Kingdom, and



•

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.

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

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

•

magnetic materials and



•

copper.

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

•

semiconductors,



•

transformers and



•

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.

Seasonality

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

Employees

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

Regulation

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

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

6

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

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

Financial Information About Industry Segments

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

Financial Information About Geographic Areas

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

Available Information

        We file reports with the SEC. The public may read and copy any materials filed by us with the SEC at the SEC's public reference room at 450 Fifth Street, NW, Washington D.C., 20549. The public may obtain information about the operation of the SEC's public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site 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, 2004:

•

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.



•

Aeroflex Plainview, Inc., also leases a manufacturing facility in Hauppauge, Long Island, New York of approximately 47,000 square feet, with an annual rental of approximately $281,000. The lease expires in 2010.



•

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 $230,000. The lease expires in 2008. This subsidiary also leases approximately 16,000 square feet of space

7

in Cupertino, California, with an annual rental of approximately $293,000. This lease expires in 2006.

•

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.



•

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.



•

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.



•

Our subsidiary, Aeroflex Inmet, Inc., conducts manufacturing operations at a plant located in Ann Arbor, Michigan. The plant, which we own, is approximately 32,000 square feet.



•

Our subsidiary, Aeroflex KDI, Inc., conducts manufacturing operations at a plant located in Whippany, New Jersey. The plant, which we own, is approximately 57,000 square feet.



•

Our subsidiary, Aeroflex Weinschel, Inc., leases approximately 32,000 square feet of space in Frederick, Maryland, with an annual rental of approximately $340,000. This lease expires in 2012.



•

Our subsidiary, Aeroflex Metelics, Inc., leases approximately 20,000 square feet in Sunnyvale, California with an annual rental of approximately $316,000. This lease expires in 2012.



•

Our subsidiary, Racal Instruments Wireless Solutions Limited, leases approximately 70,000 square feet in Burnham, England, with an annual rental of approximately $1.0 million. This lease expires in 2007.

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

ITEM 3—LEGAL PROCEEDINGS

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

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

        Not applicable.

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PART II

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

Market information

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

Holders

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

Dividends

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

Equity Compensation Plan Information as of June 30, 2004

Issuer Purchases

        None

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ITEM 6—SELECTED FINANCIAL DATA

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

(1)

Includes $4.2 million ($2.7 million, net of tax, or $.04 per diluted share) for the write-off of in-process research and development acquired in connection with the purchases of MCE, RIWS and Celerity in fiscal 2004.

(2)

Includes $3.1 million ($2.1 million, net of tax, or $.03 per diluted share) for the consolidation of our manufacturing operations in order to take advantage of excess manufacturing capacity and reduce operating costs including charges related to excess equipment capacity. 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.

(3)

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.

(4)

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

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

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

Overview

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

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

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

•

Wireless Test Equipment



•

Frequency Synthesizers



•

Radio Test Equipment



•

Synthetic Test Systems



•

Avionics Test Equipment



•

Other General Purpose Test Equipment

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

        Our operating strategy is based on the following key objectives:

•

to strengthen and expand our portfolio of proprietary technologies;



•

to broaden the applications and target markets for our existing products;



•

to expand the scope of our content in our customers' products;



•

to increase our operating efficiencies;



•

to maintain a conservative capital structure; and



•

to opportunistically pursue strategic acquisitions.

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

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

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

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

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

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

•

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 are not reimbursed under contractual arrangements are expensed in the period incurred.

Statement of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

15

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

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

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

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

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

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

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

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

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

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Gross Profit.

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

Selling, General and Administrative Costs.

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

Research and Development Costs.

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

18

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

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

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

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

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

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

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

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

Contractual Obligations

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

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

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

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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 materially adverse effect on our consolidated financial statements.

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

Backlog

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

Accounting Policies Involving Significant Estimates

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

Revenue and Cost Recognition Under Long-Term Contracts

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

Inventories

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

20

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

Recoverability of Long-Lived and Intangible Assets

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

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

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

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

Restructuring Charges

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

Income Taxes

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

Risks Relating to Our Business

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

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

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

        Our operating results may fluctuate significantly on a quarterly basis.

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

•

the timing, cancellation or rescheduling of customer estimates, orders and shipments;



•

the pricing and mix of products sold;



•

new product introductions;



•

our ability to obtain components and subassemblies from contract manufacturers and suppliers; and



•

variations in manufacturing efficiencies.

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

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

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

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

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

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

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

•

changes in a country's or region's political or economic conditions;



•

longer accounts receivable cycles;



•

trade protection measures;



•

unexpected changes in regulatory requirements;



•

differing technology standards and/or customer requirements; and

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•

import or export licensing requirements, which could affect our ability to obtain favorable terms for components or lead to penalties or restrictions.

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

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

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

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

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

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

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

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

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

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

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

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

•

the announcement of new products, services or technological innovations by us or our competitors;



•

quarterly increases or decreases in our revenue or earnings;



•

changes in quarterly revenue or earnings estimates by the investment community; and



•

speculation in the press or investment community about our strategic position, financial condition, results of operations, business or significant transactions.

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

Forward-Looking Statements

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

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ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

        None.

ITEM 9A—CONTROLS AND PROCEDURES

Evaluation and Disclosure Controls and Procedures

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

Changes in Internal Controls

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

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

25

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

Limitations on the Effectiveness of Controls

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

PART III

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

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

(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 March 5, 2004—Item 7—Amendment to Exhibit 99.4 to Report on Form 8-K/A filed November 17, 2003—Pro Forma Combined Balance Sheet and Statement of Operations for MCE Technologies, Inc. and Aeroflex Incorporated.

•

Report on Form 8-K filed on March 8, 2004—Item 5 and Item 7—Execution and Delivery of Underwriting Agreement for the sale of 7,000,000 shares of common stock.

(c)

Exhibits

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27

28

29

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

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

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31

AEROFLEX INCORPORATED

AND SUBSIDIARIES

FINANCIAL STATEMENTS AND SCHEDULES

COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K

TO SECURITIES AND EXCHANGE COMMISSION

AS OF JUNE 30, 2004 AND 2003

AND FOR THE YEARS

ENDED JUNE 30, 2004, 2003 AND 2002

FINANCIAL STATEMENTS AND SCHEDULES

INDEX

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

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Aeroflex Incorporated

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

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

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

/s/ KPMG LLP

Melville, New York
September 8, 2004

S-1

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

See notes to consolidated financial statements.

S-2

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Continued)

(In thousands, except per share amounts)

See notes to consolidated financial statements.

S-3

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

See notes to consolidated financial statements.

S-4

AEROFLEX INCORPORATED
AND SUBSIDIARIES

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

Years Ended June 30, 2004, 2003 and 2002

(In thousands)