AEROFLEX INC - 10-Q Quarterly Report

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

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

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

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

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

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

AEROFLEX INCORPORATED
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

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

For arrangements other than certain long-term contracts, revenue (including shipping and handling fees) is recognized when products are shipped and title has passed to the customer. If title does not pass until the product reaches the customer's delivery site, then recognition of the revenue is deferred until that time. 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, the Company uses the percentage-of-completion method, whereby revenues and associated costs are recognized as work on a contract progresses. The Company measures the extent of progress toward completion generally based upon one of the following (based upon an assessment of which method most closely aligns to the underlying earnings process): (i) the units-of-delivery method, (ii) the cost-to-cost method, using the ratio of contract costs incurred as a percentage of total estimated costs at contract completion (based upon engineering and production estimates), or (iii) the achievement of contractual milestones. Provisions for anticipated losses or revisions in estimated profits on contracts-in-process are recorded in the period in which such anticipated losses or revisions become evident. Revenue from software support and maintenance contracts is recognized ratably over the term of the contract in accordance with SOP-97-2, "Software Revenue Recognition."

Certain of the Company's sales are to distributors which have a right to return some portion of product within eighteen months of sale. The Company recognizes revenue on these sales at the time of shipment to the distributor as these sales meet all of the criteria of Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists." Historically, the returns under these arrangements have been insignificant and can be reasonably estimated. An estimate of such returns is recorded at the time sales are recognized.

Foreign currency contracts are used to protect us from fluctuations in exchange rates. We have entered into foreign currency contracts, which are not designated as hedges, and the change in fair value is included in income currently, within other income or expense. As of September 30, 2004, we had $5.6 million of notional value foreign currency forward contracts maturing through December 2004. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The fair value of these contracts at September 30, 2004 was $12,000 in our favor.

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

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

The per share weighted average fair value of stock options granted during the three months ended September 30, 2004 was $4.23 on the date of grant. The fair value was determined using the Black Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk free interest rate of 4.3%, expected volatility of 58%, and an expected life of 3.0 years. The per share weighted average fair value of stock options granted during the three months ended September 30, 2003 was $6.11 on the date of grant. The fair value was determined using the Black Scholes option-pricing model with the following weighted average assumptions: expected dividend yield of 0%, risk free interest rate of 4.4%, expected volatility of 108% and an expected life of 3.6 years. The

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

		Three Months Ended September 30,
		2004			2003
		(In thousands, except per share data)
Income from continuing operations		$	6,400		$	962
Deduct: Total stock-based employee compensation expense determined under fair value based method for all grants, net of tax			(3,286	)		(2,348	)

Pro forma income (loss) from continuing operations		$	3,114		$	(1,386	)

Earnings (loss) per share:
	Basic — as reported	$	.09		$	.02

	Basic—pro forma	$	.04		$	(.02	)

	Diluted—as reported	$	.08		$	.02

	Diluted—pro forma	$	.04			*

On July 31, 2003, the Company acquired the Racal Instruments Wireless Solutions Group ("RIWS") for cash of $38 million and a deferred payment of up to $16.5 million in either cash or Aeroflex common stock, at the Company's option, depending on RIWS achieving certain performance goals for the year ending July 31, 2004. The Company did not include this contingent consideration in the purchase price allocation as the payment of this consideration was not considered to be certain beyond a reasonable doubt at the date of acquisition. The Company believes that the performance goals have not been met.

RIWS develops, manufactures and integrates digital wireless testing and measurement solutions. The addition of RIWS testing solutions products and technologies is expected to enable the Company to provide a full spectrum of wireless testing solutions from development to production and services primarily for infrastructure testing and mobile handset testing.

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

		(In thousands)
Current assets (excluding cash of $5.9 million)		$	21,321
Property, plant and equipment			8,672
Developed technology			15,600
Customer related intangibles			1,700
Tradenames			200
Goodwill			17,674
In-process research and development			2,700

	Total assets acquired		67,867

Current liabilities			(27,924	)
Deferred taxes			(5,250	)

	Total liabilities assumed		(33,174	)

	Net assets acquired	$	34,693

The developed technology, tradenames and customer related intangibles are being amortized on a straight-line basis over a range of 1 to 8 years. Approximately $5.4 million of the goodwill is deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. Therefore, in accordance with accounting principles generally accepted in the United States of America, the value of such has been expensed in the quarter ended September 30, 2003 in operating costs. The allocation to in-process research and development represents 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. As of the acquisition date, cash flows from these projects were expected to commence in calendar year 2004. A 35% risk adjusted discount rate was applied to the projects' cash flows in determining fair value. At the acquisition date, RIWS was conducting design, development, engineering and testing activities associated with the completion of new 2.5G and 3G protocol and conformance testers.

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

The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company allocated the purchase price, including acquisition costs of approximately $2.0 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

		(In thousands)
Current assets (excluding cash of $1.8 million)		$	19,020
Property, plant and equipment			12,517
Developed technology			8,850
Tradenames			1,100
Customer related intangibles			2,520
Goodwill			42,638
In-process research and development			420
Other			459

	Total assets acquired		87,524

Current liabilities			(12,551	)
Long-term debt			(89	)
Deferred taxes			(5,963	)
Other long-term liabilities			(11	)

	Total liabilities assumed		(18,614	)

	Net assets acquired	$	68,910

The developed technology, customer related intangibles, and tradenames are being amortized on a straight-line basis over a range of 1 to 15 years. The goodwill is not deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. Therefore, in accordance with accounting principles generally accepted in the United States of America, the value of such has been expensed in the quarter ended September 30, 2003 in operating costs. The allocation to in-process research and development represents 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. As of the acquisition date, cash flows from these projects were expected to commence in fiscal year 2004. A 30% risk adjusted discount rate was applied to the projects' cash flows in determining fair value. At the acquisition date, MCE was conducting development activities associated with the completion of certain high frequency component technology.

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

The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company allocated the purchase price, including acquisition costs of approximately $106,000, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

		In thousands
Current assets		$	2,137
Property, plant and equipment			737
Developed technology			3,405
Goodwill			2,270
In-process research and development			1,100

	Total assets acquired		9,649
Current liabilities assumed			(1,341	)

	Net assets acquired	$	8,308

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

The developed technology is being amortized on a straight-line basis over 7 years. The goodwill is fully deductible for tax purposes. At the acquisition date, the acquired in-process research and development was not considered to have reached technological feasibility and had no alternative future uses. Therefore, in accordance with accounting principles generally accepted in the United States of America, the value of such has been expensed in the quarter ended December 31, 2003 in operating costs. The allocation to in-process research and development represents 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. As of the acquisition date, cash flows from these projects were expected to commence in fiscal year 2005. A 35% risk adjusted discount rate was applied to the projects' cash flows in determining fair value. At the acquisition date, Celerity was conducting development activities associated with the completion of its next generation modular technology.

Summarized below are the unaudited pro forma results of operations of the Company as if RIWS, MCE and Celerity had been acquired at the beginning of the fiscal period presented. The $3.1 million

write-off of in-process research and development has been included in the September 30, 2003 pro forma loss in order to provide comparability to the respective historical period.

		Pro forma Three Months Ended September 30, 2003
		(In thousands)
Net sales		$	88,994
Income from continuing operations			(2,491	)
Income from continuing operations per share
	Basic	$	(.04	)
	Diluted	$	*

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

The aggregate amortization expense for the amortized intangible assets was $2.1 million and $1.3 million for the three months ended September 30, 2004 and 2003, respectively.

The estimated aggregate amortization expense for each of the twelve-month periods ending September 30, is as follows:

	(In thousands)
2005	$	7,936
2006		7,758
2007		6,869
2008		5,723
2009		3,887

As a result of continued operating losses, in February 2004, the Board of Directors of the Company approved a formal plan to divest the Company's thin film interconnect manufacturing operation ("MIC") and to seek a strategic buyer. This operation had previously been included in the Microelectronic Solutions segment. As a result of this decision, the Company recorded a $9.1 million ($5.9 million, net of tax) loss on disposal in the quarter ended December 31, 2003. This charge included a cash requirement of $2.6 million primarily for existing equipment leases, and a non-cash charge of $6.5 million for the write down of goodwill, other intangibles and owned equipment.

In September 2004, the Company sold the stock of MIC for $8.8 million and recorded a loss on disposal of $1.1 million. Since the sale of the stock creates a capital loss for tax purposes and the Company has no current capital gains to offset it, the Company recorded a full valuation allowance against the tax benefit. Under the terms of the sale agreements, the Company has retained certain liabilities relating to potential adverse environmental conditions that may exist as of the date of sale, litigation pending against MIC as of the date of sale and product defects in products designed, developed, manufactured or sold by MIC prior to the sale date which result in a recall, withdrawal or market suspension of the product or result in injury to persons or property. Management believes these contingencies will not have a material adverse effect on the Company's consolidated financial statements.

In June 2004, the Board of Directors of the Company approved a formal plan to divest the Company's shock and vibration control device manufacturing business ("VMC"), and to seek a strategic buyer. The Company has not recorded a loss on disposal as management believes VMC can be sold for a price in excess of its carrying value. This operation had previously comprised the Isolator Products segment. Until such time, if any, as there is a definitive agreement with respect to the sale of VMC, the Company is unable to determine whether it will retain any material liabilities notwithstanding the disposal of VMC's business.

In accordance with SFAS No. 144, these business units and TriLink (which was discontinued in December 2002) have been reported as discontinued operations and, accordingly, income and losses from operations and the losses on disposal have been reported separately from continuing operations. Net sales and income (loss) from discontinued operations (including loss on disposal) for the three months ended September 30, 2004 and 2003 were as follows:

To conform with this presentation, all prior periods have been restated. As a result, the assets and liabilities of the discontinued operations have been reclassified on the balance sheet from the historical classifications and presented under the captions "assets of discontinued operations" and "liabilities of discontinued operations," respectively. As of September 30, 2004 and June 30, 2004, the net assets of the discontinued operations consisted of the following:

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

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

Options to purchase 9.0 million shares at exercise prices ranging between $11.32 and $34.41 per share were outstanding as of September 30, 2004 but were not included in the computation of diluted EPS because the exercise prices of these options were greater than the average market price of the common shares.

On February 14, 2003, the Company executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and restated loan agreement increased the line of credit to $50 million through February 2007, continued the mortgage on the Company's Plainview property for $2.7 million and is secured by the pledge of the stock of certain of the Company's subsidiaries. The interest rate on revolving credit borrowings under this agreement is at various rates depending upon certain financial ratios, with the current rate substantially equivalent to prime (4.75% at September 30, 2004). The Company paid a facility fee of $125,000 and is required to pay a commitment fee of .25% per annum of the average unused portion of the credit line. At September 30, 2004, the Company's available unused line of credit was approximately $44.4 million after consideration of letters of credit. The mortgage is payable in monthly installments of approximately $26,000 through March 2008 and a balloon payment of $1.6 million in April 2008. The Company has entered into interest rate swap agreements for the outstanding amount under the mortgage agreement at approximately 7.6% in order to reduce the interest rate risk associated with these borrowings.

The fair market value of the interest rate swap agreements was $210,000 as of September 30, 2004 in favor of the banks. If this mortgage was prepaid, although the Company has no intention of doing so, the $210,000 would be charged to the statement of operations at that time.

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. The Company is currently in full compliance with all of the covenants contained in the loan agreement.

	September 30, 2004		June 30, 2004
	(In thousands)
Raw materials	$	34,852	$	35,228
Work in process		43,295		40,248
Finished goods		19,737		19,141

	$	97,884	$	94,617

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

Effective January 1, 1994, the Company established a Supplemental Executive Retirement Plan (the "SERP") which provides retirement, death and disability benefits to certain of its officers. On September 3, 2003, the Company acquired MCE, including its defined benefit pension plan (the "MCE Plan"). The MCE Plan has been frozen since December 31, 1993.

	Three Months Ended September 30,
	2004			2003
	(In thousands)
Service cost	$	134		$	104
Interest cost		170			144
Expected return on plan assets		(31	)		(10	)
Amortization of net transition (asset) obligation		9			9
Amortization of prior service cost		—			—
Recognized actuarial (gain) loss		50			50

Net periodic benefit cost	$	332		$	297

The Company previously disclosed in its financial statements for the year ended June 30, 2004, that it expected to contribute $253,000 to its pension plan in the fiscal year ended June 30, 2005. As of September 30, 2004, $112,000 of the contributions has been made. The Company presently anticipates increasing its total contributions to $338,000 in the fiscal year ending June 30, 2005.

The Company recorded credits of $366,000 and $61,000 to additional paid-in capital during the three months ended September 30, 2004 and 2003, respectively, in connection with the tax benefit related to compensation deductions on the exercise of stock options.

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

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

Microelectronic Solutions:		Test Solutions:
a)Microelectronic Modules and Components		a)Instrument Products
b)Integrated Circuits		b)Motion Control Systems

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

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

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.

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.

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

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

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 ("MIC") 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 in December 2003. This charge included a cash requirement of $2.6 million primarily for existing equipment leases, and a non-cash charge of $6.5 million for the write down of goodwill, other intangibles and owned equipment. In accordance with SFAS 144, we have reported the 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. MIC designs, develops, manufactures and markets microelectronic products in the form of passive thin film circuits and interconnects. In September 2004, the Company sold the stock of MIC for $8.8 million and recorded an additional loss on disposal of $1.1 million. Under the terms of the sale agreements, we have retained certain liabilities relating to potential adverse environmental conditions that may exist as of the date of sale, litigation pending against MIC as of the date of sale and product defects in products designed, developed, manufactured or sold by MIC prior to the sale date which result in a recall, withdrawal or market suspension of the product or result in injury to persons or property. We believe these contingencies will not have a material adverse effect on our consolidated financial statements.

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 we believe 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. Until such time, if any, as there is a definitive agreement with respect to the sale of VMC, we are unable to determine whether we will retain any material liabilities notwithstanding the disposal of VMC's business.

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

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

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

Net Sales. Net sales increased 43% to $109.2 million for the three months ended September 30, 2004 from $76.1 million for the three months ended September 30, 2003. Net sales in the microelectronic solutions ("AMS") segment increased 75% to $47.4 million for the three months ended September 30, 2004 from $27.0 million for the three months ended September 30, 2003 due primarily to the acquisition of MCE in September 2003 and also as a result of increased sales of our microelectronic modules and integrated circuits. Net sales in the test solutions ("ATS") segment increased 26% to $61.8 million for the three months ended September 30, 2004 from $49.1 million for the three months ended September 30, 2003 due primarily to the acquisition of RIWS in July 2003 and also as a result of increased sales of our communication test products business, frequency synthesizers and scanning devices.

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.

Three Months Ended September 30,	AMS			ATS		% of sales	Total		% of sales
	(In thousands, except percentages)
2004	$	23,681	50.0	%	$	27,651	44.8	%	$	51,332	47.0	%
2003		13,181	48.8	%		20,611	42.0	%		33,792	44.4	%

Gross profit increased $10.5 million, or 80%, in the AMS segment primarily as a result of the effect of the acquisition of MCE in September 2003 and increased sales and margins in our integrated circuits and microelectronic modules businesses due to improved factory utilization. Gross profit increased $7.0 million, or 34%, 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 and a favorable sales mix.

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

Three Months Ended September 30,	AMS			ATS		% of sales	Corporate		Total
	(In thousands, except percentages)
2004	$	7,654	16.1	%	$	13,559	21.9	%	$	3,554	$	24,767	22.7	%
2003		4,305	15.9	%		11,807	24.1	%		1,800		17,912	23.5	%

Selling, general and administrative costs increased $3.3 million, or 78%, in the AMS segment due primarily to the addition of the expenses of MCE. Selling, general and administrative costs increased $1.8 million, or 15% in the ATS segment due primarily to the addition of the expenses of RIWS. Corporate selling, general and administrative expenses increased $1.8 million due primarily to increased compensation expense ($906,000), professional fees ($295,000) and insurance expense ($333,000).

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

Three Months Ended September 30,	AMS			ATS		% of sales	Total		% of sales
	(In thousands, except percentages)
2004	$	4,899	10.3	%	$	9,645	15.6	%	$	14,544	13.3	%
2003		2,749	10.2	%		7,116	14.5	%		9,865	13.0	%

Self-funded research and development costs increased $2.2 million, or 78%, in the AMS segment primarily due to the addition of the expenses of MCE. Research and development costs increased $2.5 million, or 36%, in the ATS segment primarily due to the addition of the expenses of RIWS, which historically had, and is expected to continue to have, a higher percentage of research and development costs.

Amortization of Acquired Intangibles. Amortization increased $720,000, or 54%, due to the acquisitions of MCE, RIWS and Celerity.

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. These allocations represent the estimated fair value of such incomplete research and development based on future cash flows that have been adjusted by the respective projects' completion percentage. At the respective acquisition dates, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, we expensed these costs as of the respective acquisition dates in accordance with accounting principles generally accepted in the United States of America.

Other Expense (Income). Interest expense was $260,000 for the three months ended September 30, 2004 and $320,000 for the three months ended September 30, 2003. Other income of $424,000 for the three months ended September 30, 2004 consisted primarily of interest income of $349,000 and foreign currency transaction gains of $252,000, partially offset by $133,000 of loss on investments. Other income of $245,000 for the three months ended September 30, 2003 consisted of $40,000 of interest income, gains on our investments of $98,000 and a $75,000 favorable change in the fair value of our interest rate swap agreements. Interest income increased primarily due to higher average levels of cash and cash equivalents and higher market interest rates.

Provision for Income Taxes. The income tax provision was $3.7 million (an effective income tax rate of 36.8%) for the three months ended September 30, 2004 and the income tax provision was $518,000 (an effective income tax rate of 35%) for the three months ended September 30, 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.

Income From Continuing Operations. The income from continuing operations for the three months ended September 30, 2004 was $6.4 million, or $.08 per diluted share, versus income from continuing operations of $962,000, or $.02 per diluted share, for the three months ended September 30, 2003.

Discontinued Operations. Discontinued operations includes the results of operations of MIC, VMC and TriLink. In September 2004, we sold the stock of MIC for $8.8 million and recorded a loss on disposal of $1.1 million. We are currently seeking a strategic buyer for VMC but have not entered into a binding contract.

We are not a party to any off-balance sheet arrangements other than letters of credit totaling $5.6 million to guarantee our performance under certain government contracts.

As of September 30, 2004, we had $249 million in working capital. Our current ratio was 4.0 to 1 at September 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, continued the mortgage on our Plainview property for $2.7 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 (4.75% at September 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 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, as amended to date. We expect to be in compliance with all covenants for the foreseeable future.

On July 31, 2003, we acquired RIWS for cash of $38 million and a deferred payment of up to $16.5 million depending on RIWS achieving certain performance goals for the year ending July 31, 2004. The Company believes that the performance goals have not been met.

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.

For the three months ended September 30, 2004, our operations provided cash from continuing operations of $11.0 million. For the three months ended September 30, 2004, our investing activities used cash of $4.6 million, primarily for capital expenditures. In addition, the sale of the stock of our thin film interconnect manufacturing operation resulted in net cash provided by discontinued operations of $6.3 million consisting of $8.1 million of proceeds, net of expenses, offset by $1.8 million of capital expenditures. For the three months ended September 30, 2004, our financing activities used cash of $1.3 million, including debt repayments of $2.1 million offset by stock option exercise proceeds of $796,000.

We believe that existing cash and cash equivalents coupled with internally generated funds and available lines of credit will be sufficient for our working capital requirements, capital expenditure needs and the servicing of our debt for the foreseeable future. One of our pension plans currently is unfunded, but is expected to be funded from the cash surrender value of life insurance policies that are being held in a rabbi trust. We do not believe that the amount of the pension obligations remaining after application of such policy proceeds will be material. Our cash and cash equivalents, coupled with our available lines of credit, are available to fund acquisitions and other potential large cash needs that may arise. At September 30, 2004, our available unused line of credit was $44.4 million after consideration of letters of credit.

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

The operating lease commitments shown in the above table have not been reduced by future minimum sub-lease rentals of $16.9 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 September 30, 2004, will have a material adverse affect on our liquidity.

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.

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. If title does not pass until the product reaches the customer's delivery site, then recognition of the revenue is deferred until that time. 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."

Certain of our sales are to distributors which have a right to return some portion of product within eighteen months of sale. We recognize revenue on these sales at the time of shipment to the distributor as these sales meet all of the criteria of Statement of Financial Accounting Standards ("SFAS") No. 48, "Revenue Recognition When Right of Return Exists." Historically, the returns under these arrangements have been insignificant and can be reasonably estimated. An estimate of such returns is recorded at the time sales are recognized.

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.

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 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.

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.

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

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

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

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

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

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

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

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

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.

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

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

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

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 percent from levels at September 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 September 30, 2004, the effect on our net income would be a decrease of approximately $148,000 per year.

We operate businesses that are located outside of the United States, which exposes us to the fluctuation of foreign currency exchange rates (primarily the British Pound and the Euro). If foreign currency exchange rates change by 10% from levels at September 30, 2004, the effect on our other comprehensive income would be approximately $9.5 million. We periodically enter into foreign currency forward contracts to protect us from fluctuations in exchange rates. As of September 30, 2004, we had

$5.6 million of notional value foreign currency forward contracts maturing through December 2004. Notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of cash settlements under the contracts. The fair value of these contracts at September 30, 2004 was $12,000 in our favor.

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

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 believed required improvement. These internal control issues were, in large part, the result of our recent acquisitions. Because we understand the critical importance of the effectiveness of internal controls over financial reporting, during the quarter ended September 30, 2004, we 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 estimates, improved segregation of duties at certain subsidiaries, establishment of additional monitoring controls, further training and education of financial personnel, increased secondary monitoring and review of financial information, and formal documentation of accounting policies and procedures.

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

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 such controls and procedures are effective at the "reasonable assurance" level.

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

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

November 9, 2004	74,489,027 shares (excluding	4,388 shares held in treasury)

(Date)	(Number of Shares)

			PAGE
	PART I: FINANCIAL INFORMATION
Item 1	—	CONSOLIDATED BALANCE SHEETS	3-4
		September 30, 2004 (Unaudited) and June 30, 2004
		CONSOLIDATED STATEMENTS OF OPERATIONS	5
		Three Months Ended September 30, 2004 and 2003 (Unaudited)
		CONSOLIDATED STATEMENTS OF CASH FLOWS	6
		Three Months Ended September 30, 2004 and 2003 (Unaudited)
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	7-20
Item 2	—	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
		AND RESULTS OF OPERATIONS	21-30
		Three Months Ended September 30, 2004 and 2003
Item 3	—	QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30-31
Item 4	—	CONTROLS AND PROCEDURES	31
	PART II: OTHER INFORMATION
Item 1	—	LEGAL PROCEEDINGS	32
Item 6	—	EXHIBITS AND REPORTS ON FORM 8-K	32
SIGNATURES			33
CERTIFICATIONS			34-37

			September 30, 2004		June 30, 2004
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	108,890	$	98,502
	Accounts receivable, less allowance for doubtful accounts of $1,572 and $1,618			91,741		97,031
	Inventories			97,884		94,617
	Deferred income taxes			16,638		16,774
	Assets of discontinued operations			6,065		11,910
	Prepaid expenses and other current assets			10,976		8,646

		Total current assets		332,194		327,480
Property, plant and equipment, net				75,080		74,372
Assets of discontinued operations				3,196		9,717
Other assets				14,202		10,932
Intangible assets with definite lives, net				39,666		40,602
Goodwill				84,666		88,288

		Total assets	$	549,004	$	551,391

			September 30, 2004		June 30, 2004
			(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt		$	3,396	$	4,770
	Accounts payable			25,380		25,293
	Advance payments by customers			11,202		11,725
	Income taxes payable			4,677		1,088
	Liabilities of discontinued operations			1,837		4,573
	Accrued payroll expenses			13,858		13,966
	Accrued expenses and other current liabilities			23,108		28,200

		Total current liabilities		83,458		89,615
Long-term debt				4,783		5,505
Deferred income taxes				8,799		9,445
Liabilities of discontinued operations				—		3,613
Other long-term liabilities				16,637		16,116

		Total liabilities		113,677		124,294

Stockholders' equity:
	Preferred Stock, par value $.10 per share; authorized 1,000 shares:
		Series A Junior Participating Preferred Stock, par value $.10 per share, authorized 110; none issued		—		—
		Common Stock, par value $.10 per share; authorized 110,000 shares; issued 74,456 and 74,282 shares		7,446		7,428
		Additional paid-in capital		371,635		370,491
		Accumulated other comprehensive income		12,838		11,387
		Retained earnings		43,422		37,805

				435,341		427,111
Less: Treasury stock, at cost (4 shares)				14		14

Total stockholders' equity				435,327		427,097

Total liabilities and stockholders' equity			$	549,004	$	551,391

			Three Months Ended September 30,
			2004			2003
						(Note 3)
			(Unaudited)
Net sales			$	109,183		$	76,093
Cost of sales				57,851			42,301

	Gross profit			51,332			33,792

Selling, general and administrative costs				24,767			17,912
Research and development costs				14,544			9,865
Amortization of acquired intangibles				2,060			1,340
Acquired in-process research and development costs (Note 2)				—			3,120

				41,371			32,237

	Operating income			9,961			1,555

Other expense (income)
	Interest expense			260			320
	Other expense (income), net			(424	)		(245	)

		Total other expense (income)		(164	)		75

Income from continuing operations before income taxes				10,125			1,480
Provision for income taxes				3,725			518

Income from continuing operations				6,400			962

Discontinued operations
	Income (loss) from discontinued operations, net of tax provision (benefit) of $204 and $(298)			350			(568	)
	Loss on disposal of operations, net of tax benefit of $0 and $0			(1,133	)		—

	Loss from discontinued operations, net of tax			(783	)		(568	)

Net income			$	5,617		$	394

Income (loss) per common share:
Basic
	Continuing operations		$	.09		$	.02
	Discontinued operations			(.01	)		(.01	)

	Net income		$	.08		$	.01

Diluted
	Continuing operations		$	.08		$	.02
	Discontinued operations			(.01	)		(.01	)

	Net income		$	.07		$	.01

Weighted average number of common shares outstanding:
	Basic			74,446			61,959

	Diluted			75,988			63,197

		As of September 30, 2004
		Gross Carrying Amount		Accumulated Amortization		Net Book Value
		(In thousands)
Existing technology		$	49,786	$	14,871	$	34,915
Tradenames			2,324		1,048		1,276
Customer related intangibles			4,424		949		3,475

	Total	$	56,534	$	16,868	$	39,666

		Balance as of July 1, 2004		Adjustment (Note a)			Adjustment (Note b)			Adjustment (Note c)			Balance as of September 30, 2004
		(In thousands)
Microelectronic solutions segment		$	46,371	$	317		$	—		$	—		$	46,688
Test solutions segment			41,917		(2,008	)		(1,912	)		(19	)		37,978

	Total	$	88,288	$	(1,691	)	$	(1,912	)	$	(19	)	$	84,666

		September 30, 2004		June 30, 2004
		(In thousands)
Accounts receivable		$	2,739	$	5,133
Inventory			2,504		5,247
Prepaid and other current assets			822		1,530

	Current assets		6,065		11,910

Property, plant, & equipment, net			1,775		5,543
Intangibles			789		1,550
Other assets			632		2,624

	Non-current assets		3,196		9,717

Total assets			9,261		21,627

Accounts payable			792		704
Accrued expenses			1,045		3,869

	Current liabilities		1,837		4,573

Long term debt			—		3,565
Other long term liabilities			—		48

	Long term liabilities		—		3,613

Total liabilities			1,837		8,186

	Net assets	$	7,424	$	13,441

	Unrealized Gain (Loss) on Interest Rate Swap Agreements (net of tax)			Minimum Pension Liability Adjustment (net of tax)			Foreign Currency Translation Adjustment		Total (net of tax)
	(In thousands)
Balance, July 1, 2004	$	(129	)	$	(2,208	)	$	13,724	$	11,387
Three months activity		(2	)		—			1,453		1,451

Balance, September 30, 2004	$	(131	)	$	(2,208	)	$	15,177	$	12,838

	Payments due by period
	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
	(In thousands)
Long-term debt	$	8,179	$	3,396	$	1,283	$	2,409	$	1,091
Operating leases		40,852		7,423		11,660		6,940		14,829

Total	$	49,031	$	10,819	$	12,943	$	9,349	$	15,920

Item 1.	Legal Proceedings
	We are involved in various routine legal matters. We believe the outcome of these matters will not have a material effect on us.
Item 2.	Unregistered Sales of Securities and Use of Proceeds
	None
Item 3.	Defaults upon Senior Securities
	None
Item 4.	Submission of Matters to a Vote of Security Holders
	None
Item 5.	Other Information
	None
Item 6.	Exhibits and Reports on Form 8-K
	(a)	Exhibits
		31.1	Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
		31.2	Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
		31.3	Certification of Chief Operating Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
		32.1	Certification of Chief Executive Officer and of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
	(b)	Reports on Form 8-K
		None

		AEROFLEX INCORPORATED (REGISTRANT)
November 9, 2004		By:	/s/ MICHAEL GORIN Michael Gorin Vice Chairman, Chief Financial Officer and Principal Accounting Officer