AEROFLEX INC - 10-Q Quarterly Report

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

FORM 10-Q

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

For the quarter ended December 31, 2004

Commission File Number 000-02324

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

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

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

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

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

February 8, 2005
(Date)

74,585,902 shares (excluding 4,388 shares held in treasury)
(Number of Shares)

AEROFLEX INCORPORATED
AND SUBSIDIARIES

INDEX

		PAGE
PART I: FINANCIAL INFORMATION
Item 1 —	CONSOLIDATED BALANCE SHEETS December 31, 2004 (Unaudited) and June 30, 2004	3-4
	CONSOLIDATED STATEMENTS OF OPERATIONS Six and Three Months Ended December 31, 2004 and 2003 (Unaudited)	5-6
	CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended December 31, 2004 and 2003 (Unaudited)	7
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8-22
Item 2 —	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six and Three Months Ended December 31, 2004 and 2003	23-35
Item 3 —	QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
Item 4 —	CONTROLS AND PROCEDURES	36
PART II: OTHER INFORMATION
Item 1 —	LEGAL PROCEEDINGS	37
Item 4 —	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	37
Item 6 —	EXHIBITS AND REPORTS ON FORM 8-K	37
SIGNATURES		38
CERTIFICATIONS		39-42

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

			December 31, 2004		June 30, 2004
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	11,558	$	98,502
	Marketable securities			97,666		—
	Accounts receivable, less allowance for doubtful accounts of $1,622 and $1,618			91,418		97,031
	Inventories			107,093		94,617
	Deferred income taxes			14,895		16,774
	Assets of discontinued operations			6,524		11,910
	Prepaid expenses and other current assets			8,219		8,646

		Total current assets		337,373		327,480
Property, plant and equipment, net				76,022		74,372
Assets of discontinued operations				3,218		9,717
Other assets				14,925		10,932
Intangible assets with definite lives, net				38,848		40,602
Goodwill				85,658		88,288

		Total assets	$	556,044	$	551,391

See notes to consolidated financial statements.

			December 31, 2004		June 30, 2004
			(Unaudited)
			(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt		$	659	$	4,770
	Accounts payable			27,096		25,293
	Advance payments by customers			13,233		11,725
	Income taxes payable			1,148		1,088
	Liabilities of discontinued operations			1,713		4,573
	Accrued payroll expenses			13,084		13,966
	Accrued expenses and other current liabilities			22,305		28,200

		Total current liabilities		79,238		89,615
Long-term debt				4,710		5,505
Deferred income taxes				6,481		9,445
Liabilities of discontinued operations				—		3,613
Other long-term liabilities				18,300		16,116

		Total liabilities		108,729		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 74,590 and 74,282 shares			7,459		7,428
	Additional paid-in capital			372,654		370,491
	Accumulated other comprehensive income			18,472		11,387
	Retained earnings			48,744		37,805

				447,329		427,111
	Less: Treasury stock, at cost (4 shares)			14		14

		Total stockholders' equity		447,315		427,097

		Total liabilities and stockholders' equity	$	556,044	$	551,391

See notes to consolidated financial statements.

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

			Six Months Ended December 31,
			2004			2003
						(Note 3)
			(Unaudited)
Net sales			$	221,651		$	175,674
Cost of sales				116,839			96,174

	Gross profit			104,812			79,500

Selling, general and administrative costs				51,486			41,757
Research and development costs				29,743			21,645
Amortization of acquired intangibles				4,101			3,316
Acquired in-process research and development costs (Note 2)				—			4,220

				85,330			70,938

	Operating income			19,482			8,562

Other income (expense)
	Interest expense			(422	)		(732	)
	Other income (expense), net			965			(214	)

		Total other income (expense)		543			(946	)

Income from continuing operations before income taxes				20,025			7,616
Provision for income taxes				7,484			2,742

	Income from continuing operations			12,541			4,874

Discontinued operations
	Income (loss) from discontinued operations, net of tax provision (benefit) of $(253) and $(807)			(542	)		(923	)
	Income (loss) on disposal of operations, net of tax provision (benefit) of $0 and $(3,153)			(1,060	)		(5,947	)

	Income (loss) from discontinued operations, net of tax			(1,602	)		(6,870	)

Net income (loss)			$	10,939		$	(1,996	)

Income (loss) per common share:
	Basic
		Continuing operations	$	.17		$	.08
		Discontinued operations		(.02	)		(.11	)

		Net income (loss)	$	.15		$	(.03	)

	Diluted
		Continuing operations	$	.16		$	.07
		Discontinued operations		(.02	)		(.10	)

		Net income (loss)	$	.14		$	(.03	)

Weighted average number of common shares outstanding:
	Basic			74,536			64,258

	Diluted			76,149			65,815

See notes to consolidated financial statements.

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

			Three Months Ended December 31,
			2004			2003
						(Note 3)
			(Unaudited)
Net sales			$	112,469		$	99,581
Cost of sales				58,988			53,873

	Gross profit			53,481			45,708

Selling, general and administrative costs				26,719			23,845
Research and development costs				15,199			11,780
Amortization of acquired intangibles				2,042			1,976
Acquired in-process research and development costs (Note 2)				—			1,100

				43,960			38,701

	Operating income			9,521			7,007

Other income (expense)
	Interest expense			(162	)		(412	)
	Other income (expense), net			541			(459	)

		Total other income (expense)		379			(871	)

Income from continuing operations before income taxes				9,900			6,136
Provision for income taxes				3,758			2,224

Income from continuing operations				6,142			3,912

Discontinued operations
	Income (loss) from discontinued operations, net of tax provision (benefit) of $(457) and $(509)			(892	)		(356	)
	Income (loss) on disposal of operations, Net of tax provision (benefit) of $0 and $(3,153)			73			(5,947	)

	Income (loss) from discontinued operations, net of tax			(819	)		(6,303	)

Net income (loss)			$	5,323		$	(2,391	)

Income (loss) per common share:
	Basic
		Continuing operations	$	.08		$	.06
		Discontinued operations		(.01	)		(.10	)

		Net income (loss)	$	.07		$	(.04	)

	Diluted
		Continuing operations	$	.08		$	.06
		Discontinued operations		(.01	)		(.09	)

		Net income (loss)	$	.07		$	(.03	)

Weighted average number of common shares outstanding:
		Basic		74,625			66,556

		Diluted		76,310			68,433

See notes to consolidated financial statements.

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

			Six Months Ended December 31,
			2004			2003
						(Note 3)
			(Unaudited)
Cash Flows From Operating Activities:
	Net income (loss)		$	10,939		$	(1,996	)
	Loss from discontinued operations			1,602			6,870

	Income from continuing operations			12,541			4,874
	Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
		Acquired in-process research and development		—			4,220
		Depreciation and amortization		11,842			9,781
		Deferred income taxes		(967	)		(1,951	)
		Other, net		11			2
	Change in operating assets and liabilities, net of effects from purchases of businesses:
		Decrease (increase) in accounts receivable		5,629			762
		Decrease (increase) in inventories		(10,588	)		(5,482	)
		Decrease (increase) in prepaid expenses and other assets		(2,183	)		(1,738	)
		Increase (decrease) in accounts payable, accrued expenses and other liabilities		(48	)		(4,585	)

Net Cash Provided By (Used In) Continuing Operations				16,237			5,883
Net Cash Provided By (Used In) Discontinued Operations				(1,353	)		2,489

	Net Cash Provided By Operating Activities			14,884			8,372

Cash Flows From Investing Activities:
	Payment for purchase of businesses, net of cash acquired			—			(61,541	)
	Capital expenditures			(8,030	)		(4,384	)
	Purchase of marketable securities			(394,284	)
	Sale of marketable securities			296,618
	Other, net			—			10

Net Cash Provided By (Used In) Continuing Operations				(105,696	)		(65,915	)
Net Cash Provided By (Used In) Discontinued Operations				6,277			(216	)

Net Cash Provided by (Used In) Investing Activities				(99,419	)		(66,131	)

Cash Flows From Financing Activities:
	Borrowings under debt agreements			38			26,115
	Debt repayments			(4,944	)		(11,887	)
	Proceeds from the exercise of stock options			1,506			2,473

Net Cash Provided By (Used In) Financing Activities				(3,400	)		16,701

Effect of Exchange Rate Changes on Cash and Cash Equivalents				991			(370	)

Net Increase (Decrease) In Cash And Cash Equivalents				(86,944	)		(41,428	)
Cash And Cash Equivalents At Beginning Of Period				98,502			51,307

Cash And Cash Equivalents At End Of Period			$	11,558		$	9,879

See notes to consolidated financial statements.

AEROFLEX INCORPORATED
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

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

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

Revenue Recognition

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.

Financial Instruments

Foreign currency contracts are used to protect us from fluctuations in exchange rates. The Company 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 December 31, 2004, we had $3.1 million of notional value foreign currency forward contracts maturing through March 2005. 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 December 31, 2004 was $96,000 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.

Marketable Securities

Marketable securities are classified as available-for-sale and are recorded at fair market value with unrealized gains and losses, net of taxes, reported as a separate component of shareholders' equity. Realized gains and losses and declines in market value judged to be other than temporary, of which there were none, are included in other income. Interest and dividends are also included in other income. Marketable securities consist solely of auction rate bonds.

Accounting for Stock-Based Compensation

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

The per share weighted average fair value of stock options granted during the six months ended December 31, 2004 was $4.27 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 4.2%, expected volatility of 51%, and an expected life of 3.0 years. The per share weighted average fair value of stock options granted during the six months ended December 31, 2003 was $6.59 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 84% and an expected life of 5.1 years. The

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

		Six Months Ended December 31,						Three Months Ended December 31,
		2004			2003			2004			2003
		(In thousands, except per share data)
Income from continuing operations		$	12,541		$	4,874		$	6,142		$	3,912
Deduct: Total stock-based employee compensation expense determined under fair value based method for all grants, net of tax			(6,475	)		(5,298	)		(3,189	)		(2,950	)

Pro forma income (loss) from continuing operations		$	6,066		$	(424	)	$	2,953		$	962

Income (loss) from continuing operations per share:
	Basic—as reported	$	.17		$	.08		$	.08		$	.06

	Basic—pro forma	$	.08		$	(.01	)	$	.04		$	.01

	Diluted—as reported	$	..16		$	..07		$	..08		$	..06

	Diluted—pro forma	$	.08			*		$	.04		$	.01

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

Recently Issued Accounting Standards

On December 31, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position No. FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP No. 109-1"), and FASB Staff Position No. FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP No. 109-2"). These staff positions provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 ("AJCA") that was signed into law on October 22, 2004. FSP No. 109-1 states that the tax relief (special tax deduction for domestic manufacturing) from this legislation should be accounted for as a "special deduction" instead of a tax rate reduction. FSP No. 109-2 gives a company additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company is investigating the repatriation provision to determine whether it might repatriate extraordinary dividends, as defined in the AJCA. The Company is currently evaluating all available U.S. Treasury guidance, as well as awaiting anticipated further guidance. The Company expects to complete this evaluation within a reasonable amount of time after additional guidance is published.

In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)"). This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R) requires all stock-based compensation to be recognized as an expense in the financial statements and that such cost be measured according to the fair value of stock options. SFAS 123(R) will be effective for quarterly periods beginning after June 15, 2005, which is the Company's first quarter of fiscal 2006. While the Company currently provides the pro forma disclosures required by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," on a quarterly basis (see Note 1—"Accounting for Stock-Based Compensation"), it is currently evaluating the impact this statement will have on its consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs—an amendment of Accounting Research Bulletin No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 requires all companies to recognize a current period charge for abnormal amounts of idle facility expense, freight, handling costs and wasted materials. This statement also requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the effect that this statement will have on its consolidated financial statements.

2. Acquisition of Businesses and Intangible Assets

Acquisition of Racal Instruments Wireless Solutions Group

On July 31, 2003, the Company acquired the Racal Instruments Wireless Solutions Group ("RIWS") for cash of $38 million and a deferred payment of up to $16.5 million in either cash or Aeroflex common stock, at the Company's option, depending on RIWS achieving certain performance goals for the year ending July 31, 2004. The Company 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. Although the Company believes that the performance goals have not been met, the determination is not final.

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

The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company allocated the purchase price, including acquisition costs of approximately $2.6 million, based on the estimated fair value of the assets acquired and liabilities assumed as follows:

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

Acquisition of MCE Technologies, Inc.

On September 3, 2003, the Company acquired all of the outstanding stock of MCE Technologies, Inc. ("MCE") for approximately 5.8 million shares of Aeroflex common stock with a fair value of approximately $43.5 million. In addition, the Company discharged $22.8 million of MCE outstanding bank debt, other indebtedness and preferred stock. Further, the Company issued 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.

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

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

The Company evaluated the acquired tangible and identifiable intangible assets to serve as a basis for allocation of the purchase price. The Company 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			2,220
In-process research and development			1,100

	Total assets acquired		9,599
Current liabilities assumed			(1,291	)

	Net assets acquired	$	8,308

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.

Pro Forma Results of Operations—RIWS, MCE and Celerity

Summarized below are the unaudited pro forma results of operations of the Company as if RIWS, MCE and Celerity had been acquired at the beginning of the fiscal period presented. The $4.2 million

write-off of in-process research and development has been included in the December 31, 2003 pro forma loss in order to provide comparability to the respective historical period.

		Pro forma Six Months Ended December 31, 2003
		(In thousands)
Net sales		$	189,020
Income from continuing operations			1,790
Income from continuing operations per share
	Basic	$	.03
	Diluted	$	.03

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.

Intangibles with Definite Lives

The components of amortizable intangible assets are as follows:

	As of December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Net Book Value
	(In thousands)
Existing technology	$	51,369	$	17,134	$	34,235
Tradenames		2,338		1,192		1,146
Customer related intangibles		4,545		1,078		3,467

Total	$	58,252	$	19,404	$	38,848

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

	(In thousands)
2005	$	8,195
2006		7,751
2007		7,026
2008		5,241
2009		3,763

Goodwill

The carrying amount of goodwill is as follows:

		Balance as of July 1, 2004		Adjustment (Note a)			Adjustment (Note b)			Adjustment (Note c)		Balance as of December 31, 2004
		(In thousands)
Microelectronic solutions segment		$	46,371	$	317		$	—		$	—	$	46,688
Test solutions segment			41,917		(2,059	)		(1,912	)		1,024		38,970

	Total	$	88,288	$	(1,742	)	$	(1,912	)	$	1,024	$	85,658

Note a	—	These adjustments to goodwill recorded during the period are a result of final adjustments to the fair value of assets and liabilities assumed in the acquisitions of MCE in the Microelectronic Solutions segment and of RIWS and Celerity in the Test Solutions segment.
Note b	—	This adjustment to goodwill is a result of a reduction in the purchase price of RIWS in connection with the amount of actual working capital acquired as of acquisition date.
Note c	—	The goodwill increased due to changes in foreign currency exchange rates.

3. Discontinued Operations

As a result of continued operating losses, the Board of Directors of the Company, in February 2004, 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. This operation had previously comprised the Isolator Products segment. 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. 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. Management, however, believes it is likely that it will retain liabilities relating to adverse environmental conditions that currently exist at the premises occupied by VMC. The Company has recorded a reserve for the estimated remediation costs.

In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", 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 six months ended December 31, 2004 and 2003 were as follows:

		Six Months Ended December 31,
		2004			2003
		(In thousands)
*Net sales*
	MIC	$	3,313		$	4,550
	VMC		9,093			7,663
	TriLink		—			—

		$	12,406		$	12,213

*Income (loss) from discontinued operations*
	MIC	$	(884	)	$	(7,183	)
	VMC		(732	)		313
	TriLink		14			—

		$	(1,602	)	$	(6,870	)

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 December 31, 2004 and June 30, 2004, the net assets of the discontinued operations consisted of the following:

		December 31, 2004		June 30, 2004
		(In thousands)
Accounts receivable		$	3,236	$	5,133
Inventory			2,692		5,247
Prepaid and other current assets			596		1,530

	Current assets		6,524		11,910

Property, plant, & equipment, net			1,797		5,543
Other assets			631		2,624
Intangibles			790		1,550

	Non-current assets		3,218		9,717

Total assets			9,742		21,627

Accounts payable			805		704
Accrued expenses			908		3,869

	Current liabilities		1,713		4,573

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

	Long term liabilities		—		3,613

Total liabilities			1,713		8,186

	Net assets	$	8,029	$	13,441

4. Earnings Per Share

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

		Six Months Ended December 31,
		2004		2003
		(In thousands, except per share data)
Income from continuing operations		$	12,541	$	4,874

Computation of adjusted weighted average shares outstanding:
Weighted average shares outstanding			74,536		64,258
Add: Effect of dilutive options outstanding			1,613		1,557

Weighted average shares and common share equivalents used for computation of diluted earnings per common share			76,149		65,815

Income from continuing operations per share:
	—Basic	$	.17	$	.08

	—Diluted	$	.16	$	.07

		Three Months Ended December 31,
		2004		2003
		(In thousands, except per share data)
Income from continuing operations		$	6,142	$	3,912

Computation of adjusted weighted average shares outstanding:
Weighted average shares outstanding			74,625		66,556
Add: Effect of dilutive options outstanding			1,685		1,877

Weighted average shares and common share equivalents used for computation of diluted earnings per common share			76,310		68,433

Income from continuing operations per share:
	—Basic	$	.08	$	.06

	—Diluted	$	.08	$	.06

Options to purchase 6.9 million shares at exercise prices ranging between $11.90 and $34.41 per share were outstanding as of December 31, 2004 but were not included in the computation of diluted EPS because the exercise prices of these options were greater than the average market price of the common shares.

5. Comprehensive Income

The components of comprehensive income are as follows:

	Six Months Ended December 31,					Three Months Ended December 31,
	2004		2003			2004		2003
	(In thousands)
Net income (loss)	$	10,939	$	(1,996	)	$	5,323	$	(2,391	)
Unrealized gain (loss) on interest rate swap agreements, net of tax		21		78			23		35
Foreign currency translation adjustment		7,064		3,275			5,610		2,870

Total comprehensive income (loss)	$	18,024	$	1,357		$	10,956	$	514

Accumulated other comprehensive income (loss) is as follows:

	Unrealized Gain (Loss) on Interest Rate Swap Agreements (net of tax)			Minimum Pension Liability Adjustment (net of tax)			Foreign Currency Translation Adjustment		Total (net of tax)
	(In thousands)
Balance, July 1, 2004	$	(129	)	$	(2,208	)	$	13,724	$	11,387
Six months activity		21			—			7,064		7,085

Balance, December 31, 2004	$	(108	)	$	(2,208	)	$	20,788	$	18,472

6. Bank Loan Agreements

On February 14, 2003, the Company executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and restated loan agreement increased the line of credit to $50 million through February 2007, continued the mortgage on the Company's Plainview property for $2.6 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 (5.25% at December 31, 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 December 31, 2004, the Company's available unused line of credit was approximately $43.8 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.

These instruments have been designated and qualify as effective cash flow hedges. The fair market value of the interest rate swap agreements was $171,000 as of December 31, 2004 in favor of the banks. If this mortgage was prepaid, although the Company has no intention of doing so, the $171,000 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.

7. Inventories

Inventories consist of the following:

	December 31, 2004		June 30, 2004
	(In thousands)
Raw materials	$	40,424	$	35,228
Work in process		45,419		40,248
Finished goods		21,250		19,141

	$	107,093	$	94,617

8. Product Warranty

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

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

	Six Months Ended December 31,
	2004			2003
	(In thousands)
Balance at beginning of period	$	1,702		$	1,308
Provision for warranty obligations		1,277			625
Charges incurred		(1,061	)		(595	)
Acquired warranty obligations		(194	)		197

Balance at end of period	$	1,724		$	1,535

9. Defined Benefit Pension Plans

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.

Components of Net Periodic Benefit Cost

	Six Months Ended December 31,
	2004			2003
	(In thousands)
Service cost	$	268		$	208
Interest cost		340			314
Expected return on plan assets		(62	)		(42	)
Amortization of net transition (asset) obligation		19			19
Amortization of prior service cost		—			—
Recognized actuarial (gain) loss		100			100

Net periodic benefit cost	$	665		$	599

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 December 31, 2004, $183,000 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.

10. Income Taxes

The Company recorded credits of $688,000 and $1.1 million to additional paid-in capital during the six months ended December 31, 2004 and 2003, respectively, in connection with the tax benefit related to compensation deductions on the exercise of stock options. The Company made income tax payments of $8.1 million and $4.2 million and received refunds of $20,000 and $200,000 for the six months ended December 31, 2004 and 2003, respectively.

11. Contingencies

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

12. Business Segments

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

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

			For The Six Months Ended December 31,
			2004			2003
			(In thousands)
Business Segment Data:
Net sales:
	Microelectronic solutions		$	92,646		$	68,719
	Test solutions			129,005			106,955

		Net sales	$	221,651		$	175,674

Segment adjusted operating income(1):
	Microelectronic solutions		$	19,487		$	15,636
	Test solutions			7,903			1,807
	General corporate expenses			(7,908	)		(4,661	)

				19,482			12,782
	Acquired in-process research and development(2)			—			(4,220	)
	Interest expense			(422	)		(732	)
	Other income (expense), net			965			(214	)

	Income from continuing operations before income taxes		$	20,025		$	7,616

			For The Three Months Ended December 31,
			2004			2003
			(In thousands)
Business Segment Data:
Net sales:
	Microelectronic solutions		$	45,242		$	41,685
	Test solutions			67,227			57,896

		Net sales	$	112,469		$	99,581

Segment adjusted operating income(1):
	Microelectronic solutions		$	8,911		$	9,800
	Test solutions			4,964			1,167
	General corporate expenses			(4,354	)		(2,860	)

				9,521			8,107
	Acquired in-process research and development(2)			—			(1,100	)
	Interest expense			(162	)		(412	)
	Other income (expense), net			541			(459	)

	Income from continuing operations before income taxes		$	9,900		$	6,136

(1): Management evaluates the operating results of the two segments based upon reported operating income, before costs related to in-process research and development charges.

(2): For the six months ended December 31, 2003, the charges for the write-off of in-process research and development acquired in the purchase of RIWS ($2.7 million) and Celerity ($1.1 million) are allocable to the Test Solutions segment and the charge for MCE ($420,000) is allocable to the Microelectronic Solutions segment.

The Company is a manufacturer of advanced technology systems and components for commercial industry, government and defense contractors. Approximately 33% and 35% of the Company's sales for the six months ended December 31, 2004 and 2003, respectively, were to agencies of the United States government or to prime defense contractors or subcontractors of the United States government. No one customer constituted more than 10% of the Company's sales during any year in the periods presented. Inter-segment sales were not material and have been eliminated from the tables below.

Most of the Company's operations are located in the United States, however, it also has operations in Europe and Asia. Both IFR, which we acquired in May 2002, and RIWS, which we acquired in July 2003 have significant operations in the United Kingdom. Specifically, net sales from facilities located in the United Kingdom were approximately $65.4 million for the six months ended December 31, 2004. Total assets of the United Kingdom operations were $123.8 million as of December 31, 2004.

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

	For the Six Months Ended December 31,
	2004		2003
	(In thousands)
United States of America	$	135,357	$	114,015
Europe and Middle East		59,341		46,609
Asia and Australia		24,112		13,124
Rest of World		2,841		1,926

	$	221,651	$	175,674

	For the Three Months Ended December 31,
	2004		2003
	(In thousands)
United States of America	$	67,410	$	65,257
Europe and Middle East		32,118		26,395
Asia and Australia		11,250		6,886
Rest of World		1,691		1,043

	$	112,469	$	99,581

ITEM 2—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.

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.

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
•: Frequency Synthesizers
•: Radio Test Equipment
•: Synthetic Test Systems
•: Avionics Test Equipment
•: Other General Purpose Test Equipment

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.

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.

As a result of continued operating losses, our Board of Directors, in February 2004, 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. Management, however, believes it is likely that it will retain liabilities relating to adverse environmental conditions that currently exist at the premises occupied by VMC. The Company has recorded a reserve for the estimated remediation costs.

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.

Six Months Ended December 31, 2004 Compared to Six Months Ended December 31, 2003

Net Sales. Net sales increased 26% to $221.7 million for the six months ended December 31, 2004 from $175.7 million for the six months ended December 31, 2003. Net sales in the microelectronic solutions ("AMS") segment increased 35% to $92.6 million for the six months ended December 31, 2004 from $68.7 million for the six months ended December 31, 2003 due to the acquisition of MCE in September 2003, organic growth in MCE since last year and also as a result of increased sales of our microelectronic modules and integrated circuits. Net sales in the test solutions ("ATS") segment increased 21% to $129.0 million for the six months ended December 31, 2004 from $107.0 million for the six months ended December 31, 2003 due to increased sales of our communication test products

business, organic growth in RIWS which was acquired in July 2003 and the effect of a favorable foreign currency exchange rate on the sales of our foreign operations.

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.

Six Months Ended December 31,	AMS		% of sales		ATS		% of sales		Total		% of sales
(In thousands, except percentages)
2004	$	46,353	50.0	%	$	58,459	45.3	%	$	104,812	47.3	%
2003		34,018	49.5	%		45,482	42.5	%		79,500	45.3	%

Gross profit increased $12.3 million, or 36%, in the AMS segment as a result of the effect of the acquisition of MCE in September 2003, organic growth in MCE since last year in both volume and margin and increased sales and margins in our microelectronic modules and integrated circuits businesses due to improved factory utilization. Gross profit increased $13.0 million, or 29%, in the ATS segment as a result of organic growth in RIWS since last year in both volume and margin 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, commissions, insurance and professional fees.

Six Months Ended December 31,	AMS		% of sales		ATS		% of sales		Corporate		Total		% of sales
(In thousands, except percentages)
2004	$	15,105	16.3	%	$	28,473	22.1	%	$	7,908	$	51,486	23.2	%
2003		10,985	16.0	%		26,110	24.4	%		4,662		41,757	23.8	%

Selling, general and administrative costs increased $4.1 million, or 38%, in the AMS segment due to the addition of the expenses of MCE and increased commissions. Selling, general and administrative costs increased $2.4 million, or 9% in the ATS segment due to the effect of an unfavorable foreign currency exchange rate on the expenses of our foreign operations and increased commissions on higher sales. Corporate selling, general and administrative expenses increased $3.2 million due primarily to increased compensation expense ($1.7 million) professional fees ($844,000) including those related to compliance with Section 404 of the Sarbanes-Oxley Act, and insurance expense ($422,000).

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

Six Months Ended December 31,	AMS		% of sales		ATS		% of sales		Total		% of sales
(In thousands, except percentages)
2004	$	10,674	11.5	%	$	19,069	14.8	%	$	29,743	13.4	%
2003		6,542	9.5	%		15,103	14.1	%		21,645	12.3	%

Self-funded research and development costs increased $4.1 million, or 63%, in the AMS segment primarily due to the acquisition of MCE in September 2003 together with increased development efforts in integrated circuits ($1.7 million) and microelectronic modules ($1.2 million). Research and development costs increased $4.0 million, or 26%, in the ATS segment primarily due to the addition of the expenses of RIWS and the effect of an unfavorable foreign currency exchange rate on the expenses of our foreign operations.

Amortization of Acquired Intangibles. Amortization increased $785,000, or 24%, 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. 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 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 decreased to $422,000 for the six months ended December 31, 2004 from $732,000 for the six months ended December 31, 2003 due to lower debt levels. Other income of $1.0 million for the six months ended December 31, 2004 consisted primarily of interest income of $819,000. Other expense of $214,000 for the six months ended December 31, 2003 consisted primarily of $351,000 of foreign currency transaction losses, a $356,000 charge to adjust the fair value of property held for sale to its fair value partially offset by $182,000 of income on investments, a $143,000 increase in the fair value of our interest rate swap agreements and $120,000 of interest income. Interest income increased primarily due to higher average levels of cash, cash equivalents, and marketable securities and higher market interest rates in the 2004 period.

Provision for Income Taxes. The income tax provision was $7.5 million (an effective income tax rate of 37.4%) for the six months ended December 31, 2004 and the income tax provision was $2.7 million (an effective income tax rate of 36.0%) for the six months ended December 31, 2003. The effective income tax rate for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes and research and development credits.

Income From Continuing Operations. The income from continuing operations for the six months ended December 31, 2004 was $12.5 million, or $.16 per diluted share, versus income from continuing operations of $4.9 million, or $.07 per diluted share, for the six months ended December 31, 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 definitive purchase agreement.

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

Net Sales. Net sales increased 13% to $112.5 million for the three months ended December 31, 2004 from $99.6 million for the three months ended December 31, 2003. Net sales in the AMS segment increased 9% to $45.2 million for the three months ended December 31, 2004 from $41.7 million for the three months ended December 31, 2003 due primarily to increased sales of our microelectronic modules, components and integrated circuits. Net sales in the ATS segment increased 16% to $67.2 million for the three months ended December 31, 2004 from $57.9 million for the three months ended December 31, 2003 due primarily to increased sales of our communication test products business and the effect of a favorable foreign currency exchange rate on the sales of our foreign operations.

Gross Profit.

Three Months Ended December 31,	AMS		% of sales		ATS		% of sales		Total		% of sales
(In thousands, except percentages)
2004	$	22,672	50.1	%	$	30,809	45.8	%	$	53,481	47.6	%
2003		20,837	50.0	%		24,871	43.0	%		45,708	45.9	%

Gross profit increased $1.8 million, or 9%, in the AMS segment primarily as a result of increased sales and margins in our microelectronic modules business and increased volume in our components business due to improved factory utilization. Gross profit increased $5.9 million, or 24%, in the ATS segment primarily as a result of 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.

Three Months Ended December 31,	AMS		% of sales		ATS		% of sales		Corporate		Total		% of sales
(In thousands, except percentages)
2004	$	7,452	16.5	%	$	14,913	22.2	%	$	4,354	$	26,719	23.8	%
2003		6,681	16.0	%		14,303	24.7	%		2,861		23,845	23.9	%

Selling, general and administrative costs increased $771,000, or 12%, in the AMS segment due primarily to increased commissions on higher sales. Selling, general and administrative costs increased $610,000, or 4% in the ATS segment due primarily to the effect of an unfavorable foreign currency exchange rate on the expenses of our foreign operations and higher commissions resulting from higher sales. Corporate selling, general and administrative expenses increased $1.5 million due primarily to increased professional fees ($800,000) and compensation expense ($576,000).

Research and Development Costs.

Three Months Ended December 31,	AMS		% of sales		ATS		% of sales		Total		% of sales
(In thousands, except percentages)
2004	$	5,775	12.8	%	$	9,424	14.0	%	$	15,199	13.5	%
2003		3,793	9.1	%		7,987	13.8	%		11,780	11.8	%

Self-funded research and development costs increased $2.0 million, or 52%, in the AMS segment primarily due to development efforts in integrated circuits ($958,000) and microelectronic modules ($812,000). Research and development costs increased $1.4 million, or 18%, in the ATS segment primarily due to the effect of an unfavorable foreign currency exchange rate on the expenses of our foreign operations and the addition of the expenses of Celerity.

Amortization of Acquired Intangibles. Amortization increased $66,000, or 3%, due to the acquisition of Celerity.

Other Expense (Income). Interest expense decreased to $162,000 for the three months ended December 31, 2004 from $412,000 for the three months ended December 31, 2003 due to decreased

debt levels. Other income of $541,000 for the three months ended December 31, 2004 consisted primarily of interest income of $470,000 and investment income of $300,000, partially offset by foreign currency transaction losses of $245,000. Other expense of $459,000 for the three months ended December 31, 2003 consisted primarily of $354,000 of foreign currency transaction losses and a $356,000 charge to adjust the fair value of property held for sale to its fair value partially offset by $84,000 of income on investments and $81,000 of interest income. Interest income increased primarily due to higher average levels of cash, cash equivalents, and marketable securities and higher market interest rates during the 2004 period.

Provision for Income Taxes. The income tax provision was $3.8 million (an effective income tax rate of 38.0%) for the three months ended December 31, 2004 and the income tax provision was $2.2 million (an effective income tax rate of 36.2%) for the three months ended December 31, 2003. The effective income tax rate for the two periods differed from the amount computed by applying the U.S. Federal income tax rate to income before income taxes primarily due to foreign, state and local income taxes and research and development credits.

Income From Continuing Operations. The income from continuing operations for the three months ended December 31, 2004 was $6.1 million, or $.08 per diluted share, versus income from continuing operations of $3.9 million, or $.06 per diluted share, for the three months ended December 31, 2003.

Discontinued Operations. Discontinued operations includes the results of operations of MIC, VMC and TriLink. We are currently seeking a strategic buyer for VMC but have not entered into a definitive purchase agreement.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements other than letters of credit totaling $6.2 million to guarantee our performance under certain government contracts.

Liquidity and Capital Resources

As of December 31, 2004, we had $258 million in working capital. Our current ratio was 4.3 to 1 at December 31, 2004. On February 14, 2003, we executed an amended and restated revolving credit and security agreement with two banks which replaced a previous loan agreement. The amended and restated loan agreement increased the line of credit to $50 million through February 2007, continued the mortgage on our Plainview property for $2.6 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 (5.25% at December 31, 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. Although the Company believes that the performance goals have not been met, the determination is not final.

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 six months ended December 31, 2004, our operations provided cash from continuing operations of $16.2 million. For the six months ended December 31, 2004, our investing activities used cash of $105.7 million, primarily for purchases of marketable securities, net of sales, of $97.7 million and for capital expenditures of $8.0 million. 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 six months ended December 31, 2004, our financing activities used cash of $3.4 million, including debt repayments of $4.9 million offset by stock option exercise proceeds of $1.5 million.

We believe that existing cash, cash equivalents and marketable securities 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, cash equivalents and marketable securities, coupled with our available lines of credit, are available to fund acquisitions and other potential large cash needs that may arise. At December 31, 2004, our available unused line of credit was $43.8 million after consideration of letters of credit.

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

	Payments due by period
	Total		Less Than 1 Year		1-3 Years		4-5 Years		After 5 Years
	(In thousands)
Long-term debt	$	5,369	$	659	$	1,280	$	2,344	$	1,086
Operating leases		41,211		7,760		11,646		7,125		14,680

Total	$	46,580	$	8,419	$	12,926	$	9,469	$	15,766

The operating lease commitments shown in the above table have not been reduced by future minimum sub-lease rentals of $17.5 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 December 31, 2004, will have a material adverse affect on our liquidity.

Accounting Policies Involving Significant Estimates

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

Revenue and Cost Recognition Under Long-Term Contracts

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable and collectibility of the resulting receivable is reasonably assured. For arrangements other than certain long-term contracts, revenue (including shipping and handling fees) is recognized when products are shipped and title is passed to the customer. 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

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

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

Recoverability of Long-Lived and Intangible Assets

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

Long-lived assets other than goodwill, are reviewed for impairment 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.

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.

Recently Issued Accounting Standards

expects to complete this evaluation within a reasonable amount of time after additional guidance is published.

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 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
•: 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. 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 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 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 and those described under "Risk Factors" 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 our financial condition, results of operations, growth strategy and liquidity. We undertake no obligation to update such forward-looking statements which are made as of the date of this Report.

ITEM 3—QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates and to foreign currency exchange rates. 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 December 31, 2004, the effect on our net income would be insignificant. Most of our invested cash, cash equivalents and marketable securities are at variable rates of interest. If market interest rates decrease by 10 percent from levels at December 31, 2004, the effect on our net income would be a decrease of approximately $169,000 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 December 31, 2004, the effect on our other comprehensive income would be approximately $9.4 million. We periodically enter into foreign currency forward contracts to protect us from fluctuations in exchange rates. As of December 31, 2004, we had $3.1 million of notional value foreign currency forward contracts maturing through March 2005. 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 December 31, 2004 was $96,000 in our favor.

ITEM 4—CONTROLS AND PROCEDURES

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

Changes in Internal Controls

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

Limitations on the Effectiveness of Controls

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

AEROFLEX INCORPORATED
AND SUBSIDIARIES

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. 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

(a): The Registrant held its Annual Meeting of Stockholders on November 10, 2004.
(b): Not applicable.
(c): Four directors were elected at the Annual Meeting to serve until the Annual Meeting of Stockholders in 2007. The names of these directors and votes cast in favor of their election and shares withheld are as follows:

Name	Votes For	Votes Withheld
Paul Abecassis	65,811,086	401,743
Leonard Borow	64,561,214	1,651,615
Milton Brenner	64,451,609	1,761,220
Eric Edelstein	62,753,823	3,459,006

Item 5. Other Information

None

Item 6. Exhibits

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.

SIGNATURES

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

		AEROFLEX INCORPORATED (REGISTRANT)
February 9, 2005		By:	/s/ MICHAEL GORIN Michael Gorin Vice Chairman, Chief Financial Officer and Principal Accounting Officer

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AEROFLEX INCORPORATED AND SUBSIDIARIES INDEX
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
AEROFLEX INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
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)
AEROFLEX INCORPORATED AND SUBSIDIARIES PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Unregistered Sales of Securities and Use of Proceeds

Item 3. Defaults upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

SIGNATURES