AEROFLEX INC, 10-K, 2000-09-28

AEROFLEX INC
10-K, 2000-09-28
SEMICONDUCTORS & RELATED DEVICES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended June 30, 2000
OR

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

For the transition period from ____________ to ____________

Commission File No. 000-02324
---------

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

Delaware 11-1974412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

35 South Service Road, Plainview, New York 11803
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (516) 694-6700

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

Name of Each Exchange on
Title of Class Which Registered
-------------- ------------------------
None

Securities registered pursuant
to Section 12(g) of the Act: Common Stock, $.10 par value
----------------------------
(Title of Class)

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

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

State the aggregate market value of the voting stock held by non-affiliates
of the registrant. (The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing).
As of September 18, 2000 - approximately $1,227,782,000.

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date (applicable only to
corporate registrants). Common Stock, par value $.10 per share; outstanding as
of September 18, 2000 - 28,159,174 (excluding 2,194 shares held in treasury).

Documents incorporated by reference: Part III - Registrant's definitive
proxy statement to be filed pursuant to Regulation 14A of the Securities Act of
1934.
<PAGE>
ITEM ONE - BUSINESS

Overview

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

Our operations are grouped into three segments:

-- Microelectronics
-- Test, Measurement and Other Electronics
-- Isolator Products

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

Microelectronics

The table below lists some of our products.
<TABLE>
<CAPTION>
Market Substrates Assemblies/Modules Integrated Circuits
------ ---------- ------------------ --------------------
<S> <C> <C> <C>
Fiber Optics Laser Diodes Application Specific
(including PIN Pre-Amplifiers Carrier Assemblies
Cable) Transimpedance APD Receiver
Amplifiers Sub-Assemblies
Pre-Amplifiers Clock Recovery
Post-Amplifiers Synthesizers
Lithium Niobate Laser Diode Assemblies
Terminations Transmitter Assemblies
Mach-Zender Modulators Modulator Assemblies
Clock Recovery
PIN Receivers
APD Receivers
1 Ghz Pre- and Post-
Amplifiers
Trunk Amplifiers
Line Extenders
Power Doublers

Wireless Receivers Memory Modules Application Specific
(including Handset Diplexers Multiplexers Integrated Circuits
Satellite) Handset Triplexers Data Communication Controllers
S, L, Ka, Ku Band Modules Memories
Transmit and Receive Micro Controllers LVDS Interconnects
Modules DC to DC Converters Programmable Logic
Amplifiers Voltages Regulators
Filters IF Switches

</TABLE>
-2-
<PAGE>
Thin Film Circuits and Interconnects

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

-- miniaturization;
-- ease of assembly;
-- improved thermal management;
-- reduced power consumption; and
-- critical component (laser) alignment.

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

-- fiber optic transmitters, receivers and amplifiers;
-- cable trunk amplifiers, line extenders, pre-amplifiers and power doublers;
and
-- point-to-point and point-to-multipoint microwave radios.

Thin film interconnect technology allows fiber optic module manufacturers, such
as Nortel Networks, Lucent Technologies and JDS Uniphase, to achieve maximum
performance with a low cost of ownership and a high level of quality. Exacting
laser, optical lens and diode placement requirements, coupled with stringent
thermal management needs, make our advanced optical interconnect technology a
market leading choice among the major fiber optic module manufacturers.
Continued migration from 2.5 gigabit, or Gbit, transmission rates to 10 Gbit and
40 Gbit transmission rates results in increased output power levels and
operating frequencies, further driving the need for our advanced optical
interconnect technology.

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

Microelectronic Modules

We design, develop and manufacture sub-assemblies and modules for fiber optic
networks. These products primarily support the 10 to 40 Gbit fiber optic
networks. Our manufacturing equipment, methods and processes are designed to
maintain the critical tolerances required for fiber optic components and high
Gigahertz RF and microwave signals. Our manufacturing methods are designed to
use automatic placement equipment and batch processing for maximum cost
efficiency and reliability.

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

-3-
<PAGE>
Silicon Integrated Circuits

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

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

Our subsidiary, Aeroflex UTMC has developed a Content Addressable Memory (CAM)
Engine, the UTCAM-Engine , which is beneficial for network and internet address
processing, image processing, pattern recognition, artificial intelligence
learning systems and database applications. The UTCAM-Engine is based on 0.35 m
technology, runs at 100 MHz and delivers association matches in as little as
70ns when using fast SRAM.

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

Test, Measurement and Other Electronics

Instrumentation

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

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

-4-

<PAGE>
Motion Control Systems

Motion control systems includes three divisions: stabilization and tracking
devices, magnetic motors and scanning devices. We design, develop and produce
stabilization tracking devices and systems. These products play an important
role in high altitude aircraft, as well as in other aircraft, ships and ground
vehicles which require precise, highly stable mounting for cameras, antennae and
lasers. Magnetic motors are utilized in our stabilization and tracking systems
and in other applications where precise movement is required, such as for
positioning antennae, optical systems, mechanical vanes and valves. We make
electro-optical scanning devices that are low cost, lightweight thermal imaging
devices that detect targets based on thermal radiation contrasts with the
background. These sights are intended for use on standard issue United States
Army assault rifles and crew served weapons.

Isolator Products

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

Customers

We have hundreds of customers in the communications, satellite,
aerospace/defense, transportation and construction industries. Except for
Teradyne (11.0%) and Lockheed Martin (10.5%) in fiscal 2000, Lockheed Martin
(12.2%) and Lucent Technologies (11.4%) in fiscal 1999 and Lucent Technologies
(15.5%) in fiscal 1998, no one customer accounted for more than 10% of our net
sales.

Marketing and Distribution

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

Research and Development

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

-- developing new products
-- improving existing products

-5-
<PAGE>

-- adapting such products to new applications
-- developing prototype components to bid on specific programs

Certain product development and similar costs are recoverable under contractual
arrangements and those that are not recoverable are expensed in the year
incurred. The costs of our self-funded research activities were approximately
$11.0 million for fiscal 2000, $9.6 million for fiscal 1999 and $5.2 million for
fiscal 1998. The increases are primarily attributable to our development of a
low-cost, high-speed, high-performance frequency synthesizer intended for
commercial communication test systems as well as, for fiscal 2000 and 1999, the
addition of the expenses of Aeroflex UTMC Microelectronic Systems. Also, in
connection with our acquisition of UTMC Microelectronic Systems in February
1999, we allocated $3.5 million of the purchase price to incomplete research and
development projects. Since the research and development projects had not
reached technological feasibility, $3.5 million was charged to expense in fiscal
1999 in addition to the $9.6 million, in accordance with generally accepted
accounting principles.

Backlog

We include in backlog firm purchase orders or contracts providing for delivery
of products and services. At June 30, 2000, our order backlog was approximately
$119.3 million, approximately 89% of which was scheduled to be delivered on or
before June 30, 2001. Approximately 76% of this backlog represents commercial
contracts and approximately 24% of this backlog represents defense contracts.
Generally, government contracts are cancelable with payment to us of amounts
which we have spent under the contract together with a reasonable profit, if
any, while commercial contracts are not cancelable.

At June 30, 1999, our backlog of orders was approximately $93.8 million.
Approximately 85% of this backlog was scheduled to be delivered before June 30,
2000. Approximately 42% of this backlog represented orders for military or
national defense purposes.

Competition

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

-- technology
-- performance
-- reliability
-- quality
-- customer service
-- price

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

-6-
<PAGE>
To the extent that we are engaged in government contracts, our success or
failure, to a large measure, is based upon our ability to compete successfully
for contracts and to complete them at a profit. Government business is
necessarily affected by many factors such as variations in the military
requirements of the government and defense budget allocations.

Government Sales

Approximately 32% of our sales for fiscal 2000 and 41% of our sales for fiscal
1999 were to agencies of the United States Government or to prime defense
contractors or subcontractors of the United States Government. Our overall
dependence on the military has been declining due to a focusing of resources
towards developing standard products for commercial markets. Our defense
contracts have been awarded either on a bid basis or after negotiation. The
contracts are primarily fixed price contracts, though we also have or had
defense contracts providing for cost plus fixed fee. Our defense contracts
contain customary provisions for termination at the convenience of the
government without cause. In the event of such termination, we are generally
entitled to reimbursement for our costs and to receive a reasonable profit, if
any, on the work done prior to termination. Revenues and costs on government
contracts are recognized based upon shipments or billings.

In certain product areas, we have suffered reductions in sales volume due to
cutbacks in the military budget. In other product areas, we have experienced
increased sales volume due to a realignment of government spending towards
upgrading existing systems instead of purchasing completely new systems. The
overall effect of the cutbacks and realignment has not been material to us.

Manufacturing

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

-- Colorado Springs, Colorado,
-- Boca Raton, Florida,
-- Bloomingdale, New Jersey,
-- Farmingdale, New York,
-- Pearl River, New York,
-- Plainview, New York,
-- Powell, Ohio,
-- Richardson, Texas and
-- Elancourt, France

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

-7-
<PAGE>
Historically, our volume production requirements for the defense market did not
justify our widespread implementation of highly automated manufacturing
processes. Over the last several years, we have expanded our use of high-volume
manufacturing techniques for product assembly and testing. We believe that we
have the manufacturing capacity required to meet the growing demand for our
products.

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

-- ceramic,
-- magnetic materials,
-- gold,
-- steel,
-- aluminum,
-- rubber,
-- iron and
-- copper.

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

-- semiconductors,
-- transformers and
-- amplifiers.

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

Patents and Trademarks

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

Employees

As of June 30, 2000, we had approximately 1,180 employees, of whom 630 were
employed in a manufacturing capacity, and 550 were employed in engineering,
sales, administrative or clerical positions. Approximately 240 of our employees
are covered by two collective bargaining agreements. We believe that our
employee relations are satisfactory.

Regulation

Our operations are subject to various environmental, health and employee safety
laws. We have spent money and management has spent time complying with
environmental, health and worker safety laws which apply to our operations and
facilities and we expect that we will continue to do so. Our principal products
or services do not require any governmental approval. Compliance with

-8-
<PAGE>
environmental laws has not historically materially affected our capital
expenditures, earnings or competitive position. We do not expect compliance with
environmental laws to have a material effect on us in the future.

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

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

Financial Information About Industry Segments

The sales and operating profits of each industry segment and the identifiable
assets attributable to each industry segment for each of the three years in the
period ended June 30, 2000 are set forth in Note 15 of Notes to Consolidated
Financial Statements.

ITEM TWO - PROPERTIES

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

Aeroflex Laboratories Incorporated also leases manufacturing facilities in
Farmingdale, Long Island, New York of approximately 20,000 square feet and Boca
Raton, Florida of approximately 11,000 square feet. The annual rental of these
properties is approximately $151,000 for Farmingdale and $147,000 for Boca
Raton.

Our subsidiary, Aeroflex MIC Technology Corporation, owns its manufacturing
facility in Pearl River, New York consisting of approximately 63,000 square
feet. MIC leases a manufacturing facility of approximately 29,000 square feet in
Richardson, Texas with an annual rent of approximately $182,000.

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

Our subsidiary, Aeroflex Lintek Corp., occupies approximately 20,000 square feet
of space in Powell, Ohio, with an annual rental of approximately $214,000.

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

We believe that our facilities are adequate for our current and presently
foreseeable needs.

-9-

<PAGE>
Legal Proceedings

Our former subsidiary Filtron Co. Inc.,was one of several defendants named in a
personal injury action initiated in 1994 by several plaintiffs in the Supreme
Court of the State of New York, County of Kings. Filtron's operations were
discontinued in October 1991.

The plaintiffs in the action are current or former employees of a company to
whom Filtron sold RFI filters/capacitors. According to the allegations of the
amended verified complaint, the plaintiffs and their dependents are seeking to
recover, respectively, directly and derivatively, on diverse theories of
negligence, strict liability and breach of warranty, for injuries allegedly
suffered from exposure to a liquid substance or material which Filtron
incorporated for a period of time in the RFI filters/capacitors which it
manufactured. The plaintiffs are seeking damages which cumulatively may exceed
$500 million. This action is in the discovery stage. We intend to defend against
this action vigorously. We believe that, considering our various defenses and
that we have product liability insurance, the outcome of this action will not
have a material adverse effect on us, however we cannot guarantee that will be
the case.

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

ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

-10-

<PAGE>

PART II

ITEM FIVE-MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
------------------------------------------------

(a) Our common stock trades on the Nasdaq National Market under the symbol
"ARXX". Prior to March 21, 2000, our common stock was traded on the New York
Stock Exchange under the symbol "ARX". The following table sets forth, for the
calendar periods indicated, the high and low closing sales prices of our common
stock as reported by the Nasdaq National Market since March 21, 2000 and, prior
to March 21, 2000, the high and low closing sales prices of our common stock as
reported by the New York Stock Exchange. The prices have been adjusted to
reflect a five-for-four stock split that was payable July 7, 2000.
<TABLE>
<CAPTION>
Common Stock
------------
High Low
---- ---

1998
----
First Quarter................................ $ 11.70 $ 6.30
Second Quarter............................... 11.45 6.80
Third Quarter................................ 9.25 5.35
Fourth Quarter............................... 12.10 6.00

1999
----
First Quarter................................ 14.70 9.65
Second Quarter............................... 15.80 10.40
Third Quarter................................ 17.25 9.75
Fourth Quarter............................... 10.85 4.45

2000
----
First Quarter................................ 56.00 7.75
Second Quarter............................... 39.75 20.80
Third Quarter (through September 18, 2000)... 45.00 25.69

</TABLE>
(b) As of September 18, 2000, there were approximately 750 record holders of
our common stock.

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

-11-
<PAGE>
ITEM SIX - SELECTED FINANCIAL DATA (Unaudited)

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

<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings Statement Data
-----------------------
Net Sales...................... $185,924 $157,104 $118,861 $ 94,299 $ 74,367
Net Income (Loss).............. 14,400 9,757(1) 8,406 4,420 (17,420)(2)(3)
Net Income (Loss) Per Common
Share
Basic...................... .60 .44(1) .45 .28 (1.16)(2)(3)
Diluted.................... .57 .41(1) .41 .27 (4)
Weighted Average Number of
Common Shares Outstanding
Basic...................... 23,819 22,230 18,503 15,557 14,963
Diluted.................... 25,462 23,910 20,658 18,275 (4)

June 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------
Balance Sheet Data
------------------
Working Capital................ $133,904 $ 50,366 $ 53,965 $ 25,872 $ 25,300
Total Assets................... 248,707 165,216 124,101 81,047 81,169
Long-term Debt
(including current portion).. 14,549 31,117 11,481 28,916 34,577
Stockholders' Equity........... 201,932 102,093 87,036 35,040 30,472
Other Statistics
After Tax Profit Margin (Loss).. 7.7% 6.2%(1) 7.1% 4.7% (23.4)%(2)(3)
Return on Average Stockholders'
Equity....................... 9.5% 10.3%(1) 13.8% 13.5% (45.4)%(2)(3)
Stockholders' Equity
Per Share (5) $ 7.26 $ 4.43 $ 4.01 $ 2.24 $ 1.99

<FN>
(1) Includes $3.5 million ($.14 per diluted share and $.16 basic) for the
write-off of in-process research and development acquired in connection
with the purchase of UTMC Microelectronic Systems, Inc. in February 1999.
(2) Includes $23.2 million ($1.55 per share) for the write-off of in-process
research and development acquired in connection with the purchase of MIC
Technology Corporation in March 1996.
(3) Includes a $437,000, net of tax, gain ($.03 per share) on the sale of
securities.
(4) As a result of the loss, all options, warrants and convertible debentures
are anti-dilutive.
(5) Calculated by dividing stockholders' equity, at the end of the year, by the
number of shares outstanding at the end of the year.

Note:All share and per share amounts have been restated to reflect a
five-for-four stock split.
</FN>
</TABLE>

-12-

<PAGE>
ITEM SEVEN - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Overview

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

-- microelectronics
-- test, measurement and other electronics
-- isolator products

Our consolidated financial statements include the accounts of Aeroflex
Incorporated and all of our subsidiaries. All of our subsidiaries are
wholly-owned except for Europtest, S.A., of which we own 93.4%.

Our microelectronics segment has been designing, manufacturing and selling
state-of-the-art microelectronics for the electronics industry since 1974. In
January 1994, we acquired substantially all of the net operating assets of the
microelectronics division of Marconi Circuit Technology Corporation, which
manufactures a wide variety of microelectronic assemblies. In March 1996, we
acquired MIC Technology Corporation which designs, develops, manufactures and
markets microelectronics products in the form of passive thin film circuits and
interconnects. Effective July 1, 1997, MIC Technology acquired certain
equipment, inventory, licenses for technology and patents of two of Lucent
Technologies' telecommunications component units - multi-chip modules and film
integrated circuits. These units manufacture microelectronic modules and
interconnect products. In February 1999, we acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc., consisting of UTMC's integrated
circuit business.

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

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

-- Lintek, a leader in high speed instrumentation antenna measurement
systems, radar systems and satellite test systems, which we acquired
in January 1995.

-- Europtest, S.A. (France), of which we acquired 90% effective September
1, 1998, under a purchase agreement which requires us to purchase the
remaining 10% of Europtest pro rata over a three-year period at prices
determined based upon net sales of Europtest products. In October
1999, we purchased an additional 3.4%. Europtest develops and sells
specialized software-driven test equipment used primarily in cellular,
satellite and other communications applications.

-13-

<PAGE>

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

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

Our revenue is based upon shipments or billings. We record costs on our
long-term contracts using percentage-of-completion accounting. Under
percentage-of-completion accounting, costs are recognized on revenues in the
same relation that total estimated manufacturing costs bear to total contract
value. Estimated costs at completion are based upon engineering and production
estimates. Provisions for estimated losses or revisions in estimated profits on
contracts-in-process are recorded in the period in which such losses or
revisions are first determined.

Approximately 32% of our sales for fiscal 2000, 41% of our sales for fiscal
1999 and 42% of our sales for fiscal 1998 were to agencies of the United States
Government or to prime defense contractors or subcontractors of the United
States Government. Our overall dependence on the military has been declining due
to a focusing of resources towards developing standard products for the
commercial markets. Our government contracts have been awarded either on a bid
basis or after negotiation. Our government contracts are primarily fixed price
contracts, although we also have or had government contracts providing for cost
plus fixed fee. Our defense contracts have customary provisions for termination
at the convenience of the government without cause. In the event of such
termination, we are entitled to reimbursement for our costs and to receive a
reasonable profit, if any, on the work done prior to termination.

We believe that potential reductions in defense spending will not
materially affect our operations. In certain product areas, we have suffered
reductions in sales volume due to cutbacks in the military budget. In other
product areas, we have experienced increased sales volume due to a realignment
of government spending towards upgrading existing systems instead of purchasing
completely new systems. The overall effect of the cutbacks and realignment has
not been material to our operations.

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

-- developing new products
-- improving existing products
-- adapting existing products to new applications
-- developing prototype components to bid on specific programs

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

-14-

<PAGE>

Statement of Operations

The following table sets forth our net sales and operating income by
business segment for the periods indicated. The special charge represents a $3.5
million charge for the write-off of in-process research and development acquired
in connection with the purchase of UTMC Microelectronic Systems in February
1999.

<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net Sales:
Microelectronics $110,253 $ 96,846 $ 74,263
Test, Measurement
and Other Electronics 55,918 41,515 25,685
Isolator Products 19,753 18,743 18,913
-------- -------- --------
Net Sales $185,924 $157,104 $118,861
======== ======== ========
Operating Income:
Microelectronics $ 22,734 $ 20,104 $ 14,147
Test, Measurement
and Other Electronics 2,333 3,134 996
Isolator Products 2,692 2,108 3,063
General Corporate
Expenses (5,397) (4,262) (3,348)
-------- -------- --------
22,362 21,084 14,858
Special Charge - (3,500) -
-------- -------- --------
Operating Income $ 22,362 $ 17,584 $ 14,858
======== ======== ========
</TABLE>

The following table sets forth certain items from our statement of earnings
as a percentage of net sales for the periods indicated. The special charge
represents a $3.5 million charge for the write-off of in- process research and
development acquired in connection with the purchase of UTMC Microelectronic
Systems in February 1999.

<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%

Cost of Sales 63.8 62.8 65.0
------ ------ ------
Gross Profit 36.2 37.2 35.0
------ ------ ------
Operating Expenses:
Selling, General and
Administrative Costs 18.3 17.7 18.1
Research and Development Costs 5.9 6.1 4.4
Special Charge - 2.2 -
------ ------ ------
Total Operating Expenses 24.2 26.0 22.5
------ ------ ------
Operating Income 12.0 11.2 12.5

Other Expense, Net 0.9 0.4 1.4
------ ------ ------
Income Before Income Taxes 11.1 10.8 11.1
Provision For Income Taxes 3.4 4.6 4.0
------ ------ ------
Net Income 7.7% 6.2% 7.1%
====== ====== ======
</TABLE>

-15-

<PAGE>
Fiscal Year Ended June 30, 2000 Compared to Fiscal Year Ended June 30, 1999

Net Sales. Net sales increased 18.3% to $185.9 million in fiscal 2000 from
$157.1 million in fiscal 1999. Net sales in our microelectronics segment
increased 13.8% to $110.3 million in fiscal 2000 from $96.8 million in fiscal
1999 due to the acquisition of UTMC Microelectronic Systems in 1999 partially
offset by reductions in sales in microelectronic modules due to temporary
slowdowns in the satellite market. Net sales in our test, measurement and other
electronics segment increased 34.7% to $55.9 million in fiscal 2000 from $41.5
million in fiscal 1999 primarily due to increased sales volume in frequency
synthesizers (primarily shipments of the FS-1000 for use in commercial
communications test systems). Net sales in our isolator products segment
increased 5.4% to $19.8 million in fiscal 2000 from $18.7 million in fiscal
1999.

Gross Profit. Cost of sales includes materials, direct labor and overhead
expenses such as engineering labor, fringe benefits, allocable occupancy costs,
depreciation and manufacturing supplies. Gross profit increased 15.3% to $67.4
million in fiscal 2000 from $58.5 million in fiscal 1999. Gross margin decreased
to 36.2% in fiscal 2000 from 37.2% in fiscal 1999. This increase in gross profit
was primarily as a result of increased sales. The decrease in gross margin was
due primarily to low margins in both the satellite test system development
program and the start up of the FS-1000, a low-cost, high speed, high
performance frequency synthesizer.

Selling, General and Administrative Costs. Selling, general and
administrative costs include office and management salaries, fringe benefits and
commissions. Selling, general and administrative costs increased 22.6% to $34.0
million (18.3% of net sales) in fiscal 2000 from $27.8 million (17.7% of net
sales) in fiscal 1999. The increase was primarily due to labor related expenses,
including salaries for additional personnel, in connection with our growth and
the addition of the expenses of UTMC Microelectronic Systems.

Research and Development Costs. Research and development costs include
material, engineering labor and allocated overhead. Our self-funded research and
development costs increased 14.2% to $11.0 million (5.9% of net sales) in fiscal
2000 from $9.6 million (6.1% of net sales) in fiscal 1999. This increase was
primarily attributable to the additional costs of UTMC Microelectronic Systems,
partially offset by reduced costs, relative to the prior year, related to the
development of the FS- 1000, a low-cost, high speed, high performance frequency
synthesizer intended for commercial communication test systems, which was
completed in early fiscal 2000.

Other Expense (Income). Interest expense increased to $2.3 million in
fiscal 2000 from $1.5 million in fiscal 1999, primarily due to higher average
levels of borrowings throughout most of the current year. Other income of
$554,000 for the year ended June 30, 2000 consists primarily of $650,000 of
interest income, $193,000 gain on the sale of securities and a $300,000 expense
for the settlement of a lawsuit. Other income of $777,000 for the year ended
June 30, 1999 consists primarily of interest income. Interest income decreased
due to lower average levels of cash and cash equivalents throughout most of the
current year. The increased average levels of borrowings and the decreased
average levels of cash and cash equivalents resulted from the acquisition of
UTMC Microelectronic Systems in February 1999. In connection with this
acquisition, we used most of our cash and cash equivalents and increased our
borrowings by $20.0 million.

Provision for Income Taxes. Income taxes were $7.2 million (an effective
income tax rate of 35.0%), excluding a $1.0 million benefit from the utilization
of a capital loss carryforward, in fiscal 2000, and $7.2 million (an effective
income tax rate of 35.0%, exclusive of the special charge) in fiscal 1999. The
income tax provisions for the years ended June 30, 2000 and 1999 were different

-16-
<PAGE>
from the amounts computed by applying the U.S. Federal income tax rate to income
before income taxes primarily due to state and local income taxes and research
and development credits, and for the year ended June 30, 2000, the $1.0 million
benefit from the utilization of a capital loss carryforward and for the year
ended June 30, 1999, due to the non-deductibility of the $3.5 million special
charge.

Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998

Net Sales. Net sales increased 32.2% to $157.1 million in fiscal 1999 from
$118.9 million in fiscal 1998. Net sales in our microelectronics segment
increased 30.4% to $96.8 million in fiscal 1999 from $74.3 million in fiscal
1998 due to increased sales volume in both thin film interconnects and
microelectronic modules and due to the acquisition of UTMC Microelectronic
Systems at the end of February 1999. Net sales in our test, measurement and
other electronics segment increased 61.6% to $41.5 million in fiscal 1999 from
$25.7 million in fiscal 1998 primarily due to increased sales volume in both
frequency synthesizers (including shipments under the new Navy CASS program) and
high speed automatic test systems (primarily satellite payload test equipment
for Hughes Space and Communications) and due to the acquisition of Europtest in
September 1998 offset in part by decreased sales volume of stabilization and
tracking devices. Net sales in our isolator products segment were $18.7 million
in fiscal 1999 and $18.9 million in fiscal 1998.

Gross Profit. Gross profit increased 40.6% to $58.5 million in fiscal 1999
from $41.6 million in fiscal 1998. Gross margin increased to 37.2% in fiscal
1999 from 35.0% in fiscal 1998. This increase was primarily as a result of
increased margins in our microelectronics segment and Comstron product line,
reflecting the greater efficiency of higher volume, as well as a favorable sales
mix in our microelectronics segment.

Selling, General and Administrative Costs. Selling, general and
administrative costs increased 28.9% to $27.8 million (17.7% of net sales) in
fiscal 1999 from $21.5 million (18.1% of net sales) in fiscal 1998. The increase
was primarily due to labor related costs, including salaries for additional
personnel, in connection with our growth and the addition of the expenses of
UTMC Microelectronic Systems.

Research and Development Costs. Our self-funded research and development
costs increased 85.8% to $9.6 million (6.1% of net sales) in fiscal 1999 from
$5.2 million (4.4% of net sales) in fiscal 1998. This increase was primarily
attributable to the addition of the expenses of UTMC Microelectronic Systems and
the costs for continued development of a low-cost, high speed, high performance
frequency synthesizer intended for commercial communication test systems.

Acquired In-Process Research and Development. In connection with the
acquisition of UTMC Microelectronic Systems, we allocated $3.5 million of the
purchase price to incomplete research and development projects. This allocation
represents the estimated fair value based on future cash flows that have been
adjusted by the projects' completion percentage. At the acquisition date, the
development of these projects had not yet reached technological feasibility and
the research and development in progress had no alternative future uses.
Accordingly, we expensed these costs as of the acquisition date.

We used an independent third-party appraiser to assess and value the
in-process research and development. The value assigned to this asset was
determined by identifying significant research projects for which technological
feasibility had not been established. In the case of UTMC Microelectronic
Systems, this included the design, development, and testing activities
associated with its commercial products, data bus products, radiation hardened

-17-

<PAGE>
products and application specific integrated circuits. The research and
development projects are associated with the introduction of several new
products as well as specific significant enhancements to existing products.
Valuation of development efforts in the future has been excluded from the
research and development appraisal.

The nature of the efforts to develop the acquired in-process technology
into a commercially viable product relate to the completion of all planning,
designing, prototyping and testing activities that are necessary to establish
that the proposed technologies meet their design specifications including
functional, technical and economic performance requirements.

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

Revenue growth rates for UTMC Microelectronic Systems were estimated by the
third party appraiser based on a detailed forecast we prepared, as well as the
appraiser's discussions with our finance, marketing and engineering personnel
and those of UTMC Microelectronic Systems. Allocation of total UTMC
Microelectronic Systems' projected revenues to in-process research and
development was based on the appraiser's discussions with UTMC Microelectronic
Systems' management and us. A significant portion of UTMC Microelectronic
Systems' future revenues was expected to originate from the sale of products
that were not yet completed at acquisition. However, UTMC Microelectronic
Systems' existing products and technologies are expected to generate sales
through 2008.

Selling, general and administrative expenses and profitability estimates
were determined based on our forecasts as well as an analysis of comparable
companies' margin expectations.

The projections utilized in the transaction pricing and purchase price
allocation exclude the potential synergetic benefits related specifically to our
ownership. Due to the relatively early stage of the development and reliance on
future, unproven products and technologies, the cost of capital (discount rate)
for UTMC Microelectronic Systems was estimated using venture capital rates of
return. Due to the nature of the forecast and the risks associated with the
projected growth and profitability of the development projects, a discount rate
of 45 percent was used to discount cash flows from the in-process products. This
discount rate was commensurate with UTMC Microelectronic Systems' market
position, the uncertainties in the economic estimates described above, the
inherent uncertainty surrounding the successful development of the purchased
in-process technology, the useful life of such technology, the profitability
levels of such technology, and the uncertainty related to technological advances
that could render even UTMC Microelectronic Systems' development stage
technologies obsolete.

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

Remaining development efforts for UTMC Microelectronic Systems' research
and development include various phases of design, development and testing.
Funding for such projects is expected to come from internally generated sources.

-18-

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

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

Other Expense (Income). Interest expense decreased to $1.5 million in
fiscal 1999 from $2.0 million in fiscal 1998, primarily due to reduced levels of
borrowings throughout most of the current period. Other income of $777,000 in
fiscal 1999 and $309,000 in fiscal 1998 consisted primarily of interest income.
Interest income increased due to increased levels of cash and cash equivalents
throughout most of fiscal 1999. The reduced levels of borrowings and the
increased levels of cash and cash equivalents resulted from the net proceeds of
$31.3 million from stock issued in our public offering completed in March 1998.
In connection with our acquisition of UTMC Microelectronic Systems at the end of
February 1999, we used most of our cash and cash equivalents and increased our
borrowings by $20.0 million.

Provision for Income Taxes. Income taxes increased 50.5% to $7.2 million
(an effective income tax rate of 35.0%, exclusive of the special charge) in
fiscal 1999, from $4.8 million (an effective income tax rate of 36.1%) in fiscal
1998. The income tax provisions for the years ended June 30, 1999 and 1998 were
different from the amounts computed by applying the U.S. Federal income tax rate
to income before income taxes primarily due to state and local income taxes and
research and development credits, and for the year ended June 30, 1999, due to
the non-deductibility of the $3.5 million special charge.

Market Risk

We are exposed to market risk related to changes in interest rates and, to
an immaterial extent, 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
June 30, 2000, the effect on our net income would not be material. Most of our
invested cash and marketable securities are at variable rates of interest. If
market interest rates decrease by 10 percent from levels at June 30, 2000, the
effect on our net income would be approximately $270,000.

Seasonality

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

-19-

<PAGE>
Recent Accounting Pronouncements

Effective July 1, 2000, the Company will adopt 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. In certain circumstances changes in the value
of such derivatives may be required to be recorded as gains or losses. The
impact of this statement is not expected to have a material effect on the
Company's consolidated financial statements.

Liquidity and Capital Resources

As of June 30, 2000, we had $133.9 million in working capital. Our current
ratio was 5.6 to 1 at June 30, 2000. As of February 25, 1999, we replaced a
previous agreement with a revised revolving credit, term loan and mortgage
agreement with two banks which is secured by substantially all of our assets not
otherwise encumbered. The agreement provided for a revolving credit line of
$23.0 million, a term loan of $20.0 million and a mortgage on our Plainview
property for $4.5 million. The revolving credit loan facility expires in
December 2002. The term loan was fully paid in May 2000 with the proceeds from
the sale of our Common Stock. The interest rate on borrowings under this
agreement is at various rates depending upon certain financial ratios, with the
current rate substantially equivalent to 30- day LIBOR (approximately 6.7% at
June 30, 2000) plus 1.50% on the revolving credit borrowings. 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 an
interest rate swap agreement 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 agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital expenditures and
indebtedness and prohibition of the payment of cash dividends. In connection
with the purchase of certain materials for use in manufacturing, we have a
letter of credit of $2.0 million.

In March 1998, we sold 3.2 million shares (adjusted for a five-for-four
stock split) of our Common Stock in a public offering for $31.3 million, net of
an underwriting discount of $2.0 million and issuance costs of $496,000. Of
these net proceeds, $9.6 million was used to repay bank indebtedness. The
balance of the net proceeds was used primarily for our purchase of UTMC
Microelectronic Systems in February 1999.

Effective September 1, 1998, we acquired 90% of the stock of Europtest,
S.A. (France) for approximately $1.1 million. The purchase agreement also
requires that we purchase the remaining 10% of Europtest pro rata over a
three-year period at prices determined based upon net sales of Europtest
products. In October, 1999, we purchased an additional 3.4% of Europtest's stock
for approximately $54,000. Europtest develops and sells specialized
software-driven test equipment used primarily in cellular, satellite and other
communications applications. The acquired company's net sales were approximately
$1.9 million for the year ended March 31, 1998.

In December 1998, we financed the acquisition and renovation of the land
and building of our Pearl River, NY facility and received proceeds amounting to
$4.2 million. The debt requires a balloon payment of $4.0 million in 2019.

-20-

<PAGE>
Effective February 25, 1999, we acquired all of the outstanding stock of
UTMC Microelectronic Systems, Inc. for $42.5 million of cash. Prior to the
acquisition, UTMC Microelectronic Systems distributed by dividend to its
then-parent, United Technologies Corporation, the assets and United Technologies
assumed the liabilities of the circuit card assembly portion of UTMC
Microelectronic Systems business. The purchase price was paid with available
cash of $22.5 million and borrowings under our bank loan agreement of $20.0
million. UTMC Microelectronic Systems is a leader in supplying
radiation-tolerant integrated circuits for satellite communications. The
acquired company's net sales, excluding the circuit card assembly business, were
approximately $33.4 million for the year ended December 31, 1998.

In May 2000, we sold 3.1 million shares (adjusted for a five-for-four stock
split) of its Common Stock in a public offering for $68.5 million, net of an
underwriting discount of $3.5 million and issuance costs of $500,000. Of these
net proceeds, $13.0 million was used to repay the term loan. The balance of the
net proceeds is invested in short-term marketable securities and is intended to
ultimately be used for additional working capital, including research and
development, and expansion of our facilities, and for general corporate
purposes, including possible acquisitions of technologies, product lines or
businesses.

In fiscal 2000, our operations provided cash of $14.6 million from our
continued profitability, partially offset by an increase in receivables due to
our higher sales volume and timing of billings. In fiscal 2000, our investing
activities used cash of $17.3 million primarily for the purchase of available-
for-sale securities and for capital expenditures. In fiscal 2000, our financing
activities provided cash of $54.7 million primarily from the sale of our Common
Stock in a public offering for $69.0 million offset, in part, by debt payments
of $19.1 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 at least the next twelve months. At June 30, 2000,
our available unused line of credit was $21.0 million after consideration of the
letter of credit.

One of our subsidiaries whose operations were discontinued in 1991, is one
of several defendants named in a personal injury action initiated in August
1994, by a group of plaintiffs. The plaintiffs are seeking damages which
cumulatively may exceed $500 million. The complaint alleges, among other things,
that the plaintiffs suffered injuries from exposure to substances contained in
products sold by our subsidiary to one of its customers. This action is in the
discovery stage. Based upon available information and considering our various
defenses, together with our product liability insurance, in our opinion, the
outcome of the action against our subsidiary will not have a materially adverse
effect on our consolidated financial statements.

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

We are undergoing routine audits by various taxing authorities of our state
and local income tax returns covering periods from 1994 to 1996. We believe that
the probable outcome of these various audits should not materially affect our
consolidated financial statements.

Our backlog of orders was $119.3 million at June 30, 2000 and $93.8 million
at June 30, 1999.

-21-

<PAGE>
Forward-Looking Statements

All statements other than statements of historical fact included in this Annual
Report, including without limitation statements under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" regarding our
financial position, business strategy and plans and objectives of our management
for future operations, are forward-looking statements. When used in this Annual
Report, words such as "anticipate," "believe," "estimate," "expect," "intend"
and similar expressions, as they relate to us or our management, identify
forward-looking statements. Such forward-looking statements are based on the
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, changes in legal and regulatory requirements, technological change or
difficulties, product development risks, commercialization difficulties and
general economic conditions. Such statements reflect our current views with
respect to future events and are subject to these and other risks, uncertainties
and assumptions relating to our operations, results of operations, growth
strategy and liquidity.

ITEM EIGHT - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------

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

ITEM NINE - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
-----------------------------------------------------

None.

PART III
--------

The information required by Part III is incorporated by reference to our
definitive proxy statement in connection with our Annual Meeting of Stockholders
scheduled to be held in November 2000. The proxy statement is to be filed with
the Securities and Exchange Commission within 120 days following the end of our
fiscal year ended June 30, 2000.

-22-
<PAGE>
PART IV
-------
ITEM FOURTEEN - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K

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

(b) Reports on Form 8-K:

None

3.1 Certificate of Incorporation, as amended. (Exhibit 3.1 to Form 10-K
for the year ended June 30, 1998).

3.2 By-Laws, as amended (Exhibit 3 to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).

4.1 Fourth Amended and Restated Loan and Security Agreement dated as of
February 25, 1999 among the Registrant, certain of its subsidiaries,
The Chase Manhattan Bank (as successor to Chemical Bank) and Fleet
Bank, N.A. (as successor to NatWest Bank, N.A.) (Exhibit 10.5 to Form
8-K dated February 25, 1999).

10.1 1989 Non-Qualified Stock Option Plan, as amended (Exhibit 10.8 of
Annual Report on Form 10-K for the year ended June 30, 1990).

10.2 1994 Non-Qualified Stock Option Plan. (Exhibit 10.2 of Annual Report
on Form 10-K for the year ended June 30, 1994).

10.3 1994 Outside Directors Stock Option Plan. (Exhibit 10.3 of Annual
Report on Form 10- K for the year ended June 30, 1994).

10.4 Employment Agreement between Aeroflex Incorporated and Harvey R. Blau
(Exhibit 10.1 to Report on Form 10-Q for the quarter ended March 31,
1999).

10.5 Employment Agreement between Aeroflex Incorporated and Michael Gorin
(Exhibit 10.2 to Report on Form 10-Q for the quarter ended March 31,
1999).

10.6 Employment Agreement between Aeroflex Incorporated and Leonard Borow
(Exhibit 10.3 to Report on Form 10-Q for the quarter ended March 31,
1999).

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

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

10.9 1996 Stock Option Plan (Exhibit A to Definitive Schedule 14A filed
September 30, 1996).

-23-
<PAGE>

10.10 1998 Stock Option Plan (Exhibit 10 to Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998).

10.11 Common Stock Purchase Agreement made as of February 25, 1999 between
the Registrant and UTC acting through its Hamilton Standard Division
as the owner of all of the issued and outstanding capital stock of
UTMC. (Exhibit 10.1 to Form 8-K dated February 25, 1999).

10.12 Long Term Agreement made as of February 25, 1999 between UTC and
UTMC. (Exhibit 10.2 to Form 8-K dated February 25, 1999).

10.13 Facilities Lease and Services Agreement made as of February 25, 1999
between UTMC, UTC and HSE. (Exhibit 10.3 to Form 8-K dated February
25, 1999).

10.14 Assignment and License-Back Agreement made as of February 25, 1999
between UTMC and UTC. (Exhibit 10.4 to Form 8-K dated February 25,
1999).

10.15 1999 Stock Option Plan (Exhibit A to Definitive Schedule 14A filed
December 3, 1999).

10.16 2000 Stock Option Plan

10.17 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Harvey R. Blau, effective September 1, 1999.

10.18 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Michael Gorin, effective September 1, 1999.

10.19 Amendment No. 1 to Employment Agreement between Aeroflex Incorporated
and Leonard Borow, effective September 1, 1999.

22 The following is a list of the Company's subsidiaries:
<TABLE>
<CAPTION>
State of
Name Incorporation
---- -------------
<S> <C>
Aeroflex Amplicomm, Inc. Delaware
Aeroflex Laboratories Incorporated Delaware
Aeroflex Lintek Corp. Ohio
Aeroflex MIC Technology Corporation Texas
Aeroflex Systems Corp. Delaware
Aeroflex UTMC Microelectronic Systems, Inc. Delaware
Europtest, S.A. France
Information Systems and Research, Inc. Virginia
Vibration Mountings and Controls, Inc. New York
</TABLE>
23 Consent of Independent Auditors

27 Financial Data Schedule

99 Undertakings

-24-
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 28th day of
September 2000.

Aeroflex Incorporated

By: /s/ Harvey R. Blau
--------------------------
Harvey R. Blau, Chairman

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on September 28th, 2000 by the following persons in
the capacities indicated:

/s/ Harvey R. Blau Chairman of the Board
Harvey R. Blau (Chief Executive Officer)

/s/ Michael Gorin President and Director
Michael Gorin (Chief Financial Officer and Principal Accounting
Officer)

/s/ Leonard Borow Executive Vice President, Secretary and Director
Leonard Borow (Chief Operating Officer)

------------------------- Director
Paul Abecassis

/s/ Milton Brenner Director
Milton Brenner

/s/ Ernest E. Courchene, Jr. Director
Ernest E. Courchene, Jr.

/s/ Donald S. Jones Director
Donald S. Jones

/s/ Eugene Novikoff Director
Eugene Novikoff

/s/ John S. Patton Director
John S. Patton

-25-

<PAGE>
AEROFLEX INCORPORATED

AND SUBSIDIARIES

FINANCIAL STATEMENTS AND SCHEDULES

COMPRISING ITEM 8 OF ANNUAL REPORT ON FORM 10-K

TO SECURITIES AND EXCHANGE COMMISSION

AS OF JUNE 30, 2000 AND 1999

AND FOR THE YEARS

ENDED JUNE 30, 2000, 1999 AND 1998

<PAGE>
FINANCIAL STATEMENTS AND SCHEDULES
----------------------------------

I N D E X PAGE
------------- ----

ITEM FOURTEEN (a)
-----------------
1. FINANCIAL STATEMENTS:

Independent auditors' report S-1

Consolidated financial statements:

Balance sheets - June 30, 2000 and 1999 S-2-3

Statements of earnings - each of the three years
in the period ended June 30, 2000 S-4

Statements of stockholders' equity and comprehensive
income - each of the three years in the period ended
June 30, 2000 S-5

Statements of cash flows - each of the three years
in the period ended June 30, 2000 S-6

Notes (1-15) S-7-20

Quarterly financial data (unaudited) S-21

2. FINANCIAL STATEMENT SCHEDULES:

II - Valuation and qualifying accounts S-22

All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial statements
or notes thereto.
<PAGE>
Independent Auditors' Report

The Board of Directors
and Stockholders
Aeroflex Incorporated

We have audited the accompanying consolidated balance sheets of Aeroflex
Incorporated and subsidiaries as of June 30, 2000 and 1999 and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended June
30, 2000. Our audits also included the financial statement schedule listed in
the Index at item 14(a)2. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aeroflex
Incorporated and subsidiaries as of June 30, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

/s/ KPMG LLP
KPMG LLP

Melville, New York
August 15, 2000

S-1
<PAGE>

AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)
<TABLE>
<CAPTION>
June 30,
---------------------
ASSETS 2000 1999
---- ----
<S> <C> <C>

Current assets:
Cash and cash equivalents................... $ 54,710 $ 2,714
Marketable securities....................... 11,512 -

Accounts receivable, less allowance for
doubtful accounts of $509 and $381
at June 30, 2000 and 1999, respectively... 51,086 39,967

Inventories, net............................ 37,367 32,637

Deferred income taxes....................... 5,317 5,291

Prepaid expenses and other current assets... 2,814 2,314
-------- --------
Total current assets................... 162,806 82,923

Property, plant and equipment, net............ 52,222 50,802

Intangible assets acquired in connection with
the purchase of businesses, net of
accumulated amortization of $4,689 and $3,084
at June 30, 2000 and 1999, respectively..... 12,839 13,777

Cost in excess of fair value of net assets
of businesses acquired, net of accumulated
amortization of $3,800 and $3,161 at June 30,
2000 and 1999, respectively................. 13,380 14,019
Deferred income taxes......................... 3,093 -
Other assets.................................. 4,367 3,695
-------- --------
Total assets................................ $248,707 $165,216
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

S-2

<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Continued)

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
June 30,
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
-------- --------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt.............. $ 1,566 $ 6,509

Accounts payable............................... 9,489 8,070

Accrued expenses and other current
liabilities.................................. 17,847 16,923

Income taxes payable........................... - 1,055
-------- --------
Total current liabilities................. 28,902 32,557

Long-term debt................................... 12,983 24,608
Deferred income taxes............................ - 3,582
Other long-term liabilities...................... 4,890 2,376
-------- --------
Total liabilities................................ 46,775 63,123
-------- --------
Commitments and contingencies

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
40 shares; none issued....................... - -
Common Stock, par value $.10 per share;
authorized 40,000 shares; issued 27,835 and
18,429 at June 30, 2000 and 1999,
respectively................................. 2,783 1,843
Additional paid-in capital..................... 190,250 105,720
Retained earnings (accumulated deficit)........ 8,979 (5,421)
-------- --------
202,012 102,142
Less: Treasury stock, at cost (13 and 6
shares at June 30, 2000 and 1999,
respectively)................................. 80 49
-------- --------
Total stockholders' equity....................... 201,932 102,093
-------- --------
Total liabilities and stockholders' equity....... $248,707 $165,216
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-3
<PAGE>
AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------
2000 1999 1998
---- ---- ----

<S> <C> <C> <C>
Net sales..................... $185,924 $157,104 $118,861
Cost of sales................. 118,548 98,645 77,286
-------- -------- --------
Gross profit................ 67,376 58,459 41,575
-------- -------- --------
Operating costs:
Selling, general and
administrative costs...... 34,034 27,763 21,545
Research and development
costs..................... 10,980 9,612 5,172
Acquired in-process research
and development (note 2).. - 3,500 -
Total operating costs... 45,014 40,875 26,717
-------- -------- --------
Operating income ............. 22,362 17,584 14,858
-------- -------- --------
Other expense (income):
Interest expense............ 2,316 1,454 2,011
Other expense (income)
(including interest income
and dividends of $650,
$781 and $389)............ (554) (777) (309)
-------- -------- --------
Total other expense
(income).............. 1,762 677 1,702
-------- -------- --------
Income before income taxes.... 20,600 16,907 13,156
Provision for income taxes.... 6,200 7,150 4,750
-------- -------- --------
Net income ................... $ 14,400 $ 9,757 $ 8,406
======== ======== ========
Net income per common share:
Basic...................... $0.60 $0.44 $0.45
===== ===== =====
Diluted.................... $0.57 $0.41 $0.41
===== ===== =====
Weighted average number of
common shares outstanding:
Basic...................... 23,819 22,230 18,503
Diluted.................... 25,462 23,910 20,658

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

S-4

<PAGE>
AEROFLEX INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

Years Ended June 30, 2000, 1999 and 1998
(In thousands)

<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-in (Accumulated Treasury Stock Comprehensive
Total Shares Par Value Capital Deficit) Shares Cost Income
--------- ------ --------- ---------- ----------- ------ ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997................ $ 35,040 12,658 $ 1,266 $ 58,110 $ (23,584) 169 $ (752)
Stock issued in public offering...... 31,285 2,597 260 31,025 - - -
Stock issued upon exercise
of stock options and warrants...... 2,923 349 35 2,141 - (168) 747
Stock issued upon conversion
of debentures...................... 9,382 1,774 177 9,205 - - -
Net income........................... 8,406 - - - 8,406 - - $ 8,406
--------- ------ ------- --------- --------- ---- ------- ---------
Balance, June 30, 1998............... 87,036 17,378 1,738 100,481 (15,178) 1 (5) $ 8,406
Stock issued upon exercise =========
of stock options and warrants...... 4,967 1,051 105 4,563 - (34) 299
Purchase of treasury stock........... (343) - - - - 39 (343)
Deferred compensation................ 676 - - 676 - - -
Net income........................... 9,757 - - - 9,757 - - $ 9,757
--------- ------ ------- --------- --------- ---- ------- ---------
Balance, June 30, 1999............... 102,093 18,429 1,843 105,720 (5,421) 6 (49) $ 9,757
=========
Stock issued in public offering...... 68,500 2,500 250 68,250 - - -
Stock issued upon exercise of
stock options and warrants......... 18,457 1,339 133 16,365 - (296) 1,959
Purchase of treasury stock........... (1,990) - - - - 300 (1,990)
Deferred compensation................ 401 - - 401 - - -
Five-for-four stock split............ (11) 5,567 557 (568) - 3 -
Unrealized gain on marketable
securities......................... 82 - - 82 - - - $ 82
Net income........................... 14,400 - - - 14,400 - - 14,400
--------- ------ ------- --------- --------- ---- ------- ---------
Balance, June 30, 2000............... $ 201,932 27,835 $ 2,783 $ 190,250 $ 8,979 13 $ (80) $ 14,482
========= ====== ======== ========= ========= ==== ======= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-5

<PAGE>

AEROFLEX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................. $ 14,400 $ 9,757 $ 8,406
Adjustments to reconcile net income to
net cash provided by operating
activities:
Acquired in-process research
and development.................... - 3,500 -
Depreciation and amortization........ 8,983 6,554 4,884
Amortization of deferred gain........ (596) (588) (588)
Deferred income taxes................ 1,086 1,812 1,004
Other................................ 390 292 (10)
Change in operating assets and
liabilities, net of effects from
purchase of businesses:
Decrease (increase) in accounts
receivable.......................... (11,133) (16,365) 1,975
Decrease (increase) in inventories.... (4,232) 3,825 (8,397)
Decrease (increase) in prepaid
expenses and other assets........... (1,067) (2,238) (633)
Increase (decrease) in accounts
payable, accrued expenses and
other long-term liabilities......... 2,393 2,739 5,384
Increase (decrease) in income
taxes payable....................... 4,416 2,090 1,648
-------- --------- --------
Net cash provided by operating
activities................................ 14,640 11,378 13,673
-------- --------- --------
Cash flows from investing activities:
Payment for purchase of businesses,
net of cash acquired.................... (566) (43,656) (249)
Purchase of equipment, inventory and
technology rights from Lucent
Technologies............................ - - (4,435)
Capital expenditures...................... (7,213) (9,104) (10,613)
Proceeds from sale of property,
plant and equipment..................... 1,686 967 209
Purchase of marketable securities......... (11,430) - -
Proceeds from sale of marketable
securities.............................. 193 198 110
-------- --------- --------
Net cash used in investing activities....... (17,330) (51,595) (14,978)
-------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of
common shares in public
offering................................. 69,000 - 31,781
Costs in connection with
public offering.......................... (500) - (496)
Borrowings under debt agreements........... 2,090 24,191 6,231
Debt repayments............................ (19,081) (4,663) (13,685)
Bank debt financing costs.................. - (438) -
Purchase of treasury stock................. (1,990) (343) -
Proceeds from the exercise of stock
options and warrants..................... 5,170 2,539 1,292
Amounts paid for withholding taxes on
stock option exercises................... (11,169) (5,434) (1,512)
Withholding taxes collected for stock
option exercises......................... 11,166 2,671 1,502
-------- --------- --------
Net cash provided by financing activities.... 54,686 18,523 25,113
-------- --------- --------
Net increase (decrease) in cash and
cash equivalents........................... 51,996 (21,694) 23,808
Cash and cash equivalents at beginning of
period..................................... 2,714 24,408 600
-------- --------- --------
Cash and cash equivalents at end of period... $ 54,710 $ 2,714 $ 24,408
======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
S-6

<PAGE>
AEROFLEX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Principles and Policies

Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Aeroflex Incorporated and its subsidiaries (the "Company"), all of which
are wholly-owned with the exception of Europtest which is 93.4% owned as of
June 30, 2000 (see Note 2). All intercompany balances and transactions have
been eliminated.

Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management of the Company make
a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities.
Among the more significant estimates included in the consolidated financial
statements are the estimated costs to complete contracts in process. Actual
results could differ from those estimates.

Cash and Cash Equivalents
The Company considers all highly liquid investments having maturities of
three months or less at the date of acquisition to be cash equivalents.

Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories related to long-term contracts are recorded at cost
less amounts expensed under percentage-of-completion accounting.

Financial Instruments
The fair values of all on-balance sheet financial instruments, other than
long-term debt (see Note 8), approximate book values because of the short
maturity of these instruments. Amounts receivable or payable under interest
rate swap agreements are accounted for as adjustments to interest expense.

Revenue and Cost Recognition on Contracts
Revenue is recognized based upon shipments or billings. The Company records
gross profit on its long-term contracts using percentage-of-completion
accounting under which costs are recognized on revenues in the same
relation that total estimated manufacturing costs bear to total contract
value. Estimated costs at completion are based upon engineering and
production estimates. Provisions for estimated losses or revisions in
estimated profits on contracts-in-process are recorded in the period in
which such losses or revisions are first determined.

Property, Plant and Equipment
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.

Research and Development Costs
All research and development costs are charged to expense as incurred. See
Note 2 for a discussion of acquired in-process research and development.

Intangible Assets
Intangible assets are recorded at cost less accumulated amortization. The
excess of purchase price over the fair value of tangible assets acquired is
being amortized on a straight-line basis over periods ranging from 15 to 40
years except for certain costs allocated to identifiable intangible assets
including existing technology, assembled workforce, customer relationships
and patents which are amortized over 6 to 15 years, the estimated remaining
lives of the intangibles at the time they were acquired by the Company. The

S-7
<PAGE>
Company periodically evaluates the recoverability of the carrying value of
its intangible assets and the related amortization periods. The Company
assesses the recoverability of unamortized goodwill based on the
undiscounted projected future earnings of the related businesses.

Income Per Common Share
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128 "Earnings Per Share," income per common share ("Basic EPS") is computed
by dividing net income by the weighted average common shares outstanding.
Income per common share assuming dilution ("Diluted EPS") is computed by
dividing net income plus a pro forma addback of debenture interest by
weighted average common shares outstanding plus potential dilution from the
conversion of debentures and the exercise of stock options and warrants.

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. Effective July 1, 1996, the
Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company has elected not to implement the fair value based accounting
method for employee and director stock options, but instead has elected to
disclose the pro forma net income and pro forma net income per share for
employee and director stock option grants made beginning in fiscal 1996 as
if such method had been used to account for stock-based compensation cost
as described in SFAS No. 123.

Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes," the Company
measures deferred tax assets and liabilities based upon the differences
between the financial accounting and tax bases of assets and liabilities.

Comprehensive Income
On July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." Comprehensive income consists of net income and equity adjustments
from foreign currency translation and available for-sale securities and is
presented in the Consolidated Statements of Stockholders' Equity and
Comprehensive Income. The statement requires only additional disclosures in
the consolidated financial statements; it does not effect the Company's
financial position or results of operations.

Reclassifications
Reclassifications have been made to the 1998 and 1999 consolidated
financial statements to conform to the 2000 presentation.

Recent Accounting Pronouncements
Effective July 1, 2000, the Company will adopt 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. In certain circumstances changes
in the value of such derivatives may be required to be recorded as gains or
losses. The impact of this statement is not expected to have a material
effect on the Company's consolidated financial statements.

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of
Accounting Principles Board Opinion No.25. This interpretation clarifies
the application of Option No. 25 for certain issues. This interpretation is
effective July 1, 2000. The effects of applying this interpretation would
be recognized on a prospective basis from July 1, 2000. The impact of this
interpretation is not expected to be material.

S-8
<PAGE>
2. Acquisition of Businesses

UTMC
Effective February 25, 1999, the Company acquired all of the outstanding
stock of UTMC Microelectronic Systems, Inc. ("UTMC") for $42.5 million of
cash. The purchase price was paid with available cash of $22.5 million and
borrowings under the Company's bank loan agreement of $20.0 million. UTMC
is a supplier of radiation-tolerant integrated circuits for satellite
communications. The acquired company's net sales were approximately $33.4
million for the year ended December 31, 1998.

The Company commissioned an independent asset valuation study of acquired
tangible and identifiable intangible assets to serve as a basis for
allocation of the purchase price. Based on this study, the Company
allocated the purchase price, including acquisition costs of approximately
$500,000, as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Net tangible assets $28,771
Identifiable intangible assets 6,300
Costs in excess of fair value of
net assets acquired 4,429
In-process research and development 3,500
-------
$43,000
=======
</TABLE>

The identifiable intangible assets include existing technology, customer
relationships and assembled work force. The identifiable intangibles and
costs in excess of fair value of net assets are being amortized on a
straight-line basis over 6 to 15 years based on the study described above.
The acquired in-process research and development was not considered to have
reached technological feasibility and, in accordance with generally
accepted accounting principles, the value of such was expensed in the third
quarter of fiscal 1999.

Summarized below are the unaudited pro forma results of operations of the
Company as if UTMC had been acquired at the beginning of the fiscal periods
presented. The $3.5 million write-off has been included in the June 30,
1999 pro forma income but not the June 30, 1998 pro forma income in order
to provide comparability to the respective actual results.
<TABLE>
<CAPTION>
Pro Forma Years Ended
June 30,
-----------------------------------
1999 1998
---- ----
(In thousands, except per share data)

<S> <C> <C>
Net sales $ 177,149 $ 155,371
Net income 9,469 11,267

Net income per share
Basic $ 0.43 $ 0.61
Diluted 0.40 0.55
</TABLE>

The pro forma financial information presented above is not necessarily
indicative of either the results of operations that would have occurred had
the acquisition taken place at the beginning of the periods presented or of
future operating results of the combined companies.

Europtest
Effective September 1, 1998, the Company acquired 90% of the stock of
Europtest, S.A. (France) for approximately $1.1 million. The purchase
agreement also requires that the Company purchase the remaining 10% of
Europtest pro rata over a three-year period at prices determined based upon
net sales of Europtest products. In October 1999, the Company purchased an
additional 3.4% of Europtest's stock for approximately $54,000. Europtest
develops and sells specialized software-driven test equipment used

S-9
<PAGE>
primarily in cellular, satellite and other communications applications. The
acquired company's net sales were approximately $1.9 million for the year
ended March 31, 1998. On a pro forma basis, had the Europtest acquisition
taken place as of the beginning of the periods presented, results of
operations for those periods would not have been materially affected. The
purchase price has been allocated to the assets acquired and liabilities
assumed based on their fair values.

The acquisitions have been accounted for as purchases and, accordingly, the
acquired assets and liabilities assumed have been recorded at their
estimated fair values at the respective dates of acquisition. The operating
results of UTMC and Europtest are included in the consolidated statements
of earnings from the respective acquisition dates.

3. Acquisition of Assets From Lucent Technologies
Effective July 1, 1997, the Company's subsidiary, MIC Technology ("MIC"),
acquired certain equipment, inventory, licenses for technology and patents
of two of Lucent Technologies' microelectronics components units -
multi-chip modules and film integrated circuits - for $4.4 million in cash.
These units manufacture microelectronic modules and interconnect products.
The purchase price has been allocated to the assets acquired, based on
their fair values, and certain obligations assumed relating to the
agreements.

4. Marketable Securities

All of the Company's marketable securities are deemed by management to be
available-for-sale and are reported at fair value with net unrealized gains
or losses reported within stockholders' equity. Realized gains and losses
are recorded based on the specific identification method. For fiscal years
2000, 1999 and 1998, gross realized gains and losses were $193,000, $0 and
$0, respectively. The carrying amount of the Company's investments is shown
in the table below:
<TABLE>
<CAPTION>
June 30, 2000
-------------
(In thousands)
<S> <C>
Amortized cost $11,430
Gross unrealized gains 85
Gross unrealized losses (3)
-------
Estimated fair value $11,512
=======
</TABLE>

The marketable securities at June 30, 2000 were virtually all U.S.
corporate debt securities with scheduled maturities within one year.

5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
Raw materials......... $ 20,392 $ 18,441
Work-in-process....... 12,783 11,148
Finished goods........ 4,192 3,048
-------- --------
$ 37,367 $ 32,637
======== ========
</TABLE>

Inventories include contracts-in-process of $9.3 million and $9.6 million at
June 30, 2000 and 1999, respectively, which consist substantially of unbilled
material, labor and overhead costs that are or were expected to be billed
during the succeeding fiscal year.

S-10

<PAGE>
6. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, Estimated
-------------------------- -----------
2000 1999 Useful Life
(In thousands) In Years
-----------
<S> <C> <C> <C>
Land............................ $ 4,725 $ 4,725
Building and leasehold
improvements.................. 33,058 32,353 2 to 40
Machinery, equipment, tools
and dies................... 38,268 37,727 3 to 10
Furniture and fixtures.......... 8,258 7,521 5 to 10
Assets recorded under
capital leases................ 6,769 2,334 5 to 10
---------- ----------
91,078 84,660
Less accumulated depreciation
and amortization.............. 38,856 33,858
---------- ----------
$ 52,222 $ 50,802
========== ==========
</TABLE>

In July 1998, the Company purchased a previously leased operating facility
in Pearl River, New York for $2.5 million in cash.

Repairs and maintenance expense on property, plant and equipment was $2.5
million, $2.3 million and $1.4 million for the years ended June 30, 2000,
1999 and 1998, respectively.

7. Accrued Expenses and Other Current Liabilities Accrued expenses and other
current liabilities include accrued salaries, wages and other compensation
of $6.6 million and $7.1 million at June 30, 2000 and 1999, respectively.

8. Long-Term Debt and Credit Arrangements Long-term debt consists of the
following:
<TABLE>
<CAPTION>
June 30,
-------------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Revolving credit, term loan
and mortgage agreement (a).. $ 4,038 $ 21,853
Building mortgage (b)......... 3,965 4,165
Equipment loans (c)........... - 4,877
Capitalized lease
obligations (c)............. 6,026 124
Other......................... 520 98
-------- --------
14,549 31,117
Less current maturities....... 1,566 6,509
-------- --------
$ 12,983 $ 24,608
======== ========
</TABLE>

Aggregate long-term debt as of June 30, 2000 matures in each fiscal
year as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2001............... $ 1,566
2002............... 1,603
2003............... 1,338
2004............... 1,545
2005............... 1,646
Thereafter......... 6,851
--------
$ 14,549
========
</TABLE>

Interest paid was $2.4 million, $1.6 million and $2.1 million during the
years ended June 30, 2000, 1999 and 1998, respectively.

S-11

<PAGE>
(a) As of February 25, 1999, the Company replaced a previous agreement with
a revised revolving credit, term loan and mortgage agreement with two banks
which is secured by substantially all of the Company's assets not otherwise
encumbered. The agreement provided for a revolving credit line of $23.0
million, a term loan of $20.0 million and a mortgage on the Company's
Plainview property for $4.5 million. The revolving credit loan facility
expires in December 2002. As of June 30, 1999, the outstanding term loan
was $17.5 million. The term loan was fully paid with the proceeds from the
Company's sale of its Common Stock in May 2000. The interest rate on
borrowings under this agreement is at various rates depending upon certain
financial ratios, with the current rate substantially equivalent to 30-day
LIBOR (approximately 6.7% at June 30, 2000) plus 1.50% on the revolving
credit borrowings. The Company paid a facility fee of $100,000 and is
required to pay a commitment fee of .25% per annum of the average unused
portion of the credit line. The mortgage is payable in monthly installments
of approximately $26,000 through March 2008 and a balloon payment of $1.6
million in April 2008. The Company has entered into an interest rate swap
agreement for the outstanding amount under the mortgage agreement at
approximately 7.6% in order to reduce the interest rate risk associated
with these borrowings. The fair market value of the interest rate swap
agreement was $154,000 as of June 30, 2000 in favor of the Company.

The terms of the agreement require compliance with certain covenants
including minimum consolidated tangible net worth and pretax earnings,
maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash
dividends. In connection with the purchase of certain materials for use in
manufacturing, the Company has a letter of credit of $2.0 million. At June
30, 2000, the Company's available unused line of credit was $21.0 million
after consideration of the letter of credit.

(b) In December 1998, the Company financed the acquisition and renovation
of the land and building of its Pearl River, NY facility and received
proceeds amounting to $4.2 million. This debt requires a balloon payment of
$4.0 million in 2019.

(c) During the year ended June 30, 1998, the Company entered into equipment
loans with two banks totaling $6.2 million. In June 2000, the remaining
balance of these loans of $4.1 million was refinanced under two sale and
capital leaseback agreements for approximately $6.0 million. For purposes
of the Consolidated Statements of Cash Flows, the $4.1 million refinancing
was considered a non-cash transaction. These agreements expire through June
2006 and bear interest at approximately 7.9%.

9. Senior Subordinated Convertible Debentures On September 8, 1997, the
Company called for the redemption of all of its outstanding 7-1/2% Senior
Subordinated Convertible Debentures at 104.5% of the principal amount of
$10.0 million. All of the principal amount of the debentures was converted
into the Company's Common Stock at a price of $4.50 per share. In
connection with the conversions, $599,000 of deferred bond issuance costs
were charged to additional paid-in capital.

10. Stockholders' Equity

Common Stock Offerings
In March 1998, the Company sold 3.2 million shares (adjusted for the stock
split) of its Common Stock in a public offering for $31.3 million, net of
an underwriting discount of $2.0 million and issuance costs of $496,000. Of
these net proceeds, $9.6 million was used to repay bank indebtedness. The
balance of the net proceeds was used primarily for the purchase of UTMC.

In May 2000, the Company sold 3.1 million shares (adjusted for the stock
split) of its Common Stock in a public offering for $68.5 million, net of
an underwriting discount of $3.5 million and issuance costs of $500,000. Of
these net proceeds, $13.0 million was used to repay the term loan. The
balance of the net proceeds is invested in short-term marketable securities

S-12

<PAGE>
and is intended to ultimately be used for additional working capital,
including research and development, and expansion of our facilities, and
for general corporate purposes, including possible acquisitions of
technologies, product lines or businesses.

Common Stock Split
On June 12, 2000, the Company's Board of Directors authorized a
five-for-four stock split on its Common Stock, effective June 26, 2000. The
share and per share amounts in the consolidated financial statements give
effect to the stock split.

Stock Options and Warrants
Under the Company's stock option plans, options may be granted to purchase
shares of the Company's Common Stock exercisable at prices equal to the
fair market value on the date of grant. During 1990, the Company's
shareholders approved the Non- Qualified Stock Option Plan (the "NQSOP").
In December 1993, the Board of Directors adopted the Outside Director Stock
Option Plan (the "Directors' Plan") which provides for options to
non-employee directors, which become exercisable in three installments and
expire ten years from the date of grant. The Directors' Plan, as amended,
covers 625,000 shares of the Company's Common Stock. In November 1994, the
shareholders approved the Directors' Plan and the 1994 Non-Qualified Stock
Option Plan (the "1994 Plan"). In November 1996, the shareholders approved
the 1996 Stock Option Plan (the "1996 Plan"). In April 1998, the Board of
Directors adopted the 1998 Stock Option Plan (the "1998 Plan"). In January
2000, the shareholders approved the 1999 Stock Option Plan (the "1999
Plan"). In March 2000, the Board of Directors adopted the 2000 Stock Option
Plan ("the 2000 Plan"). The NQSOP, the 1994 Plan, the 1996 Plan, the 1998
Plan, the 1999 Plan and the 2000 Plan provide for options which become
exercisable in one or more installments and each covers 1.9 million shares
of the Company's Common Stock except for the 1999 Plan which covers 1.1
million shares and the 2000 Plan which covers 938,000 shares. Options under
the NQSOP and the 1994 Plan expire five years from the date of grant.
Options under the 1996 Plan, the 1998 Plan, the 1999 Plan and the 2000 Plan
shall expire not later than ten years from the date of grant.

The Company has also issued to employees, who are not executive officers,
options to purchase 685,000 shares of Common Stock exercisable between
$3.20 and $10.90 per share. Such grants were not covered by one of the
above plans.

Additional information with respect to the Company's stock options is as
follows:
<TABLE>
<CAPTION>
Weighted Shares
Average Under
Exercise Outstanding
Prices Options
------------- -----------
(In thousands)
<S> <C> <C>
Balance, July 1,
1997......... $ 3.06 4,150
Granted....... 7.95 1,304
Forfeited..... 2.92 (44)
Exercised..... 2.54 (545)
Balance, June 30, -----
1998......... 4.43 4,865
Granted....... 9.46 1,444
Forfeited..... 3.60 (4)
Exercised..... 2.99 (1,825)
Balance, June 30, -----
1999......... 6.64 4,480
Granted....... 28.02 2,197
Forfeited..... 9.64 (28)
Exercised..... 4.45 (1,866)
Balance, June 30, -----
2000......... 17.30 4,783
=====
</TABLE>

S-13

<PAGE>
The Company's stock option plans allow employees to use shares received
from the exercise of the option to satisfy the tax withholding
requirements. During fiscal years 2000, 1999 and 1998, payroll tax on stock
option exercises were withheld from employees in shares of the Company's
Common Stock amounting to $0, $2.6 million and $10,000, respectively.

Options to purchase 1.7 million, 1.9 million and 2.9 million shares were
exercisable at weighted average exercise prices of $13.62, $4.06 and $3.12
as of June 30, 2000, 1999 and 1998, respectively.

The options outstanding as of June 30, 2000 are summarized in ranges as
follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------
Weighted Weighted
Range of Average Average
Exercise Exercise Options Remaining
Prices Price Outstanding Life
-------- -------- ----------- ---------
(In thousands)
<S> <C> <C> <C>
$ 3.00-$ 4.30 $ 3.60 321 5.8 years
$ 6.50-$ 9.70 7.86 1,789 7.8
$10.75-$14.05 12.67 1,386 8.7
$32.82-$39.20 38.83 1,287 9.7
-----
4,783
=====
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------
Weighted
Range of Average
Exercise Exercise Options
Prices Price Exercisable
-------- -------- -----------
(In thousands)
<S> <C> <C>
$ 3.00-$ 4.30 $ 3.60 321
$ 6.50-$ 9.70 7.67 813
$10.75-$14.05 11.46 194
$32.82-$39.20 38.73 338
-----
1,666
=====
</TABLE>

As of June 30, 2000, the Company has outstanding warrants to purchase
66,000 shares of its Common Stock exercisable between $5.40 and $6.00 per
share through June 2004. These warrants were issued primarily in connection
with the acquisition of MIC in fiscal 1996.

Accounting for Stock-Based Compensation
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." 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 net income and net income per share
as if such method had been used to account for stock-based compensation
cost as described in SFAS No. 123.

The per share weighted average fair value of stock options granted during
fiscal 2000, 1999 and 1998 was $21.20, $6.00 and $5.91, respectively, on
the date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions: 2000 - expected dividend yield of
0%, risk free interest rate of 6.0%, expected stock volatility of 94%, and
an expected option life of 5.3 years; 1999 - expected dividend yield of 0%,
risk free interest rate of 5.3%, expected stock volatility of 77%, and an
expected option life of 5.1 years; 1998 - expected dividend yield of 0%,
risk free interest rate of 5.8%, expected stock volatility of 80%, and an
expected option life of 7.4 years. The pro forma compensation cost before
income taxes was $14.0 million , $4.8 million and $2.0 million for the

S-14
<PAGE>
years ended June 30, 2000, 1999 and 1998, respectively, based on the
aforementioned fair value at the grant date only for options granted after
fiscal year 1995. The Company's net income and net income per share using
this pro forma compensation cost would have been:
<TABLE>
<CAPTION>

Years Ended June 30,
-----------------------
(In thousands, except per share data)

2000
--------------------------
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Net income............... $ 14,400 $ 5,305

Net income per share
- Basic................. $ 0.60 $ 0.22
- Diluted............... 0.57 0.21

1999
--------------------------
As Reported Pro Forma
----------- ---------
Net income.............. $ 9,757 $ 6,608

Net income per share
-Basic......... $ 0.44 $ 0.30
-Diluted....... 0.41 0.28

1998
--------------------------
As Reported Pro Forma
----------- ---------
Net income.............. $ 8,406 $ 7,112

Net income per share
-Basic............. $ 0.45 $ 0.38
-Diluted........... 0.41 0.36
</TABLE>

Since the pro forma compensation cost reflects only options granted after
fiscal year 1995, the full impact of calculating stock-based compensation
costs under SFAS No. 123 is not reflected in the pro forma net income
because compensation cost is recognized over the respective vesting period
and compensation cost for options granted prior to fiscal year 1996 was not
reflected.

Shareholders' Rights Plan
On August 13, 1998, the Company's Board of Directors approved a
Shareholders' Rights Plan which provides for a dividend distribution of one
right for each share to holders of record of the Company's Common Stock on
August 31, 1998 and the issuance of one right for each share of Common
Stock that shall be subsequently issued. The rights become exercisable only
in the event a person or group ("Acquiring Person") accumulates 15% or more
of the Company's Common Stock, or if an Acquiring Person announces an offer
which would result in it owning 15% or more of the Common Stock. The rights
expire on August 31, 2008. Each right will entitle the holder to buy 1/1250
of a share of Series A Junior Participating Preferred Stock, as amended, of
the Company at a price of $65. In addition, upon the occurrence of a merger
or other business combination, or the acquisition by an Acquiring Person of
50% or more of the Common Stock, holders of the rights, other than the
Acquiring Person, will be entitled to purchase either Common Stock of the
Company or common stock of the Acquiring Person at half their respective
market values.

The Company will be entitled to redeem the rights for $.01 per right at any
time prior to a person becoming an Acquiring Person.

S-15
<PAGE>
Net Income Per Share
A reconciliation of the numerators and denominators of the Basic EPS and
Diluted EPS calculations is as follows:
<TABLE>
<CAPTION>

Years Ended June 30,
-----------------------------------
2000 1999 1998
---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C>
Computation of Adjusted
Net Income:
Net income for basic
earnings per common share...... $ 14,400 $ 9,757 $ 8,406
Add: Debenture interest and
amortization expense, net
of income taxes................ - - 103
Adjusted net income for diluted -------- -------- --------
earnings per common share...... $ 14,400 $ 9,757 $ 8,509
Computation of Adjusted ======== ======== ========
Weighted Average Shares
Outstanding:
Weighted average shares
outstanding.................... 23,819 22,230 18,503
Add: Shares assumed to be
issued upon conversion of
debentures..................... - - 489
Add: Effect of dilutive
options and warrants
outstanding.................... 1,643 1,680 1,666
Weighted average shares and ------- ------- -------
common share equivalents used
for computation of diluted
earnings per common share...... 25,462 23,910 20,658
Net Income Per Common Share: ======= ======= =======
Basic.......................... $0.60 $0.44 $0.45
======= ======= =======
Diluted........................ $0.57 $0.41 $0.41
======= ======= =======
</TABLE>

Options to purchase 1.3 million shares at exercise prices ranging between
$32.82 and $39.20 per share were outstanding as of June 30, 2000 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.

11. Income Taxes

The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
2000 1999 1998
--------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Current:
Federal............... $ 4,656 $ 4,465 $ 3,178
State and local....... 458 873 568
--------- --------- ---------
5,114 5,338 3,746
--------- --------- ---------
Deferred:
Federal............... 990 1,989 932
State and local....... 96 (177) 72
--------- --------- ---------
1,086 1,812 1,004
--------- --------- ---------
$ 6,200 $ 7,150 $ 4,750
========= ========= =========
</TABLE>

S-16
<PAGE>
The provision for income taxes varies from the amount computed by applying
the U.S. Federal income tax rate to income before income taxes as a result
of the following:
<TABLE>
<CAPTION>

Years Ended June 30,
2000 1999 1998
--------- ---------- ----------
(In thousands)

<S> <C> <C> <C>
Tax at statutory rate.... $ 7,210 $ 5,917 $ 4,505
Utilization of capital
loss carryforward....... (1,017) - -
Non-deductible acquired
in-process research
and development charge.. - 1,225 -
State and local
income tax.............. 360 452 416
Research and development
credit.................. (300) (500) (250)
Other, net............... (53) 56 79
--------- --------- ----------
$ 6,200 $ 7,150 $ 4,750
========= ========= ==========
</TABLE>

Deferred tax assets and liabilities consist of:
<TABLE>
<CAPTION>
June 30,
----------------------------
2000 1999
--------- ----------
(In thousands)
<S> <C> <C>
Accounts receivable....................... $ 210 $ 160
Inventories............................... 4,891 5,025
Accrued expenses and other current
liabilities............................. 216 106
--------- ----------
Current assets.......................... 5,317 5,291
--------- ----------
Capital lease obligation.................. 1,955 -
Other long-term liabilities............... 1,793 801
Capital loss carryforwards................ 1,262 2,543
Tax loss carryforwards.................... 6,189 1,434
Tax credit carryforwards.................. 4,164 3,864
Less: valuation allowance................. (2,165) (3,426)
--------- ----------
Non-current assets...................... 13,198 5,216
--------- ----------
Property, plant and equipment............. (5,698) (3,572)
Intangibles............................... (4,407) (5,205)
Other..................................... - (21)
--------- ----------
Long-term liabilities................... (10,105) (8,798)
--------- ----------
Net non-current assets (liabilities).... 3,093 (3,582)
--------- ----------
Total................................. $ 8,410 $ 1,709
========= ==========
</TABLE>

The Company recorded credits of $13.3 million, $5.2 million and $1.6 million to
additional paid-in capital during the years ended June 30, 2000, 1999 and 1998,
respectively, in connection with the tax benefit related to compensation
deductions on the exercise of stock options and warrants. The deduction in
fiscal 2000, is expected to create a net operating loss carryforward for tax
purposes which has resulted in an increase in the Company's deferred tax assets.

In accordance with SFAS No. 109, the Company records a valuation allowance
against deferred tax assets if it is more likely than not that some or all of
the deferred tax assets will not be realized. The reduction of the valuation
allowance in fiscal 2000, was primarily due to the utilization of capital loss
carryforwards.

The Company is undergoing routine audits by various taxing authorities of its
state and local income tax returns covering periods from 1994 to 1996.
Management believes that the probable outcome of these various audits should not
materially affect the consolidated financial statements of the Company.

S-17

<PAGE>
The Company made income tax payments of $2.0 million, $3.3 million and $2.1
million and received refunds of $940,000, $75,000 and $26,000 during the
years ended June 30, 2000, 1999 and 1998, respectively.

12. Employment Contracts

As of June 30, 2000, the Company has employment agreements with certain of
its officers for periods through June 30, 2004 with annual remuneration
ranging from $206,000 to $368,000, plus cost of living adjustments and, in
some cases, additional compensation based upon earnings of the Company.
Future aggregate minimum payments under these contracts are $1.2 million
per year. Certain of the contracts provide for a three-year consulting
period at the expiration of the employment term at two-thirds of salary. In
addition, these officers have the option to terminate their employment
agreements upon change in control of the Company, as defined, and receive
lump sum payments equal to the salary and bonus, if any, for the remainder
of the term.

13. Employee Benefit Plans

All employees of the Company and certain subsidiaries who are not members
of a collective bargaining agreement are eligible to participate in one of
two company sponsored 401(k) plans. Each participant has the option to
contribute a portion of his or her compensation and receive a discretionary
employer matching contribution. Furthermore, employees of certain
subsidiaries are eligible to participate in qualified profit sharing plans
and receive an allocation of a discretionary share of their respective
subsidiary's profits. For fiscal years ended June 30, 2000, 1999 and 1998,
these 401(k) and profit sharing plans had an aggregate expense of $1.7
million, $1.0 million and $810,000, respectively.

Effective January 1, 1994, the Company established a Supplemental Executive
Retirement Plan (the "SERP") which provides retirement, death and
disability benefits to certain of its officers. The SERP expense for the
fiscal years ended June 30, 2000, 1999 and 1998 was $454,000, $384,000 and
$324,000, respectively. The assets of the SERP are held in a Rabbi Trust
and amounted to $1.8 million and $1.2 million at June 30, 2000 and 1999,
respectively. The accumulated benefit obligation was $2.6 million and $2.0
million at June 30, 2000 and 1999, respectively. The projected benefit
obligation was $3.3 million and $2.9 million at June 30, 2000 and 1999,
respectively. The intangible asset related to the SERP was $586,000 and
$462,000 at June 30, 2000 and 1999, respectively. A discount rate of 7.5%
and a rate of compensation increase of 3.0% are assumed in the above
calculations for both years. No participants are currently receiving
benefits.

14. Commitments and Contingencies

Operating Leases

Several of the Company's operating facilities and certain machinery and
equipment are leased under agreements expiring through 2006. The leases for
machinery and equipment generally contain options to purchase at the then
fair market value of the related leased assets.

Future minimum payments under operating leases as of June 30, 2000 are as
follows for the fiscal years:
<TABLE>
<CAPTION>
(In thousands)
------------
<S> <C>
2001............... $ 2,507
2002............... 2,174
2003............... 2,113
2004............... 1,216
2005............... 699
Thereafter......... 191
---------
$ 8,900
=========
</TABLE>

S-18

<PAGE>
Rental expense was $2.6 million, $2.3 million and $1.9 million during the
fiscal years 2000, 1999 and 1998, respectively.

Legal Matters

A subsidiary of the Company whose operations were discontinued in 1991, is
one of several defendants named in a personal injury action initiated in
August 1994, by a group of plaintiffs. The plaintiffs are seeking damages
which cumulatively exceed $500 million. The complaint alleges, among other
things, that the plaintiffs suffered injuries from exposure to substances
contained in products sold by the subsidiary to one of its customers. This
action is in the discovery stage. Based upon available information and
considering its various defenses, together with its product liability
insurance, in the opinion of management of the Company the outcome of the
action against its subsidiary will not have a materially adverse effect on
the Company's consolidated financial statements.

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

15. Business Segments

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

Microelectronics:
a)Microelectronic Modules
b)Thin Film Interconnects
c)Integrated Circuits

Test, Measurement and
Other Electronics:
a)Instrument Products
b)Motion Control Systems

Isolator Products:
a)Commercial Spring and Rubber Isolators
b)Industrial Spring and Rubber Isolators
c)Military Wire-rope Isolators

The Company is a manufacturer of advanced technology systems and components
for commercial industry, government and defense contractors. Approximately
32%, 41% and 42% of the Company's sales for the fiscal years 2000, 1999 and
1998, respectively, were to agencies of the United States government or to
prime defense contractors or subcontractors of the United States
government. The only customers which constituted more than 10% of the
Company's sales during any year in the period presented were Teradyne and
Lockheed Martin which comprised 11.0% and 10.5% of sales in fiscal year
2000, respectively, Lockheed Martin and Lucent Technologies which comprised
12.2% and 11.4% of sales in fiscal year 1999, respectively, and Lucent
Technologies which comprised 15.5% of sales in fiscal year 1998. The
Company's customers are located primarily in the United States, but export
sales accounted for 11.8%, 7.7% and 5.5% in fiscal years 2000, 1999 and
1998, respectively.

S-19
<PAGE>
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------
2000 1999 1998
------ ------ ------
Business Segment Data:
(In thousands)
<S> <C> <C> <C>
Net sales:
Microelectronics............ $110,253 $ 96,846 $ 74,263
Test, Measurement and
Other Electronics......... 55,918 41,515 25,685
Isolator Products........... 19,753 18,743 18,913
-------- -------- --------
Net sales................. $185,924 $157,104 $118,861
======== ======== ========
Operating income:
Microelectronics............ $ 22,734 $ 20,104 $ 14,147
Test, Measurement and
Other Electronics......... 2,333 3,134 996
Isolator Products........... 2,692 2,108 3,063
General corporate expenses.. (5,397) (4,262) (3,348)
-------- -------- --------
22,362 21,084 14,858
Acquired in-process research
and development(1)........ - (3,500) -
Interest expense............ (2,316) (1,454) (2,011)
Other income (expense), net. 554 777 309
-------- -------- --------
Income before income
taxes..................... $ 20,600 $ 16,907 $ 13,156
======== ======== ========
Total assets:
Microelectronics............ $112,183 $104,222 $ 58,053
Test, Measurement and
Other Electronics......... 52,401 43,958 27,522
Isolator Products........... 9,567 10,020 10,163
Corporate................... 74,556 7,016 28,363
-------- -------- --------
Total assets.............. $248,707 $165,216 $124,101
======== ======== ========
Capital expenditures:
Microelectronics............ $ 4,777 $ 6,955 $ 8,792
Test, Measurement and
Other Electronics......... 2,284 1,559 848
Isolator Products........... 152 586 970
Corporate................... - 4 3
-------- -------- --------
Total capital
expenditures.............. $ 7,213 $ 9,104 $ 10,613
======== ======== ========
Depreciation and amortization
expense:
Microelectronics............ $ 6,657 $ 4,112 $ 2,802
Test, Measurement and
Other Electronics......... 1,744 1,849 1,553
Isolator Products........... 554 563 500
Corporate................... 28 30 29
-------- -------- --------
Total depreciation and
amortization expense..... $ 8,983 $ 6,554 $ 4,884
======== ======== ========
<FN>
(1) The special charge for the write-off of in-process research and development
acquired in the purchase of UTMC is allocable fully to the Microelectronics
segment.
</FN>
</TABLE>

S-20
<PAGE>

Quarterly Financial Data (Unaudited):
(In thousands, except per share data and footnotes)
<TABLE>
<CAPTION>

Quarter Year Ended
2000 First Second Third Fourth June 30,
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 42,072 $ 41,531 $ 46,275 $ 56,046 $185,924
Gross Profit 15,139 13,559 16,721 21,957 67,376
Net Income $ 2,930 $ 1,341 $ 3,032 $ 7,097 $ 14,400
======== ======== ======== ======== ========
Net income per share:
Basic $ 0.13 $ 0.06 $ 0.13 $ 0.28 $ 0.60
======== ======== ======== ======== ========
Diluted $ 0.12 $ 0.06 $ 0.12 $ 0.26 $ 0.57
======== ======== ======== ======== ========

Quarter Year Ended
1999 First Second Third Fourth June 30,
----------------------------------------------------------------------------------
Net Sales $ 31,629 $ 36,197 $ 40,604 $ 48,674 $157,104
Gross Profit 11,125 12,402 15,399 19,533 58,459
Net Income (1) $ 2,258 $ 2,810 $ 188 $ 4,501 $ 9,757
======== ======== ======== ======== ========
Net income per share:
Basic (1) $ 0.10 $ 0.13 $ 0.01 $ 0.20 $ 0.44
======== ======== ======== ======== ========
Diluted (1) $ 0.10 $ 0.12 $ 0.01 $ 0.18 $ 0.41
======== ======== ======== ======== ========
<FN>
(1) Includes $3.5 million ($.14 per diluted share and $.16 basic) for the year
ended June 30, 1999 and quarter ended March 31, 1999, for the write-off of
the in- process research and development acquired in connection with the
purchase of UTMC Microelectronic Systems, Inc.
</FN>
</TABLE>

Since per share information is computed independently for each quarter and the
full year, based on the respective average number of common and common
equivalent shares outstanding, the sum of the quarterly per share amounts does
not necessarily equal the per share amounts for each year.

All shares and per share amounts have been restated to reflect a five-for-four
stock split.

S-21

<PAGE>

AEROFLEX INCORPORATED
---------------------
AND SUBSIDIARIES
----------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
--------------------
Charged
Balance at Charged to to other Balance at
beginning costs and accounts Deductions end of
Description of period expenses - describe - describe period
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 2000:
------------------------

Allowance for doubtful
accounts $ 381 $ 183 $ - $ 55 (A) $ 509
====== ====== ======== ====== ======
Reserve for inventory
obsolescence $4,354 $ 170 $ - $ 574 (B) $3,950
====== ====== ======== ====== ======
YEAR ENDED JUNE 30, 1999:
------------------------

Allowance for doubtful
accounts $ 317 $ 152 $ - $ 88 (A) $ 381
====== ====== ======== ====== ======
Reserve for inventory
obsolescence $3,592 $ 805 $ - $ 43 (B) $4,354
====== ====== ======== ====== ======

YEAR ENDED JUNE 30, 1998:
------------------------

Allowance for doubtful
accounts $ 417 $ 15 $ - $ 115 (A) $ 317
====== ====== ======== ====== ======
Reserve for inventory
obsolescence $4,055 $ 150 $ - $ 613 (B) $3,592
====== ====== ======== ====== ======
<FN>
Note: (A) - Net write-offs of uncollectible amounts.
(B) - Write-off of inventory.
</FN>
</TABLE>

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