IFR SYSTEMS INC, 10-K405, 2000-06-29

IFR SYSTEMS INC
10-K405, 2000-06-29
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS

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

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FORM 10-K

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE FISCAL YEAR ENDED MARCH 31, 2000 OR

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

COMMISSION FILE NUMBER 0-14224

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IFR SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 48-1197645
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)

10200 WEST YORK STREET, WICHITA, KANSAS 67215
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (316) 522-4981

Securities registered pursuant to Section 12(b) of the Act: NONE

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

COMMON STOCK, $.01 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. /X/

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 2, 2000 was approximately $48,981,986 (based on the
June 2, 2000 closing price of $5.938 per share). As of June 2, 2000, there were
8,248,903 shares of Registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy statement for the 2000 Annual Meeting of Stockholders
are incorporated by reference in Part III hereof.

The Exhibit Index to this Form 10-K is located on pages 41 through 43.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I...................................................... 1
Item 1. Business....................................... 1
Item 2. Properties..................................... 6
Item 3. Legal Proceedings.............................. 7
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 7

PART II..................................................... 7
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters............................. 7
Item 6. Selected Financial Data........................ 8
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... 9
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk............................................. 12
Item 8. Financial Statements and Supplementary Data.... 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 40

PART III.................................................... 40
Item 10. Directors and Executive Officers of the
Registrant.............................................. 40
Item 11. Executive Compensation......................... 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 40
Item 13. Certain Relationships and Related
Transactions............................................ 40

PART IV..................................................... 40
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K..................................... 40
Exhibit Index................................... 41
Signatures...................................... 44
</TABLE>
<PAGE>
PART I

ITEM 1. BUSINESS

GENERAL

IFR Systems, Inc. ("IFR" or the "Company") is a Delaware corporation,
incorporated in 1998 as a successor by merger to a corporation incorporated in
1985, with its principal offices in Wichita, Kansas. IFR's predecessor
corporation was originally founded in 1968 as a supplier of specialized test
solutions to the avionics industry. IFR expanded its activities in 1974 to apply
its knowledge of radio frequency ("RF") and related technologies to the
development of test solutions for the then emerging wireless communications
market. Today, through its Electronics Test and Measurement Segment ("ETM"), IFR
designs, manufactures, and markets communications, test and measurement, and
avionics test instruments that are used to test a wide variety of radio
products, aircraft and avionics systems.

In the description of the Company's business, reference to IFR and to the
Company includes all subsidiaries of the Company, unless otherwise stated.

DISCONTINUED OPERATIONS--see NOTE 10 to the consolidated financial statements

On June 25, 1999, the Board of Directors approved a formal plan to sell the
Company's Optical Test and Measurement Division ("OTM Division"). The sale was
completed on July 7, 1999 to GN Nettest, a company in the GN Great Nordic Group,
Copenhagen, Denmark for $43,988,000 in cash. A net of tax gain of approximately
$11,031,000 (approximately $1.34 per share) was recorded. The proceeds from the
sale were used to reduce the Company's outstanding debt obligation in
July 1999, with $31,740,000 applied to long-term debt and $11,260,000 used to
reduce short-term debt.

The results of operations for the OTM Division have been segregated and
classified as discontinued operations in the consolidated statements of
operations and prior periods have been restated. The consolidated balance sheets
have been segregated to reflect the OTM Division as discontinued operations and
prior periods have been restated. The consolidated statements of cash flows and
the consolidated statements of shareholders' equity include operations of the
OTM Division through the date of disposition.

PRODUCTS

While the Company makes a broad variety of products, substantially all of
the Company's products are test instruments. Since the sale of the OTM Division,
the Company has one segment, the ETM Segment.

The following table sets forth the contribution to total net sales of each
of the Company's three classes of test instruments for the periods ended
(amounts in thousands of dollars):

<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
JUNE 30, 1998 MARCH 31, 1999 MARCH 31, 2000
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Communications................. $46,516 42.7 $31,654 29.8 $39,727 28.0
Test & Measurement............. 19,671 18.1 26,441 24.9 37,905 26.7
Avionics....................... 9,520 8.7 11,387 10.7 13,209 9.3
Other.......................... 33,184 30.5 36,677 34.6 51,050 36.0
</TABLE>

Set forth below are discussions of each of the three classes of test
instruments that are designed, manufactured, and sold by the Company:
communications test equipment, test and measurement test equipment, and avionics
test equipment. In addition, the Company sells software computer solutions to be
used in connection with certain of the Company's test equipment products.

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COMMUNICATIONS TEST EQUIPMENT. The Company's communications test equipment
products are designed to test mobile radio products, such as mobile telephones
and cellular telephones, as well as base station equipment. IFR products emulate
the required system or parameters so the systems can be tested for proper
frequency transmission, signal modulation, power levels, and other key
performance parameters. The Company produces self-contained portable test sets
for both the digital and analog communications markets.

IFR's communications service monitors are used to test and maintain radio
products, including pagers, scanners, military communication transceivers, and
cellular, land mobile, marine and citizen band radios. Service monitors test
mobile radio equipment for proper frequency transmission, signal modulation and
power output. The principal end users of communications service monitors are
original equipment manufacturers, service and repair companies, government
agencies, and users of mobile radio equipment.

The mobile radio product industry is undergoing a transformation as the
result of the increased use of digital technology. Digital technology offers
spectral efficiencies, better voice quality, and more data services. As a
result, there is an increasing demand for products that use complex digital
modulation schemes. Cellular telephone systems currently deployed use CDMA, GSM,
and TDMA technologies. IFR provides a wide range of mobile radio test products
for both GSM and TDMA technologies and has secured software licensing agreements
with Qualcomm for marketing Qualcomm's production test software for CDMA
technology.

The professional mobile radio market, a traditionally strong market for IFR,
is also beginning to move towards digital technology with a new worldwide
terrestrial trunked radio access ("TETRA") protocol. IFR has been one of the
contributing suppliers for the initial test equipment requirements for TETRA
system design and production. IFR released its 2968 TETRA mobile radio test set
in 1999. IFR is presently designing products for other new technologies,
including the Project 25 ("P25") standard proposed by the Association of Public
Safety Communications Officials, "iDEN", a Motorola technology used
predominately by Nextel for general trunked radio access, and "EDACS Prism"
developed by Ericsson.

IFR continues to sell products to test mobile and professional analog
telephones and systems. Analog telephone systems continue to be deployed in
South America and a majority of the professional mobile radio market, which
includes users such as police, ambulance, and other mission-critical
environments, still relies on analog technology.

TEST AND MEASUREMENT TEST EQUIPMENT. The Company's electronic test and
measurement products are sophisticated instruments for the test and maintenance
of digital and analog communication systems, laboratory and field measurement of
electromagnetic signals and radio frequency test equipment for the aviation
industry, and automated test equipment. Included in the Company's test and
measurement equipment are spectrum analyzers, signal generators, counter power
meters, and microwave and modulation analyzers. These products are primarily
used to bench test equipment and are sold to original equipment manufacturers,
service and repair companies, and educational institutions.

The Company's spectrum analyzers, which display and measure the level of a
signal across a swept range of frequencies, signal amplitude versus frequency,
are used as a tool in the design of communications transmitting and receiving
equipment. The Company does not have a significant share of the spectrum
analyzer market.

The Company's signal generators create time-varying waveforms with defined
characteristics that simulate radio frequency signals under test. This product
series is used in the design, manufacture, and test of electronic subassemblies,
intermodulation distortion measurements and cordless telephone manufacturing.

IFR manufactures microwave products and multifunction microwave test sets,
which are used to measure the output and frequency of a device under test. The
products are used in establishing the

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microwave links that form the core infrastructure of a communication network.
The Company does not have a significant share of the microwave test product
market.

Microwave and modulation analyzers are used to measure the characteristics
of forward and reverse gain input and output impedance on radio frequency or
microwave networks.

AVIONICS TEST EQUIPMENT. The Company's avionics test instruments include
portable and stationary precision simulators which duplicate airborne conditions
to test the communications, weather radar, and instrument landing and
navigational systems installed in aircraft and ground stations. Principal
products tested by IFR equipment include transponder simulation systems,
navigation systems, collision avoidance systems, weather radar systems, global
positioning systems ("GPS") and military variants of such products. IFR's
precision simulators are used to test the avionics systems in commercial,
military, and general aviation aircraft. These products are primarily used by
general aviation service and repair companies, commercial airlines,
manufacturers, and the federal government.

IFR navigation test products are designed for testing instrument landing
systems, VHF omnidirectional radio range, marker beacons, automatic direction
finders, and selective calling systems and microwave landing system angle
receivers installed in aircraft.

IFR traffic alert and collision avoidance ("TCAS") products simulate the
airborne environment necessary to perform many of the required tests for
supplemental type certification.

IFR also has a weather radar simulation product, the RD-301A, that is
designed to test weather radar and narrow-pulse marine radar systems. This fully
integrated test set permits complete testing of routine radar functions and
provides the capabilities to satisfy simulation requirements for new generation
non-coherent radar systems.

IFR's global positioning simulator provides accurate and repeatable testing
of GPS receivers. It achieves this testing capability by simulating a GPS
satellite and generating specific vehicle and navigational data patterns.

OTHER PRODUCTS AND SERVICES. Within the ETM segment, IFR also offers
calibration, repair, and onsite field services for most types and makes of
electronic test equipment. IFR maintains major customer service facilities in
the United States and the United Kingdom, which are ISO accredited facilities.
Services performed include full maintenance and calibration, express calibration
and facilities management, including in-house calibration, repair, asset
management, and consultant services.

The Company's line of high-volume automated test equipment ("ATE") includes
products designed for the automotive, consumer electronics, and communications
industries. Such products include manufacturing defect analyzers, in-circuit
analyzers, and functional analyzers, all of which are used to test printed
circuit boards.

The following table sets forth the total sales of other products and
services of the Company for the periods ended (amounts in thousands of dollars):

<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
JUNE 30, 1998 MARCH 31, 1999 MARCH 31, 2000
------------- -------------- --------------
<S> <C> <C> <C>
Service............................. $ 14,218 $ 17,497 $ 26,233
Other............................... 10,421 8,311 10,669
ATE & Solutions..................... 8,545 10,869 14,148
</TABLE>

COMPETITION

IFR competes with numerous companies, foreign and domestic, many of which
have greater financial, marketing, and technical resources than IFR. According
to Prime Data, the test instrument global market

3
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is estimated at approximately $8.0 billion. IFR's market share is estimated as
approximately two percent. Two suppliers control over 40% of the test instrument
market. Competition is based primarily on product quality, technological
innovation, product features and customer service. IFR believes it is an
effective competitor in all these areas.

MARKETING AND DISTRIBUTION

IFR products and services are marketed and sold throughout the world by a
combination of IFR sales persons and distributors. The Company employs
approximately 156 salespersons located in the United States, the United Kingdom,
Hong Kong, France, Germany, Spain, and China, who call on various "house"
accounts as well as call on and assist independent distributors in selling IFR
products. The Company has been reducing the number of its nonexclusive
independent distributors to reflect its increasing emphasis on direct sales.

IFR's sales personnel and distributors are supported by an internal
marketing staff that performs market research and creates brochures and other
marketing materials.

SOURCES AND AVAILABILITY OF RAW MATERIALS

The Company's products require a wide variety of electronic and mechanical
components, most of which are purchased. The Company has multiple sources for
the vast majority of the components and materials it uses; however, there are
some instances where the components are obtained from a sole-source supplier. If
a sole-source supplier ceased to deliver, the Company could experience a
temporary adverse impact on its operations; however, management believes
alternative sources could be identified quickly. With occasional exceptions,
purchased materials and components have generally been available to the Company
as needed with acceptable lead times.

PATENTS, TRADEMARKS, LICENSES, FRANCHISES, AND CONCESSIONS

The Company owns a number of patents in the United States and various
foreign countries and is licensed to use patents owned by others. IFR has
granted licenses to use certain of its patents, but does not anticipate revenues
from licensing activities will be material. There can be no assurances that any
of the Company's current patents will provide the Company with adequate
protection. IFR has registered its "IFR" trademark. While the Company considers
its patents and trademark registrations to be valuable in the aggregate, it does
not consider that the loss of any single patent or trademark registration would
have a material effect on the Company or its operations. Likewise, while the
Company believes its products do not infringe the patent or other intellectual
property rights of third parties, there can be no assurance that third parties
will not assert infringement claims against the Company or that the Company will
prevail on any such claim or that a license, if needed, would be available on
acceptable terms.

SEASONALITY

The Company's business is not seasonal in nature.

WORKING CAPITAL ITEMS

IFR is typically able to meet its delivery schedules without maintaining
large inventories of completed goods and its customers generally do not require
extended payment terms. Accordingly, the ability to fund working capital
requirements for inventory and receivables financing is not a significant factor
and the Company does not consider itself to have any unusual working capital
needs.

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CUSTOMERS

IFR's products are marketed to a diverse customer base and no single product
line is a predominant factor in determining revenues or profits. IFR does not
have a single customer or a few customers, the loss of any one or more of which
would have a significant adverse effect.

BACKLOG

Backlog is not a significant factor in the Company's business because most
orders are in smaller quantities or on terms that allow the customer to cancel
or delay delivery without significant penalty. The Company's backlog of firm
orders was approximately $37,500,000 at March 31, 1999, and $26,056,000 at
March 31, 2000. It is anticipated that all of the backlog orders will be filled
during the current fiscal year unless canceled or deferred by customers.

GOVERNMENT AND MILITARY CONTRACTS

During the past fiscal year, approximately 4.3% of the Company's revenues
were derived from sales to the United States and its various agencies including
the armed services. All contracts with the United States Government and its
agencies are subject to termination at the convenience of the government.

IFR has maintained a portion of its business in military contracting. Over
the past five fiscal years, the percentage of total revenues from sales to the
military has ranged from a high of 21.6% in 1995 to a low of 3.1% in fiscal
1999. Military contracts generally provide an opportunity to diversify the
customer base, but typically involve lower margins than commercial sales to
private industry. IFR anticipates continuing to make military sales on a
selective basis but has no present plan to significantly increase its military
contracting.

RESEARCH AND DEVELOPMENT

The test equipment industry is characterized by continuous technology
changes that require an ongoing effort to enhance existing products and to
develop new products. IFR relies primarily on its internal research and
development programs for the development of new products and for improvement of
existing products. The Company does not perform basic research but uses new
component and software technologies in the development of new products. The
Company's research and development expenditures excluding discontinued
operations were approximately $14,077,000 in fiscal 2000, $11,816,000 in fiscal
1999, and $9,208,000 in fiscal 1998. As of May 31, 2000, the Company had
approximately 160 professional employees engaged in research and development
activities.

GOVERNMENTAL REGULATION

IFR is subject to laws and regulations affecting manufacturers and employers
generally and to certain Federal Communications Commission regulations that
affect equally all suppliers of similar products and are not considered a
significant factor in the Company's competitive position. Compliance with
federal, state, and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment have not had and are not expected to have a
material effect upon IFR's capital expenditures, earnings, or competitive
position.

EMPLOYEES

At May 31, 2000, the Company had approximately 1,200 full-time employees.
None of the Company's employees is covered by a collective bargaining agreement
or is represented by a labor union. The Company considers its relationship with
its employees to be satisfactory.

The design and manufacture of the Company's products require technical
capabilities in many disciplines. While the Company believes that the capability
and experience of its employees compare

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favorably with other similar manufacturers, there can be no assurance that it
can retain existing employees or attract and hire a sufficient number of the
highly capable employees it may need in the future on satisfactory terms.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

For information concerning the Company's export sales, see NOTE 7 of the
"Notes to Consolidated Financial Statements" for the year ended March 31, 2000.
More than half of the Company's revenues are to customers located outside the
United States which, as a consequence, the Company's results are affected by
economic conditions in other countries and by changes in various foreign
currency exchange rates. The Company believes that its foreign subsidiaries and
other larger international markets are in countries where the economic and
political climate is generally stable.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995--FORWARD-LOOKING STATEMENTS

In addition to historical information, this report contains forward-looking
statements and information that are based on management's beliefs and
assumptions, as well as information currently available to management.
Forward-looking statements are all statements other than statements of
historical fact included in this report. When used in this document, the words
"anticipate", "estimate", "expect", "intend", "believe", and similar expressions
are intended to identify forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable and are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, it can give no assurance that such
expectations will prove to be correct and that actual results will not differ
materially from the Company's expectations. Such forward-looking statements
speak only as of the date of this report, and the Company cautions readers not
to place undue reliance on such statements.

Factors that could cause actual results to differ from expectations include:
(1) the degree and nature of competition, including pricing pressure and the
development of new products or discoveries of new technologies by competitors,
(2) fluctuations in the global economy and various foreign countries including
recent developments adversely affecting the economies of various Asian
countries, (3) demand for the Company's products, (4) loss of significant
customers, (5) the Company experiencing delays in developing new products and
technologies, (6) the ability of the Company to continue the transition to
digital technologies in the communications test equipment products, (7) the
failure of such technologies or products to perform according to expectations,
(8) difficulties in manufacturing new products so they may be profitably priced
on a competitive basis, (9) lack of adequate market acceptance of new products
or technologies, (10) changes in products or sales mix and the related effects
on gross margins, (11) availability of components, parts, and supplies from
third party suppliers on a timely basis and at reasonable prices, (12) currency
fluctuations, (13) inventory risks due to changes in market demand or the
Company's business strategies, (14) inability to hire sufficient personnel at
reasonable levels of compensation and other labor problems, (15) inability to
realize anticipated efficiencies and savings from the Company's acquisition of
Marconi Instruments, Limited and (16) other risks described herein.

ITEM 2. PROPERTIES

IFR's principal executive offices and principal manufacturing facilities are
located at 10200 West York Street, Wichita, Kansas, 67215. IFR also operates
manufacturing facilities and sales offices in the United Kingdom and has sales
offices in four other countries.

IFR generally considers the productive capacity of its plants adequate and
suitable for the requirements of the company. The extent of utilization of such
manufacturing facilities varies from plant to plant and from time to time during
the year.

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The following table describes the Company's principal facilities.

<TABLE>
<CAPTION>
(1)
SQUARE LEASE
LOCATION FOOTAGE LEASE/OWNED EXPIRES DESCRIPTION
-------- -------- ---------------- -------- ---------------------------
<S> <C> <C> <C> <C>
Wichita, Kansas................ 156,000 Capital lease(2) 2017 Mfg., Eng.,
Admin., Sales

Stevenage,Hertfordshire,
England
Longacres House.............. 46,000 Operating lease 2020 Admin., Sales
Six Hills Way Bldg........... 81,000 Owned N/A Mfg., Eng.
Gunnelswood Road Bldg........ 34,000 Owned N/A Manufacturing
Sanders Bldg................. 27,000 Owned N/A Inventory, Customer Service

Chelmsford, England............ 3,000 Leased 2001 Customer Service
Portsmouth, England............ 5,000 Leased 2002 Customer Service
Donibristle, Scotland.......... 20,000 Leased 2020 Customer Service, Eng.
</TABLE>

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(1) Includes renewal option periods where appropriate.

(2) Industrial revenue bond financing in which the Company has an option to
purchase for a nominal price.

ITEM 3. LEGAL PROCEEDINGS

IFR is not a party to any material pending legal proceedings.

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

No matters were submitted to a vote of IFR's security holders during the
fiscal quarter ended March 31, 2000.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS

The Company's common stock is traded on the national over-the-counter market
under the NASDAQ symbol IFRS. The approximate number of shareholders of record
as of June 26, 2000, was 1,100. The high and low sales prices of the Company's
common stock for the fiscal quarters for the periods ended are set forth below
(in dollars).

<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999 JUNE 30, 1998
------------------- ------------------- -------------------
QUARTERS HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
First.......................................... 5 3 7/8 23 1/4 4 1/8 22 11 1/2
Second......................................... 6 1/2 2 15/16 6 1/2 3 1/8 23 1/2 15 1/8
Third.......................................... 13 3 7 4 5/8 25 1/2 14 1/8
Fourth......................................... 11 7/8 5 1/8 -- -- 22 1/2 17 1/2
</TABLE>

No cash dividends were paid during the fiscal periods ended March 31, 2000
and March 31, 1999. The Company paid cash dividends in the fiscal year ended
June 30, 1998 of $0.033 per share.

The Company's credit agreement with Bank One and other lenders precludes the
payment of cash dividends by the Company.

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ITEM 6. SELECTED FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
(NINE MONTHS)
2000 1999 1998 1997 1996
-------- ------------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Sales.................................. $141,891 $106,159 $108,891 $67,710 $57,234
Research & development expense......... 14,077 11,816 9,208 6,223 4,153
Operating income (loss)................ 1,829 3,468 (16,137) 8,417 7,112
Operating income--excluding
non-recurring charges(1)............. 1,829 3,468 11,407 8,417 7,112
Continuing operations:
Income (loss)........................ (4,098) (2,149) (18,078) 5,254 4,516
Income (loss) excluding non-recurring
charges(1)......................... (4,098) (2,149) 5,797 5,254 4,516
-------- -------- -------- ------- -------

BALANCE SHEET DATA
Total assets........................... $151,146 $187,043 $190,757 $65,830 $60,713
Working capital........................ 29,924 46,163 49,692 33,515 27,273
Shareholders' equity................... 34,818 28,228 32,081 48,154 43,368
Long-term debt and capital lease
obligations.......................... 59,383 96,567 100,080 3,765 2,110
-------- -------- -------- ------- -------

PROFITABILITY RATIOS
Gross profit........................... 41.3% 44.6% 32.7% 39.4% 36.7%
Gross profit--excluding non-recurring
charges(1)........................... 41.3 44.6 43.6 39.4 36.7
Continuing operations:
Income (loss)........................ (2.9) (2.0) (16.6) 7.8 7.9
Income (loss) excluding non-recurring
charges(1)......................... (2.9) (2.0) 5.3 7.8 7.9
Effective income tax rate(1)......... 36.1 41.3 34.3 37.0 37.9
Return on assets(2).................... (2.4) (1.5) (14.1) 8.3 7.6
Return on equity(2).................... (13.0) (9.5) (45.1) 11.5 11.0
-------- -------- -------- ------- -------

EARNINGS PER SHARE--DILUTED
Continuing operations:
Income (loss)........................ $ (0.50) $ (0.26) $ (2.21) $ 0.62 $ 0.53
Income (loss) excluding non-recurring
charges(1)......................... (0.50) (0.26) 0.66 0.62 0.53
Book value............................. 3.83 3.67 4.90 5.43 4.84
Dividends.............................. -- -- 0.07 -- --
-------- -------- -------- ------- -------
</TABLE>

Amounts differ from previously reported amounts since the results of the OTM
Division have been reflected as discontinued operations (see NOTE 10 to the
consolidated financial statements).

(1) In 1998, excludes pre-tax acquisition related charges of $11,844,000 in cost
of products sold and $15,700,000 in operating expenses. The effective income
tax rate excludes the effect of the acquisition adjustments.

(2) In 1999, annualized the nine month loss from continuing operations
($2,149,000) to calculate these returns.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995--FORWARD-LOOKING STATEMENTS

SALE OF THE OTM DIVISION

On June 25, 1999, the Board of Directors approved a formal plan to sell the
Company's Optical Test and Measurement (OTM) Division. The sale was completed on
July 7, 1999 to GN Nettest, a company in the GN Great Nordic Group, Copenhagen,
Denmark for $43,988,000 in cash. A net of tax gain of approximately $11,031,000
(approximately $1.34 per share) was recorded. The proceeds from the sale were
used to reduce the Company's outstanding debt obligation in July 1999, with
$31,740,000 applied to long-term debt and $11,260,000 used to reduce short-term
debt.

As a consequence of the divestiture, the results of operations for the OTM
Division have been segregated and classified as discontinued operations in the
consolidated statements of operations and prior periods have been restated. The
consolidated balance sheets have been segregated to reflect the OTM Division as
discontinued operations and prior periods have been restated. The consolidated
statements of cash flows and consolidated statements of shareholders' equity
include the OTM Division through the date of divestiture.

The net gain on disposal was recognized in the period the sale was
completed. See NOTE 10 to the consolidated financial statements for further
discussion.

COMPARISON OF FISCAL 2000 (12 MONTHS) VS. 1999 (9 MONTHS)

Sales for the fiscal year ended March 31, 2000 were $141,891,000 compared to
$106,159,000 for the nine-month fiscal period ended March 31, 1999. This
represents an increase of 33.7%. Sales increased by

9
<PAGE>
$35,732,000 or 33.7% due mainly to one more quarter in the current fiscal year.
International sales were $79,867,000 (56.3% of sales) in fiscal year 2000
compared to $67,776,000 (63.8% of sales) in the nine-month fiscal period ended
in 1999. The increase in foreign sales dollars is due to one more quarter in
fiscal year 2000. The decrease in foreign sales percentage is due to the
increased demand in the US market. The majority of the increase in international
sales took place in the Americas and the Pacific Rim.

Gross profit as a percent of sales decreased from 44.6% in the nine months
ended in 1999 to 41.3% in fiscal year 2000. The current year includes $667,000
(0.5% of sales) of non-recurring charges due to the recording of cost reduction
charges (termination and severance benefits) in the third quarter. Excluding the
cost reduction charges, the normalized gross profit percentage for 2000 was
41.7% or 2.9% lower than the prior year. The decrease is due to the product mix.

Operating expenses decreased 1.3% to 40.0% of sales. The current year
includes non-recurring cost reduction charges of $2,213,000 or 1.6% of sales in
fiscal year 2000, which are excluded for comparison purposes. Excluding the
effect of the cost reduction charges, operating expenses decreased to 38.4%
compared to 41.3% in the nine months ended in 1999. Engineering expenses
decreased 1.5% as a percentage of sales from 12.9% in the nine months ended in
1999 to 11.4% for fiscal year 2000. Selling expenses decreased 0.6% as a
percentage of sales from 17.3% in the nine months ended in 1999 to 16.7% for
fiscal year 2000. Administrative expenses decreased as a percentage of sales
from 11.1% in the nine months ended in 1999 to 10.2% for fiscal year 2000.

Operating income as a percent of sales decreased from 3.3% for the nine
months ended in 1999 to 1.3% for fiscal year 2000. Excluding the non-recurring
cost reduction charges in fiscal year 2000 noted above, normalized operating
income was $4,709,000 or 3.3% of sales compared to 3.3% in the nine months ended
in 1999.

Interest expense for fiscal year 2000 was $8,121,000 compared to interest
expense for the nine months ended in March 1999 of $7,685,000. Interest income
decreased $407,000 from the prior year. Other expense was $293,000 compared to
$22,000 in the prior year.

The effective income tax rate from continuing operations was 41.3% for the
nine months ended in 1999 compared to 36.1% for fiscal year 2000. The decrease
in rate results from a prior period increase in valuation allowances not
repeated in the current year.

The loss from continuing operations including the cost reduction charges, as
a percent of revenue, was 2.9% in fiscal year 2000 compared to 2.0% in the prior
period.

COMPARISON OF FISCAL 1999 (9 MONTHS) VS. 1998 (12 MONTHS)

The Company completed the purchase of Marconi Instruments Limited on
February 6, 1998, resulting in fiscal 1998 purchase accounting related
adjustments, specifically the $15,700,000 write off of in-process research and
development and $11,844,000 of inventory valuation expenses, increasing cost of
products sold, which were recorded in the third and fourth quarter of fiscal
1998.

Sales for the nine month fiscal year ended March 31, 1999 were $106,159,000
compared to $108,891,000 for the twelve month fiscal year ended June 30, 1998.
This represents a decrease of 2.5%. The prior fiscal year includes approximately
five months sales of $46,822,000 from the Marconi acquisition compared to nine
months sales of $67,916,000 in fiscal period 1999. Excluding the acquisition,
sales declined by $23,826,000 or 38.4%, due mainly to one less quarter in the
fiscal period 1999. International sales were $67,776,000 (63.8% of sales) in the
nine months ended in 1999 compared to $52,630,000 (48.3% of sales) in fiscal
year 1998. The increase in foreign sales was due to the purchase of Marconi and
its presence in the foreign markets. The majority of the increase in
international sales took place in Europe and the Pacific Rim.

Gross profit as a percent of sales increased from 32.7% in fiscal year 1998
to 44.6% in the nine months ended in 1999. The prior year includes $11,844,000
(10.9% of sales) of non-recurring charges due to the

10
<PAGE>
recording of inventory valuations related to the Marconi acquisition. Excluding
the acquisition related charges; the normalized gross profit percentage for 1998
was 43.6% or 1.0% lower than the current year.

Operating expenses decreased 6.2% to 41.3% of sales in the nine months ended
in 1999. The prior year includes a non-recurring write-off ($15,700,000) of
in-process research and development technology related to the Marconi
acquisition. Excluding the effect of the acquisition adjustment, operating
expenses increased to 41.3% compared to 33.1% in fiscal year 1998. Significant
cost reductions were made in the latter part of the fiscal period ended in 1999.
Engineering expenses increased as a percentage of sales from 10.4% in fiscal
year 1998 to 12.9% for the nine months ended in 1999. This was due to the
increased focus on the development of new test instruments for the emerging
wireless digital telecommunications markets. Selling expenses increased as a
percentage of sales from 14.5% in fiscal year 1998 to 17.3% for the nine months
ended in 1999. The 2.8% increase was due to the redirection of the Company to a
direct sales force after the purchase of Marconi and the increased cost of
marketing communications due to the purchase. Administrative expenses increased
as a percentage of sales from 8.2% in fiscal year 1998 to 11.1% for the nine
months ended in 1999. The 2.9% increase was due to higher amortization costs
related to the acquisition.

Operating income as a percent of sales increased from a negative 14.8% for
fiscal year 1998 to a positive 3.3% for the nine months ended in 1999. Excluding
the non-recurring acquisition adjustments in fiscal year 1998 noted above, the
$15,700,000 in process research and development and the $11,844,000 inventory
valuation, normalized operating income was $11,407,000 or 10.5% of sales
compared to 3.3% in the nine months ended in 1999. The 7.2% decrease was due to
higher operating expenses.

Interest expense in the nine months ended in 1999 increased by $3,805,000
compared to the prior year due to higher interest expense related to the Marconi
acquisition (nine months expense compared to five months in the prior year) and
higher short-term bank borrowings ($6,700,000). Interest income decreased
$64,000 from the prior year. Other expense in the nine months ended in 1999 was
$22,000 compared to $0 in the prior year.

Excluding the effect of the acquisition adjustments, the effective income
tax rate from continuing operations was 34.3% for fiscal year 1998 compared to
41.3% for the nine months ended in 1999.

The loss from continuing operations, as a percent of revenue was 2.0% in the
nine months ended in 1999 compared to 16.6% in the prior year. In fiscal year
1998, the components include the $15,700,000 in process research and
development, the $11,844,000 before tax inventory valuation and the increased
interest incurred in the purchase of Marconi. Income from continuing operations
is 5.3% after normalization of these components compared to negative 2.0% in the
nine months ended in 1999. The 7.3% decrease is mainly due to higher operating
expenses.

EURO CONVERSION

Effective January 1, 1999, the European Economic and Monetary Union created
a single Eurocurrency (the euro) for its member countries. A transition period
is in effect that began January 1, 1999, and goes through December 31, 2001,
during which time transactions will be executed in both the euro and the member
country currencies. Effective January 1, 2002 the euro will be the sole legal
tender of the European Economic and Monetary Union countries.

In general, the adoption of a single currency for the participating
countries is expected to result in greater transparency of pricing, making
Europe a more competitive environment for businesses. In addition, conversion to
the euro is expected to affect many financial systems and business applications.

At the time IFR switches to using the euro as a functional currency for
certain of its affiliates, information system modifications will be required. It
is not anticipated, at this time, that the euro will have a material impact on
the competitive environment in which IFR operates or a significant impact on
IFR's fundamental risk management philosophy. Any costs incurred associated with
the adoption of the euro will

11
<PAGE>
be expensed as incurred, and are not anticipated to be material to IFR's results
of operations, financial condition, or liquidity.

YEAR 2000

IFR successfully completed its Year 2000 readiness project. The January 1,
2000 rollover went smoothly, as expected. The Company's facilities and
operational systems were successfully made Year 2000 ready and are functioning
effectively. The expenses associated with Year 2000 readiness effort were not
significant.

LIQUIDITY AND CAPITAL RESOURCES

The Company maintains an adequate financial position with working capital of
$29,924,000 at March 31, 2000. The Company used cash in operations of $3,719,000
in fiscal year 2000 and generated cash from operations of $5,059,000 in the nine
months ended in 1999.

Cash flows used in investing activities and cash flows provided in financing
activities reflect primarily the proceeds from the sale of the OTM Division,
acquisition payment and resulting loans, subsequent debt payments and capital
expenditures.

No cash dividends were paid in fiscal year 2000 and 1999. The Company's
credit agreement with Bank One and other lenders precludes the payment of cash
dividends by the Company.

At March 31, 2000, the Company had no significant commitments for capital
expenditures. The Company anticipates that the available line of credit and
funds generated from operations will be adequate to meet capital asset
expenditures, interest and working capital needs for the next twelve months. In
June 2000, the Company signed an amendment to its credit agreement. The
amendment restated certain financial ratio covenants, waived violations of its
minimum fixed charge coverage and maximum leverage ratio covenants, which
occurred during fiscal 2000, as well as modified the repayment schedule of the
loans. See NOTE 2 to the consolidated financial statements.

INFLATION

Changes in product mix from year to year and highly competitive markets make
it very difficult to define accurately the impact of inflation on profit
margins. The Company believes that during the recent period of moderate
inflation it has been able to reduce inflationary effects by vendor partnering
arrangements and continuing expense control.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.

The Company is exposed to interest rate risk primarily from its Credit
Agreement (Agreement) in which floating rates are based upon the relationship
between earnings before interest, depreciation and taxes (EBITDA) and total
debt. To mitigate the impact of fluctuations in interest rates, the Company has
entered into interest rate swap agreements on $50,000,000 of the associated
debt. Because of the Company's interest rate swap agreements a hypothetical 10%
movement in interest rates would not have a material impact on net income.

Due to the global nature of its operations, the Company conducts its
business in various foreign currencies (primarily the currencies of Western
Europe) and as a result, is subject to the exposures that arise from foreign
exchange rate movements. Such exposures arise primarily from the translation of
results of operations from outside the United States. Because the Company
intends to maintain its international operations and not repatriate earnings
from those operations, IFR does not hedge its net investment exposure.

12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

IFR SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<S> <C>
Responsibility for Financial Statements..................... 14

Report of Independent Auditors.............................. 15

Consolidated Balance Sheets as of March 31, 2000 and
March 31, 1999............................................ 16

Consolidated Statements of Operations for the year ended
March 31, 2000, nine months ended March 31, 1999, and year
ended June 30, 1998....................................... 18

Consolidated Statements of Shareholders' Equity for the year
ended March 31, 2000, nine months ended March 31, 1999,
and year ended June 30, 1998.............................. 19

Consolidated Statements of Cash Flows for the year ended
March 31, 2000, nine months ended June 30, 1999, and year
ended June 30, 1998....................................... 20

Notes to Consolidated Financial Statements.................. 21

Quarterly Results of Operations (unaudited)................. 37
</TABLE>

13
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS

The management of IFR Systems, Inc. is responsible for the preparation of
the financial statements and financial statement schedule, the Annual Report and
for the integrity and objectivity of the information presented. The financial
statements and financial statement schedule have been prepared in conformity
with accounting principles generally accepted in the United States and
necessarily include amounts which are estimates and judgments. The fairness of
the presentation in these statements of the Company's financial position,
results of operations and cash flows is reported on by the independent auditors.

To assist in carrying out the above responsibility, the Company has internal
systems which provide for selection of personnel, segregation of duties and the
maintenance of accounting policies, systems, procedures and related controls.

Although no cost effective system can ensure the elimination of errors, the
Company's systems have been designed to provide reasonable but not absolute
assurances that assets are safeguarded, that policies and procedures are
followed, and that the financial records are adequate to permit the production
of reliable financial statements.

The Audit Committee of the Board of Directors, which is composed of
Directors who are not employees of the Company, meets regularly with Company
officers and independent auditors in connection with the adequacy and integrity
of the Company's financial reporting and internal controls.

/s/ Dennis H. Coley

Dennis H. Coley
CHIEF FINANCIAL OFFICER
AND TREASURER

14
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors
IFR Systems, Inc.

We have audited the accompanying consolidated balance sheets of IFR
Systems, Inc. as of March 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year ended
March 31, 2000, nine months ended March 31, 1999 and year ended June 30, 1998.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IFR
Systems, Inc. at March 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for the year ended March 31, 2000, nine months
ended March 31, 1999 and year ended June 30, 1998, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

/s/ Ernst & Young LLP

Indianapolis, Indiana
May 5, 2000
except for Note 2, as to which that
date is
June 15, 2000

15
<PAGE>
IFR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,169 $ 5,086
Accounts receivable, less allowance for doubtful accounts
of $600 in 2000 and $731 in 1999........................ 29,267 27,306
Inventories:
Finished products....................................... 13,278 15,568
Work in process......................................... 9,174 8,811
Materials............................................... 14,537 13,650
-------- --------
36,989 38,029
Prepaid expenses and sundry............................... 4,301 6,042
Deferred income taxes (NOTE 3)............................ 2,248 2,492
Current assets of discontinued operations................. -- 17,460
-------- --------
TOTAL CURRENT ASSETS........................................ 75,974 96,415
PROPERTY AND EQUIPMENT:
Land...................................................... 4,650 4,670
Buildings................................................. 8,223 8,183
Machinery................................................. 26,299 23,226
Allowances for depreciation (deduction)................... (17,976) (13,835)
-------- --------
21,196 22,244
PROPERTY UNDER CAPITAL LEASE (NOTE 2):
Building.................................................. 2,757 2,757
Machinery................................................. 2,444 2,444
Allowances for depreciation (deduction)................... (2,414) (1,962)
-------- --------
2,787 3,239
PROPERTY AND EQUIPMENT PENDING DISPOSITION, NET OF
ALLOWANCES FOR DEPRECIATION OF $4,380 IN 1999............. -- 3,058
OTHER ASSETS (NOTE 11):
Cost in excess of net assets acquired, less accumulated
amortization of $1,556 in 2000 and $812 in 1999......... 20,125 21,485
Developed technology, less accumulated amortization of
$2,028 in 2000 and $1,092 in 1999....................... 16,772 17,708
Other intangibles, less accumulated amortization of $2,446
in 2000 and $1,594 in 1999.............................. 12,320 13,172
Other..................................................... 1,972 2,090
Other assets related to discontinued operations--net...... -- 7,632
-------- --------
51,189 62,087
-------- --------
TOTAL ASSETS................................................ $151,146 $187,043
======== ========
</TABLE>

16
<PAGE>
IFR SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank borrowings (NOTE 2)....................... $ 15,700 $ 17,700

Accounts payable.......................................... 12,493 9,883

Accrued compensation and payroll taxes.................... 4,262 4,401

Other liabilities and accrued expenses (NOTE 8)........... 6,355 8,890

State and local taxes..................................... 887 564

Federal income taxes...................................... 913 556

Current maturity of capital lease obligations............. 190 185

Current maturity of long-term debt........................ 5,250 4,250

Current liabilities of discontinued operations............ -- 3,823
-------- --------

TOTAL CURRENT LIABILITIES................................... 46,050 50,252

CAPITAL LEASE OBLIGATIONS (NOTE 2).......................... 3,248 3,442

LONG-TERM DEBT (NOTE 2)..................................... 56,135 93,125

DEFERRED INCOME TAXES (NOTE 3).............................. 10,895 11,828

DEFERRED INCOME TAXES OF DISCONTINUED OPERATIONS............ -- 168

SHAREHOLDERS' EQUITY (NOTE 5):

Preferred Stock, $.01 par value:
Authorized shares--1,000,000, none issued............... -- --

Common Stock, $.01 par value:
Authorized shares--50,000,000
Issued shares--9,266,250................................ 93 93

Additional paid-in capital................................ 7,330 7,368

Cost of common stock in treasury--1,025,722
shares in 2000 and 1,056,985 shares in 1999............. (8,357) (8,611)

Accumulated other comprehensive loss...................... (2,072) (1,187)

Retained earnings......................................... 37,824 30,565
-------- --------

Total shareholders' equity.................................. 34,818 28,228
-------- --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $151,146 $187,043
======== ========
</TABLE>

SEE ACCOMPANYING NOTES.

17
<PAGE>
IFR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
SALES....................................................... $141,891 $106,159 $108,891
COST OF PRODUCTS SOLD....................................... 83,350 58,858 73,257
-------- -------- --------
GROSS PROFIT................................................ 58,541 47,301 35,634

OPERATING EXPENSES:
Selling................................................... 24,035 18,329 15,810
Administrative............................................ 16,152 11,799 8,942
Engineering............................................... 16,525 13,705 11,319
Acquired research and development (NOTE 11)............... -- -- 15,700
-------- -------- --------
56,712 43,833 51,771
-------- -------- --------
OPERATING INCOME (LOSS)..................................... 1,829 3,468 (16,137)

OTHER EXPENSE:
Interest income........................................... 171 578 642
Interest expense.......................................... (8,121) (7,685) (3,880)
Other, net................................................ (293) (22) --
-------- -------- --------
(8,243) (7,129) (3,238)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(BENEFIT)................................................. (6,414) (3,661) (19,375)

INCOME TAX BENEFIT (NOTE 3)................................. (2,316) (1,512) (1,297)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS............................. (4,098) (2,149) (18,078)

INCOME (LOSS) FROM DISCONTINUED OPERATIONS LESS APPLICABLE
INCOME TAXES (NOTE 10).................................... 11,357 (446) 2,141
-------- -------- --------
NET INCOME (LOSS)........................................... $ 7,259 $ (2,595) $(15,937)
======== ======== ========

EARNINGS (LOSS) PER SHARE--BASIC:
Loss from continuing operations........................... $ (0.50) $ (0.26) $ (2.21)
Income (loss) from discontinued operations................ 1.38 (0.06) 0.26
-------- -------- --------
Net income (loss)......................................... $ 0.88 $ (0.32) $ (1.95)
======== ======== ========

EARNINGS (LOSS) PER SHARE--DILUTED:
Loss from continuing operations........................... $ (0.50) $ (0.26) $ (2.21)
Income (loss) from discontinued operations................ 1.38 (0.06) 0.26
-------- -------- --------
Net income (loss)......................................... $ 0.88 $ (0.32) $ (1.95)
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING........................... 8,233 8,207 8,191
======== ======== ========
DILUTIVE COMMON SHARES OUTSTANDING.......................... 8,233 8,207 8,191
======== ======== ========
</TABLE>

SEE ACCOMPANYING NOTES.

18
<PAGE>
IFR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER
------------------- PAID-IN ------------------- COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT INCOME (LOSS) EARNINGS TOTAL
-------- -------- ---------- -------- -------- ------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1997.... 9,266 $62 $6,400 (1,130) $(8,040) $ 58 $ 49,674 $ 48,154
Net loss.................... -- -- -- -- -- -- (15,937) (15,937)
Translation adjustments..... -- -- -- -- -- 328 -- 328
--------
Comprehensive loss.......... (15,609)
Purchases for treasury...... -- -- -- (128) (2,057) -- -- (2,057)
Incentive stock options
exercised................. -- -- (237) 193 1,418 -- -- 1,181
Stock split effected in the
form of a dividend........ -- 31 -- -- -- -- (31) --
Dividends--$.067 per
share..................... -- -- -- -- -- -- (546) (546)
Tax benefit from exercise of
stock options............. -- -- 958 -- -- -- -- 958
----- --- ------ ------ ------- ------- -------- --------
BALANCE AT JUNE 30, 1998.... 9,266 $93 $7,121 (1,065) $(8,679) $ 386 $ 33,160 $ 32,081
Net loss.................... -- -- -- -- -- -- (2,595) (2,595)
Translation adjustments..... -- -- -- -- -- (1,573) -- (1,573)
--------
Comprehensive loss.......... (4,168)
Incentive stock options
exercised................. -- -- (17) 5 44 -- -- 27
Tax benefit from exercise of
stock options............. -- -- 288 -- -- -- -- 288
Restricted stock grants
(NOTE 5).................. -- -- (24) 3 24 -- -- --
----- --- ------ ------ ------- ------- -------- --------
BALANCE AT MARCH 31, 1999... 9,266 $93 $7,368 (1,057) $(8,611) $(1,187) $ 30,565 $ 28,228
Net Income.................. -- -- -- -- -- -- 7,259 7,259
Translation adjustments..... -- -- -- -- -- (885) -- (885)
--------
Comprehensive income........ 6,374
Incentive stock options
exercised................. -- -- (37) 9 79 -- -- 42
Issuance of stock options... -- -- 20 -- -- -- -- 20
Restricted stock grants
(NOTE 5).................. -- -- (21) 22 175 -- -- 154
----- --- ------ ------ ------- ------- -------- --------
BALANCE AT MARCH 31, 2000... 9,266 $93 $7,330 (1,026) $(8,357) $(2,072) $ 37,824 $ 34,818
===== === ====== ====== ======= ======= ======== ========
</TABLE>

SEE ACCOMPANYING NOTES.

19
<PAGE>
IFR SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 7,259 $(2,595) $(15,937)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property and equipment.................... 4,545 4,422 4,234
Amortization of intangibles............................... 2,532 2,276 2,207
Amortization of loan origination fees..................... 403 -- --
Gain on sale of discontinued operations................... (17,207) -- --
Write off of acquired research and development............ -- -- 15,700
Deferred income taxes..................................... (689) 910 (3,622)
Deferred compensation expense............................. 135 -- --
Utilization of acquired tax loss carryforwards............ -- -- 416
Changes in operating assets and liabilities
(net of effects of acquired businesses):
Accounts receivable..................................... (1,961) 8,971 (3,081)
Inventories............................................. 1,040 (494) 13,810
Other current assets.................................... 233 (2,974) 1,320
Accounts payable and accrued liabilities................ 552 (6,549) (7,044)
Other current liabilities............................... (561) 1,092 (4,320)
-------- ------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... (3,719) 5,059 3,683
INVESTING ACTIVITIES
Proceeds from sale of discontinued operations............... 43,988 -- --
Payments for acquired businesses............................ -- -- (108,851)
Purchases of property and equipment......................... (3,358) (3,239) (4,543)
Proceeds from sale of equipment............................. 70 -- 1,071
Sundry...................................................... (293) (525) (1,832)
-------- ------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... 40,407 (3,764) (114,155)
FINANCING ACTIVITIES
Purchases of capital stock for treasury..................... -- -- (2,057)
Principal payments on capital lease obligations............. (189) (138) (175)
Principal payments on long-term debt........................ (35,990) (2,625) --
Principal payments on short-term bank borrowings............ (36,660) (8,100) (3,535)
Proceeds from short-term bank borrowings.................... 34,660 14,800 12,150
Proceeds from acquisition loan.............................. -- -- 100,000
Proceeds from exercise of common stock options.............. 216 315 2,139
Payment of dividends........................................ -- -- (546)
-------- ------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... (37,963) 4,252 107,976
Effect of exchange rate changes on cash..................... (642) (620) 276
-------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (1,917) 4,927 (2,220)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 5,086 159 2,379
-------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 3,169 $ 5,086 $ 159
======== ======= ========
</TABLE>

SEE ACCOMPANYING NOTES.

20
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of IFR Systems, Inc. (Company or IFR)
include the accounts of all subsidiaries after elimination of intercompany
accounts and transactions.

STOCK SPLIT

On November 7, 1997, the Company's Board of Directors approved a
three-for-two stock split to be effected in the form of a 50% stock dividend.
The additional stock was distributed on December 5, 1997 to shareholders of
record on November 21, 1997. All references to number of shares, share prices
and per share amounts reflect the stock split.

USE OF ESTIMATES

Preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

FOREIGN CURRENCY TRANSLATION

The functional currency for the Company's foreign operations is the
applicable local currency. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using the
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The gains or
losses resulting from such translation are included in other comprehensive
income. Gains or losses resulting from foreign currency transactions are
included in other income.

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out method) or
market.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed by
straight-line and declining balance methods at rates based on the estimated
useful lives of the assets from 3 to 30 years.

PROPERTY UNDER CAPITAL LEASE

Property under capital lease is recorded at the lower of the fair market
value of the leased property or the present value of the minimum lease payments.
Depreciation of leased property is computed by the straight-line method over the
useful life of the asset.

21
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS

The cost in excess of net assets acquired (goodwill), developed technology
and other intangibles are being amortized by the straight-line method over
periods ranging from 10 to 30 years. Goodwill, developed technology and other
intangibles are reviewed to assess recoverability when impairment indicators are
present. Assets are considered to be impaired and are written down to fair value
if expected future operating cash flows of the related assets are less than
their carrying amounts. Fair value is the present value of the expected future
cash flows of the related assets using a discount rate commensurate with the
risk involved. Assets are grouped at the lowest level for which there are
identifiable cash flows for purposes of impairment testing.

INTEREST SWAP AGREEMENTS

The Company is required by its bank syndicate to enter into interest rate
swaps to manage interest rate exposures. The Company designates the interest
rate swaps as hedges of the underlying debt. Interest expense on the debt is
adjusted to include the payments made or received under the swap agreements.

INCOME TAXES

Deferred taxes are recognized for the future tax effects of temporary
differences between financial and income tax reporting based on enacted tax laws
and rates. Federal income taxes are provided on the portion of the income of
foreign subsidiaries that is expected to be remitted to the United States and be
taxable.

REVENUE RECOGNITION

Revenue from the sale of products is recognized at the time products are
shipped or when services have been rendered to the customer.

Sales and cost of sales on long-term contracts are recorded as deliveries
are made. Estimates of cost to complete are revised periodically throughout the
lives of the contracts, and any estimated losses on contracts are recorded in
the accounting period in which the revisions are made.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is calculated based on the weighted-average
number of outstanding common shares. Diluted earnings (loss) per share is
calculated based on the weighted-average number of outstanding common shares,
plus the effect of dilutive stock options.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. A recent
amendment to this statement extended the required implementation date to fiscal
years beginning after June 15, 2000. The statement permits early adoption as of
the beginning of any fiscal quarter after its issuance. The Company expects to
adopt the new statement effective April 1, 2001. The statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through

22
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.

The Company has not yet determined what the effect of Statement 133 will be
on the earnings and financial position of the Company.

CHANGE IN FISCAL YEAR

In January 1999, the Company's Board of Directors approved an amendment of
the Bylaws to change the fiscal year end from June 30 to March 31. The change in
year end was done to allow more efficient alignment of the planning and
accounting functions of the business which has changed significantly with the
increase in the Company's international presence.

2. DEBT AND LEASE ARRANGEMENTS

Long-term debt consisted of the following (IN THOUSANDS):

<TABLE>
<CAPTION>
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Term Loan A............................................... $44,000 $47,750
Term Loan B (see Note 10)................................. 17,385 49,625
------- -------
61,385 97,375
Less current maturities................................... 5,250 4,250
------- -------
Total long-term debt...................................... $56,135 $93,125
======= =======
</TABLE>

TERM LOANS PAYABLE TO BANK: In June 2000, the Company entered into an
amendment of its Credit Agreement with the bank syndication (the Agreement). The
amendment restated certain financial ratio covenants, waived violations of its
minimum fixed charge coverage and maximum leverage ratio covenants which
occurred during fiscal 2000 as well as modified the repayment schedule of the
loans. Both of the term loans are payable in quarterly installments of principal
pursuant to a schedule contained in the Agreement which calls for such payments
to increase over the term of the loan. Term Loan A and Term Loan B are due
June 30, 2002. Under certain conditions, the Company has the ability to extend
the term to June 30, 2003. Summary payments by year are as follows (IN
THOUSANDS):

<TABLE>
<S> <C>
2001........................................................ $ 5,250
2002........................................................ 9,250
2003........................................................ 46,885
Thereafter.................................................. --
-------
Total....................................................... $61,385
=======
</TABLE>

23
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

2. DEBT AND LEASE ARRANGEMENTS (CONTINUED)
Under the terms of the Agreement, borrowings bear interest at a spread up to
3.75% per annum over the London Interbank Offered Rate (LIBOR) which varies
depending on the Term Loan and the current leverage ratio as defined in the
Agreement. At March 31, 2000, the spread was 3.0% on Term Loan A and 3.5% on
Term Loan B. The interest rate on the loans at March 31, 2000 was 9.01% on Term
Loan A and 9.58% on Term Loan B. The fair value of the Company's long-term debt
approximates carrying value since the facilities bear a current market rate of
interest.

In July 1999 Term Loan B was paid down $31,740,000 from the proceeds of the
sale of the OTM Division (SEE NOTE 10).

LINES OF CREDIT: The Company also has available lines of credit with the
bank syndicate aggregating $23,000,000. The Credit Agreement expires on
June 30, 2002. Under the terms of the Agreement, borrowings bear interest at a
spread over LIBOR based on certain financial criteria. At March 31, 2000, this
spread was 3.0%. The total interest rate on the outstanding portion of the lines
of credit was 9.88% at March 31, 2000. As of March 31, 2000, the Company has
unused available lines of credit aggregating $7,300,000.

SWING LINE NOTE: The Agreement allows for swing line loans for an amount
not to exceed $5,000,000. At March 31, 2000, the Company had available funds
aggregating $5,000,000 at an interest rate of 11.0%.

INTEREST SWAP AGREEMENT: In February 1998, the Company entered into two
separate interest swap agreements for $25,000,000 each. The first swap agreement
is for a fixed interest rate of 5.8% and expires on March 30, 2001 with an
option to extend an additional two years. The second swap agreement is for a
fixed interest rate of 5.76% and expires on March 30, 2001. The swap agreements
limit the exposure to increased LIBOR rates on the Term Loans. The fair value of
the swap is approximately $370,000 and is determined using the current market
rate of the instrument.

CAPITAL LEASES: In March 1997, the Company entered into a capital lease to
refund and redeem the industrial revenue bonds dated May 1, 1989 which were
issued in the original principal amount of $3,500,000 of which $2,330,000 were
outstanding; and to finance manufacturing support equipment and building
improvements to the existing facility. This lease was entered into in connection
with an issuance of industrial revenue bonds dated March 15, 1997 (the 97 Bonds)
by the City of Goddard, Kansas (the City). The transaction for the 97 Bonds
totaled $3,940,000. The Company has guaranteed the future repayment of all
amounts due relating to the 97 Bonds. The City has retained title to the
facilities and related equipment. The Company has the option to purchase the
facilities and equipment for a nominal amount after repayment in full of all
amounts due relating to the 97 Bonds. Under the terms of the lease, the Company
is required to make quarterly payments in an amount sufficient to pay the
principal and interest installments of the 97 Bonds when due. The 97 Bonds
mature serially over a 15 year period which commenced May 1, 1997, and are
callable for early redemption by the Company on or after May 1, 2004. Upon the
occurrence of certain events, the 97 Bonds are subject to immediate redemption
at the option of each Bond holder. These events include the acquisition or right
to acquire beneficial ownership of 25% of the outstanding Common Stock (unless
waived by the Board of Directors), the subsequent determination that the Bonds
are taxable or other specified events.

Amortization of the building and equipment pledged for the 97 Bonds is
included in depreciation expense.

24
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

2. DEBT AND LEASE ARRANGEMENTS (CONTINUED)
Future minimum lease payments, based upon scheduled redemptions of the Bonds
as of March 31, 2000, are as follows (IN THOUSANDS):

<TABLE>
<S> <C>
2001........................................................ $ 399
2002........................................................ 404
2003........................................................ 402
2004........................................................ 404
2005........................................................ 402
Thereafter.................................................. 2,930
------
Total minimum lease payments................................ 4,941
Amounts representing interest............................... 1,503
------
Present value of minimum lease payments..................... 3,438
Current maturities.......................................... 190
------
Long-term portion........................................... $3,248
======
</TABLE>

OPERATING LEASES: The Company also leases certain facilities and equipment
under operating leases that expire at various dates. The equipment leases
provide the Company with the option after the initial lease term to purchase the
property at the then fair value, renew its lease at the then fair rental value
for a period of one year or return the equipment to the lessor. Generally,
management expects that, after the initial lease term, the equipment will be
purchased for the then fair value.

Minimum payments for operating leases having initial or remaining
noncancelable terms in excess of one year are as follows (IN THOUSANDS):

<TABLE>
<S> <C>
2001........................................................ $ 2,543
2002........................................................ 2,099
2003........................................................ 1,453
2004........................................................ 1,014
2005........................................................ 950
Thereafter.................................................. 9,728
-------
Total minimum lease payments................................ $17,787
=======
</TABLE>

Minimum lease payments have not been reduced by sublease rentals of $812,000
due in the future under noncancelable subleases.

Total rent expense for all operating leases amounted to approximately
$1,976,000, $1,776,000, and $691,000 for 2000, 1999 and 1998, respectively.

INTEREST PAID: Interest paid during 2000, 1999 and 1998 was approximately
$7,828,000, $7,257,000, and, $3,681,000, respectively.

25
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

3. INCOME TAXES

The Company files a consolidated federal income tax return for all U.S.
subsidiaries and files group relief or separate returns for foreign
subsidiaries. Income reported for federal and foreign tax purposes differs from
pre-tax accounting income due to variations between the requirements of the
jurisdictional tax codes and the Company's accounting practices.

For financial reporting purposes, loss from continuing operations before
income taxes is as follows (IN THOUSANDS):

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
---------- ----------------- ----------
<S> <C> <C> <C>
U.S.................................... $(5,699) $(2,672) $ 6,812
Foreign................................ (715) (989) (26,187)
------- ------- --------
Total.................................. $(6,414) $(3,661) $(19,375)
======= ======= ========
</TABLE>

Income tax benefit from continuing operations is summarized as follows (IN
THOUSANDS):

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
---------- ----------------- ----------
<S> <C> <C> <C>
Federal:
Current.............................. $(2,197) $(1,308) $ 1,425
Deferred............................. 533 343 619
Foreign:
Current.............................. (1,338) 1,369 343
Deferred............................. 1,140 (1,633) (4,202)
State.................................. (454) (283) 518
------- ------- -------
Income tax benefit..................... $(2,316) $(1,512) $(1,297)
------- ------- -------
</TABLE>

26
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

3. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax liabilities and assets
are as follows (IN THOUSANDS):

<TABLE>
<CAPTION>
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation.............................. $ 599 $ 822
Purchased intangibles................................... 9,915 10,468
Other................................................... 381 538
------- -------
Total deferred tax liabilities............................ 10,895 11,828
Deferred tax assets:
Net operating loss carryforwards........................ 627 1,242
Capital loss carryforward............................... -- 170
Inventory reserve....................................... 434 594
Accrued vacation........................................ 477 395
Warranty reserve........................................ 375 303
Allowance for bad debts................................. 132 154
Foreign interest deduction.............................. -- 614
Other--net.............................................. 599 563
------- -------
Total deferred tax assets................................. 2,644 4,035
Valuation allowance for deferred tax assets............... (396) (1,543)
------- -------
Net deferred tax assets................................... 2,248 2,492
------- -------
Net total deferred tax liabilities........................ $(8,647) $(9,336)
======= =======
</TABLE>

At March 31, 1999, the Company had loss carryforwards and foreign interest
deductions, the utilization of which was dependent upon future income and gains.
For financial reporting purposes, a valuation allowance has been recognized to
offset the deferred tax assets related to a portion of these assets. In fiscal
2000, the Company was able to utilize the foreign interest deductions and
certain net operating losses due to a recognized gain on the sale of
discontinued operations. Thus, at March 31, 2000, the valuation allowance
related to these interest deductions and certain net operating losses was no
longer necessary. Because the Company's ability to utilize these assets is a
direct result of the gain on the segment disposal as well as certain other
actions occurring in the fourth quarter of 2000, the reduction of the valuation
allowance is displayed as a reduction of the tax expense related to the gain
from discontinued operations.

Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries since substantially all of these earnings are expected to be
permanently reinvested in foreign operations. Determination of the amount of
unrecognized deferred U.S. income tax liabilities and potential foreign tax
credits is not practical to calculate because of the complexity related with
this hypothetical calculation.

27
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

3. INCOME TAXES (CONTINUED)
The effective income tax rate from continuing operations varied from the
statutory federal income tax rate as follows for the periods ended:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
---------- ----------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate........... 34.0% 34.0% 34.0%
Increases (decreases):
State income taxes, net of federal tax
benefit................................. 3.8 3.4 (1.9)
Amortization of goodwill and
intangibles............................. (3.1) (7.5) (0.2)
Valuation allowance....................... -- 7.2 --
Change in tax rate........................ 0.8 4.5 --
Acquired Research and Development......... -- -- (27.6)
Foreign Rate Differential................. (4.4) (4.6) (0.6)
Research and development tax credits...... -- -- 0.7
Other..................................... 5.0 4.3 2.3
---- ---- -----
36.1% 41.3% 6.7%
==== ==== =====
</TABLE>

Income taxes paid during 2000, 1999 and 1998 were approximately $1,367,000,
$2,732,000, and $4,001,000, respectively.

4. RESEARCH AND DEVELOPMENT COSTS

Research and development costs, excluding the acquired research and
development, were approximately $14,077,000, $11,816,000, and $9,208,000 for
2000, 1999 and 1998, respectively.

5. SHAREHOLDERS' EQUITY

INCENTIVE STOCK OPTION PLAN: The Company has an incentive stock option
plan--the 1996 Plan (the Plan). At March 31, 2000, under the 1996 Plan, 600,000
shares of Common Stock have been reserved for issuance. The Company grants
qualified stock options to officers and key employees. The option price per
share under the Plan is not to be less than the fair market value of a share of
Common Stock on the date of grant. Generally options vest over 3 years and have
a term of 10 years. All grants are made by the Compensation Committee.

NONQUALIFIED STOCK OPTION PLAN: In November 1992, shareholders of the
Company approved the 1992 Nonqualified Stock Option Plan whereby all employees
of the Company are eligible to be granted nonqualified stock options. A total of
750,000 authorized but unissued or treasury shares of the Company's Common Stock
were reserved for grant under the plan. The Compensation Committee determines
the time or times at which options will be granted, selects the employees to
whom options will be granted, and determines the number of shares covered by
each option, purchase price, vesting periods and other terms.

28
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

5. SHAREHOLDERS' EQUITY (CONTINUED)

OUTSIDE DIRECTOR PLAN: In August 1999, an Amended Outside Director
Compensation, Stock Option and Retirement Plan (Outside Director Plan) was
approved by the shareholders. The Outside Director Plan provides that each
director who is not an employee of the Company will be granted an option to
purchase 1,500 shares of the Company's Common Stock on the third business day
after the annual meeting of the shareholders in each of the next ten years,
commencing in fiscal 2000. The option price under the Outside Director Plan is
the fair market value of a share of Common Stock on the date of grant.

The following table summarizes information concerning options outstanding
and exercisable at March 31, 2000 for all plans:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-
NUMBER CONTRACTUAL WEIGHTED-AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1-$ 5....................... 491,700 7.49 $ 4.25 115,700 $ 4.57
$ 6-$ 8....................... 125,500 5.84 $ 7.44 93,000 $ 7.39
$ 9-$11....................... 100,500 6.47 $10.48 83,625 $10.46
$12-$18....................... 123,250 7.39 $14.24 62,662 $14.23
$19-$22....................... 99,500 8.03 $19.98 35,000 $20.02
</TABLE>

Stock option activity during 1998-2000 is summarized below:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED- NUMBER OF
SHARES AVERAGE SHARES WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- -------------- ----------- ----------------
<S> <C> <C> <C> <C>
July 1, 1997............................... 740,148 $ 7.09 392,583 $6.08
Granted.................................... 484,250 17.02
Exercised.................................. (193,194) 6.03
Canceled or expired........................ (60,949) 17.86
-------- ------ ------- -----

June 30, 1998.............................. 970,255 11.58 352,821 6.62
Granted.................................... 25,500 5.47
Exercised.................................. (5,400) 5.11
Canceled or expired........................ (17,000) 19.75
-------- ------ ------- -----

March 31, 1999............................. 973,355 11.31 455,638 8.16
Granted.................................... 488,000 4.31
Exercised.................................. (9,769) 4.39
Canceled or expired........................ (511,136) 10.27
-------- ------ ------- -----

March 31, 2000............................. 940,450 $ 8.31 389,987 $9.44
======== ====== ======= =====
</TABLE>

The Company accounts for stock option awards as prescribed by Accounting
Principles Board Opinion No. 25. Accordingly, no compensation cost has been
recognized in the Consolidated Statements of Operations. Had the Company
recorded compensation expense for the fair value of the options granted,

29
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

5. SHAREHOLDERS' EQUITY (CONTINUED)
as provided by SFAS No. 123, the Company's net loss and net loss per common
share would have been as follows:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Loss from continuing operations:
As reported............................................... $(4,098) $(2,149) $(18,078)
Pro forma................................................. (4,172) (2,927) (18,777)
Loss from continuing operations per share--diluted:
As reported............................................... $ (0.50) $ (0.26) $ (2.21)
Pro forma................................................. (0.51) (0.36) (2.29)
</TABLE>

The fair values of the options were determined by using a Black-Scholes
option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 JUNE 30, 1998
--------------- --------------- --------------
<S> <C> <C> <C>
Dividend yield....................... 0% 0% 0%
Volatility........................... 71% 61% 46%
Risk-free interest rate.............. 6% 6% 6%
Expected life........................ 6 years 6 years 6 years
</TABLE>

The weighted average fair value of options granted at the market price for
2000, 1999 and 1998 was $2.88, $3.42, and $8.06, respectively. The weighted
average fair value and weighted average exercise price of nonqualified options
granted below the market price for 1998 was $11.98 and $19.75, respectively.

RESTRICTED STOCK GRANT PLAN: On February 27, 1989, the shareholders of the
Company approved a restricted stock grant plan whereby officers and key
employees may be granted restricted shares of the Company's Common Stock. The
restrictions lapse over various vesting periods not to exceed ten years. A total
of 450,000 authorized but unissued or treasury shares of the Company's Common
Stock were reserved for grant under the plan. These restricted shares may be
granted at a price equal to par value. In 2000, 1999, and 1998 the Company made
grants of 21,500, 3,000, and 4,000 shares, respectively. The market value of
restricted shares granted is being amortized as compensation expense over the
vesting period. Total expense of $153,816, $15,000, and $0 was recognized in
2000, 1999, and 1998 in connection with the restricted stock grant plan
respectively. The shares reserved for future grants are 102,541 as of March 31,
2000.

SHAREHOLDER RIGHTS PLAN: The Board of Directors of the Company amended its
Shareholder Rights Plan on January 21, 1999, whereby common stock purchase
rights (the Rights) were distributed as a dividend at the rate of one Right for
each share of the Company's Common Stock held as of the close of business on
January 25, 1999. The Rights will expire on January 20, 2009. Each Right
entitles shareholders to buy one share of common stock of the Company at an
exercise price of $65 per share. The Rights are exercisable only if a person or
group acquires beneficial ownership of 20% or more of the Company's

30
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

5. SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock or announces a tender or exchange offer upon consummation of which
such person or group would beneficially own 20% or more of the Common Stock.

Following the acquisition of 20% or more, but less than 50%, of the
Company's Common Stock by a person or group, the Board of Directors may
authorize the exchange of the Rights (except those owned by the acquirer), in
whole or in part, for shares of the Company's Common Stock at an exchange ratio
of one share for each Right.

The Board of Directors of IFR will generally be able to redeem the Rights at
$.01 per Right at any time prior to the time that a 20% position in the Company
has been acquired. If a bidder who owns less than 5% of the Common Stock offers
to buy all of the Common Stock at a price which a nationally recognized
investment banker states in writing is fair and if the bidder has full financing
for the bid, the shareholders of the Company may cause the Rights to be
automatically redeemed immediately prior to the consummation of the offer,
provided that such offer or another offer is consummated within 60 days at a
price per share that is not less than the price approved by the shareholders.

6. EARNINGS PER SHARE

The following is a reconciliation of the numerator and denominators used in
computing basic and diluted earnings per share from continuing operations:

<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
----------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NUMERATOR
Loss from continuing operations available to common
shareholders............................................ $(4,098) $(2,149) $(18,078)
======= ======= ========

DENOMINATORS
Basic loss per share:
Weighted-average common shares Outstanding.............. 8,233 8,207 8,191
======= ======= ========
Basic loss per share from continuing operations......... $ (0.50) $ (0.26) $ (2.21)
======= ======= ========

Diluted loss per share:
Weighted-average common shares Outstanding.............. 8,233 8,207 8,191
Effect of stock options................................. 57 47 570
------- ------- --------
Weighted-average common shares outstanding--diluted..... 8,290 8,254 8,761
======= ======= ========
Diluted loss per share from continuing operations....... $ (0.49) $ (0.26) $ (2.06)
======= ======= ========
</TABLE>

Note--Since the effect of stock options for 2000, 1999, and 1998 is
antidilutive, the statements of operations reflect diluted per share amounts
equal to the basic per share amounts.

31
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

7. SEGMENTS

DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES

On July 7, 1999, the Company sold its Optical Test and Measurement Division
(SEE NOTE 10). The Company now has one segment: Electronic Test and Measurement
Equipment (ETM). The Company manufactures and markets a broad array of test
equipment as well as offers service and repair for these products.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
GEOGRAPHIC AREA SALES
United States............................. $ 62,024 $ 38,383 $ 56,261
South America and Canada.................. 5,829 7,325 4,127
-------- -------- --------
Total Americas.......................... 67,853 45,708 60,388
-------- -------- --------
United Kingdom............................ 23,481 23,361 17,891
France.................................... 10,437 8,582 5,721
Germany................................... 5,655 5,045 3,664
Other..................................... 13,963 9,190 7,234
-------- -------- --------
Total Europe............................ 53,536 46,178 34,510
-------- -------- --------
Pacific Rim............................... 16,137 10,090 9,359
Rest Of World............................. 4,365 4,183 4,634
-------- -------- --------
Total................................... $141,891 $106,159 $108,891
======== ======== ========
</TABLE>

32
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

7. SEGMENTS (CONTINUED)
Sales are attributed to geographic areas based on the location of the
customers.

<TABLE>
<S> <C> <C> <C>
GEOGRAPHIC AREA LONG-LIVED ASSETS
United States--Total Americas............... $ 9,882 $ 10,382 $ 10,282
-------- -------- --------

United Kingdom.............................. 65,511 69,145 70,634
France...................................... 154 210 399
Germany..................................... 51 71 129
Other....................................... 2 57 115
-------- -------- --------
Total Europe............................ 65,718 69,483 71,277
-------- -------- --------
Pacific Rim................................. 48 73 80
-------- -------- --------
Total..................................... $ 75,648 $ 79,938 $ 81,639
======== ======== ========

SALES BY MARKET SECTOR
Communications.............................. $ 39,727 $ 31,654 $ 46,616
Test & Measurement.......................... 37,905 26,441 20,836
Avionics.................................... 13,209 11,387 9,520
ATE & Solutions............................. 14,148 10,869 8,545
Service..................................... 26,233 17,497 15,083
Other....................................... 10,669 8,311 8,291
-------- -------- --------
Total..................................... $141,891 $106,159 $108,891
======== ======== ========
</TABLE>

8. BENEFIT PLANS

RETIREMENT PLAN: The Company has a trusteed, defined contribution
retirement plan for all U.S. employees. Company contributions are discretionary
with respect to the plan. Employee benefits are based on amounts accumulated
from contributions and investment gains or losses. The Company has established a
defined contribution plan for substantially all U.K. employees. Total retirement
plan expenses for 2000, 1999 and 1998 were approximately $2,375,000, $1,736,000,
and $1,229,000, respectively.

DIRECTORS RETIREMENT PLAN: The Company maintains an unfunded retirement
plan for nonemployee directors of the Company. Benefits will not accrue for
periods in excess of 10 years of service and are payable when the Plan's
requirements are satisfied. In August 1999, an Amended Outside Director
Compensation, Stock Option and Retirement Plan (Outside Director Plan) was
approved by the shareholders. No additional benefits will be earned under the
Plan after fiscal year 2000. The estimated liability at March 31, 2000 and
March 31, 1999 was $454,000 and $345,000, respectively, and is included in the
balance sheet caption Other Liabilities and Accrued Expenses.

SAVINGS AND INVESTMENT PLAN: The Company has a savings and investment plan
for substantially all U.S. employees under Section 401(k) of the Internal
Revenue Code. Employees may contribute to the plan up to 12% of their salary.
Matching Company contributions are discretionary with respect to the plan.
During 2000, 1999 and 1998, the Company matched 50% of each employee's
contribution up to 4% of their salary.

33
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

8. BENEFIT PLANS (CONTINUED)
Company contributions charged to expense in 2000, 1999 and 1998, were
approximately $300,000, $218,000, and $260,000, respectively.

INCENTIVE BONUS PLAN: The Company has established a bonus plan payable to
selected employees based on pre-established operating income goals approved by
the Board of Directors. Total bonus plan expenses for 2000, 1999 and 1998 were
approximately $0, $0, and $116,000, respectively.

VEBA TRUST: The Company has a voluntary employees' beneficiary association
(VEBA), which funds certain employee welfare plan benefits. The Company is
obligated to fund a trust as needed to provide for actual claims and trust
expenses incurred. Total VEBA expenses for 2000, 1999 and 1998 were
approximately $1,710,000, $1,034,000, and $1,163,000, respectively.

9. SPECIFIED FINANCIAL INFORMATION

As a result of the change in the Company's year end in 1999, the following
comparative information is presented for the years ending March 31, 2000 and
March 31, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA):

<TABLE>
<CAPTION>
2000 1999
-------- -----------
(UNAUDITED)
<S> <C> <C>
Sales.................................................. $141,891 $145,974
Gross profit........................................... 58,541 59,538
Income tax benefit..................................... (2,316) (3,907)
Continuing operations:
Net Loss............................................. (4,098) (5,188)
Basic and Diluted loss per share..................... (0.50) (0.63)
</TABLE>

Since the per share amounts for 2000 and 1999 are antidilutive, the diluted
per share amounts equal the basic per share amounts.

10. DISCONTINUED OPERATIONS

The results of operations for the OTM Division have been classified as
discontinued operations in the consolidated statements of operations and prior
periods have been restated. The consolidated balance sheet at March 31, 1999 has
been segregated to reflect the OTM Division as discontinued operations. The
consolidated statements of cash flows and consolidated statements of
shareholders' equity include the

34
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

10. DISCONTINUED OPERATIONS (CONTINUED)
OTM Division through the date of divestiture. Selected results of operations for
the OTM Division follows (IN THOUSANDS):

<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
--------- ----------- --------
<S> <C> <C> <C>
Sales......................................... $8,335 $23,358 $39,178
Income tax expense (benefit).................. 7,184 (6) 1,744
Income (loss) from discontinued operations.... 326 (446) 2,141
Net gain on sale of OTM Division.............. 11,031 -- --
</TABLE>

11. ACQUISITIONS

MARCONI INSTRUMENTS

On February 6, 1998, IFR acquired for cash all of the issued and outstanding
capital stock of Marconi Instruments Limited, Hertfordshire, U.K. (Marconi). The
purchase price for Marconi was approximately $109,000,000, paid in cash funded
primarily by debt (SEE NOTE 2). The acquired business is engaged in the design,
manufacture, distribution and sale of test and measurement equipment for the
telecommunications and electronics industries.

The acquisition has been accounted for as a purchase and, accordingly, the
net assets and results of operations are included in the consolidated financial
statements from the effective date of acquisition. The purchase price, as
adjusted during fiscal 1999, has been allocated to the assets and liabilities
based on their estimated fair values at the date of acquisition as follows (IN
THOUSANDS):

<TABLE>
<S> <C>
Purchase price per agreement................................ $106,939
Direct acquisition costs.................................... 2,459
--------
Total purchase price........................................ $109,398
========

Total current assets........................................ $ 61,737
Property and equipment--net................................. 20,850
Developed technology (amortized over 20 years).............. 18,800
Goodwill (amortized over 30 years).......................... 22,297
Other intangible assets (amortized over 1-20 years)......... 14,766
Acquired research and development........................... 15,700
--------
Total assets.............................................. 154,150

Total current liabilities assumed........................... (32,181)

Deferred income taxes....................................... (12,571)
--------
Total net assets............................................ $109,398
========
</TABLE>

35
<PAGE>
IFR SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 2000

11. ACQUISITIONS (CONTINUED)
The amounts allocated to acquired research and development were determined
through established valuation techniques. Since technological feasibility had
not been established and no future alternative uses existed, these amounts were
expensed upon acquisition.

Restructuring liabilities related to the Marconi acquisition of
approximately $7,700,000 were recorded in connection with the acquisition for
severance and related costs associated with the shutdown of certain acquired
facilities. Payments of $6,830,000 have been charged against the liability
through March 31, 2000. In addition, the original estimate of the liability was
reduced in fiscal 2000 by $796,000 primarily due to the execution of a long-term
sublease of the Fort Worth Texas facility to a third party. The impact of the
reversal resulted in a reduction of goodwill of $616,000, net of tax of
$180,000. The remaining balance of $121,000 covers remaining costs under the
lease and miscellaneous severance payments.

YORK SENSORS

On December 22, 1997, the Company acquired York Sensors Ltd. in Hampshire,
U.K. The acquired business was involved in the design and manufacture of
distributed temperature sensing (DTS) equipment based on optical time domain
reflectometer (OTDR) technology for the electric utility, oil exploration and
other industries.

The Company acquired assets of approximately $930,000 and assumed
liabilities of approximately $1,902,000 for a nominal purchase price. This
resulted in goodwill of approximately $972,000 which was being amortized over
10 years. The acquisition was accounted for as a purchase. The purchase price
was allocated to the assets and liabilities based on their estimated fair values
at the date of acquisition. York Sensors is part of the Optical Test and
Measurement (OTM) Division which has been segregated and classified as
discontinued operations.

PRO FORMA INFORMATION

The following pro forma data presents the consolidated results of operations
as if the Marconi acquisition had occurred on July 1, 1996, after giving effect
to certain adjustments including amortization of intangibles, increased interest
expense and related income tax effects. The pro forma data for both years does
not include non-recurring charges related to acquired research and development
($15,700,000) and inventory valuations ($11,844,000). The pro forma results have
been prepared for comparative purposes only and do not purport to indicate the
results of operations which would actually have occurred had the acquisitions
been in effect on the date indicated or which may occur in the future.

<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1998
--------------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C>
Sales....................................................... $174,688
Income from continuing operations........................... $ 4,916
Income from continuing operations per common share.......... $ 0.60
Income from continuing operations per share assuming
dilution.................................................. $ 0.56
</TABLE>

36
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31,
FISCAL 2000 1999 1999 2000 2000
----------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales from continuing operations........................ $33,991 $34,705 $35,265 $37,930
Sales from discontinued operations...................... 8,335 -- -- --
Gross profit from continuing operations................. 14,930 13,751 13,393 16,467
Income (loss) from:
Continuing operations................................. (1,101) (993) (2,632) 628
Discontinued operations............................... 326 10,134 -- 897
Net income (loss)....................................... (775) 9,141 (2,632) 1,525

Earnings (loss) per share--basic:
Continuing operations................................. $ (0.13) $ (0.12) $ (0.32) $ 0.08
Discontinued operations............................... 0.04 1.23 -- 0.11
Net income............................................ (0.09) 1.11 (0.32) 0.19

Earnings (loss) per share--diluted:
Continuing operations................................. $ (0.13) $ (0.12) $ (0.32) $ 0.07
Discontinued operations............................... 0.04 1.23 -- 0.11
Net income............................................ (0.09) 1.11 (0.32) 0.18

Average common shares outstanding....................... 8,223 8,231 8,236 8,240
Dilutive common shares outstanding...................... 8,223 8,231 8,236 8,481
</TABLE>

Amounts differ from previously reported amounts since the results of the OTM
Division have been reflected as discontinued operations (see NOTE 10).

The effect of stock options for the first, second, and third quarters in
fiscal year 2000 is antidilutive because of the net loss. In these cases, the
diluted per share amounts equal the basic per share amounts.

37
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
FISCAL 1999 1998 1998 1999 1999
----------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales from continuing operations......................... $33,157 $36,072 $36,930 N/A
Sales from discontinued operations....................... 7,743 8,046 7,569 N/A
Gross profit from continuing operations.................. 15,005 15,773 16,523 N/A
Income (loss) from:
Continuing operations.................................. (1,549) (534) (66) N/A
Discontinued operations................................ (91) 133 (488) N/A
Net income (loss)........................................ (1,640) (401) (554) N/A

Earnings (loss) per share--basic:
Continuing operations.................................. $ (0.19) $ (0.07) $ (0.01) N/A
Discontinued operations................................ (0.01) 0.02 (0.06) N/A
Net income............................................. (0.20) (0.05) (0.07) N/A

Earnings (loss) per share--diluted:
Continuing operations.................................. $ (0.19) $ (0.07) $ (0.01) N/A
Discontinued operations................................ (0.01) 0.02 (0.06) N/A
Net income............................................. (0.20) (0.05) (0.07) N/A

Average common shares outstanding........................ 8,205 8,208 8,208 N/A
Dilutive common shares outstanding....................... 8,205 8,208 8,208 N/A
</TABLE>

Amounts differ from previously reported amounts since the results of the OTM
Division have been reflected as discontinued operations (see NOTE 10).

The effect of stock options for fiscal year 1999 is antidilutive because of
the net loss. In these cases, the diluted per share amounts equal the basic per
share amounts.

38
<PAGE>
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
FISCAL 1998 1997 1997 1998 1998
----------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales from continuing operations........................ $15,692 $17,230 $36,154 $39,815
Sales from discontinued operations...................... 9,829 10,309 9,624 9,416
Gross profit from continuing operations................. 6,178 7,275 9,944 12,237
Income (loss) from:
Continuing operations................................. 1,013 1,386 (17,438) (3,039)
Discontinued operations............................... 862 905 454 (80)
Net income (loss)....................................... 1,875 2,291 (16,984) (3,119)

Earnings (loss) per share--basic:
Continuing operations................................. $ 0.12 $ 0.17 $ (2.13) $ (0.37)
Discontinued operations............................... 0.11 0.11 0.05 (0.01)
Net income............................................ 0.23 0.28 (2.08) (0.38)

Earnings (loss) per share--diluted:
Continuing operations................................. $ 0.12 $ 0.16 $ (2.13) $ (0.37)
Discontinued operations............................... 0.10 0.10 0.05 (0.01)
Net income............................................ 0.22 0.26 (2.08) (0.38)

Average common shares outstanding....................... 8,168 8,228 8,173 8,196
Dilutive common shares outstanding...................... 8,562 8,711 8,173 8,196
</TABLE>

Amounts differ from previously reported amounts since the results of the OTM
Division have been reflected as discontinued operations (see NOTE 10).

The quarter ending March 31, 1998 reflects acquisition-related charges of
$15,700,000 for the write-off of in-process research and development and
$4,738,000 before taxes for inventory related charges included in cost of goods
sold.

The quarter ending June 30, 1998 includes an additional write-off of
$7,106,000 before taxes for acquisition-related inventory.

The effect of stock options for the third and fourth quarter of fiscal year
1998 is antidilutive because of the net loss. In these cases, the diluted per
share amounts equal the basic per share amounts.

39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 concerning directors of IFR is
incorporated herein by reference from "Election of Directors" contained in IFR's
Proxy Statement for its August 25, 2000 annual meeting of shareholders (the
"2000 Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference from
"Election of Directors" and "Compensation of Directors", "Executive
Compensation", and "Compensation Committee Report on Executive Compensation"
contained in the 2000 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated herein by reference from
"Outstanding Shares" and "Election of Directors" contained in the 2000 Proxy
Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated herein by reference from
"Certain Relationships" contained in the 2000 Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

(a)(1) Financial Statements--See Index to Financial Statements at Item 8 of
this report.

(a)(2) Financial Statement Schedule
The following financial statement schedule of IFR is included in this
report in response to Item 14(d):
Schedule II--Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the instructions or are
inapplicable, and therefore have been omitted.

(a)(3) See Exhibit Index

(b) No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended March 31, 2000:

40
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
--------------------- ----------------------
<C> <S>
2.1 Share Sale and Purchase Agreement, dated February 6, 1998,
among IFR Systems, Inc., IFR Systems Limited, and The
General Electric Company p.l.c. (Exhibit 2.01 to Form 8-K,
dated February 6, 1998, previously filed by Registrant).*

2.2 Deed of Tax Covenant, dated February 6, 1998, between The
General Electric Company p.l.c., as Covenantor, and IFR
Systems Limited, as Purchaser (Exhibit 2.02 to Form 8-K,
dated February 6, 1998, previously filed by Registrant).*

2.3 Agreement and Plan of Merger of IFR Systems, Inc., with IFR
Merger Corporation, dated as of January 20, 1998 (Exhibit
2 to Form 8-K, dated January 30, 1998, previously filed by
Registrant).*

3.1 Amended and Restated Certificate of Incorporation of IFR
Systems, Inc. (the "Company"), dated January 30, 1998
(Exhibit 3.01 to Form 8-K, dated January 30, 1998,
previously filed by Registrant).*

3.2 Bylaws of the Company (Exhibit 3.2 to the Company's
Amendment No. 1 to Form 8-K, dated February 18, 1999, File
No. 0-14224, previously filed by Registrant).*

4.1 Specimen certificate representing common stock of the
Company (Exhibit 4.1 to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed January 17, 1986,
Reg. No. 33-2122, as previously filed by Registrant).*

4.2 Article II of the Amended and Restated Certificate of
Incorporation of the Company, (Included in Exhibit 3.1).*

4.3 Articles I, III, and VII of the Amended and Restated
Certificate of Incorporation of the Company, (Included in
Exhibit 3.1).*

4.4 Articles 2, 3, and 5 of the By-laws of the Company.
(Included in Exhibit 3.2).*

4.5 Rights Agreement between the Company and Harris Trust &
Savings Bank dated as of February 28, 1999 (Exhibit 4 to
the Company's registration statement on Form 8-A dated
February 19, 1999, previously filed by Registrant).*

4.6 Form of Rights Certificate of the Company. (Included in
Exhibit 4.5).*

4.7 IFR Systems, Inc., 1992 Nonqualified Stock Option Plan
(Exhibit 4(a) to the Company's Registration Statement on
Form S-8 filed January 8, 1993, Reg. No. 33-56862,
previously filed by Registrant).*

4.8 Form of Option Agreement for IFR Systems, Inc., 1992
Nonqualified Stock Option Plan (Exhibit 4(b) to the
Company's Registration Statement on Form S-8 filed
January 8, 1993, Reg. No. 33-56862, previously filed by
Registrant).*

10.1 Description of Incentive Bonus Plan for Management of the
Company. (Incorporated by reference from page 8 of the
1996 Proxy Statement as filed on September 23, 1996, File
No. 0-14224).*

10.2 Stock Purchase Agreement, dated as of June 28, 1999, between
GN Nettest A/S, GN Nettest (New York)Inc, and GN Great
Britain Limited and IFR Systems, Inc. (Exhibit 1 to Form
8-K, dated July 8, 1999, previously filed by Registrant).*

10.4 Termination Agreement between the Company and Jeffrey A.
Bloomer (Exhibit 10.0 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, previously
filed by Registrant).*

10.5 Termination Agreement between the Company and Dennis H.
Coley
</TABLE>

41
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
--------------------- ----------------------
<C> <S>
10.6 IFR Systems, Inc. Employees' Profit Sharing Plan (Exhibit
10.4 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1990, File No. 0-14224, previously
filed by Registrant).*

10.7 Restricted Stock Grant Plan of the Company (Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year
ended June 30, 1989, File No. 0-14224, previously filed by
Registrant).*

10.9 1996 Incentive Stock Option Plan of the Company (Exhibit A
of the 1996 Proxy Statement as filed on September 23,
1996, File No. 0-14224, previously filed by Registrant).*

10.10 Form of Indemnity Agreement entered into between the Company
and its directors and certain of its officers as of
February 27, 1989 (Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1989, File
No. 0-14224, previously filed by Registrant).*

10.11 IFR Systems, Inc., Outside Director Compensation, Stock
Option, and Retirement Plan (Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended
March 31, 2000, File No. 0-14224, previously filed by
Registrant).*

10.12 Lease between the Company and the City of Goddard, Kansas,
dated as of March 15, 1997 (Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1997, previously filed by Registrant)*

10.13 Credit Agreement, dated as of February 5, 1998, among IFR
Systems, Inc., The First National Bank of Chicago, and
various lenders (Exhibit 10.01 to the Form 8-K, dated
February 6, 1998, previously filed by Registrant).*

10.14 Form of Security Agreement executed by Registrants and its
United States subsidiaries (Exhibit 10.02 to Form 8-K,
dated February 6, 1998, previously filed by Registrant).*

10.15 Form of Guaranty executed by each of Registrants United
States subsidiaries (Exhibit 10.03 to Form 8-K, dated
February 6, 1998, previously filed by Registrant).*

10.16 Pledge Agreement between Registrant and First National Bank
of Chicago (Exhibit 10.04 to Form 8-K, dated February 6,
1998, previously filed by Registrant).*

10.17 Equitable Share Change by Registrant to First National Bank
of Chicago (Exhibit 10.05 to Form 8-K, dated February 6,
1998, previously filed by Registrant).*

10.18 Form of Copyright Security Agreement executed by Registrant
and each of its United States subsidiaries (Exhibit 10.06
to Form 8-K, dated February 6, 1998, previously filed by
Registrant).*

10.19 Form of Patent Security Agreement executed by Registrant and
each of its United States subsidiaries (Exhibit 10.07 to
Form 8-K, dated February 6, 1998, previously filed by
Registrant).*

10.20 Form of Trademark Security Agreement Security Agreement
executed by Registrant and each of its United States
subsidiaries (Exhibit 10.08 to Form 8-K, dated February 6,
1998, previously filed by Registrant).*

10.21 Amendment No. 1 to Credit Agreement, dated as of November 3,
1998, among IFR Systems, Inc., The First National Bank of
Chicago, and various lenders. (Exhibit 10.0 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, previously filed by
Registrant).*
</TABLE>

42
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
--------------------- ----------------------
<C> <S>
10.22 Amendment No. 2 to Credit Agreement, dated as of March 31,
1999, among IFR Systems, Inc., The First National Bank of
Chicago, and various lenders. (Exhibit 10.24 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, previously filed by Registrant).*

10.23 Amendment No. 3 to Credit Agreement, dated as of June 28,
1999, among IFR Systems, Inc., The First National Bank of
Chicago, and various lenders. (Exhibit 10.24 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999, previously filed by Registrant).*

10.24 Amendment No. 4 to Credit Agreement, dated as of
October 15, 1999, among IFR Systems, Inc., The First
National Bank of Chicago, and various lenders.

10.25 Amendment No. 5 to Credit Agreement, dated as of June 15,
2000, among IFR Systems, Inc., The First National Bank of
Chicago, and various lenders.

21.0 Subsidiaries of the Registrant

23.0 Consent of Ernst & Young LLP

27.0 Financial Data Schedule
</TABLE>

------------------------

* Document has been previously filed with the Securities and Exchange
Commission and is incorporated by reference and made a part hereof.

43
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the under signed, thereunto duly authorized.

<TABLE>
<S> <C> <C>
IFR SYSTEMS, INC.

June 28, 2000 By /s/ JEFFREY A. BLOOMER
------------------------------------------
Jeffrey A. Bloomer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
DATE TITLE SIGNATURE
---- ----- ---------
<C> <S> <C>
June 28, 2000 Chairman of the Board of Directors /s/ ALFRED H. HUNT, III
And Chief Technology Officer --------------------------------------
Alfred H. Hunt, III

June 28, 2000 President and Chief Executive Officer /s/ JEFFREY A. BLOOMER
(Principal Executive Officer) --------------------------------------
Director Jeffrey A. Bloomer

June 28, 2000 Director /s/ WILTON W. COGSWELL, III
--------------------------------------
Wilton W. Cogswell, III

June 28, 2000 Director /s/ DONALD L. GRAF
--------------------------------------
Donald L. Graf

June 28, 2000 Director /s/ JOHN V. GROSE
--------------------------------------
John V. Grose

June 28, 2000 Director /s/ OSCAR L. TANG
--------------------------------------
Oscar L. Tang

June 28, 2000 Director /s/ RALPH R. WHITNEY, JR.
--------------------------------------
Ralph R. Whitney, Jr.

June 28, 2000 Treasurer And Chief Financial Officer /s/ DENNIS H. COLEY
(Principal Accounting Officer) --------------------------------------
Dennis H. Coley
</TABLE>

44
<PAGE>
IFR SYSTEMS, INC

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
COL. A COL. B COL C. COL. D COL. E
---------------------------- ------------------- ------------------------------------- ------------ -----------
ADDITIONS
-------------------------------------
BALANCE AT CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS-- BALANCE AT
DESCRIPTION BEGINNING OF PERIOD AND EXPENSES ACCOUNTS--DESCRIBE DESCRIBE(1) END OF YEAR
---------------------------- ------------------- ---------------- ------------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended March 31,2000:
Allowance for doubtful
accounts (deducted in
balance sheet from
accounts receivable).... 730,767 91,000 -- 222,123 599,644

Year ended March 31,1999:
Allowance for doubtful
accounts (deducted in
balance sheet from
accounts receivable).... 773,173 122,000 -- 164,406 730,767

Year ended June 30,1998:
Allowance for doubtful
accounts (deducted in
balance sheet from
accounts receivable).... 368,773 180,000 303,000 78,600 773,173
</TABLE>

Note 1: Uncollectible accounts receivable charged off, less recoveries and
Discontinued Operations of OTM Division.