The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-Q. The following discussion, other than historical facts, contains forward-looking statements that involve a number of risks and uncertainties. The Company's results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including factors described elsewhere in this Quarterly Report on Form 10-Q and factors described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2008.

Overview

The consolidated financial statements present the financial condition of the Company as of September 30, 2008 and 2007, and the consolidated results of operations and cash flows of the Company for the three months ended September 30, 2008 and 2007.

The Company designs, develops and markets microwave components and assemblies for the wireless communications, satellite communications and defense electronics markets. The Company's distinctive manufacturing and packaging techniques enable it to cost-effectively produce compact, lightweight microwave products for use in base stations and subscriber equipment for wireless communications as well as, in satellites and in defense electronics systems. The Company sells its products to leading wireless communications equipment manufacturers such as Ericsson, Motorola, Nokia Siemens Networks, Nortel Networks, and Huawei, and to satellite communications and defense electronics companies such as Boeing, ITT, Lockheed Martin, Northrop Grumman and Raytheon.

Net sales are derived from sales of the Company's products to other manufacturers or systems integrators. Net sales are recognized when units are shipped.

Net sales under certain long-term contracts of the Space & Defense Group, many of which provide for periodic payments, are recognized under the percentage-of-completion method using the units of delivery method. Estimated manufacturing cost-at-completion for these contracts are reviewed on a routine periodic basis, and adjustments are made periodically to the estimated cost-at-completion based on actual costs incurred, progress made, and estimates of the costs required to complete the contractual requirements. When the estimated manufacturing cost-at-completion exceeds the contract value, the contract is written down to its net realizable value, and the loss resulting from cost overruns is immediately recognized. To properly match net sales with costs, certain contracts may have revenue recognized in excess of billings (unbilled revenues), and other contracts may have billings in excess of net sales recognized (billings in excess of contract costs). Under long-term contracts, the prerequisites for billing the customer for periodic payments generally involve the Company's achievement of contractually specific, objective milestones (e.g., completion of design, testing, or other engineering phase, delivery of test data or other documentation, or delivery of an engineering model or flight hardware).

On July 31, 2008, the Company cancelled its previous $50.0 million demand note loan agreement with no balance outstanding on the loan; and on the same day, the Company signed a loan agreement with KeyBank National Association bank for a $50.0 million declining revolving line of credit to be used to finance acquisitions and working capital needs. On July 31 and August 29, 2008, the Company took advances totaling $49.8 million on this line to finance the acquisitions of M.S. Kennedy Corp. and Unicircuit, Inc. Advances under this line, at the Company's choice, bear interest at LIBOR, plus 100 to 425 basis points or at the Prime Rate, minus (100) to plus 225 basis points, depending upon the Company's EBITDA performance at the end of each quarter as measured by the formula:

EBITDA divided by the Current Portion of Long-term debt plus interest expense. Availability of credit under the line declines 20% annually on the anniversary date of the note and any outstanding principal balance in excess of the new line limit is due and payable at that time.

On August 1, 2008, the Company completed the acquisition of M.S. Kennedy, Corp. ("MSK"), located in Syracuse, New York. MSK is a leading provider of high performance analog microelectronics to the Defense and Space markets and is a leading designer and producer of custom analog hybrids, power hybrids, and multi-chip modules. MSK offers broad electronic component design, packaging, and integration capability with net sales of $22.4 million in calendar 2007. MSK was integrated into Anaren's existing Space & Defense Group. Anaren acquired MSK for a purchase price of $28.0 million on a cash free, debt free basis, and earnings from MSK are expected to be accretive in fiscal year 2009. The Company financed this transaction through a five year, $50.0 million revolving debt facility.

On August 29, 2008, the Company completed the acquisition of Unicircuit Inc. located in Littleton, Colorado. Unicircuit is a manufacturer of printed circuit boards (PCB) used in various military and aerospace applications with net sales of $18.7 million in calendar 2007. Unicircuit is a leader in high frequency PCB technology and will enhance Anaren's ability to capture integrated microwave assembly opportunities in the defense, satellite and aerospace markets. Unicircuit was integrated into Anaren's existing Space & Defense Group. Anaren acquired Unicircuit, Inc. for a purchase price of approximately $21.7 million on a cash free, debt free basis, and earnings from Unicircuit are expected to be accretive in fiscal year 2009. The Company financed this transaction by utilizing its existing five year, $50.0 million revolving debt facility.

Second Quarter of Fiscal 2009 Outlook

For the second quarter of fiscal 2009, which will include three months of net sales and earnings from M.S. Kennedy Corp. and Unicircuit, Inc., we anticipate an increase in sales for the Space & Defense Group and relatively unchanged sales for the Wireless Group. As a result, we expect net sales to be in the range of $40-45 million. We expect GAAP net earnings per diluted share to be in the range of $0.10 - $0.13 using an anticipated effective income tax rate of approximately 25% and accounting for approximately $0.11 per diluted share in charges related to expected stock based compensation expense and amortization of acquired intangibles and inventory step-up related to the two recent acquisitions.

Results of Operations

Net sales for the three months ended September 30, 2008 were $38.1 million, up 18.8% from sales of $32.1 million for the first quarter of fiscal 2008. Net income for the first quarter of fiscal 2009 was $1.3 million, or 3.5% of net sales, down $1.4 million from net income of $2.7 million in the first quarter of fiscal 2008. Net income in the first quarter of fiscal 2009 included $1.3 million of acquisition related expense for inventory step-up and intangible amortization compared to no such expense in the first quarter of fiscal 2008.

The following table sets forth the percentage relationships of certain items from the Company's consolidated condensed statements of earnings as a percentage of net sales.

                                                    Three Months Ended
                                            Sept. 30, 2008     Sept. 30, 2007
                                            --------------     --------------
Net Sales                                       100.0%            100.0%
Cost of sales                                    69.4%             67.2%
                                                ------            ------
Gross profit                                     30.6%             32.8%
                                                ------            ------
Operating expenses:
    Marketing                                     5.5%              5.5%
   Research and development                       8.1%              8.1%
   General and administrative                    11.9%             10.5%
                                                ------            ------
     Total operating expenses                    25.5%             24.1%
                                                ------            ------
Operating income                                  5.1%              8.7%
                                                ------            ------
Other income (expense):
       Other, primarily interest income           1.0%              2.3%
     Interest expense                            -0.7%             -0.1%
                                                ------            ------
     Total other income (expense), net            0.3%              2.2%
                                                ------            ------

Income before income taxes                        5.4%             10.9%
Income taxes                                      1.9%              2.5%
                                                ------            ------
   Net income                                     3.5%              8.4%
                                                ======            ======

The following table summarizes the Company's net sales by operating segments for the periods indicated. Amounts are in thousands.

                                                   Three Months Ended
                                            Sept. 30, 2008     Sept. 30, 2007
                                            --------------     --------------
Wireless Group                                $19,702            $21,103
Space & Defense Group                          18,422             10,987
                                              -------            -------
     Total                                    $38,124            $32,090
                                              =======            =======

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Net sales. Net sales were $38.1 million for the first quarter ended September 30, 2008, up 18.8% compared to $32.1 million for the first quarter of fiscal 2008. Shipments of Wireless products fell $1.4 million, or 6.6%, and sales of Space and Defense products rose $7.4 million, or 67.0%, in the current first quarter compared to the first quarter of fiscal 2008.

The decline in sales of Wireless products, which consist of standard components, ferrite components and custom subassemblies for use in building wireless basestation and consumer equipment, was the result of a decline in demand for custom Wireless assemblies during the current first quarter compared to the first quarter of last year. Strong Wireless infrastructure component demand continued throughout the first quarter and partially off-set the decline in demand for custom assembly products. The platform transition at a major OEM customer and the continuing challenging pricing environment for custom assembly products negatively impacted net sales for the current quarter compared to last year. Demand for Wireless products in the second quarter of fiscal 2009 is expected to be relatively unchanged from first quarter levels.

Space and Defense products consist of custom components and assemblies for communication satellites and defense radar, receiver, and countermeasure subsystems for the military. Sales of Space and Defense products rose $7.4 million, or 67.0% in the first quarter of fiscal 2009 compared to the first quarter of the previous fiscal year. Sales of Space and Defense products in the first quarter of the current fiscal year benefited from two months of sales from M.S. Kennedy Corp. and one month of sales from Unicircuit, Inc., totaling $4.8 million. Space and Defense product sales continue to benefit from the higher level of business won by the Company over the past few fiscal years which has resulted in the Group's backlog of $77.6 million, including $18.0 million from M.S. Kennedy and Unicircuit. Quarterly shipments of the Space and Defense Group's products for the second quarter of fiscal 2009 are expected to range between $23.0 and $25.0 million.

Gross Profit. Cost of sales consists primarily of engineering design costs, materials, material fabrication costs, assembly costs, direct and indirect overhead, and test costs. Gross profit for the first quarter of fiscal 2009 was $11.7 million, (30.6% of net sales), up from $10.5 million (32.8% of net sales) for the same quarter of the prior year. Gross profit as a percent of sales decreased in the first quarter of fiscal 2009 from the first quarter of last year due to the inclusion of $1.1 million of amortization of inventory step-up costs related to the acquisition of M.S. Kennedy and Unicircuit.

Marketing. Marketing expenses consist mainly of employee related expenses, commissions paid to sales representatives, trade show expenses, advertising expenses and related travel expenses. Marketing expenses were $2.1 million (5.5% of net sales) for the first quarter of fiscal 2009, up $336,000 from $1.8 million (5.5% of net sales) for the first quarter of fiscal 2008. Marketing expenses in the current first quarter rose $336,000 from the first quarter of last fiscal year due to the inclusion of $242,000 of marketing expenses from Unicircuit and M.S. Kennedy. The remaining increase in marketing costs in the current first quarter compared to the first quarter of last year relates to additional personnel expenses incurred to support the current higher level of business.

Research and Development. Research and development expenses consist of material and salaries and related overhead costs of employees engaged in ongoing research, design and development activities associated with new products and technology development. Research and development expenses were $3.1 million (8.1% of net sales) in the first quarter of fiscal 2009, up 18.5% from $2.6 million (8.1% of net sales) for the first quarter of fiscal 2008. Research and development expenditures are supporting further development of Wireless infrastructure and consumer

component opportunities, as well as new technology development in the Space & Defense Group. Research and Development expenditures have increased in the first quarter of fiscal 2009 versus the first quarter of last year due to the higher level of opportunities in both the Wireless and Space and Defense marketplaces and the addition of M.S Kennedy and Unicircuit. The Company does not expect to reduce its current research and development efforts through year-end and is presently working on a number of new standard and custom Wireless and Space and Defense opportunities.

General and Administrative. General and administrative expenses consist of employee related expenses, professional services, intangible amortization, travel related expenses and other corporate costs. General and administrative expenses increased $1.2 million, to $4.6 million (11.9% of net sales) for the first quarter of fiscal 2009, from $3.4 million (10.5% of net sales) for the first quarter of fiscal 2008. The increase in general and administrative expense in the first quarter of fiscal 2009 compared to the first quarter last year resulted from additional personnel in the Finance, Human Resource and Information Technology functions, and the inclusion of $1.05 million in additional costs and intangible amortization from the acquisitions of M.S. Kennedy and Unicircuit during the current first quarter.

Operating Income. Operating income fell 31.1% in the first quarter of fiscal 2009 to $1.9 million, (5.1% of net sales), compared to $2.8 million (8.7% of net sales) for the first quarter of fiscal 2008. This decline was due mainly to the inclusion of $1.3 of acquisition related inventory step-up costs and intangible amortization in the current first quarter compared to the first quarter last year.

On an operating segment basis, Wireless Group operating income was $1.1 million for the first quarter of fiscal 2009, down $608,000, from the Group's operating income of $1.7 million in the first quarter of fiscal 2008. The decline in Wireless Group operating income in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008 was due to the $1.4 million decline in Wireless sales year-over-year in the current first quarter due to the current lower demand the Company is experiencing for custom base station assemblies.

Space & Defense Group operating income was $1.1 million in the first quarter of fiscal 2009, unchanged from $1.1 million for the first quarter of fiscal 2008. Operating margins for this Group declined in the current first quarter, as they included $1.3 million of acquisition related inventory step-up and intangible amortization costs caused by the acquisition of M.S. Kennedy and Unicircuit during the first quarter of fiscal 2009.

Other Income. Other income primarily consists of interest income received on invested cash balances and rental income. Other income decreased 46.2% to $403,000 in the first quarter of fiscal 2009 compared to $750,000 for the first quarter of last year. This decrease was caused by the decline in available investable cash due to the use of $23.0 million to purchase treasury shares over the last twelve months. Other income will fluctuate based on short term market interest rates and the level of investable cash balances.

Interest Expense. Interest expense consists mainly of interest on Company borrowings and deferred items. Interest expense in the first quarter of fiscal 2009 was $266,000 compared to $37,000 for the first quarter of fiscal 2008. This increase was due to the interest expense generated by the Company's borrowings in the first quarter of fiscal 2009 to finance the acquisitions of M.S. Kennedy and Unicircuit. The Company borrowed a total of $49.8 million under its $50.0 million revolving credit facility in the first quarter. These borrowings bear interest at the 90 day LIBOR rate, plus 100 to 425 basis points, depending upon the Company's rolling twelve month EBITDA performance. The rate is reset quarterly and for the second quarter of fiscal 2009 is expected to be approximately 4.9%.

Income Taxes. Income taxes for the first quarter of fiscal 2009 were $722,000 (1.9% of net sales), representing an effective tax rate of 35.0%. This compares to income tax expense of $804,000 (2.5% of net sales) for the first quarter of fiscal 2008, representing an effective tax rate of 22.9%. This increase resulted from the expiration of the Federal Research and Experimentation credit at December 31, 2007, a significant decline in lower taxed foreign source income and a $350,000 decline in non-taxable investment income in the current first quarter compared to the first quarter of fiscal 2008. Subsequent to the end of the first quarter of fiscal 2009, the Federal Research and Experimentation credit was reinstated. Therefore, the projected effective tax rate for fiscal 2009 is now expected to be approximately 31.0% and will include a $200,000 one-time tax benefit in the second quarter related to research credits for the first half of calendar 2008, resulting in an expected effective tax rate of 25% for the second quarter.

Critical Accounting Policies

The methods, estimates and judgments management uses in applying the Company's most critical accounting policies have a significant impact on the results reported in the Company's financial statements. The U.S. Securities

and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results, and that require management to make the most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company's most critical policies include: 1) valuation of accounts receivable, which impacts general and administrative expense; 2) valuation of inventory, which impacts cost of sales and gross margin; 3) the assessment of recoverability of goodwill and other intangible and long-lived assets, which impacts impairments of goodwill, intangibles and long-lived assets; 4) accounting for stock based compensation, which impacts multiple expense components throughout the statements of income; and 5) accounting for income taxes, which impacts the valuation allowance and the effective tax rate. Management reviews the estimates, including, but not limited to, allowance for doubtful accounts, inventory reserves and income tax valuations on a regular basis and makes adjustments based on historical experiences, current conditions and future expectations. The reviews are performed regularly and adjustments are made as required by current available information. The Company believes these estimates are reasonable, but actual results could and have differed at times from these estimates.

The Company's accounts receivable represent those amounts which have been billed to its customers but not yet collected. The Company analyzes various factors including historical experience, credit worthiness of customers and current market and economic conditions. The allowance for doubtful accounts balance is established based on the portion of those accounts receivable which are deemed to be potentially uncollectible. Changes in judgments on these factors could impact the timing of costs recognized.

The Company states inventories at the lower of cost or market, using a standard cost methodology to determine the cost basis for the inventory. This method approximates actual cost on a first-in-first-out basis. The recoverability of inventories is based on the types and levels of inventory held, forecasted demand, pricing, competition and changes in technology.

The Company records valuation allowances to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized. The Company evaluates the need for valuation allowances on a regular basis and adjusts the allowance as needed. These adjustments, when made, would have an impact on the Company's financial statements in the period that they were recorded.

Long-lived assets with estimated useful lives are depreciated to their residual values over those useful lives in proportion to the economic value consumed. Long-lived assets are tested for impairment at the group level, which is usually an economic unit such as a manufacturing facility or department, which has a measurable economic output or product. Long-lived assets, or asset groups, are tested for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, and exceeds its fair market value. This circumstance exists if the carrying amount of the assets in question exceeds the sum of the undiscounted cash flows expected to result from the use of the asset, or asset group. The impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value as determined by the discounted cash flow or in the case of negative cash flow, an independent market appraisal of the asset, or asset group.

Goodwill is tested annually during the fourth fiscal quarter, or sooner if indicators of impairment exist, for impairment by the Company at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Valuation methods for determining the fair value of the reporting unit include reviewing quoted market prices and discounted cash flows. If the goodwill is indicated as being impaired (the fair value of the reporting unit is less than the carrying amount), the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value of the reporting unit goodwill is then compared with the carrying amount of the reporting unit goodwill and, if it is less, the Company would then recognize an impairment loss.

The projection of future cash flows for the goodwill impairment analysis requires significant judgments and estimates with respect to future revenues related to the assets and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in changes in this assessment and result in an impairment charge. The use of different assumptions could increase or decrease the related impairment charge.

The Company accounts for stock based compensation by recognizing expense over the vesting period for any unvested stock option awards granted. Stock option grants are valued by using a Black-Scholes method at the date of the grant. There are assumptions and estimates made by management which go into the valuation of the options granted, such as volatility, expected option term, and forfeiture rate. The Company recognizes expense on options granted using a straight-line method over the vesting period. Restricted stock grants are expensed over the vesting period, which is determined at the date of the grant.

Liquidity and Capital Resources

Net cash provided by operations for the first three months of fiscal 2009 was $5.0 million and resulted from net income before depreciation and non-cash equity based compensation expense. The positive cash flow from earnings for the quarter was further enhanced by a $2.3 million decrease in accounts receivable due to improved collection, which more than off-set a small increase in inventory and a pay down of current liabilities. Net cash provided by operations for the first quarter of fiscal 2008 was $1.5 million and resulted from net income before depreciation and non cash equity based compensation. The positive cash flow from earnings in the first quarter of fiscal 2008 was partially offset by a $2.0 million increase in inventory and accounts receivable and a $3.7 million pay down of accounts payable and accrued expenses.

Net cash used in investing activities in the first three months of fiscal 2009 was $42.0 million and consisted of $7.1 million provided by the maturity of marketable debt securities, $1.8 million used to pay for capital additions and $47.3 million used to pay for the acquisitions of M.S. Kennedy and Unicircuit, net of the cash received in both transactions. Net cash provided by investing activities in the first three months of fiscal 2008 was $9.8 million and consisted of $14.1 million provided by the maturities of marketable debt securities, net of $4.3 million used for capital additions.

Net cash provided by financing activities in the first three months of fiscal 2009 was $43.7 million and consisted of borrowings of $49.8 million under the Company's revolving declining line of credit to finance the acquisitions of M.S. Kennedy and Unicircuit, net of $1.2 million used to pay off an acquired mortgage and $5.0 million used to purchase 471,000 treasury shares. Net cash used by financing activities was $12.0 million in the first three months of fiscal 2008 and consisted of $12.3 million used to purchase 864,000 shares of treasury stock, net of $310,000 of cash and tax benefits provided by the exercise of stock options.

During the remainder of fiscal 2009, the Company anticipates that its main cash requirement will be for capital expenditures, possible continued repurchase of the Company's common stock and the $9.8 million principal payment on its line of credit due in July 2009. Capital expenditures for the remainder of fiscal 2009 are expected to total between $7.0 - $8.0 million and will be funded from existing cash and investments.

The Company may continue to repurchase shares of its common stock in the open market and/or through privately negotiated transaction under the current Board authorization, depending on market conditions. At September 30, 2008, there were approximately 1.1 million shares remaining under the current Board repurchase authorization.

At September 30, 2008, the Company had approximately $44.8 million in cash, cash equivalents, and marketable securities. The Company has had positive operating cash flow for over ten years, and believes that its cash requirements for the foreseeable future will be satisfied by currently invested cash balances and expected cash flows from operations.

Disclosures About Contractual Obligations and Commercial Commitments
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