Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

All statements other than statements of historical fact included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" which follows are forward-looking statements. Forward-looking statements involve various important assumptions, risks, uncertainties and other factors which could cause our actual results to differ materially from those expressed in such forward-looking statements. Forward-looking statements in this discussion can be identified by words such as "anticipate," "believe," "could," "estimate," "expect," "plan," "intend," "may," "should" or the negative of these terms or similar expressions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievement. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to, competitive factors and pricing pressures, changes in legal and regulatory requirements, cancellation or deferral of customer orders, technological change or difficulties, difficulties in the timely development of new products, difficulties in manufacturing, commercialization and trade difficulties and general economic conditions as well as the factors set forth in our public filings with the Securities and Exchange Commission.

You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report or the date of any document incorporated by reference, in this Quarterly Report. We are under no obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934.

Explanatory Note

We begin Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of Herley Industries, Inc. with a business overview. This is followed by a discussion of the critical accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results, which we discuss under "Results of Operations." We then provide an analysis of cash flows under "Liquidity and Capital Resources." This MD&A should be read in conjunction with our unaudited condensed consolidated financial statements, the notes thereto, the other unaudited financial data included elsewhere in this 10-Q and our 2008 Form 10-K.

Business Overview

We are a leading supplier of microwave products and systems to defense and aerospace entities worldwide. Our primary customers include large defense prime contractors (including Northrop Grumman Corporation, Lockheed Martin Corporation, Raytheon Company, The Boeing Company, BAE Systems and Harris Corporation), the U.S. Government (including the Department of Defense, NASA and other U.S. Government agencies) and international customers (including the Egyptian, German, Japanese and South Korean militaries and suppliers to international militaries). We are a leading provider of microwave technologies for use in command and control systems, flight instrumentation, weapons sensors and electronic warfare systems. We have served the defense industry since 1965 by designing and manufacturing microwave devices for use in high technology defense electronics applications. Our products and systems are currently deployed on a wide range of high profile military platforms, including the F-16 Falcon, the F/A-18E/F Super Hornet, the E-2C/D Hawkeye, EA-18G Growler, the AEGIS class surface combatants, the EA-6B Prowler, the AMRAAM air to air missile, CALCM (Conventional Air Launch Cruise Missile), Multi-mission Maritime Aircraft and unmanned aerial vehicles, or UAVs, as well as high priority national security programs such as National Missile Defense and the Trident II D-5.

Critical Accounting Policies

Our significant accounting policies are described in Note A of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended August 3, 2008 ("Report"); and a discussion of these critical accounting policies and estimates are included in Management's Discussion and Analysis of Results of Operations and Financial Condition of that Report. Management has discussed the development and selection of these policies with the Audit Committee of the Company's Board of Directors, and the Audit Committee of the Board of Directors has reviewed the Company's disclosures of these policies.

There have been no material changes to the critical accounting policies or estimates reported in Management's Discussion and Analysis section of the audited financial statements for the fiscal year ended August 3, 2008 as filed with the Securities and Exchange Commission.

Results of Operations

Our Company's senior management regularly reviews the performance of our operations including reviews of key performance metrics as well as the status of operating initiatives. We review information on the financial performance of the operations, new business opportunities, customer relationships and initiatives, IR&D activities, human resources, manufacturing effectiveness, cost reduction activities, as well as other subjects. We compare performance against budget, against prior comparable periods, and against our most recent internal forecasts. The following table presents a financial summary comparison (in thousands) of the key performance metrics concerning our continuing operations.

                                                First Quarter
                                    -------------------------------------
                                       2009         2008      % Change
                                    -------------------------------------

        Key performance metrics of continuing operations:

        Net sales                       $35,344      $32,538         9 %
        Gross profit                     $6,603       $9,312       (29)%
        Gross profit percentage           18.7%        28.6%       (35)%
        Operating loss                    ($660)     ($4,318)       85 %
        Bookings                        $61,051      $38,003        61 %
        Backlog                        $183,161     $137,906        33 %

The operational improvement initiatives that began in fiscal 2008 are continuing and are impacting results across our operating facilities. We established four improvement objectives across all locations: improve cycle time, reduce defects, improve customer satisfaction, and increase Herley pride. We motivated our employees to actively engage in this program and we are pleased with the excitement and participation across the Company. This process improvement culture is taking root in our operations and we reasonably expect the success of the program to continue. However, there are no representations as to future results or performance or that achievements will be realized.

Similarly, we formed five Councils which are: Technology, Operations, Business Development, Finance, and Contracts. Each Council has a representative from each of our locations and is chartered with the objective of implementing process improvements in their respective discipline that crosses all locations as well as sharing of best practices across Herley. The Councils are now into their second year and each has again identified specific, measurable objectives which are expected to be achieved on or before the end of fiscal 2009.

During the first quarter, the Company recorded record bookings resulting in a record level of backlog. At the same time, the overall prospect for new business continues to be promising as proposal activity remains high. Still, the business continues to face a number of operational challenges across our locations and we are addressing those challenges aggressively. Among other changes, we are implementing certain cost containment measures throughout our Company, including the reduction of personnel.

Accordingly, we believe we are taking appropriate and aggressive actions to meet the challenges facing our Company and we remain optimistic that the Company's performance should continue to improve.

Thirteen weeks ended November 2, 2008 and October 28, 2007

Net sales from continuing operations for the thirteen weeks ended November 2, 2008 were approximately $35.3 million, as compared to $32.5 million in the thirteen weeks ended October 28, 2007, an increase of $2.8 million (8.6%). Net sales exclude the operations of ICI for the thirteen weeks ended November 2, 2008 and October 28, 2007 which were approximately $6.0 million and $3.4 million, respectively. (See Note 3 to Condensed Consolidated Financial Statements.) Net sales include $3.3 million of revenue from the recent acquisition of Eyal in Israel, which reflects two months of Eyal's operations during the thirteen weeks ended November 2, 2008. Revenues at Herley Lancaster increased by $2.5 million due in part to revenue associated with the Trident program, as well as other shipments of products across multiple programs. Revenues also increased at Herley New England ($0.5 million) and at EWST ($0.9 million) due to increased productivity.

Offsetting these increases was a total decrease of $4.4 million across MSI ($1.0 million), CTI ($0.6 million), Herley Israel ($0.9 million), and Herley Farmingdale ($1.9 million) largely due to the timing of customer scheduled shipments, and the closure of the Farmingdale manufacturing facility.

Domestic and foreign sales from all locations were 67% and 33% respectively of total net sales from continuing operations in the quarter, versus 66% and 34% respectively in the prior year quarter. Bookings from continuing operations in the first quarter were approximately $61.0 million, and were 76% domestic and 24% foreign. This compares to bookings of approximately $38 million in the prior year first quarter which were 71% domestic and 29% foreign.

The gross profit margin from continuing operations in the thirteen weeks ended November 2, 2008 was 18.7% compared to 28.6% in the first quarter of fiscal 2008, a decrease of 9.9%. The primary contributors to the decrease in gross profit margin for the quarter are the following:

At Herley Farmingdale, a decrease of approximately $2.1 million due to (a) reduced sales volume and (b) unabsorbed overhead expenses, including severance costs of approximately $311,000, resulting from the closure of the facility which will be completed by December 31, 2008.

At Herley Israel, a decrease of approximately (a) $0.9 million due to sales volume and product mix and (b) $0.4 million due to the effects of the exchange

rate of the New Israeli Shekel versus the U.S. dollar.

The operations at Eyal, the recently acquired company in Israel, delivered a 17% gross margin in the period. Management plans to institute a number of performance improvement initiatives at this new Herley operation that are expected to significantly improve the financial performance at Eyal in future periods.

Selling and administrative expenses for the thirteen weeks ended November 2, 2008 were $7.3 million versus approximately $7.1 million in the first quarter of fiscal 2008 and was 20.7% of net sales as compared to 21.7% in fiscal 2008. This first quarter of fiscal 2009 includes approximately $0.5 million of selling and administrative costs relating to Eyal, including approximately $0.2 million of amortization expense relating to intangibles.

On October 31, 2008, we completed the sale of the assets of our machine shop located at our MSI operation to a third party in the amount of $675,000. Payment terms are $1,000 due at closing and the balance of $674,000 payable over six years in accordance with the terms of an interest bearing Note. The sale of assets resulted in a net gain of approximately $618,000 as reported in the results of operations in the quarter ended November 2, 2008.

Loss from operations for the first quarter of fiscal 2009 was approximately $0.7 million or 1.9% of net sales, as compared to a loss from operations of approximately $4.3 million or 13.3% of net sales in the prior year. The loss from operations for the first quarter of the prior year was largely impacted by the $6.0 million litigation settlement costs.

Other income (expense) was an expense of $0.6 million in the first quarter of fiscal 2009 versus other income in the prior year first quarter of approximately $0.6 million. Investment income declined by $0.4 million as compared to the prior year first quarter due to significantly lower cash balances in the first quarter of 2009. Interest expense increased by $0.2 million in the first quarter of fiscal 2009 versus the prior year driven primarily by the debt incurred related to the purchase of Eyal. We recognized net foreign exchange losses of $0.4 million versus a gain of $0.1 million in the first quarter of fiscal 2008. These foreign exchange losses and gains are attributable to fluctuations in exchange rates between the U.S. dollar and the local currency of our U.K. subsidiary primarily in connection with temporary advances we have made to them in U.S. dollars.

The income tax benefit recognized for continuing operations in the first quarter of fiscal 2009 was $0.3 million (an effective income tax benefit rate of approximately 28%) as compared to a benefit of $1.6 million in the prior year's first quarter. The estimated effective tax rate for fiscal year 2009 is approximately 28%, which is less than the statutory rate of 35% primarily due to the foreign earnings attributable to our Israeli subsidiary which is taxed at an estimated rate of 10% for fiscal 2009, thereby reducing the effective income tax rate by approximately 7%.

On September 18, 2008, we executed an agreement (the "Agreement") with a foreign defense company to divest our ICI subsidiary located in McLean, Virginia. ICI is a communications technology development firm specializing in research, design, development, production, and support of wireless data communications products and services. The Agreement provided for an all cash transaction valued at approximately $15 million and the required U.S. Government approval was granted on November 3, 2008. As the transaction is completed, ICI is reported as a discontinued operation. The pre-tax loss from operations of this discontinued subsidiary was approximately $0.7 million in the first quarter and was comprised of (a) a non-cash charge to earnings of approximately $1.0 million to reflect the difference between the sale price pursuant to the Agreement and the net carrying value of the assets held for sale and (b) income from the operations of the discontinued subsidiary of approximately $0.3 million.

Basic and diluted loss per common share for the thirteen weeks ended November 2, 2008 were $.10 per common share each as compared to basic and diluted loss per common share of $.19 each in the prior year's first quarter. In the first quarter of fiscal 2009, the loss included $.07 from continuing operations and $.03 from discontinued operations, versus $.16 from continuing operations and $.03 from discontinued operations in the first quarter of fiscal 2008.

Liquidity and Capital Resources

As of November 2, 2008 and August 3, 2008, working capital was $105.5 million and $94.4 million, respectively, and the ratio of current assets to current liabilities was 3.3 to 1 and 3.1 to 1, respectively.

As is customary in the defense industry, inventory is partially financed by progress payments. In addition, it is customary for us to receive advanced payments from customers on major contracts at the time a contract is entered into. The un-liquidated balance of progress payments was approximately $1.2 million at November 2, 2008 and $0.7 million at August 3, 2008. The balance of advanced payments was approximately $7.8 million at November 2, 2008 and $8.1 million at August 3, 2008.

Net cash provided by operating activities during the thirteen weeks ended November 2, 2008 was approximately $1.1 million as compared to $2.1 million during the first quarter of the prior year, a net decrease of approximately $1.0 million. We had a net loss in the first quarter of the current fiscal year of $1.3 million versus a loss of $2.6 million in the prior year first quarter, a decrease of approximately $1.3 million. The first quarter of fiscal 2008 was impacted by the litigation settlement and related costs of approximately $6.6 million.

Other significant increases in cash provided by operating activities during the thirteen weeks ended November 2, 2008 include a decrease in cost incurred and

income recognized in excess of billings on uncompleted contracts of $4.8 million due to the shipment and billing of contracts on percentage of completion, offset primarily by a reduction in accounts payable and accrued expenses of $4.1 million.

Net cash used in investing activities relates to the acquisition of Eyal for cash of $30.0 million (including acquisition costs of $0.4 million less cash acquired of $0.4 million), and capital expenditures of $2.0 million.

Net cash provided by financing activities includes borrowings under our bank line of credit of $20.0 million and of $10.0 million from a new term loan in Israel to fund the acquisition of Eyal; less payments of $1.0 million and $0.4 million related to our bank line of credit and long-term debt, respectively.

We believe that presently anticipated future cash requirements will be provided by internally generated funds, our existing unsecured credit facility, and existing cash balances. A significant portion of our revenue for fiscal 2009 will be generated from our existing backlog of sales orders. The funded backlog of orders at November 2, 2008 was approximately $183 million. In the event of the cancellation of a significant amount of government contracts included in our backlog, we will be required to rely more heavily on our existing credit facility to fund operations. We are not aware of any events which are reasonably likely to result in any cancellation of our government contracts. As of November 2, 2008, we have approximately $3.2 million available under our bank credit facility (net of outstanding stand-by letters of credit of approximately $15.3 million and borrowings of $21.5 million) and cash of approximately $12.0 million. In November 2008 we repaid $14.0 million of our line of credit loans from the proceeds of the sale of ICI.

Contractual Financial Obligations, Commitments and Off-Balance Sheet Arrangements

Our financial obligations and commitments to make future payments under contracts include purchase orders, debt and lease agreements, and contingent commitments such as stand-by letters of credit. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transaction, with the result that some are recorded as liabilities on the Balance Sheet, while others are required to be disclosed in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis. The Company's contractual financial obligations and other contingent commitments are disclosed in our Annual Report on Form 10-K for the fiscal year ended August 3, 2008 under Management's Discussion and Analysis. In addition to the financial obligations contained therein, the following payments (including imputed interest), are required under the terms of the financing discussed in Note 2 (in thousands):

                                            Within   2-3    4-5  After 5
              Obligations           Total   1 Year  Years  Years  Years
              -----------           -----   ------  -----  -----  -----
        Revolving loan facility  $   21,660    820  20,840   -      -
                                     ======    ===  ====== =====  =====
        Notes Payable - bank     $   12,242  1,421   2,711 2,536  5,574
                                     ======  =====   ===== =====  =====

New Accounting Pronouncements

For a discussion of new accounting standards, see Note 13 to our Condensed Consolidated Financial Statements - (Unaudited) in Item 1.