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 current economic conditions as well as the factors set forth in this report and 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 Annual Report 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.

                                Second Quarter                            Six Months Year-to-Date
                            ------------------------------------    ------------------------------------

                               2009        2008      % Change          2009        2008      % Change
                            ------------------------------------    ------------------------------------
Key performance metrics
Net sales                       $39,974     $32,167        24 %         $75,318     $64,705        16 %
Gross profit                     $9,671      $5,441        78 %         $16,274     $14,753        10 %
Gross profit percentage           24.2%       16.9%                       21.6%       22.8%
Operating income (loss)          $2,579     ($2,507)                     $1,919     ($6,825)
Backlog                        $177,760    $142,431        25 %        $177,760    $142,431        25 %

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 targeted 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.

The Company ended the second quarter with a strong backlog; up 25% over the second quarter of fiscal 2008, and up 28% over the level of backlog at the start of the current fiscal year. This includes an increase of 12% attributable to the acquisition of Eyal. The overall prospect for new business continues to be promising as proposal activity remains high. We continue to face a number of operational challenges across our locations and we are addressing those challenges aggressively. This includes the continued implementation of 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 February 1, 2009 and fourteen weeks ended February 3, 2008

Net sales from continuing operations for the thirteen weeks ended February 1, 2009 were approximately $40.0 million, as compared to $32.2 million in the fourteen weeks ended February 3, 2008, an increase of $7.8 million (24%). The increase in net sales is primarily due to:

o an approximate $5.1 million revenue increase resulting from the acquisition of Eyal in Israel that occurred during the first quarter of the current fiscal year;
o an increase of approximately $2.8 million in revenue at Herley Lancaster, driven by improved productivity versus the second quarter of fiscal 2008, during which the facility experienced significant supplier quality issues relating to printed circuit boards and plating; and
o revenue of approximately $0.8 million for data items at Herley Farmingdale.

Domestic and foreign sales from all locations were 65% and 35%, respectively, of total net sales from continuing operations in the second quarter, versus 68% and 32% respectively in the prior year second quarter.

Gross profit in the thirteen weeks ended February 1, 2009 was approximately $9.7 million (24% of net sales) versus approximately $5.4 million (17% of net sales) in the second quarter of fiscal 2008, an increase of $4.3 million. The primary contributors to the increase in the gross profit margin for the quarter are the following:

o an increase in gross profit of approximately $1.8 million at Herley Lancaster, driven by higher sales volume achieved through improved productivity, supplier quality, and manufacturing throughput relative to the second quarter of last year;

o a gross profit increase of approximately $1.2 million at MSI, largely driven by favorable sales mix related to shipments of an avionics suite for a supersonic sea skimming target and to lower IR&D spending;

o gross profit of approximately $1.0 million attributable to the acquisition of Eyal which was completed during the first quarter of the current fiscal year; and

o an increase in gross profit of approximately $0.8 million at Herley New England related to favorable sales mix and manufacturing efficiencies.

Offsetting these increases was:

o approximately $0.7 million decrease in gross profit at Herley Farmingdale due to reduced sales and manufacturing volume, as the facilities operations continued to transition to other Herley manufacturing sites, as well as an increase of $0.5 million in the reserve for losses on a contract.

Selling and administrative expenses for the thirteen weeks ended February 1, 2009 were $7.0 million versus $7.4 million for the fourteen weeks ended February 3, 2008. Selling and administrative expenses include $0.7 million of expenses associated with the acquisition of Eyal, acquired during the first quarter of the current fiscal year. As a percentage of net sales, selling and administrative expenses were 17.7% in the second quarter of fiscal 2009, versus 22.9% in the second quarter of last year.

Litigation costs in the second quarter of fiscal 2008 were $0.6 million. We anticipate our legal costs during the second half of fiscal 2009 to increase as we prepare for the securities litigation discussed in Note 8 of the Notes to Condensed Consolidated Financial Statements.

Income from continuing operations before income taxes for the thirteen weeks ended February 1, 2009 was $2.1 million, versus an operating loss of $2.6 million for the fourteen weeks ended February 3, 2008, an increase of $4.7 million. This improvement mostly results from sales volume gains at Herley Lancaster driven by productivity and supply chain improvements, favorable sales mix at MSI and Herley New England, and the accretive impact of the recently acquired Eyal.

Other net expenses increased $0.5 million in the second quarter of fiscal 2009 over the second quarter of the prior fiscal year. Investment income declined by $0.4 million versus the same period of the prior year mostly due to the elimination of the investment of excess cash balances. Interest expense of $0.5 million represents an increase of $0.3 million over the same fiscal quarter of the previous year due to debt incurred for the purchase of Eyal.

The income taxes benefit related to continuing operations in the second quarter of fiscal 2009 relates to the carryback of unused research and development credits to fiscal year 2005. The estimated effective income tax rate for fiscal 2009 of 22.9% is lower than the statutory rate of 35% primarily due to the Company's 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 6%; and the benefit from the carryback of unused research and development credits to fiscal year 2005 reducing the effective tax rate by approximately 5.5%.

Basic and diluted earnings per common share from continuing operations for the thirteen weeks ended February 1, 2009 were $.16 per common share each, as compared to basic and diluted loss per common share from continuing operations of ($.19) each in the prior year's second quarter. The prior year's second quarter also includes a loss of ($.09) per basis and diluted common share from discontinued operations.

Twenty-six weeks ended February 1, 2009 and twenty-seven weeks ended February 3,
2008

Net sales for the twenty-six weeks ended February 1, 2009 were $75.3 million compared to $64.7 million in the first twenty-seven weeks of fiscal 2008, an increase of $10.6 million (16%). The increase in net sales is primarily related to:

o an increase of $8.4 million in revenue due to the inclusion of five months of Eyal which was acquired in Israel during the first quarter of the current fiscal year,

o an increase in sales at Herley Lancaster of $4.5 million driven by improved productivity versus the first half of fiscal 2008, during which the facility experienced significant supplier quality issues relating to printed circuit boards and plating, and

o an increase in revenues of approximately $1.0 million at Herley New England as two programs transitioned into production.

Offset by:

o a decrease in shipments at Herley Farmingdale of approximately $2.5 million due to the transition of its contracts to other Herley sites, and

o a decrease in shipments at Herley Israel of approximately $1.5 million due to the focus on the transition of certain contracts from the Herley Farmingdale facility.

Domestic and foreign sales were 66% and 34%, respectively, of net sales in the twenty-six and twenty-seven weeks ended February 1, 2009 and February 3, 2008, respectively.

Gross profit in the twenty-six weeks ended February 1, 2009 was $16.3 million (22% of net sales) compared to $14.8 million (23% of net sales) in the first

half of fiscal 2008; an increase of $1.5 million. The increase is due to the following:

o an increase in gross profit of $1.8 million at Herley Lancaster, driven by higher sales volume achieved through improved productivity, supplier quality, and manufacturing throughput relative to the first half of last year;

o an increase in gross profit of $1.5 million due to the inclusion of the financial results of Eyal,

o an increase in gross profit of $0.9 million related to favorable sales mix including shipments of an avionics suite for a supersonic sea skimming target, and improved productivity at MSI,

o an increase in gross profit of $0.8 million at Herley New England due to favorable sales mix and productivity improvements; and

o gross profit improvement at EWST of $0.6 million.

These gross profit gains were offset by:

o a reduction in gross profit of $2.8 million at Herley Farmingdale, mostly related to the reduction in sales resulting from the transition of existing programs to other Herley manufacturing sites and the provision of $1.1 million in a reserve for losses on a contract; and

o a reduction of $1.4 million in gross profit at Herley Israel due the combined impact of a 6% decrease in the U.S. dollar currency exchange rate on manufacturing costs and reduced sales volume.

Selling and administrative expenses for each of the twenty-six weeks ended February 1, 2009 and the twenty-seven weeks ended February 3, 2008 were $14.4 million. The twenty-six weeks ended February 1, 2009 includes $1.2 million of selling and administrative expenses associated with the Eyal acquisition, including $0.5 million of amortization of intangible assets. Reductions in selling and administrative expenses occurred in commissions of $0.6 million, and the balance in expense reductions in several categories.

Income from continuing operations before income taxes for the twenty-six weeks ended February 1, 2009 was $0.9 million, versus an operating loss of $6.3 million for the twenty-seven weeks ended February 3, 2008, an improvement of $7.2 million. The results of operations in the first half of fiscal 2008 include $7.1 million of litigation related costs versus legal costs of $0.6 million in fiscal 2009. The financial results of Eyal in the current fiscal year contributed $0.3 million to operating income.

Other (expense) income for the twenty-six weeks ended February 1, 2009 was a net expense of $1.1 million, versus net income of $0.5 million in the twenty-seven weeks ended February 3, 2008, a net change of $1.5 million. Investment income declined by $0.8 million versus the same period of the prior year mostly due to a reduction in cash balances. Interest expense of $0.7 million reflects an increase of $0.4 million over the first half of the previous fiscal year primarily due to debt incurred for the purchase of Eyal. Currency exchange transaction losses of $0.4 million recognized in the first half of fiscal year 2009 were $0.3 million higher than the prior fiscal year, reflecting a further weakening of the United States dollar.

The income taxes benefit related to continuing operations in the first half of fiscal 2009 was $0.4 million as compared to a benefit of $1.6 million in the prior year's first half. The estimated effective tax rate for fiscal year 2009 is approximately 22.9%, which is less than the statutory rate of 35.0% primarily due to the Company's 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 6%; and the benefit from the carryback of unused research and development credits to fiscal year 2005 reducing the effective tax rate by approximately 5.5%.

Basic and diluted earnings per common share from continuing operations for the twenty-six weeks ended February 1, 2009 were $.09 per common share each; as compared to basic and diluted loss per common share from continuing operations of ($.35) each in the twenty-seven weeks ended February 3, 2008. The twenty-six and twenty-seven weeks ended February 1, 2009 and February 3, 2008 include a loss of ($.03) and ($.12) per basis and diluted common share, respectively from discontinued operations.

Liquidity and Capital Resources

As of February 1, 2009 and August 3, 2008, working capital was $97.7 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 unliquidated balance of progress payments was approximately $1.4 million at February 1, 2009 and $0.7 million at August 3, 2008. The balance of advanced payments was approximately $13.3 million at February 1, 2009 and $8.1 million at August 3, 2008. The increase relates to a contract at Herley Lancaster for approximately $4.0 million and a contract at MSI for approximately $1.4 million.

Net cash provided by operating activities during the twenty-six weeks ended February 1, 2009 was approximately $3.4 million as compared to $0.2 million during the first half of the prior year, a net increase of approximately $3.2 million. We had net income in the first half of the current fiscal year of $0.8 million versus a loss of $6.4 million in the prior year first half, an improvement of approximately $7.2 million. The first half of fiscal 2008 was impacted by the litigation settlement and related costs of approximately $7.1 million.

Other significant increases in cash provided by operating activities during the twenty-six weeks ended February 1, 2009 include a reduction in cost incurred and income recognized in excess of billings on uncompleted contracts of $3.6 million due to the shipment and billing of contracts on percentage of completion, and the receipt of cash advances on the two contracts noted above. Increases in inventory and payments/reductions in accounts payable and accrued expenses account for the significant uses of cash during the first half of fiscal 2009. Herley New England recorded the receipt of approximately $1.3 million of materials related to the ICAP program, and MSI and CTI increased their inventory in anticipation of higher volume in the second half of fiscal 2009.

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 $2.6 million. Proceeds from the sale of ICI were $15.0 million of which approximately $0.8 million is held in escrow as security for certain indemnification obligations.

Net cash provided by financing activities of $11.9 million includes borrowings under our bank line of credit of $4.0 million for working capital; and $20.0 million under the credit line plus $10.0 million from a new term loan in Israel to fund the acquisition of Eyal. Payments of $21.5 million and $0.8 million were made relating to our bank line of credit and long-term debt, respectively; and a quarterly payment of approximately $0.3 million was made on the loan in Israel.

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 February 1, 2009 was approximately $178 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 February 1, 2009, we have approximately $20.1 million available under our bank credit facility (net of outstanding stand-by letters of credit of approximately $14.9 million and borrowings of $5.0 million) and cash of approximately $11.9 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 Condensed 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 during fiscal 2009 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  $    7,660    820   6,840   -      -
                         ==========  =====   ===== =====   =====
Notes Payable - bank     $   12,242  1,421   2,711 2,536   5,574
                         ==========  =====   ===== =====   =====

As noted above, in November 2008 we repaid $14.0 million of the revolving credit loan facility balance out of the proceeds from the sale of ICI.

New Accounting Pronouncements

For a discussion of new accounting standards, see Note 14 to our Condensed Consolidated Financial Statements - (Unaudited) in Item 1.