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, including the potential for significant changes in US defense spending under the new Administration which could affect future funding of programs and allocations within the budget to various programs 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 on 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.

                                         Third Quarter                       Nine Months Year-to-Date
                            -------------------------------------     -------------------------------------

                               2009         2008      % Change           2009        2008       % Change
                            -------------------------------------     -------------------------------------
Key performance metrics
Net sales                       $41,811      $33,516        25 %         $117,129     $98,221         19 %
Gross profit                    $11,198       $6,486        73 %          $27,471     $21,239         29 %
Gross profit percentage           26.8%        19.4%                        23.5%       21.6%
Operating income (loss)          $3,021     ($11,717)                      $4,940    ($18,542)
Backlog                        $182,919     $138,263        32 %         $182,919    $138,263         32 %

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 third quarter with a strong backlog; up 32% over the third quarter of fiscal 2008, and up 31% 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 May 3, 2009 and thirteen weeks ended May 4, 2008
Net sales from continuing operations for the thirteen weeks ended May 3, 2009 were approximately $41.8 million, as compared to $33.5 million in the thirteen weeks ended May 4, 2008, an increase of $8.3 million (25%). The increase in net sales is primarily due to:

o an approximate $4.7 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 $2.5 million in revenue at Herley Lancaster, mostly due to improved productivity versus the third quarter of fiscal 2008.

Domestic and foreign sales from all locations were 70% and 30%, respectively, of total net sales from continuing operations in the third quarter, versus 67% and 33% respectively in the prior year third quarter.

Gross profit in the thirteen weeks ended May 3, 2009 was approximately $11.2 million (27% of net sales) versus approximately $6.5 million (19% of net sales) in the third quarter of fiscal 2008, an increase of $4.7 million. The primary contributors to the increase in the gross profit margin for the quarter are the following:

o a net increase in gross profit of approximately $2.2 million primarily driven by higher sales volume, improved productivity, and a reduction in estimated costs to complete a contract accounted for under percentage of completion resulting in an increase in gross profit of approximately $1.3 million in the quarter,

o gross profit of approximately $0.9 million attributable to the acquisition of Eyal which was completed during the first quarter of the current fiscal year, and

o an improvement in gross profit of approximately $0.9 million due to the closure of the Herley Farmingdale facility;

Offset by:

o a $2.0 million loss provision for various contracts due to changes in estimated costs required to complete the contracts.

Selling and administrative expenses for the thirteen weeks ended May 3, 2009 and May 4, 2008 were $7.5 million. Selling and administrative expenses include $0.6 million of expenses associated with Eyal, which was acquired during the first quarter of the current fiscal year. As a percentage of net sales, selling and administrative expenses were 17.9% in the third quarter of fiscal 2009, versus 22.5% in the third quarter of last year.

Litigation costs/settlement in the third quarter of fiscal 2009 were $0.7 million, versus $10.7 million in the third quarter of the prior fiscal year, which included a $9.5 million settlement of the Department of Justice litigation. We anticipate our legal costs during the fourth quarter of fiscal 2009 to increase as we prepare for the securities litigation discussed in Note 8 of the Notes to Condensed Consolidated Financial Statements.

Other net expenses increased $0.1 million in the third quarter of fiscal 2009 over the third quarter of the prior fiscal year, as foreign exchange gains partially offset higher interest expense and lower interest income.

Income from continuing operations before income taxes for the thirteen weeks ended May 3, 2009 was $3.0 million, versus an operating loss of $11.7 million for the thirteen weeks ended May 4, 2008, an improvement of $14.7 million. This improvement mostly results from a reduction in litigation costs/settlement, to sales volume gains at Herley Lancaster and Herley New England, to the accretive impact of the recently acquired Eyal, and to cost reductions realized through the closure of Herley Farmingdale.

The income taxes benefit related to continuing operations in the third quarter of fiscal 2009 relates to the carryback of unused research and development credits to fiscal year 2005 and the final adjustment for the fiscal year 2008 research and development credit. The estimated effective income tax rate for fiscal 2009 of 21.4% is lower than the statutory rate of 35% primarily due to the benefit from the carryback of unused research and development credits to fiscal year 2005 and a benefit for the final adjustment to the fiscal year 2008 research and development credit, reducing the rate by 6.5% and 4.7%, respectively. The Company's foreign earnings attributable to our Israeli subsidiary, which is taxed at an estimated rate of 10% for fiscal 2009, also reduced the effective income tax rate by approximately 2.0%.

Basic and diluted earnings per common share from continuing operations for the thirteen weeks ended May 3, 2009 were $.18 per common share each, as compared to basic and diluted loss per common share from continuing operations of ($.33) each in the prior year's third quarter. The prior year's third quarter also includes net income of $.06 per basic and diluted common share from discontinued operations.

Thirty-nine weeks ended May 3, 2009 and forty weeks ended May 4, 2008
Net sales for the thirty-nine weeks ended May 3, 2009 were $117.1 million compared to $98.2 million in the first forty weeks of fiscal 2008, an increase of $18.9 million (19%). The increase in net sales is primarily related to:

o an increase of $13.2 million in revenue due to the inclusion of eight 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 $7.7 million driven by improved productivity versus the first three quarters of fiscal 2008, during which the facility experienced supplier quality and manufacturing throughput issues.

Domestic and foreign sales were 67% and 33%, respectively, of net sales in the thirty-nine weeks ended May 3, 2009, versus 67% and 33%, respectively, in the forty weeks ended May 4, 2008.

Gross profit in the thirty-nine weeks ended May 3, 2009 was $27.5 million (24% of net sales) compared to $21.2 million (22% of net sales) in the forty weeks ended May 4, 2008; an increase of $6.3 million. The increase is mostly due to the following:

o a net increase in gross profit of approximately $4.7 million primarily driven by higher sales volume, improved productivity, supplier quality improvements, and a reduction in estimated costs to complete a contract accounted for under percentage of completion resulting in an increase in gross profit of approximately $1.3 million in the period,

o gross profit of approximately $2.5 million attributable to the acquisition of Eyal;

Offset by:

o a $2.0 million loss provision for various contracts due to changes in estimated costs required to complete the contracts.

Selling and administrative expenses for each of the thirty-nine weeks ended May 3, 2009 and the forty weeks ended May 4, 2008 were $22.0 million. The thirty-nine weeks ended May 3, 2009 includes $1.8 million of selling and administrative expenses related to Eyal, with this increase offset by reductions in selling and administrative expenses at other facilities.

Litigation costs/settlement for the thirty-nine weeks ended May 3, 2009 were $1.1 million, versus $17.8 million for the forty weeks ended May 4, 2008, which included a $9.5 million settlement of the Department of Justice litigation and a $6.0 million settlement of the EADS litigation.

Other (expense) income for the thirty-nine weeks ended May 3, 2009 was a net expense of $1.1 million, versus net income of $0.5 million in the forty weeks ended May 4, 2008, a net change of $1.6 million. Interest income declined by $0.9 million versus the same period of the prior year mostly due to a reduction in cash balances. Interest expense of $0.9 million reflects an increase of $0.5

million over the first three quarters of the previous fiscal year primarily due to debt incurred for the purchase of Eyal. Currency exchange transaction losses of $0.2 million recognized in the thirty-nine weeks ended May 3, 2009 were $0.2 million higher than the prior fiscal year, reflecting a weakening of the United States dollar.

Income from continuing operations before income taxes for the thirty-nine weeks ended May 3, 2009 was $3.9 million, versus an operating loss of $18.0 million for the forty weeks ended May 4, 2008, an improvement of $21.9 million. The results of operations in the forty weeks ended May 4, 2008 include $17.8 million of litigation related costs versus legal costs of $1.1 million in fiscal 2009, a reduction of $16.7 million. The financial results of Eyal in the current fiscal year contributed $0.7 million to operating income.

The provision for income taxes related to continuing operations for the thirty-nine weeks ending May 3, 2009 was $0.2 million as compared to a benefit of $8.8 million for the first nine months of the prior year. The estimated effective income tax rate for fiscal 2009 is 21.4%, which is lower than the statutory rate of 35% primarily due to the benefit from the carryback of unused research and development credits to fiscal year 2005 and the benefit for the final adjustment to the fiscal year 2008 research and development credit, reducing the rate by 6.5% and 4.7%, respectively. The Company's foreign earnings applicable to our Israeli subsidiary, which is taxed at an estimated rate of 10% for fiscal 2009, also reduced the effective tax rate by approximately 2.0%.

Basic and diluted earnings per common share from continuing operations for the thirty-nine weeks ended May 3, 2009 were $.27 per common share each; as compared to basic and diluted loss per common share from continuing operations of ($.67) each in the forty weeks ended May 4, 2008. The thirty-nine and forty weeks ended May 3, 2009 and May 4, 2008 include a loss from discontinued operations of ($.03) and ($.06) per basic and diluted common share, respectively.

Liquidity and Capital Resources

As of May 3, 2009 and August 3, 2008, working capital was $95.1 million and $94.4 million, respectively, and the ratio of current assets to current liabilities was 3.0 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 inception of the contract. The unliquidated balance of progress payments was approximately $2.4 million at May 3, 2009 and $0.7 million at August 3, 2008. The balance of advanced payments was approximately $17.2 million at May 3, 2009 and $8.1 million at August 3, 2008. The fiscal year to date increase relates to various contracts at Herley Lancaster aggregating approximately $6.8 million, advanced payments on the ICAP and EA-18G programs at CTI aggregating approximately $1.0 million, and on the AMRAAM contract at MSI for approximately $1.4 million.

Net cash provided by operating activities during the thirty-nine weeks ended May 3, 2009 was approximately $12.1 million as compared to cash used in operations of $2.8 million during the first nine months of the prior year, a net positive cash flow increase of approximately $14.9 million. We had net income in the first nine months of the current fiscal year of approximately $3.2 million versus a loss of $10.0 million in the prior year's comparable period, an improvement of approximately $13.2 million. The first nine months of fiscal 2008 reflects certain litigation settlements and related costs of approximately $17.8 million.

Other significant changes in net cash provided by operating activities during the thirty-nine weeks ended May 3, 2009 include:

o the receipt of refundable income taxes of approximately $2.1 million,
o a reduction in cost incurred and income recognized in excess of billings on uncompleted contracts of $3.5 million due to the shipment and billing of contracts on percentage of completion,
o the receipt of cash advances, net of liquidations aggregating approximately $9.4 million on the contracts noted above,
o Increases in inventory of $6.2 million including approximately $1.3 million of materials related to the ICAP program at Herley New England and increases in inventory at MSI and CTI in anticipation of higher sales volume for the remainder of fiscal 2009,
o an increase in trade receivables of $2.3 million, as well as payments/reductions in accounts payable and accrued expenses of $6.1 million,
o and a final payment on the litigation settlement of $1.0 million account for the other significant uses of cash during the first nine months 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 $4.5 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 $7.3 million includes borrowings under our bank line of credit of $11.0 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 $32.0 million and $1.6 million were made relating to our bank line of credit and long-term debt, respectively; and payments of approximately $0.5 million were 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. It is anticipated that a significant portion of our

revenue for the remainder of fiscal 2009 will be generated from our existing backlog of sales orders. The funded backlog of orders at May 3, 2009 was approximately $183 million.

By letter dated May 28, 2009, the Company was advised that a contract with General Microwave Corporation doing business as Herley Farmingdale ("GMC") which is included in the Company's backlog in the aggregate amount of approximately $4.9 million was being terminated for default. By letter dated June 1, 2009, the customer demanded a return of approximately $3.8 million, which represented an alleged progress payment made under the contract to GMC. On June 8, 2009 GMC filed suit for breach of contract related to its customer's decision to terminate the contract for default. GMC will vigorously pursue these claims and defend against any anticipated counterclaims. See Note 17 to our Condensed Consolidated Financial Statements - (Unaudited) in Item 1.

As of May 3, 2009, we have approximately $24.1 million available under our bank credit facility (net of outstanding stand-by letters of credit of approximately $14.9 million and borrowings of $1.0 million) and cash of approximately $14.1 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 Notes 2 and 9 (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
                             ======   =====   ===== =====  =====

New Accounting Pronouncements

For a discussion of new accounting standards, see Note 15 to our Condensed Consolidated Financial Statements - (Unaudited) in Item 1.