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-K. 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 Annual Report.

Overview

The consolidated financial statements present the financial condition of the Company as of June 30, 2009 and 2008, and the consolidated results of operations and cash flows of the Company for the years ended June 30, 2009, 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 is also a leading provider of high performance analog microelectronics including custom hybrids, power hybrids, and multi-chip modules. 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 Satellite, 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 its 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 450 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 will be integrated into Anaren's existing Space & Defense Group. Anaren acquired MSK for a purchase price of $27.7 million, net of cash acquired, and earnings from MSK were accretive in fiscal year 2009. The Company financed this transaction through a five year, $50.0 million revolving debt facility. Goodwill and intangible assets related to this acquisition were $12.5 million.

On August 30, 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 will be integrated into Anaren's existing Space & Defense Group. Anaren acquired Unicircuit, Inc. for a purchase price of approximately $20.8 million, net of cash acquired, and earnings from Unicircuit were accretive in fiscal year 2009. The Company financed this transaction by utilizing its existing five year, $50.0 million revolving debt facility. Goodwill and intangible assets related to this acquisition were $11.8 million.

Results of Operations

Net sales from continuing operations for the year ended June 30, 2009 were $166.9 million, up 27.1% from $131.3 million for fiscal 2008. Income from continuing operations for fiscal 2009 was $9.9 million, or 5.9% of net sales, up $1.4 million, or 16% from income from continuing operations of $8.5 million in fiscal 2008.

The following table sets forth the percentage relationships of certain items from the Company's consolidated statements of operations as a percentage of net sales for the periods indicated:

                                                         Years Ended June 30,
                                                         --------------------
                                                     2009       2008       2007
                                                    -----      -----      -----
Net sales                                           100.0%     100.0%     100.0%
Cost of sales                                        67.3       69.2       64.4
                                                    -----      -----      -----
Gross Profit                                         32.7       30.8       35.6
                                                    -----      -----      -----
Operating expenses:
  Marketing                                           5.4        5.3        5.8
  Research and development                            7.8        7.9        7.1
  General and administrative                         11.1       10.4        9.5
  Restructuring                                        --        0.2         --
                                                    -----      -----      -----
    Total operating expenses                         24.3       23.8       22.4
                                                    -----      -----      -----
Operating income                                      8.4        7.0       13.2
                                                    -----      -----      -----
Other income (expense):
  Interest expense                                   (0.9)      (0.1)        --
  Other, primarily interest income                    0.7        1.8        2.7
                                                    -----      -----      -----
    Total other income (expense)                     (0.2)       1.7        2.7
                                                    -----      -----      -----
Income from continuing operations
  before income taxes                                 8.2        8.7       15.9
Income taxes                                          2.3        2.3        4.0
                                                    -----      -----      -----
Net income from continuing operations                 5.9        6.4       11.9
Discontinued operations:
  Income from discontinued
    operations of Anaren Europe                        --         --         --
  Income tax benefit                                   --       (0.6)        --
                                                    -----      -----      -----
  Net income from discontinued operations              --        0.6         --
                                                    -----      -----      -----
  Net income                                          5.9%       7.0%      11.9%
                                                    =====      =====      =====

The following table sets forth the Company's net sales by industry segment for the periods indicated:

                                                                       Years Ended June 30,
                                                                       --------------------
                                                    2009                       2008                     2007
                                               (In thousands)             (In thousands)            (In thousands)
                                             ------------------        -------------------        ------------------
Wireless                                     $ 68,622      41.1%       $ 78,741       60.0%       $ 77,800      60.3%
Space & Defense                                98,283      58.9%         52,575       40.0%         51,187      39.7%
                                             --------     -----        --------      -----        --------     -----
                                             $166,905     100.0%       $131,316      100.0%       $128,987     100.0%
                                             ========     =====        ========      =====        ========     =====

Year Ended June 30, 2009 Compared to Year Ended June 30, 2008

Net sales. Net sales were $166.9 million for the year ended June 30, 2009, up 27.1% compared to $131.3 million for the fiscal 2008 and included $37.5 million of sales from M.S. Kennedy Corp. and Unicircuit, Inc. in fiscal 2009. Shipments of Wireless Group products fell $10.1 million, or 12.9%, and sales of Space & Defense Group products rose $45.7 million, or 86.9%, in fiscal 2009 compared to fiscal 2008.

Wireless Group products consist of standard components, ferrite components and custom subassemblies for use in building wireless

base station and consumer equipment. The decline in Wireless Group sales was the result of a decline in demand for custom components during fiscal 2009 compared to fiscal 2008. Sales of custom products fell $12.1 million, or 38.0% in fiscal 2009 compared to fiscal 2008, reflecting the overall worldwide economic slowdown and delays in a new platform introduction at a large Wireless customer. This decline was partially off-set by a $1.6 million, or 41%, increase in consumer product sales in fiscal 2009 compared to fiscal 2008 resulting from new design wins in the handset sector and a $0.5 million increase in standard component sales year over year in fiscal 2009.

Custom Wireless products are tied to specific base station designs and are much more sensitive to actual customer design wins making future order levels difficult to predict. Sales of custom products in fiscal 2010 are expected to be relatively flat, but may be further impacted by the current state of the economy and its impact on the level of worldwide infrastructure spending. The company's standard component products enjoy wide spread use in base station applications across many different platforms and original equipment manufacturers. Sales of these products in fiscal 2010 are tied to the overall infrastructure spending and through fiscal 2009 were not significantly impacted by the current economic downturn.

Space & Defense Group products consist of custom components and assemblies for communication satellites and defense radar, receiver, and countermeasure systems for the military. Sales of Space & Defense Group products rose $45.7 million, or 86.9% in fiscal year 2009 compared to fiscal year 2008. Space & Defense Group sales in fiscal year included $37.5 million of sales from M.S. Kennedy and Unicircuit. Additionally, sales of catalog and passive devices rose due to shipments of Counter-Improvised Explosive Device (Counter-IED) products, which rose to $6.7 million in fiscal 2009 compared to $1.0 million in fiscal 2008. Existing Space & Defense Group product sales continue to benefit from the higher level of business won by the Company over the past few fiscal years, with orders in fiscal 2009 exceeding $98.0 million.

Through fiscal 2009, the Company's defense business felt little or no impact from the current down turn in the economy as we experienced no cancellations or significant push outs in deliveries under specific contracts other than a six month delay in a commercial space job. Based on the current proposed defense budget for fiscal 2010, the Company does not expect any contract cancellations or program discontinuations related to existing or expected orders.

Gross Profit. Cost of sales consists primarily of engineering design costs, materials, material fabrication costs, assembly costs, acquisition inventory step-up amortization, intangible amortization, direct and indirect overhead, and test costs. Gross profit represents net sales minus cost of sales. Gross profit for fiscal 2009 was $54.6 million (32.7% of net sales), up from $40.5 million (30.8% of net sales) for the prior year. Gross profit, as a percent of sales, increased in fiscal 2009 compared to last year due to the decrease in sales of lower margin custom Wireless Group products, a more favorable sales mix in the Space & Defense Group and, comparable gross margin at M. S. Kennedy Corp. and Unicircuit, Inc. compared to the Company's other operations. The improvement in gross margins of approximately 2.0% for fiscal 2009 resulted from fairly equal percentage improvements at all of the Company's operations.

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 in the current fiscal year were $9.0 million (5.4% of net sales), compared to $7.0 million (5.3% of net sales), a $2.0 million increase which included the addition of $1.9 million of marketing expenses from Unicircuit and M. S. Kennedy as well as expenses for additional sales and marketing personnel and higher commission expenses resulting from the overall sales mix. This increase was partially offset by an accounting adjustment in the second quarter resulting in the reduction of commission expense of $275,000 to correct an over accrual that was accumulated over a number of prior periods.

Research and Development. Research and development expenses consist of materials 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 $13.0 million (7.8% of net sales) in fiscal 2009, up 24.7% from $10.4 million (7.9% of net sales) for fiscal 2008. Research and development expenditures are supporting further development of the Wireless Group infrastructure and consumer component opportunities, as well as new technology development in the Space & Defense Group. Research and Development expenditures have increased in fiscal 2009 versus last year due to the higher level of opportunities in both the Wireless Group and Space & Defense Group marketplaces which resulted in approximately $977,000 in additional spending at our Anaren Ceramics and Anaren Microwave operations. The addition of M. S. Kennedy Corp. and Unicircuit, Inc. accounted for the remaining $1.6 million of the increase. 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 Group and Space & Defense Group opportunities.

General and Administrative. General and administrative (G&A) expenses consist of employee related expenses, professional services, intangible amortization, travel related expenses and other corporate costs. General and administrative expenses increased $5.0 million, to $18.6 million (11.2% of net sales) for fiscal 2009, from $13.6 million (10.4% of net sales) for fiscal 2008. The increase in

general and administrative expense in fiscal 2009 compared to last year resulted from additional personnel in the Finance, Human Resource and Information Technology functions, and the inclusion of $5.6 million in additional G&A costs including intangible amortization of $933,000 from the acquisition of M. S. Kennedy and Unicircuit. This increase was partially off-set by a decline in G&A costs by consolidating subsidiary operations at the Ceramics operations of $0.7 million.

Operating Income. Operating income rose 52.2% in fiscal 2009 to $14.0 million, (8.4% of net sales), compared to $9.2 million (7.0% of net sales) for fiscal 2008. This increase was due mainly to the improvement in profitability in the second half of fiscal 2009 resulting from the higher overall sales volume and $2.5 million in operating profitability contributed by M. S. Kennedy Corp and Unicircuit, Inc., the Company's new subsidiaries acquired in the first quarter of fiscal 2009. Operating income as a percent of sales increased year over year due to a significant increase in third and fourth quarter profitability, despite the inclusion of $3.2 million of combined acquisition related inventory step-up costs and intangible amortization for fiscal 2009, due to a higher margin product mix compared to fiscal 2008.

On an operating segment basis, Wireless Group operating income was $6.6 million for fiscal 2009, up $3.0 million from $3.6 million in fiscal 2008. The increase in Wireless Group operating income in fiscal 2009 compared to fiscal 2008, despite the decline in Wireless Group sales, was due to a more favorable sales mix which included more standard component sales and the overall increase in corporate sales volume which had a positive impact on overhead absorption.

Space & Defense Group's operating income was $8.2 million in fiscal 2009, up $2.0 million, or 33.3%, from $ 6.2 million for fiscal 2008. Operating margins in this Group rose in fiscal 2009 due to the large increase in sales and the addition of the two new subsidiaries, M. S. Kennedy Corp. and Unicircuit, Inc. Operating margin as a percent of sales was 8.3% in fiscal 2009 compared to 11.7% in fiscal 2008. The drop in operating income as a percent of sales in fiscal 2009 was due to the inclusion of $3.2 million (3.3% of Space & Defense sales) of combined acquisition related inventory step-up and intangible amortization costs resulting from the acquisition of M. S. Kennedy and Unicircuit and a $2.0 million increase in Space & Defense Group R&D expense at the Company's East Syracuse operation for a number of new defense projects.

Other Income. Other income primarily consists of interest income received on invested cash balances and rental income. Other income decreased 53.2% to $1.1 million in fiscal 2009 compared to $2.3 for last year. This decrease was caused by the decline in available investable cash due to the purchase of treasury shares in the first quarter of fiscal 2009 and the decline in interest rates year over year. 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 fiscal 2009 was $1.5 million (0.9% of net sales), compared to $79,000 for fiscal 2008. This increase was due to the interest expense generated by the Company's borrowings starting in the first quarter of fiscal 2009 to finance the acquisitions of M. S. Kennedy Corp. and Unicircuit, Inc. The Company borrowed a total of $49.8 million under its $50.0 million revolving declining line of credit in the first quarter. These borrowings bear interest at the 90 day LIBOR, plus 100 to 425 basis points, depending upon the Company's rolling twelve month EBITDA performance. The rate is reset quarterly and was approximately 2.5% for the fourth quarter. The interest rate on the outstanding loan balance for the first quarter of fiscal 2010 is expected to be approximately 1.5%.

Income Taxes. Income taxes for fiscal 2009 were $3.8 million (2.3% of net sales), representing an effective tax rate of 27.7%. This compares to income tax expense of $3.0 million (2.3% of net sales) for fiscal 2008, representing an effective tax rate of 26.1%. The projected effective tax rate for fiscal year 2010 is now expected to be approximately 32.0%. The Company's effective tax rate is a direct result of the proportion of federally exempt state municipal bond income and federal tax credits and benefits in relation to the levels of United States and foreign taxable income or loss and in fiscal 2009 reflects adjustments and provisions of completed and ongoing state and federal tax audits.

Discontinued Operations. Income from discontinued operations for fiscal 2008 included $770,000 due to the reduction of an unrecognized tax benefit resulting from the lapse of the applicable statute of limitations related to the prior dissolution of the Company's European subsidiary, Anaren Europe, B.V.

Year Ended June 30, 2008 Compared to Year Ended June 30, 2007

Net Sales. Net sales increased $2.3 million, or 1.8% to $131.3 million for fiscal 2008 compared to $129.0 million for fiscal 2007. This increase resulted from a $1.4 million rise in shipments of Space & Defense products and a $940,000 increase in shipments of Wireless products in fiscal 2008.

Sales of Wireless products were relatively flat in fiscal 2008, rising $940,000 over fiscal 2007. The small increase was led by a $2.1 million rise in standard component sales which offset a $1.3 million decline in consumer product sales year over year. Sales of

Wireless custom products were unchanged in fiscal 2008 compared to fiscal 2007 and included sales to Nokia Corp. of $22.4 million, which represented 28% of total Wireless sales and 17% of total Company net sales.

Sales of Space & Defense products rose $1.4 million, or 2.7% in fiscal 2008 compared to fiscal2007. Sales of Space & Defense products in fiscal 2007 benefited from $11.4 million in shipments of Counter-Improvised Explosive Device (Counter-IED) products, which dropped to slightly more than $1.0 million in fiscal 2008. This drop in sales was offset by higher sales in receiver and space products resulting from the higher level of business won by the Company over fiscal 2006 through fiscal 2008, which has resulted in the record level of backlog for this group of $64.6 million at June 30, 2008.

Gross Profit. Gross profit represents net sales minus cost of sales. Gross profit for fiscal 2008 was $40.5 million (30.8% of net sales), down $5.4 million from $45.9 million (35.6% of net sales) for fiscal 2007. Gross profit on sales decreased in fiscal 2008 over fiscal 2007 due to the decline in sales of higher margin defense Counter-IED products, and continuing losses at the Company's Salem, New Hampshire facility due to lower than planned sales volume and product yield. Additionally, yield and production efficiency problems in fiscal 2008 in the Space & Defense Group and a $450,000 charge for an anticipated cost overrun on an engineering prototype contract in the fourth quarter added further to the decline in gross margin.

Marketing. Marketing expenses were $7.0 million (5.3% of net sales) for fiscal 2008, down $398,000 from $7.4 million (5.8% of net sales) for fiscal 2007. Marketing expenses in the current fiscal year were below fiscal 2007 due to lower commission expense on defense products and lower payroll costs from a reduction in sales personnel.

Research and Development. Research and development expenses were $10.4 million (7.9% of net sales) in fiscal 2008, up 14.0% from $9.1 million (7.1% of net sales) for fiscal 2007. 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 fiscal 2008 versus fiscal 2007 due to the higher level of opportunities in both the Wireless and Space & Defense Group marketplaces, which has resulted in the hiring of additional personnel in the 12 month period in 2008 to perform development activities.

General and Administrative. General and administrative expenses increased 10.5% to $13.6 million (10.4% of net sales) for fiscal 2008 from $12.3 million (9.5% of net sales) for fiscal 2007. The increase resulted primarily from additional professional service costs ($350,000) associated with the restatement of the Company's second and third quarter fiscal 2007 financial statements that were incurred during the first quarter of fiscal 2008, additional costs from new restricted stock grants issued in August 2007 that have a shorter vesting schedule than the traditional stock option grants issued in the comparable prior period, and additional personnel in Finance, Human Resources and Information Technology functions.

Restructuring. Restructuring expense consists of payroll, outplacement, and benefit costs associated with the termination of nine employees at the Company's Salem, New Hampshire facility in the fourth quarter of fiscal 2008.

Operating Income. Operating income fell 45.9% in fiscal 2008 to $9.2 million, (7.0% of net sales) compared to $17.0 million (13.2% of net sales) for fiscal 2007. On an operating segment basis, Wireless operating income was $3.6 million for fiscal 2008, down 55% from the Wireless operating income of $8.0 million in fiscal 2007. The decline in Wireless operating income in fiscal 2008 compared to fiscal 2007 resulted from a number of factors including: price erosion on standard components products sold to large customers, lower margins on custom products due to platform transitions at Nokia, and continuing losses at our Salem, New Hampshire facility due to product yield and inefficiencies. Additionally, 2008 Wireless operating margins were further eroded compared to fiscal 2007 due to end of program life scrap charges of $250,000, a $350,000 charge for anticipated costs to repair a custom assembly product in the Wireless group and a $255,000 restructuring charge for severance pay related to a reduction in workforce at the Company's ceramic facility in Salem, New Hampshire.

The Space & Defense Group's operating income was $6.2 million in fiscal 2008 down $3.4 million from $9.6 million for fiscal 2007. Operating margins in this segment declined due to manufacturing inefficiencies encountered on some programs which suffered procurement delays, engineering cost overruns, a change in product mix due to a decline in higher margin Counter-IED products, a higher level of internal research and development spending for the segment year over year and the increase in general and administrative expense in fiscal 2008.

Interest Expense. Interest expense represents interest incurred on deferred . . .