The following discussion should be read in conjunction with our Consolidated Financial Statements and notes thereto included in Item 8 of Part II of this Annual Report on Form 10-K.

All statements other than statements of historical fact included in `Management's Discussion and Analysis of Financial Condition and Results of Operations' which follow 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 Annual Report or the date of any document incorporated by reference in this Annual 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.

Business Summary

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, Lockheed Martin, Raytheon and Boeing), the U.S. Government (including the Department of Defense, NASA and other U.S. Government agencies) and international customers (including the Israeli, Egyptian, German, Japanese, Taiwanese, Spanish, Australian 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), MMA (Multi-mission Maritime Aircraft) and unmanned aerial vehicles ("UAVs"), as well as high priority national security programs such as National Missile Defense and the Trident II D-5.

Significant Events

We faced many challenges in fiscal 2009, many of which were carried over from fiscal 2008. The significant events of fiscal 2009 are as follows:

Closure and Transition of Farmingdale, NY Manufacturing Operation

In the fourth quarter of fiscal 2008, we decided to close our manufacturing facility in Farmingdale, NY as expeditiously as possible and transfer substantially all of its work orders to our other facilities in Whippany, NJ, Woburn, MA, Lancaster, PA and Jerusalem, Israel. The closure of our manufacturing operation at Farmingdale was substantially completed by the end of fiscal 2009. However, due to certain unanticipated transition difficulties, we incurred additional costs in fiscal 2009 of $4.3 million due to production cost overruns and technology transfer issues related to certain contracts and inventory and fixed asset write-offs. We have worked diligently to correct the problems we encountered and believe that any remaining transition matters will not have a significant adverse impact on fiscal 2010 operating results.

Acquisition of Eyal Microwave, Inc.

We entered into an Asset Purchase Agreement, dated as of August 1, 2008, to acquire the business and certain assets, subject to the assumption of certain liabilities, of Eyal Microwave Industries ("Eyal"), a privately-held Israeli company, for $30 million. Eyal is a leading supplier of a broad range of innovative, high reliability RF, microwave and millimeter wave components and

customized subsystems for the global defense industry. Eyal's core capabilities include complex integrated microwave assemblies and "off-the-shelf" components for radar, ESM, ECM and communication systems which complement and expand our current product line. Eyal's customers and programs further strengthen our presence in the international marketplace. Eyal, which employs approximately 175 employees and is based in Kibbutz Eyal, Israel, includes Eyal Microwave Ltd. and its wholly-owned subsidiary, Eyal Mag Ltd. Funding for the purchase was provided through a $20 million loan under our existing revolving credit line and a $10 million term loan through another bank in Israel. The new term loan is payable in quarterly installments over a period of ten years, bearing interest at LIBOR plus 1.5%. The operating results of Eyal are included in our results from continuing operations beginning in September 2008. The acquisition was accounted for under the provisions of SFAS No. 141.

Sale of Innovative Concepts, Inc.

In September 2008, we executed an agreement with a foreign defense company to divest our Innovative Concepts, Inc. ("ICI") subsidiary located in McLean, VA. ICI is a communications technology development firm specializing in research, design, development, production, and support of wireless data communications products and services. In November 2008, after receiving requisite U.S. Government approval for the sale, we sold the stock of ICI for approximately $15 million in cash, of which approximately $0.8 million is held in escrow as security for certain indemnification obligations. In accordance with the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," operating results of ICI have been reported as discontinued operations in the Consolidated Statements of Operations for all periods presented.

Senior Management Changes

In July 2009, we entered into an agreement with Myron Levy, our former Chairman and Chief Executive Officer, terminating his employment agreement. Concurrently, our Board of Directors appointed Mr. David Lieberman as Chairman of the Board. Mr. Lieberman, a senior partner in the New York law firm of Beckman, Lieberman & Barandes, LLP, is a past director of Herley and has been a practicing attorney in New York since 1970. Beckman, Lieberman & Barandes, LLP is one of several law firms that has provided legal services to us, specifically in the areas of corporation and securities law.

Further, Mr. Richard Poirier was appointed by our Board of Directors as our Chief Executive Officer and President. Mr. Poirier was Corporate Vice President and our General Manager of Herley New England in Woburn, MA since August 2003 and has been employed with us since 1992 when we acquired Micro Dynamics, Inc.

Mr. Yonah Adelman was appointed Senior Vice President by the Board of Directors to serve at the pleasure of the Board. Mr. Adelman has been General Manager of our General Microwave Israel subsidiary since our 1999 acquisition of General Microwave Corp.

In August 2009, we also entered into an agreement with Jeffrey L. Markel, our former Chief Operating Officer, terminating his employment agreement.

Results of Operations

The following table sets forth for the periods indicated certain financial information derived from our consolidated statements of operations expressed as a percentage of net sales. There can be no assurance that trends in sales growth or operating results will continue in the future.

                                                             52 weeks       53 weeks       52 weeks
                                                              ended          ended          ended
                                                             August 2,      August 3,       July 29,
                                                               2009           2008           2007
                                                          ------------------------------------------
Net sales                                                      100.0%         100.0%         100.0%
Cost of products sold                                           82.9%          79.2%          72.0%
                                                               ------         ------         ------
Gross profit                                                    17.1%          20.8%          28.0%

Selling and administrative expenses                             18.1%          20.8%          19.8%
Impairment of goodwill and other intangible assets              27.5%             -              -
Litigation costs                                                 1.1%           4.1%           1.2%
Litigation settlements                                            -            11.4%           0.0%
Employment contract settlement costs                             6.6%             -            6.5%
                                                               ------         ------         ------
Operating (loss) income                                        (36.2%)        (15.5%)          0.5%
                                                               ------         ------         ------
Other (expense) income, net:
     Investment income                                           0.1%           0.8%           0.8%
     Interest expense                                           (0.9%)         (0.5%)         (0.6%)
     Foreign exchange (loss) gain                               (0.2%)         (0.1%)          0.4%
                                                               ------         ------         ------
                                                                (1.0%)          0.2%           0.6%
(Loss) income from continuing operations before                ------         ------         ------
      income taxes                                             (37.2%)        (15.3%)          1.1%
     Benefit for income taxes                                  (11.8%)         (7.5%)         (0.6%)
                                                               ------         ------         ------
Net (loss) income from continuing operations                   (25.4%)         (7.8%)          1.7%
                                                               ------         ------         ------

Our senior management regularly reviews the performance of our operations including reviews of key performance metrics and 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 operating results from continuing operations and certain key performance indicators.

                                               Fourth Quarter                          Fiscal Year
                                       --------------------------------------------------------------------------
                                       2009        2008        % Change        2009        2008          % Change
                                       --------------------------------------------------------------------------
Net sales                               $42,960     $37,867         13%        $160,089    $136,088         18%
Gross profit                               ($30)     $7,001       (100)%        $27,441     $28,240        (3)%
Gross profit percentage                    (0.1)%      18.5%                       17.1%       20.8%
Selling and administrative               $7,505      $6,371         18%         $28,981     $28,349          2%
Impairment of goodwill and other
     intangible assets                  $44,151      -                          $44,151      -
Litigation costs                           $731      $3,289        (78)%         $1,786      $5,550       (68)%
Litigation settlement                    -           -                           -          $15,542
Employment settlement costs             $10,553      -                          $10,553      -
Operating loss                         ($62,970)    ($2,658)       n/a         ($58,030)   ($21,201)       174%
Bookings                                $44,269     $33,702         31%        $191,101    $139,163         37%
Backlog                                $181,936    $138,534         31%        $181,936    $138,534         31%

We ended fiscal 2009 with a strong backlog; increasing 31% from the start of our 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.

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

Fifty-two weeks ended August 2, 2009 and fifty-three weeks ended August 3, 2008

Net sales for fiscal 2009 were approximately $160.1 million compared to $136.1 million in fiscal 2008, an increase of $24.0 million, or 17.6%. The increase in net sales is primarily related to:

o an increase of approximately $18.0 million primarily due to the inclusion of eleven months of Eyal's revenues since its acquisition in the first quarter of fiscal 2009;
o an increase of approximately $5.6 million, or 11.3%, at Herley Lancaster primarily due to improved manufacturing productivity on contract shipments compared to last year's supplier quality and manufacturing throughput issues. The increase was partially offset by a reduction in net sales of approximately $2.8 million related to the settlement of a claim with Lockheed Martin for equitable adjustment for unpriced change orders;
o an increase of approximately $4.7 million, or 21.4%, at Herley New England primarily due to increased bookings on the ICAP and EA-18G programs; and
o net revenue decreases related to various other programs and products across multiple sites.

Domestic and foreign sales were 67% and 33%, respectively, of net sales in fiscal 2009 versus 67% and 33%, respectively, in the prior fiscal year. Bookings were approximately $191.1 million, of which 66% were domestic and 34% were foreign. This compares to bookings of approximately $139.2 million in the prior-year period, of which 74% were domestic and 26% were foreign.

Gross profit in fiscal 2009 was $27.4 million (17.1% gross profit margin) compared to $28.2 million (20.8% gross profit margin) in fiscal 2008, a decrease of $0.8 million. Contributing to the decrease in gross profit and gross profit percentage during fiscal 2009 are primarily the following:

o Herley Lancaster experienced certain unfavorable, non-recurring expenses including an approximately $6.2 million write-off of certain inventory associated with the settlement of litigation with a customer, approximately $2.8 million adjustment to net sales and expenses of $0.3 million associated with the settlement of an outstanding claim for equitable adjustment with Lockheed Martin and unfavorable inventory obsolescence and related adjustments of approximately $2.0 million, partially offset by the an estimated favorable variable contribution margin of approximately $4.5 million related to the incremental revenue increase;
o Offsetting the overall gross profit decrease was the inclusion of approximately $3.3 million representing eleven months of Eyal's operating results since its acquisition in the first quarter of fiscal 2009; and
o Product mix of contracts both domestically and internationally.

Selling and administrative (S&A) expenses for fiscal 2009 were $29.0 million, or 18.1% of sales, as compared to $28.3 million, or 20.8% of sales, in fiscal 2008. The $0.7 million increase in selling and administrative expenses is primarily attributable to an increase of approximately $2.4 million due to the inclusion of eleven months of Eyal's expenses since its acquisition in the first quarter of fiscal 2009, partially offset by a gain on the sale of certain assets, reductions in certain sales commissions and overall cost reductions. S&A expenses as a percent of sales decreased 270 basis points due to leveraging the cost structure.

In accordance with the provisions of Statement of Financial Accounting Standards No. 142, we evaluated goodwill and other intangible assets for possible impairment in our fourth quarter of fiscal 2009. We concluded that our goodwill was impaired and recorded a charge to operating results of $42.1 million. In addition, we partially impaired the value of a license agreement of approximately $2.1 million. The fourth-quarter non-cash goodwill and partial intangible asset impairments are not fully tax deductible, resulting in an increase in our effective tax rate from continuing operations for the period. These impairments do not affect our cash position, cash flow from operating activities, credit availability or liquidity and should not have any affect on our future operations.

We had an operating loss from continuing operations during fiscal 2009 of $58.0 million compared to an operating loss of $21.2 million last year. The results in fiscal 2009 include impairment of goodwill and other intangible assets of $44.2 million, employment contract settlement costs of $10.6 million and legal expenses of $1.8 million, while results in fiscal 2008 include litigation settlements of $9.5 million with the Department of Justice and $6.0 million with EADS (see Note A to the Consolidated Financial Statements), as well as related legal expenses of $5.6 million. In addition, fiscal 2009 operating results were further adversely impacted by costs associated with the transition of the Farmingdale manufacturing operation (including related contract losses of approximately $2.0 million, abandonment of fixed assets of approximately $0.3 million and inventory write-offs of approximately $2.0 million), additional inventory adjustments and obsolescence reserves of approximately $1.3 million and the settlement of certain litigation and other claims of approximately $9.3 million. Excluding these non-recurring or unusual costs, the comparative operating results would have been better than last year primarily due to the increase in sales volume.

Interest income was $0.1 million, decreasing $1.0 million in fiscal 2009 due to lower average cash balances through portions of the year and an overall decrease in rates. Interest expense was $1.4 million, increasing $0.7 million over last year primarily attributable to the incremental debt incurred from the Eyal acquisition.

We recognized a net foreign exchange loss of $0.3 million in fiscal year 2009 compared to $0.1 million last year. 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 benefit for income taxes from continuing operations for fiscal 2009 was $18.9 million representing an effective income tax benefit rate of 31.7%, compared to an effective income tax benefit rate of 49.2% in fiscal 2008. The 31.7% benefit is less than the statutory rate of 35% primarily due to the unfavorable effect of a portion of the goodwill impairment that is not deductible for tax purposes, the benefit of research and development credits, as well as the estimated benefit of state net operating losses.

Basic and diluted loss per common share for fiscal 2009 were both $(3.03) compared to $(.76) loss per basic and diluted common share for fiscal 2008.

Fiscal 2008 Compared to Fiscal 2007

The following  table presents a financial  summary  comparison (in thousands) of
operational  results  from  continuing  operations  and certain key  performance
indicators.
                                            Fourth Quarter                      Fiscal Year to Date
                                 ------------------------------------    ---------------------------------

                                      2008       2007        % Change         2008       2007    % Change
                                 ------------------------------------    ---------------------------------
Net sales                            $37,867    $34,531         10 %       $136,088   $137,850       (1)%
Gross profit                          $7,001    $10,211        (31)%        $28,240    $38,645      (27)%
Gross profit percentage                 18.5%      29.6%                       20.8%      28.0%
Selling and administrative            $6,371     $7,614        (16)%        $28,349    $27,305        4 %
Litigation costs                      $3,289       $448        634 %         $5,550     $1,674      232 %
Litigation settlement                    -          -                       $15,542       -          n/a
Employment settlement costs              -          -                          -        $8,914       n/a
Operating (loss) income              ($2,658)    $2,149       (224)%       ($21,201)      $752       -
Bookings                             $33,702    $25,947         30 %       $139,163   $158,388      (12)%
Backlog                             $138,534   $131,826          5 %       $138,534   $131,826        5 %

Fifty-three weeks ended August 3, 2008 and fifty-two weeks ended July 29, 2007

Net sales for fiscal 2008 were approximately $136.1 million compared to $137.9 million in fiscal 2007, a decrease of $1.8 million, or 1%. The decrease in net sales is primarily related to:

o delays in key microwave development and production programs at Herley Farmingdale of approximately $6.3 million;
o a decrease of approximately $2.4 million as certain commercial programs ended and the transition towards military business progressed at Herley CTI;
o a decrease of approximately $2.1 million at our Herley Medical Products division related to the timing of capital purchasing requirements at two key commercial customers; and
o disruptions across several production programs due to supplier quality issues.

Partially offsetting these decreases was:
o an increase of approximately $5.7 million of simulation systems and other product sales through Micro Systems, Inc.;
o an increase of approximately $0.8 million at Herley New England due to volume of certain key second-generation production programs; and
o an overall increase on various programs and products across multiple sites.

Domestic and foreign sales were 66% and 34% respectively of net sales in fiscal 2008 versus 69% and 31%, respectively, in the prior fiscal year. Bookings were approximately $139.2 million, of which 74% were domestic and 26% were foreign. This compares to bookings of approximately $158.4 million in the prior-year period, of which 63% were domestic and 37% were foreign.

Gross profit in fiscal 2008 was $28.2 million (20.8% gross profit margin) compared to $38.6 million (28.0% gross profit margin) in fiscal 2007, representing a decrease of $10.4 million. Contributing to the reduction in gross profit during fiscal 2008 are the following items:

o Higher independent research and development costs of approximately $3.1 million on investments in certain strategic opportunities at several Herley operations;
o Approximately $2.6 million in contract losses recognized on two development and production contracts at Herley Farmingdale;
o Higher costs at our Israeli subsidiary due to the unfavorable exchange rate of the U.S. Dollar versus the New Israeli Shekel reduced gross profit by approximately $1.6 million;
o Reduced volume of revenues across several Herley operations affected gross profit by approximately $1.2 million;
o Approximately $1.0 million at Herley Farmingdale due to cost overruns and a change in management's estimate of the recoverability of the costs on future contracts;
o Disruptions across several production programs due to supplier quality issues, increased costs of production; and
o Product mix of contracts both domestically and internationally.

Selling and administrative expenses in fiscal 2008 were $28.3 million as . . .