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-Q. 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 Quarterly Report on Form 10-Q and factors described in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Overview

The consolidated financial statements present the financial condition of the Company as of September 30, 2009 and June 30, 2009, and the consolidated results of operations and cash flows of the Company for the three months ended September 30, 2009 and 2008.

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 sells its products to leading wireless communications equipment manufacturers such as Ericsson, Motorola, Nokia Siemens 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 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).

Second Quarter of Fiscal 2010 Outlook

For the second quarter of fiscal 2010, we anticipate a decline in sales for the Wireless Group and increased sales for the Space & Defense Group from our just completed first quarter. As a result, we expect net sales to be in the range of $40 million to $44 million. We expect GAAP net earnings per diluted share to be in the range of $0.18 - $0.22, using an anticipated tax rate of approximately 32.0% and inclusive of approximately $0.05 - $0.06 per share related to expected equity based compensation expense and acquisition related amortization of acquired intangibles.

Results of Operations

Net sales for the three months ended September 30, 2009 were $40.3 million, up 5.8% from sales of $38.1 million for the first quarter of fiscal 2009. Net income for the first quarter of fiscal 2010 was $2.9 million, or 7.1% of net sales, up $1.6 million from net income of $1.3 million in the first quarter of fiscal 2009. Net income in the first quarter of fiscal 2010 included $0.3 million of acquisition related expense for intangible amortization and no expense for amortization of inventory step-up compared to $1.3 million of combined acquisition related intangible amortization and inventory step-up in the first quarter of fiscal 2009.

The following table sets forth the percentage relationships of certain items from the Company's condensed consolidated statements of earnings as a percentage of net sales.

                                                           Three Months Ended
                                                         Sept. 30,     Sept. 30,
                                                           2009          2008
                                                         ---------     ---------
Net Sales                                                  100.0%       100.0%
Cost of sales                                               63.6%        69.4%
                                                           -----        -----
Gross profit                                                36.4%        30.6%
                                                           -----        -----
Operating expenses:
   Marketing                                                 5.9%         5.5%
   Research and development                                  9.0%         8.1%
   General and administrative                               11.1%        11.9%
                                                           -----        -----
     Total operating expenses                               26.0%        25.5%
                                                           -----        -----
Operating income                                            10.4%         5.1%
                                                           -----        -----
Other income (expense):
     Other, primarily interest income                        0.3%         1.1%
     Interest expense                                       -0.4%        -0.8%
                                                           -----        -----
     Total other income (expense), net                      -0.1%         0.3%
                                                           -----        -----

Income before income taxes                                  10.3%         5.4%
Income taxes                                                 3.3%         1.9%
                                                           -----        -----
   Net income                                                7.0%         3.5%
                                                           =====        =====

The following table summarizes the Company's net sales by operating segments for the periods indicated.

                                                           Three Months Ended
                                                         Sept. 30,     Sept. 30,
                                                           2009          2008
                                                         ---------     ---------
(amounts in thousands)
Wireless Group                                            $14,411       $19,702
Space & Defense Group                                      25,926        18,422
                                                          -------       -------
     Total                                                $40,337       $38,124
                                                          =======       =======

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Net sales. Net sales were $40.3 million for the first quarter ended September 30, 2009, up 5.8% compared to $38.1 million for the first quarter of fiscal 2009. Sales of Wireless Group products fell $5.3 million, or 26.9%, and sales of Space & Defense Group products rose $7.5 million, or 40.7%, in the current first quarter compared to the first quarter of fiscal 2009.

The decline in sales of Wireless Group products, which consist of standard components, ferrite components and custom subassemblies for use in building wireless base station and consumer equipment, was the result of a decline in demand for custom Wireless Group assemblies during the current first quarter compared to the first quarter of last year. Sales of custom products fell $2.3 million in the current quarter compared to the first quarter last fiscal year, led by a $1.8 million decline in sales to a major OEM resulting from a general decline in global wireless infrastructure spending and decreased demand for second generation GSM equipment. Wireless Group infrastructure component demand in the first quarter of fiscal 2010, while comparable to fourth quarter 2009 levels, fell $2.9 million from the first quarter of fiscal 2009 due to a general decline in shipments to both OEMs and distributors resulting from the general decline in the worldwide economy and infrastructure capital expenditure levels. The continuing challenging pricing environment for both standard component and custom assembly products also negatively impacted net sales for the current quarter compared to last year. Demand for Wireless Group products in the second quarter of fiscal 2010 is expected to decline compared to first quarter levels.

Space & Defense Group products consist of custom components and assemblies for commercial and military satellites, as well as radar, receiver, and countermeasure subsystems for the military. Sales of Space & Defense Group products rose $7.5 million, or 40.7% in the first quarter of fiscal 2010 compared to the first quarter of the

previous fiscal year. Sales of Space & Defense Group products in the first quarter of the current fiscal year included three months of sales from M. S. Kennedy Corp. and Unicircuit, Inc., totaling $12.8 million, while sales in the first quarter of fiscal 2009 included two months and one month of sales from M. S. Kennedy and Unicircuit, respectively, amounting to $4.8 million. Space & Defense Group product sales continue to benefit from the higher level of business won by the Company over the past few fiscal years which has resulted in the Group's backlog of $85.7 million, including $24.8 million from M. S. Kennedy and Unicircuit.

Gross Profit. Cost of sales consists primarily of engineering design costs, materials, material fabrication costs, assembly costs, direct and indirect overhead, and test costs. Gross profit for the first quarter of fiscal 2010 was $14.7 million, (36.4% of net sales), up from $11.7 million (30.6% of net sales) for the same quarter of the prior year. Gross profit as a percent of sales increased in the first quarter of fiscal 2010 from the first quarter of last year due to the absence in the current first quarter of $1.1 million (2.6% of net sales) of amortization of inventory step-up costs related to the acquisition of M. S. Kennedy and Unicircuit, which were included in the first quarter fiscal 2009 cost of sales. Additionally, gross margins were enhanced by the $2.3 million reduction in sales of lower margin, high material content custom Wireless Group products and by reduced production overhead costs, including personnel, freight, and production supplies, in excess of $1.1 million in the current first quarter compared to the same period last year resulting from ongoing cost reduction efforts throughout the Company.

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 were $2.4 million (5.9% of net sales) for the first quarter of fiscal 2010, up $0.3 million from $2.1 million (5.5% of net sales) for the first quarter of fiscal 2009. Marketing expenses in the current first quarter rose $0.3 million from the first quarter of last fiscal year due to the inclusion of $663,000 of marketing expenses from Unicircuit and M. S. Kennedy in the current first quarter, compared to $282,000 for these two subsidiaries in the first quarter of last fiscal year, which include only two months and one month of expense for M. S. Kennedy and Unicircuit, respectively.

Research and Development. Research and development expenses consist of material 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 $3.6 million (9.0% of net sales) in the first quarter of fiscal 2010, up 17% from $3.1 million (8.1% of net sales) for the first quarter of fiscal 2009. Research and development expenditures are supporting further development of 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 the first quarter of fiscal 2010 versus the first quarter of last year due to the higher level of opportunities in the Space & Defense Group marketplaces which resulted in approximately $0.5 million in additional spending at our Anaren Ceramics, Anaren Microwave and M. S. Kennedy operations compared to the first quarter of fiscal 2009. The Company expects to continue its current research and development efforts and spending levels through the remainder of the fiscal year 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 expenses consist of employee related expenses, professional services, intangible amortization, travel related expenses and other corporate costs. General and administrative expenses decreased to $4.5 million (11.1% of net sales) for the first quarter of fiscal 2010, from $4.6 million (11.9% of net sales) for the first quarter of fiscal 2009. The decrease in general and administrative expense in the first quarter of fiscal 2010 compared to the first quarter last year resulted from the inclusion of $0.4 million in additional costs and intangible amortization from the acquisitions of M. S. Kennedy and Unicircuit during the current first quarter, compared to the first quarter of fiscal 2009 which include only two months and one month of expense for M. S. Kennedy and Unicircuit, respectively, which was partially offset by a net $0.3 million decline in compensation and other administrative expenses.

Operating Income. Operating income increased 119% in the first quarter of fiscal 2010 to $4.2 million, (10.4% of net sales), compared to $1.9 million (5.1% of net sales) for the first quarter of fiscal 2009. This increase in the first quarter of fiscal 2010 from the first quarter of last year was due to the absence in the current first quarter of $1.1 million of amortization of inventory step-up costs related to the acquisition of M. S. Kennedy and Unicircuit, which were included in the first quarter fiscal 2009 cost of sales, as well as, the effect of ongoing cost containment and reduction initiatives throughout the Company over the last twelve months which have had a significant positive effect on overall Company expense levels.

On an operating segment basis, Wireless Group operating income was $1.2 million (8.5% of group sales) for the first quarter of fiscal 2010, up $0.1 million, from the Group's operating income of $1.1 million (5.8% of group sales) in the first quarter of fiscal 2009. The increase in Wireless Group operating income in the first quarter of fiscal

2010 compared to the first quarter of fiscal 2009 was achieved despite the decline in Wireless group sales due to the Company's overall cost reduction efforts which resulted in a $0.7 million (13%) decline in R&D, marketing and Administrative expenses within the group in the current first quarter compared to the first quarter last year. Additionally, Wireless Group profits were further enhanced by a 6.7 percentage point increase in gross margins within the group which resulted from $2.3 million of the group's $5.1 million sales decline coming from lower margin high material content custom products, as well as the previously discussed companywide cost reduction efforts.

Space & Defense Group operating income was $3.1 million (11.8% of Group sales) in the first quarter of fiscal 2010, up $2.1 from $1.0 million (5.2% of net group sales) for the first quarter of fiscal 2009. Operating margins for this Group increased in the current first quarter, as they included only $0.3 million of acquisition related intangible amortization costs and no inventory step-up costs in the first quarter of fiscal 2010, compared to $1.3 million of combined acquisition related inventory step-up and intangible amortization costs caused by the acquisition of M. S. Kennedy and Unicircuit during the first quarter of fiscal 2009 resulting in a 4.1 percentage point improvement in group gross and operating margins. Additionally, Group operating margins rose an additional 3.2 percentage points due to the efficiencies achieved from the $7.5 million increase in Space & Defense sales, year over year, in the current first quarter and as a result of the cost savings achieved through the companywide cost reduction efforts.

Other Income. Other income primarily consists of interest income received on invested cash balances and rental income. Other income decreased to $0.1 million in the first quarter of fiscal 2010 compared to $0.4 million for the first quarter of last year. This decrease was caused by the substantial decline in short-term interest rates year over year and a deliberate shortening of the maturities of the Company's investment portfolio due to the turmoil in the credit market. 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 the first quarter of fiscal 2010 was $0.2 million compared to $0.3 million for the first quarter of fiscal 2009. This decrease, despite a higher average outstanding debt balance over the current first quarter compared to the first quarter of fiscal 2009, was due to the substantial decline in the 90 day LIBOR interest rate for the first quarter of fiscal 2010 (approx. 0.5%) compared to the rate (approx. 2.79%) for the first quarter of fiscal 2009. The Company borrowed a total of $49.8 million under its $50.0 million revolving credit facility in the first quarter 2009 and repaid $9.8 million in the first quarter of fiscal 2010. These borrowings bear interest at the 90 day LIBOR rate, plus 100 to 425 basis points, depending upon the Company's rolling twelve month EBITDA performance. The rate is reset quarterly and for the second quarter of fiscal 2010 is expected to be approximately 1.30%.

Income Taxes. Income taxes for the first quarter of fiscal 2010 were $1.3 million (3.3% of net sales), representing an effective tax rate of 31.3%. This compares to income tax expense of $0.7 million (1.9% of net sales) for the first quarter of fiscal 2009, representing an effective tax rate of 35.0%. The decrease in the effective rate for the quarter is a results of the Federal Research and Experimentation Credit not being in effect during the first quarter of fiscal year 2009, as it had expired and was not reinstated until subsequent to September 30, 2008. The projected effective tax rate for fiscal 2010 is expected to be approximately 32.0%.

Critical Accounting Policies

There have been no material changes to the company's critical accounting policies, estimates, or judgments from those discussed in the company's 2009 Annual Report Form 10-K.

Liquidity and Capital Resources

Net cash provided by operations for the first three months of fiscal 2010 was $5.6 million and resulted from net income before depreciation, amortization and non-cash equity based compensation expense. The positive cash flow from earnings for the quarter was further enhanced by a $0.4 million decrease in inventory and a $2.0 million increase in accounts payable, which more than off-set a $1.8 million increase in accounts receivable. The large fluctuations in the working capital were a result of the timing of when sales were made during the quarter. Net cash provided by operations for the first three months of fiscal 2009 was $5.0 million and resulted from net income before depreciation and non-cash equity based compensation expense. The positive cash flow from earnings for the prior year quarter was further enhanced by a $2.3 million decrease in accounts receivable due to improved collections, which more than off-set a small increase in inventory and a pay down of current liabilities.

Net cash provided by investing activities in the first three months of fiscal 2010 was $4.6 million and consisted of $5.8 million provided by the maturities of marketable debt securities, net of $1.2 million used for capital additions. Net cash used in investing activities in the first three months of fiscal 2009 was $42.0 million and consisted of $7.1 million

provided by the maturity of marketable debt securities, $1.8 million used to pay for capital additions and $47.3 million used to pay for the acquisitions of M. S. Kennedy and Unicircuit, net of the cash received in both transactions.

Net cash used in financing activities was $7.3 million in the first three months of fiscal 2010 and consisted of $2.7 million of cash and tax benefits provided by the exercise of stock options, less $9.8 million used to pay long-term debt and $0.5 million used to purchase approximately 29,000 treasury shares. Net cash provided by financing activities in the first three months of fiscal 2009 was $43.7 million and consisted of borrowings of $49.8 million under the Company's revolving declining line of credit to finance the acquisitions of M. S. Kennedy and Unicircuit, net of $1.2 million used to pay off an acquired mortgage and $5.0 million used to purchase 471,000 treasury shares.

During the remainder of fiscal 2010, the Company anticipates that its main cash requirement will be for capital expenditures, possible continued repurchase of the Company's common stock and the $10.0 million principal payment on its line of credit due in July 2010. Capital expenditures for the remainder of fiscal 2010 are expected to be in the range of $7.0 - $8.0 million and will be funded from existing cash and investments.

The Company may continue to repurchase shares of its common stock in the open market and/or through privately negotiated transaction under the current Board authorization, depending on market conditions. At September 30, 2009, there were approximately 1.0 million shares remaining under the current Board repurchase authorization.

At September 30, 2009, the Company had approximately $61.9 million in cash, cash equivalents, and marketable securities. The Company has had positive operating cash flow for over ten years, and believes that its cash requirements for the foreseeable future will be satisfied by currently invested cash balances and expected cash flows from operations.

Recent Accounting Pronouncements

In October 2009, new accounting guidance was issued related to the accounting for revenue recognition from arrangement with multiple deliverables. This guidance removes the objective-and-reliable-evidence-of-fair-value criterion from the separation criteria used to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting, replaces references to "fair value" with "selling price" to distinguish from the fair value measurements required under the "Fair Value Measurements and Disclosures" guidance, provides a hierarchy that entities must use to estimate the selling price, eliminates the use of the residual method for allocation, and expands the ongoing disclosure requirements. This update is effective for the company beginning July 1, 2011 and can be applied prospectively or retrospectively. Management is currently evaluating the effect that adoption of this update will have, if any, on the Company's condensed consolidated financial statements when it becomes effective in 2012.

In September 2009, new accounting guidance was issued, which permits entities to measure the fair value of certain investments, including those with fair values that are not readily determinable, on the basis of the net asset value per share of the investment (or its equivalent) if such net asset value is calculated in a manner consistent with the measurement principles in "Financial Services-Investment Companies" as of the reporting entity's measurement date (measurement of all or substantially all of the underlying investments of the investee in accordance with the "Fair Value Measurements and Disclosures" guidance). The update also requires enhanced disclosures about the nature and risks of investments within its scope that are measured at fair value on a recurring or nonrecurring basis. The Company does not believe that this update will have a material effect on the Company's condensed consolidated financial position and results of operations.

In January 2009, new accounting guidance which requires more detailed disclosures about employers' plan assets, including employers' investment strategies, major categories of plan assets, concentrations of risk within plan assets,

and valuation techniques used to measure the fair value of plan assets. Other than for some additional disclosures in the Annual Report on Form 10-K, adoption of this guidance will not have an effect on the Company's condensed consolidated financial statements.