ANEN Anaren, Inc. (MM)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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/A. 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/A.

The purpose of this amended Quarterly Report on Form 10-Q/A of Anaren, Inc. (the "Company") is to restate the Company's consolidated condensed financial statements for the three and nine months ended March 31, 2007 ("the financial statements") and to modify the related disclosures. See note 1 to the consolidated condensed financial statements included in this amended Quarterly Report. The restatement arose from the Company's determination that accounting errors had occurred at its China subsidiary. The accounting errors were caused by a material weakness in the Company's risk assessment and oversight controls as disclosed in the June 30, 2007 Annual Report Form 10-K. The unapproved and undetected changes in procedures over accounting for the reconciliation of inventory and the recording of vendor payables for materials received, but not yet invoiced at the China facility resulted in a misstatement of pre-tax income and inventory. Additionally, the Company has corrected certain errors in accounting for income taxes, equity based compensation and pension expense; and, as part of the Company's adoption of the Securities and Exchange Commissions Staff Accounting Bulletin No. 108, the Company has corrected errors in their warranty expense and allowance for sales returns. As a result of these errors, the Company has determined that its pre-tax income for the three and nine months ended March 31, 2007 was overstated by $676,000 and $914,000, respectively.

Overview

The consolidated financial statements present the financial condition of the Company as of March 31, 2007 and June 30, 2006, and the consolidated results of operations and cash flows of the Company for the three months and nine months ended March 31, 2007 and 2006.

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 for wireless communications systems, in satellites and in defense electronics systems. The Company also produces microwave components addressing consumer wireless applications such as wireless local area networks, Bluetooth, WiFi, cellular handsets and satellite telecommunications. The Company sells its products to leading wireless communications equipment manufacturers such as Ericsson, Motorola, Nokia, Nortel Networks, and Andrew, and to satellite communications and defense electronics companies such as Boeing Satellite, ITT, SRCTec, Lockheed Martin, Northrup Grumman and Raytheon.

The Company generally recognizes sales at the time products are shipped to customers, provided that persuasive evidence of an arrangement exists, the sales price is fixed or easily determinable, collectibility is reasonably assured and title and risk of loss has passed to the customer. Title and the risks and rewards of ownership of products are generally transferred at the time of shipment. Payments received from customers in advance of products delivered are recorded as customer advance payments until earned. Annually, a small percentage of sales are derived from fixed-price contracts for the sale of engineering design and development efforts for space and defense electronics products. Sales and estimated profits under long-term contracts are recognized according to customer contractual milestones on a units-of-delivery basis. Profit estimates are revised periodically based upon changes in sales value and costs at completion. Any losses on these contracts are recognized in the period in which such losses are determined.

In April 2006, the Company entered into a lease for a new 76,000 square foot facility in Suzhou, China, at an annual rent of approximately $178,000 to replace its 25,000 square foot leased facility. The initial lease period on the new building runs through April 2013 and is renewable through April 2023. No additional cost was incurred for termination of the lease on the original building in the third quarter of fiscal 2007. The Company was fully operational in this new facility prior to the end of calendar year 2006.

In July 2006, the Company began construction on a 54,000 square foot addition to its facility in East Syracuse, New York. This addition is needed primarily to accommodate the growth of the Company's Space and Defense business. The project is expected to be completed during the third quarter of calendar 2007 at an estimated cost of $5.8 million for the building addition.

In February 2007, the Company was selected to receive a contract valued in excess of $8.0 million from Alcatel-Alenia Space (France) for development and production of integrated beamforming assemblies that will be deployed on the Globalstar-2 satellite payload. The contract award, expected to be finalized prior to June 30, 2007, covers design services and manufacture of up to 48 beamforming networks. Work has been authorized to begin immediately, with production deliveries starting in May 2008.

Fourth Quarter of Fiscal 2007 Outlook

For the fourth quarter, we expect comparable demand for wireless infrastructure and consumer component products and a decrease in sales for the Space & Defense segment as a result of the anticipated decline in sales of counter-Improvised Explosive Device (IED) related components. As a result, we expect net sales to be in the range of $28.0 - $31.0 million for the fourth quarter of fiscal 2007. With an anticipated tax rate of approximately 26% and an expected stock based compensation expense of approximately $0.04 per diluted share, we expect net earnings per diluted share to be in the range of $0.16 to $0.21 for the fourth quarter.

Results of Operations

Net sales for the three months ended March 31, 2007 were $32.6 million, up $5.9 million from $26.7 million for the third quarter of fiscal 2006. Net income for the third quarter of fiscal 2007 was $3.5 million (As restated), or 10.8% (As restated) of net sales, up $258,000 (As restated), or 7.9% (As restated) from net income of $3.3 million in the third quarter of fiscal 2006.

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

                                                   Three Months Ended                Nine months Ended
                                            -------------------------------   -----------------------------
                                            Mar. 31, 2007     Mar. 31, 2006   Mar. 31, 2007   Mar. 31, 2006
                                            -------------     -------------   -------------   -------------
                                             (As restated)                     (As restated)
Net Sales                                       100.0%            100.0%          100.0%         100.0%

Cost of sales                                    65.2%             61.6%           64.5%          63.8%
                                                 -----             -----           -----          -----
Gross profit                                     34.8%             38.4%           35.5%          36.2%
                                                 -----             -----           -----          -----
Operating expenses:
   Marketing                                      5.6%              6.8%            6.0%           6.9%
   Research and development                       7.2%              8.2%            7.2%           8.5%
   General and administrative                     9.7%             10.3%            9.3%          10.2%
                                                 -----             -----           -----          -----
     Total operating expenses                    22.5%             25.3%           22.5%          25.6%
                                                 =====             =====           =====          =====
Operating income                                 12.3%             13.1%           13.0%          10.6%
                                                 -----             -----           -----          -----
Other income (expense):
     Other, primarily interest income             2.7%              2.3%            2.9%           2.3%
     Interest expense                             0.0%              0.0%            0.0%           0.0%
                                                 -----             -----           -----          -----
     Total other income (expense), net            2.7%              2.3%            2.9%           2.3%
                                                 =====             =====           =====          =====
Income before income taxes                       15.0%             15.4%           15.9%          12.9%
Income taxes                                      4.2%              3.5%            4.1%           3.2%
                                                 -----             -----           -----          -----
   Net income                                    10.8%             11.9%           11.8%           9.7%
                                                 =====             =====           =====          =====
Discontinued operations:
Income (loss) from discontinued
  operations of Anaren Europe                     0.0%              0.3%            0.0%           0.1%
Income tax benefit                                0.0%              0.0%            0.0%           0.0%
                                                 -----             -----           -----          -----
Net income (loss) from discontinued
  operations                                      0.0%              0.3%            0.0%           0.1%
                                                 =====             =====           =====          =====
Net income                                       10.8%             12.2%           11.8%           9.8%
                                                 =====             =====           =====          =====

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

                         Three Months Ended              Nine months Ended
                   -----------------------------   -----------------------------
                   Mar. 31, 2007   Mar. 31, 2006   Mar. 31, 2007   Mar. 31, 2006
                   -------------   -------------   -------------   -------------
                                   (As restated)                   (As restated)
Wireless              $17,842         $16,014         $54,668         $47,919
Space and Defense      14,759          10,687          38,459          28,415
     Total            $32,601         $26,701         $93,127         $76,334

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Net sales. Net sales increased $5.9 million, or 22.1% to $32.6 million for the third quarter ended March 31, 2007, compared to $26.7 million for the third quarter of fiscal 2006. This increase resulted from a $4.1 million rise in shipments of Space and Defense products and a $1.8 million increase of Wireless products in the current third quarter of fiscal 2007.

The increase in sales of Wireless products, which consist of standard components, ferrite components and custom subassemblies for use in building wireless basestation and consumer equipment, was a result of a rise in base station infrastructure construction which caused an increase in customer demand for custom Wireless components during the current third quarter compared to the third quarter of last year.

Wireless product sales rose $1.8 million, or 11.4% in the third quarter of fiscal 2007 compared to the third quarter of fiscal 2006, due to a $2.2 million increase in shipments of custom wireless components in the third quarter of fiscal 2007 due to a continuing high level of demand for infrastructure products from Nokia. Additionally, new Wireless consumer product sales increased $283,000, or 48% in the current third quarter compared to the third quarter of fiscal 2006, reflecting the improving customer acceptance of our new commercial products. During this same period, sales of standard components fell 6.6%, or $640,000 compared to the third quarter of fiscal 2006 due to a small decline in demand for termination products in the current quarter.

Space and Defense products consist of custom components and assemblies for communication satellites and defense radar, receiver, and countermeasure subsystems for the military. Sales of Space and Defense products rose $4.1 million, or 38.3% in the third quarter of fiscal 2007 compared to the third quarter of the previous fiscal year. Space and Defense product sales are increasing due to the higher level of new business booked by the Company over the last two fiscal years. Shipments relating to the counter-IED contract accounted for the large increase in sales for Space and Defense during the quarter. Shipments under this contract are expected to fall to a rate of approximately $2.0 million in the fourth quarter and to less than $1.0 million per quarter thereafter.

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 third quarter of fiscal 2007 was $11.4 million (As restated) (34.8% (As restated) of net sales), up $1.2 million (As restated) from $10.2 million (38.4% of net sales) for the same quarter of the prior year. Gross profit as a percent of sales declined in the third quarter of fiscal 2007 over the third quarter of last year despite the $5.9 million increase in sales due to a somewhat less favorable Wireless product mix and an unexpected scrap loss in the Space and Defense group amounting to approximately 1.0% of total sales.

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 $1.8 million (5.6% of net sales) for the third quarter of fiscal 2007, unchanged compared to $1.8 million (6.8% of net sales) for the third quarter of fiscal 2006. Marketing expenses in the current third quarter were flat compared to the third quarter of last fiscal year due to declining commission expense resulting from the maturing of a number of large programs to lower rate structures. This decline off-set higher travel and personnel expenses in the current quarter compared to the same period last year.

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 $2.3 million (7.2% of net sales) in the third quarter of fiscal 2007, up 7.2% from $2.2 million (8.2% of net sales) for the third quarter of fiscal 2006. Research and development expenditures are supporting further development of Wireless infrastructure and consumer component opportunities, as well as new technology development in the Space and Defense

Group. Research and Development expenditures have fluctuated with the level of opportunities in the marketplace which have resulted in the hiring of additional personnel over the last twelve months to assist in development initiatives. The Company does not expect to reduce its current research and development efforts and is presently working on a number of new standard and custom Wireless and Space and Defense 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 increased 14.5% to 3.2 million (9.7% of net sales) for the third quarter of fiscal 2007, from $2.8 million (10.3% of net sales) for the third quarter of fiscal 2006. The increase resulted primarily from additional professional service costs incurred due to the restatements of the Company's financial statements that were required to be filed with the Securities and Exchange Commission in January 2007, as well as additional personnel costs due to the expanded level of the Company's business, and additional outside consulting services retained by the Company for specific short term initiatives.

Operating Income. Operating income rose 15.1% (As restated) in the third quarter of fiscal 2007 to $4.0 million (As restated) (12.3% (As restated) of sales), compared to $3.5 million (13.1% of net sales) for the third quarter of fiscal 2006. On a reporting segment basis, Wireless operating income was $0.5 million (As restated) for the third quarter of fiscal 2007, down $1.0 million (As restated), or 64.6% (As restated), from Wireless operating income of $1.5 million in the third quarter of fiscal 2006. Wireless operating income declined in the current third quarter due to inefficiencies in the Salem, New Hampshire facility resulting from a decline in net sales at that facility.

Space and Defense operating income was $3.5 million (As restated), (23.6% (As restated) of Space and Defense net sales), for the third quarter of fiscal 2007, up $1.5 million (As restated) from $2.0 million for the third quarter of fiscal 2006. Operating margins in this group have improved as a result of efficiencies realized from both the overall $5.9 million increase in sales volume and the $4.1 million rise in shipments of Space and Defense Group products in the current third quarter, which included $5.0 million counter-IED products.

Other Income. Other income is primarily interest income received on invested cash balances. Other income increased 41.0% to $874,000 in the third quarter of fiscal 2007 compared to $620,000 for the third quarter of last year. This increase was caused mainly by the rise in market interest rates over the last twelve months and off-set partially by a decline in investable cash balances during the third quarter. Other income will fluctuate based on short term market interest rates and the level of investable cash balances.

Interest Expense. Interest expense represents interest paid on a deferred obligation. Interest expense for the third quarter of fiscal 2007 was unchanged from the third quarter of fiscal 2006.

Income Taxes. Income taxes for the third quarter of fiscal 2007 were $1.4 million (As restated) (4.2% (As restated) of net sales), representing an effective tax rate of 28.3% (As restated). This compares to income tax expense of $942,000 (3.5% of net sales) for the third quarter of fiscal 2006, representing an effective tax rate of 22.9%. 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 taxable income or loss. The projected effective tax rate for fiscal 2007 is approximately 26% compared to an actual effective tax rate of 22.8% for fiscal 2006. The increase in the projected effective tax rate is due mainly to the higher level of taxable

income the Company is currently generating and the continuing phase-out of the federal extraterritorial tax benefit.

Discontinued Operations. Discontinued operations represents the result of liquidation and dissolution of the Company's Anaren Europe corporate structure which ceased operation in December 2003. During the third quarter ended March 31, 2006 and in conjunction with the finalization of Anaren Europe's bankruptcy proceeding, the Company performed the final liquidation of its Anaren Europe corporate structure. As a result of this liquidation, the Company recognized a gain of $81,713 from the liquidation of the remaining assets.

Nine months Ended March 31, 2007 Compared to Nine months Ended March 31, 2006

Net Sales. Net sales increased $16.8 million, or 22.0% to $93.1 million for the first nine months ended March 31, 2007 compared to $76.3 million for the first nine months of fiscal 2006. This increase resulted from a $6.8 million rise in shipments of Wireless infrastructure and consumer products and a $10.0 million rise in sales of Space and Defense products.

The increase in sales of Wireless products was a result of a rise in worldwide customer demand for Wireless infrastructure products over the past year. Wireless product sales rose $6.8 million or 14.1% in the first nine months of fiscal 2007 compared to the first nine months of fiscal 2006, due to a $3.7 million increase in shipments of custom products resulting from higher demand from Nokia, as well as a $1.7 million increase (58%) in sales of new consumer component products and a $1.4 million rise in sales of standard Wireless components used mainly in power amplifier basestation applications.

Sales of Space and Defense products rose $10.0 million, or 35.3% in the first nine months of fiscal 2007 compared to the same period last year. Approximately $8.9 million of the increase resulted from the initial production of a component used in a jammer system designed to counter IED. Meanwhile, the remainder of the increase was a result of general business growth in Space and Defense. Shipments under the counter-IED contract, which began in September 2006, are expected to drop to approximately $2.0 million in the fourth quarter of fiscal 2007.

Gross Profit. Gross profit for the first nine months of fiscal 2007 was $33.1 million (As restated) (35.5% (As restated) of net sales), up $5.4 million (As restated) from $27.7 million (36.2% of net sales) for the same period of the prior year. Gross profit on sales increased in the first nine months of fiscal 2007 over the first nine months of last year due to the substantial rise in overall sales of $16.8 million. The overall increase in net sales included a substantial increase in Defense sales which enhanced production efficiencies in that segment, as well as a more favorable product mix in the Wireless segment resulting from the increase in sales of higher margin standard components.

Marketing. Marketing expenses were $5.6 million (6.0% of net sales) for the first nine months of fiscal 2007, up 5.3% from $5.3 million (6.9% of net sales) for the first nine months of fiscal 2006. Marketing expenses in the first nine months rose over the first nine months of last fiscal year due to increased commission expense resulting from the higher sales levels and additional personnel and travel expenses to serve the expanding Asian and Defense markets.

Research and Development. Research and development expenses were $6.7 million (7.2% of net sales) in the first nine months of fiscal 2007, up 2.9% from $6.5 million (8.5% of net sales) for the first nine months of fiscal 2006. Research and development expenditures are supporting further development of Wireless infrastructure and consumer component opportunities, as well as

new technology development in the Space and Defense Group. Internal Research and Development expenditures have increased with the higher level of opportunities in the marketplace. The Company does not expect to reduce its current research and development efforts and is presently working on a number of new standard and custom Wireless and Space and Defense opportunities.

General and Administrative. General and administrative expenses increased 11.7% (As restated) to $8.7 million (9.3% of net sales) for the first nine months of fiscal 2007, from $7.8 million (10.2% of net sales) for the first nine months of fiscal 2006. The increase resulted primarily from additional personnel costs due to the expanded level of Company business, a write down of the China facility leasehold improvement due to the move to a new facility, additional professional service costs associated with the restatement of the Company's financial statements in January 2007, and additional outside consulting services retained by the Company for specific short-term initiatives.

Operating Income. Operating income rose 50.2% (As restated) in the first nine months of fiscal 2007 to $12.2 million (As restated) (13.0% (As restated) of sales), compared to $8.1 million (10.6% of net sales) for the first nine months of fiscal 2006. On a reporting segment basis, Wireless operating income was $4.5 million (As restated) for the first nine months of fiscal 2007, a decrease of $327,000 (As restated) from Wireless operating income of $4.8 million in the first nine months of fiscal 2006.

Space and Defense operating income was $7.7 million (20.0% of Space and Defense net sales), for the first nine months of fiscal 2007, up $4.4 million from $3.3 million for the first nine months of fiscal 2006. Operating margins in this group have improved as a result of efficiencies realized from both the overall $16.8 million increase in sales volume and the $10.0 million rise in shipments of Space and Defense Group products in the current first nine months. This increase resulted primarily from $8.9 million in shipments of counter-IED products in the first nine months of fiscal 2007, compared to the same nine months of the prior year.

Other Income. Other income is primarily interest income received on invested cash balances and gains on the sale of land. Other income increased 54.0% to $2.7 million in the first nine months of fiscal 2007, compared to $1.7 million for the first nine months of last year. This increase was caused mainly by the rise in market interest rates over the last twelve months and a gain of $80,000 on the sale of a small parcel of land during the first quarter. Other income will fluctuate based on short term market interest rates and the level of investable cash balances.

Interest Expense. Interest expense represents interest paid on a deferred obligation. Interest expense for the first nine months of fiscal 2007 was unchanged from the first nine months of fiscal 2006.

Income Taxes. Income taxes for the first nine months of fiscal 2007 were $3.8 million (As restated) (4.1% (As restated) of net sales), including a tax benefit resulting from the renewal of the federal research and experimentation credit retroactive to January 1, 2006, representing an effective tax rate of 25.6% (As restated). This compares to income tax expense of $2.4 million (3.2% of net sales) for the first nine months of fiscal 2006, representing an effective tax rate of 24.6%. 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 taxable income or loss. The projected effective tax rate for fiscal 2007 is approximately 26% compared to an actual effective tax rate of 22.8% for fiscal 2006. The increase in the projected

effective tax rate is due mainly to the higher level of taxable income the Company is currently generating.

Discontinued Operations. Discontinued operations represents the result of liquidation and dissolution of the Company's Anaren Europe corporate structure which ceased operation in December 2003. During the third quarter ended March 31, 2006 and in conjunction with the finalization of Anaren Europe's bankruptcy proceeding, the Company performed the final liquidation of its Anaren Europe corporate structure. As a result of this liquidation, the Company recognized a gain of $81,713 from the liquidation of the remaining assets.

Critical Accounting Policies

The methods, estimates and judgments management uses in applying the Company's most critical accounting policies have a significant impact on the results reported in the Company's financial statements. The U.S. Securities and Exchange Commission has defined the most critical accounting policies as the ones that are most important to the portrayal of the Company's financial condition and results, and that require management to make the most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company's most critical policies include: valuation of accounts receivable, which impacts general and administrative expense; valuation of inventory, which impacts cost of sales and gross margin; the assessment of recoverability of goodwill and other intangible and long-lived assets, which impacts write-offs of goodwill, intangibles and long-lived assets; accounting for stock based compensation, which impacts multiple expense components throughout the statement of earnings; and accounting for income taxes, which impacts the valuation allowance and the effective tax rate. Management reviews the estimates, including, but not limited to, allowance for doubtful accounts, inventory reserves and income tax valuations on a regular basis and makes adjustments based on historical experiences, current conditions and future expectations. The reviews are performed regularly and adjustments are made as required by current available information. The Company believes these estimates are reasonable, but actual results could and have differed at times from these estimates.

The Company's accounts receivable represent those amounts which have been billed to its customers but not yet collected. The Company analyzes various factors including historical experience, credit worthiness of customers and current market and economic conditions. The allowance for doubtful accounts balance is established based on the portion of those accounts receivable which are deemed to be potentially uncollectible. Changes in judgments on these factors could impact the timing of costs recognized.

The Company states inventories at the lower of cost or market, using a standard cost methodology to determine the cost basis for the inventory. This method approximates actual cost on a first-in-first-out basis. The recoverability of inventories is based on the types and levels of inventory held, forecasted demand, pricing, competition and changes in technology.

The Company records valuation allowances to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized. The Company evaluates the need for valuation allowances on a regular basis and adjusts the allowance as needed. These adjustments, when made, would have an impact on the Company's financial statements in the period that they were recorded.

Intangible assets with estimable useful lives are amortized to their residual values over those estimated useful lives in proportion to the economic benefit consumed.

Long-lived assets with estimated useful lives are depreciated to their residual values over those useful lives in proportion to the economic value consumed. Long-lived assets are tested for impairment at the group level, which is usually an economic unit such as a manufacturing facility or department, which has a measurable economic output or product. Long-lived assets are tested for impairment when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable and exceeds its fair market value. This circumstance exists if the carrying amount of the assets in question exceeds the sum of the undiscounted cash flows expected to result from the use of the asset. The impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value as determined by the discounted cash flow or in the case of negative cash flow, an independent market appraisal of the asset.

Goodwill is tested annually during the fourth fiscal quarter, or sooner if indicators of impairment exist, for impairment by the Company at the reporting unit level by comparing the fair value of the reporting unit with its carrying value. Valuation methods for determining the fair value of the reporting unit include reviewing quoted market prices and discounted cash flows. If the goodwill is indicated as being impaired (the fair value of the reporting unit is less than the carrying amount), the fair value of the reporting unit is then allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This implied fair value of the reporting unit goodwill is then compared with the carrying amount of the reporting unit goodwill and, if it is less, the Company would then recognize an impairment loss.

The projection of future cash flows for the goodwill impairment analysis requires significant judgments and estimates with respect to future revenues related to the assets and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in changes in this assessment and result in an impairment charge. The use of different assumptions could increase or decrease the related impairment charge.

The Company accounts for stock based compensation by recognizing expense over the vesting period for any nonvested stock option awards granted. Stock option grants are valued by using a Black-Scholes method at the date of the grant. There are assumptions and estimates made by management which go into the valuation of the options granted, such as volatility, vesting period, and forfeiture rate. The Company recognizes expense on options granted using a straight-line method over the vesting period. Restricted stock grants are expensed over the vesting period, which is determined at the date of the grant.

Liquidity and Capital Resources

Net cash provided by continuing operations for the nine months ended March 31, 2007 was $9.4 million compared to net cash provided by continuing operations for the first nine months of the prior year of $11.0 million. The positive cash flow from continuing operations in the current nine months was due to the high level of net income before depreciation and non cash equity compensation ($17.4 million (As restated)) which more than off-set the $6.8 million (As restated) used to fund the current inventory and accounts receivable increases. The positive cash flow from continuing operations in the first nine months of fiscal 2006 was due primarily to income before depreciation and non cash equity compensation for the period of $13.6 million which more than off-set the $3.3 million used to fund inventory and accounts receivable increases.

Net cash used in, or provided by, investing activities consists of funds used to purchase capital equipment, proceeds from the sale of land and equipment and funds used or provided by the net purchase or maturity of marketable debt securities.

Net cash used in investing activities in the first nine months of fiscal 2007 was $1.5 million and consisted of $7.8 million provided by the settlement of matured investments, net of $9.3 million used to acquire capital equipment and fund the Company's current physical plant expansion. Net cash used in investing activities in the first nine months of fiscal 2006 was $1.4 million and consisted of funds provided by net purchases and settlement of matured investments totaling $2.9 million, less capital additions of $4.3 million.

Net cash used in financing activities was $9.4 million in the first nine months of fiscal 2007 and consisted of funds and tax benefits received from the exercise of stock options amounting to $2.8 million, less $12.1 million used to purchase treasury shares. Cash used in financing activities the first nine months of fiscal 2006 was $7.6 million, which consisted of $9.8 million used for the purchase of treasury shares, net of $2.2 million received from funds and tax benefits generated by stock option exercises.

During the remainder of fiscal 2007, the Company anticipates that its main cash requirements will be for additions to capital equipment and funds for the current building expansion. Capital expenditures are expected to total between $11.0 and $12.0 million for fiscal 2007 and will be funded by existing cash balances.

The Company expects to continue to purchase shares of its common stock in the open market and/or through private negotiated transactions under the current Board authorization, depending on market conditions. At March 31, 2007, there were 361,105 shares remaining under the current Board repurchase authorization.

At March 31, 2007, the Company had approximately $79.4 million in cash, cash equivalents, and marketable securities. The Company has no debt, and on a fiscal year basis has had positive operating cash flow for over eight years. The Company believes that its cash requirements for the foreseeable future will be satisfied by currently invested cash balances and expected cash flows from operations.

                                                   Payment Due by Period
                                -------------------------------------------------------------
                                               Less
                                  Total     than 1 Yr.    2-3 Yrs       4-5 Yrs    Over 5 Yrs
                                  -----     ----------    -------       -------    ----------
Contractual obligations
Operating leases - facilities   $4,626,699   $690,394    $1,380,789   $1,380,789   $1,174,727
Deferred compensation              333,564     65,000       130,000      130,000        8,564

Recent Accounting Pronouncements

FASB Interpretation 48 was issued in July 2006 to clarify the criteria for recognizing tax benefits under FASB Statement No. 109, Accounting for Income Taxes. The Interpretation defines the threshold for recognizing the benefits of tax-return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority and will affect many companies' reported results and their disclosures of uncertain tax positions. The Interpretation does not prescribe the type of evidence required to support meeting the more-likely-than-not threshold, stating that it depends on the individual facts and circumstances. The benefit recognized for a tax position meeting the more-likely-than-not criterion is measured based on the largest benefit that is more than 50 percent likely to be realized. The measurement of the related benefit is determined by considering the probabilities of the amounts that could be realized upon ultimate settlement, assuming the taxing authority has full knowledge of all relevant facts and including expected negotiated settlements with the taxing authority. Interpretation 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006 (the Company's 2008 fiscal year). The company is currently analyzing the financial statement impact of adopting this pronouncement.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The Company adopted SAB 108 as of July 1, 2006. (See Note 16).

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, "Fair Value Measurements" which is effective for fiscal years beginning after November 15, 2007 (the Company's 2009 fiscal year) and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. The Company is currently evaluating the potential impact of this statement.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 158, "Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment to FASB Statements 87, 88, 106 and 132(R)" ("SFAS 158"), which requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in Accumulated Other Comprehensive Income, net of tax effects, until they are amortized as a component of net periodic benefit cost. In addition, the measurement date, the date at which plan assets and the benefit obligation are measured, is required to be the company's fiscal year end. This Statement is effective for fiscal years ending after December 15, 2006 (the Company's 2007 fiscal year). The Company is currently analyzing the financial statement impact of adopting this pronouncement.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115" (SFAS 159). This Statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS 159 will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for

fiscal years beginning after November 15, 2007 the Company's 2009 fiscal year).The Company is currently evaluating the potential impact of this statement.

Forward-Looking Cautionary Statement

The statements contained in this news release which are not historical information are "forward-looking statements". These, and other forward-looking statements, are subject to business and economic risks and uncertainties that could cause actual results to differ materially from those discussed. The risks and uncertainties described below are not the only risks and uncertainties facing our Company. Additional risks and uncertainties not presently known to us or that are currently deemed immaterial may also impair our business operations. If any of the following risks actually occur, our business could be adversely affected, and the trading price of our common stock could decline, and you may lose all or part of your investment. Such known factors include, but are not limited to: the Company's ability to timely ramp up to meet some of our customers' increased demands; potential unanticipated liabilities and delays associated with the physical expansion of the Company's Syracuse, New York facility; unanticipated delays in successfully completing customer orders within contractually required timeframes; increased pricing pressure from our customers; decreased capital expenditures by wireless service providers; the possibility that the Company may be unable to successfully execute its business strategies or achieve its operating objectives, generate revenue growth or achieve profitability expectations; successfully securing new design wins from our OEM customers, reliance on a limited number of key component suppliers, unpredictable difficulties or delays in the development of new process and products including LTCC; order cancellations or extended postponements; the risks associated with any technological shifts away from the Company's technologies and core competencies; unanticipated impairments of assets including investment values and goodwill; diversion of defense spending away from the Company's products and or technologies due to on-going military operations; and litigation involving antitrust, intellectual property, environmental, product warranty, product liability, and other issues. You are encouraged to review Anaren's 2006 Annual Report, Anaren's Form 10-K for the fiscal year ended June 30, 2006, as amended, Anaren's Form 10-Q for the three months ended September 30, 2006, as amended, Anaren's Form 10-Q for the three months ended December 31, 2006 and exhibits to those Reports filed with the Securities and Exchange Commission to learn more about the various risks and uncertainties facing Anaren's business and their potential impact on Anaren's revenue, earnings and stock price. Unless required by law, Anaren disclaims any obligation to update or revise any forward-looking statement.