UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

      For the fiscal year ended June 30, 2005

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

      For the transition period from _____________________ to
      _____________________

      Commission file number 0-6620

                                  ANAREN, INC.
             (Exact name of Registrant as specified in its Charter)

       New York                                         16-0928561
(State of incorporation)                     (I.R.S Employer Identification No.)

6635 Kirkville Road, East Syracuse, New York              13057
  (Address of principal executive offices)              (Zip Code)

        Registrant's telephone number, including area code: 315-432-8909

        Securities Registered Pursuant to Section 12(b) of the Act: None

     Securities Registered Pursuant to Section 12(g) of the Securities Act:

                          Common Stock, $.01 Par Value
                                (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]

Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [_] No [X]

The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant, based on the closing sale price of the Common
Stock on December 31, 2004, as reported on the Nasdaq National Market, was
approximately $213,325,138.

The number of shares of the Registrant's Common Stock outstanding on September
9, 2005 was 17,320,403.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for use in connection with its 2005
Annual Meeting of Shareholders are incorporated into Part III of this Annual
Report on Form 10-K.


<PAGE>

                                     PART I

Item 1. Business

Forward-Looking Cautionary Statement

In an effort to provide investors a balanced view of the Company's current
condition and future growth opportunities, this Annual Report on Form 10-K
includes comments by the Company's management about future performance. These
statements which are not historical information are "forward-looking statements"
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. 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;
difficulties achieving acceptable operating performance at the Company's
recently consolidated Anaren Ceramics subsidiary in Salem, New Hampshire;
increased pricing pressure from our customers; decreased capital expenditures by
wireless service providers; the possibility that the Company may be unable to or
have difficulties in successfully executing its business strategies or achieve
its operating objectives, generate revenue growth or achieve profitability
expectations; successfully securing new design wins from our original equipment
manufacturer customers, reliance on a limited number of key component suppliers,
unpredictable difficulties or delays in the development of new products; order
cancellations or extended postponements; unanticipated delays and/or
difficulties increasing procurement of raw materials in Asia through the
Company's Suzhou, China facility; 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 2005 Annual Report, this Form 10-K for the
fiscal year ended June 30, 2005 and Anaren's Form 10-Q for the three months
ended March 31, 2005, 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.

General

The Company was incorporated in New York in 1967. The Company's executive
offices are located at 6635 Kirkville Road, East Syracuse, New York 13057. The
telephone number of the Company at that location is (315) 432-8909. The
Company's website is located at www.anaren.com. The Company makes its periodic
and current reports available, free of charge, on its website as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission. The Company's common stock
is listed on the Nasdaq National Market under the symbol "ANEN." Unless the
context otherwise provides, the "Company" or "Anaren" refers to Anaren, Inc. and
its subsidiaries.


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<PAGE>

Recent Developments

In August 2004, the Company, through a wholly owned subsidiary, Anaren
Properties, LLC, purchased a 65,000 square foot building situated on
approximately 12 acres in Salem, New Hampshire for $4.8 million. The Company
moved its Amitron and RF Power operations to this facility during the second
quarter of fiscal 2005 and is presently operating them under its wholly owned
subsidiary, Anaren Ceramics, Inc. This facility was acquired to provide adequate
space for future growth of these businesses and to achieve administrative cost
savings through consolidation of two smaller businesses into one entity. In
conjunction with the move to this new facility, the Company negotiated a buyout
of the remaining lease of the Amitron facility in North Andover, Massachusetts
for a one-time charge of $350,000 and accelerated amortization of leasehold
improvements and certain intangibles related to this lease of approximately
$500,000. Additionally, the Company negotiated a buyout of the lease of the RF
Power facility in Bohemia, New York amounting to $91,000. These expenses were
recorded and recognized in the fourth quarter of fiscal 2004 and the first six
months of fiscal 2005.

Overview

The Company is a leading provider of microwave components and assemblies for the
wireless and space and defense markets. The Company's distinctive manufacturing
and packaging techniques enable it to cost-effectively produce compact,
lightweight microwave products for use in wireless communication and space and
defense systems.

Through its focused research and development efforts, Anaren continues to design
components and subsystems for wireless communication systems, as well as
advanced radar, beamforming and receiver applications for the space and defense
markets.

In addition, the Company is developing and producing a diverse set of miniature
microwave component products for consumer wireless communications applications
such as WiFi, Bluetooth(R), cellular handsets and satellite reception. The
Company's customer base includes leading global original equipment manufacturers
that serve the wireless, space and defense markets, including:

o Andrew
o Boeing, Inc.
o California Amplifier
o Ericsson
o ITT Aerospace/Communications
o Lockheed Martin
o Motorola
o Nokia
o Nortel Networks
o Northrop Grumman
o Powerwave, Inc.
o Raytheon

Industry Background

The volume of high-speed data traffic across global communications networks has
grown as the public Internet and private business intranets have become
essential for daily communications and electronic commerce. The number of
persons using the Internet and mobile internet terminals for e-commerce and
recreational use is also expected to continue to grow. Servicing the increasing
demand for higher bandwidth content and applications requires cost-effective and
high-speed connections. Wireless communications provide an advantageous access
solution for mobile high-speed Internet and multimedia services, with a faster
deployment and implementation. This is underscored by the increasing number of
wireless systems and subscribers worldwide.

Despite this continued growth in customer demand, expenditures for capital
infrastructure equipment by service providers began to decline rapidly during
the first quarter of calendar year 2001 and remained


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<PAGE>

depressed during fiscal 2002 and 2003. During fiscal 2004, expenditures for
wireless infrastructure equipment rebounded with a positive impact on our
business and subsequently leveled off in fiscal 2005.

A Wireless Network

A typical mobile or fixed wireless communications system is comprised of a
geographic region containing a number of cells, each of which contains one or
more base stations, which are linked in a network to form a service provider's
coverage area. Each base station houses the equipment that receives incoming
telephone calls from the switching offices of the local wire-based telephone
company and broadcasts calls to the wireless users within the cell. A base
station can process a fixed number of radio channels through the use of multiple
transceivers, power amplifiers and tunable filters, along with an antenna to
transmit and receive signals to and from the wireless user.

Mobile Wireless Communications

The late 1990's through 2000 saw dramatic growth in the demand for mobile
communications. This was fueled by decreasing prices for handsets and airtime, a
favorable global communications regulatory environment, increased competition
among service providers, opening of new frequency spectrum and services, and the
installation of mobile networks in developing nations as an alternative to
wire-based networks. Despite this rapid growth in customer demand, expenditures
for capital infrastructure equipment by service providers began to decline
rapidly during the first quarter of calendar year 2001. This had a negative
impact on all of the Company's wireless product lines, particularly the
printed-circuit board business. During fiscal 2004, infrastructure spending
rebounded due to the deployment of new technology to expand existing network
capacity resulting in rising sales and orders across all of the Company's
Wireless product lines. In fiscal 2005 demand and Wireless product sales have
remained strong, at or above fiscal 2004 levels.

Wireless Local Area Networking

Wireless local area networks (WLAN) generally referred to as WiFi are unlicensed
flexible data communication systems that can either replace or extend wired
communication systems. Using radio frequency technology, wireless local area
networks transmit and receive data over the air without wired cabling. A
wireless local area network provides all the features and benefits of
traditional local area network technologies like Ethernet, often with lower
installation costs and increased flexibility.

Wireless local area network technology is now in the process of widespread
deployment and accelerated development for low-cost, interoperable products.
Wireless local area network technology provides high data rates to rapidly
transfer large data files, access the web, and support wireless video
conferencing from mobile platforms including handheld personal computers and
laptops. The flexibility that the wireless local area network offers the
business and consumer user is leading to applications such as wireless home
multimedia, wireless e-business, and wireless printers and scanners.

Space and Defense

The Space and Defense industry is currently focused on supporting National
Defense programs, Homeland Security, integrated communications systems and
technologies that improve the performance and survivability of existing air,
land and sea based platforms. As a result of the priorities for these programs,
the funding for advanced radar systems, advanced jamming systems, smart
munitions, electronic surveillance systems and satellite and ground based
communication systems has remained strong.

The Anaren Solution

The Company's technology addresses the demands of the wireless market for high
quality products manufactured in volume with continuous improvements in
performance and cost. The Company also provides the satellite market with
enabling technologies that increase network capacity and flexibility, allowing
for increased revenue generation. The Company's proprietary Multi-Layer
Stripline, ceramic circuit technologies and advanced design and modeling
techniques, which are described more fully below, allow the Company to provide
compact, light weight, cost-effective, and highly integrated microwave
components, assemblies and subsystems. The Company's solution includes:


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<PAGE>

Broad Array of Standard and Customized Products. The Company offers a broad
array of standard and custom microwave products to the mobile and wireless
networking, satellite communications and defense electronics markets. The
technologies underlying the Company's product portfolio allow the Company to
address the new wireless data communications products being developed by its
existing and potential customers with limited incremental investment. As the
original equipment manufacturers in the wireless communications industry have
been reducing the number of their suppliers, the Company believes that its
expanding product portfolio has helped the Company become a strategic supplier
to many of these original equipment manufacturers.

Advanced Microwave Design and Manufacturing Capabilities. The Company's
engineering and design staff of 140 engineers (as of June 30, 2005) works with
customers to develop product solutions. Anaren's engineers collaborate with
customers to develop products that provide state-of-the-art performance that can
be manufactured in significant volume with excellent quality and reliability.
The Company has consistently met the stringent requirements of the wireless,
defense and satellite communications markets due to the Company's strengths in
advanced packaging and interconnecting of radio, microwave and extremely high
frequency signals, as well as its ability to produce small, light weight,
cost-effective and efficient microwave components and assemblies. The Company
utilizes its Suzhou China based operation to manufacture and test selected
microwave component and subassembly products for wireless infrastructure
applications. This local presence also provides rapid and cost effective
manufacturing for its Asian customer base.

Rapid Product Development. Anaren's integrated design and manufacturing
facilities allow it to produce custom solutions from concept to product delivery
often in a matter of days. With its Multi-Layer Stripline technology, design
libraries, manufacturing experience and investment in automation, the Company
can facilitate a rapid transition from development to production, thereby
offering its customers a complete turnkey solution and allowing them to bring
their products to market faster.

Strong Customer Relationships. The Company believes that it has become an
integral part of its key customers' operations by working closely with them
through the entire development and production process. The Company assigns a
project engineer to each customer to ensure a high level of responsiveness and
customer service. The project engineer and a design team assist the customer
from the conceptual, system level design stages through the development and
manufacturing process. By maintaining close contact with the customers' design
engineering, manufacturing, purchasing and project management personnel, the
Company can better understand their needs, rapidly develop customer-specific
solutions, and more effectively design the Company's solutions into the
customers' systems and networks. The Company believes that the strength of its
customer support and depth of its customer relationships provide the Company a
competitive advantage.

Technology

The Company utilizes three basic technologies: Multi-Layer Stripline, Thick Film
Ceramics and Ball Grid Array assembly. Additionally, the Company uses outside
sources for lower cost and unique process capabilities.

Multi-Layer Stripline technology is a technique of processing stripline
circuits, in which multiple layers of etched stripline circuits are laminated
together in a manner that is similar to printed circuit board manufacturing, but
with superior microwave characteristics. Plated through holes are used to
interconnect layers. The Company's proprietary techniques enable it to implement
multi-layer connections that perform optimally at microwave frequencies. Unlike
traditional printed circuit board manufacturing, simply connecting the
appropriate points on the multi-layer board does not ensure adequate
performance. In order to achieve optimal microwave performance on a consistent
basis, material and process variations must be tightly controlled and the
circuit design must take into consideration variations in the manufacturing
process.

Ball Grid Array technology is a technique used to integrate active functionality
onto Multi-Layer Stripline circuits at microwave frequencies. Ball Grid Array
technology is an efficient integration technique


                                       5
<PAGE>

offering superior high frequency performance, and is compatible with standard
low cost manufacturing techniques.

Thick Film Ceramic technology is a technique of processing multi-layer ceramic
circuits in which the signal conductors are screen printed onto ceramic
substrates. Thick Film Ceramic technology is an efficient method of integrating
passive components such as resistors and capacitors, eliminating costly assembly
steps to mount discreet components.

The Company's microwave design engineering staff has developed proprietary
modeling techniques and component design libraries that allow for consistent and
efficient design and production of complex microwave products utilizing its
proprietary technologies.

Strategy

The Company's strategy is to continue to use its proprietary technologies,
extensive microwave design libraries and low cost manufacturing capabilities to
further expand its penetration in the wireless and space and defense markets.
Key components of the Company's strategy include the following:

Pursue Large Addressable Markets. The Company has successfully penetrated the
mobile wireless infrastructure market and intends to use its market position to
pursue other wireless markets like Wireless Local Area networks (WLAN), Mobile
Handsets, Bluetooth and other related technology such as WiMAX and Ultra Wide
Band. The Company also intends to continue to offer additional products and
technologies to address existing and developing space and defense applications.

Focus on value added products. The Company plans to continue to increase the
value of its products in wireless and space and defense systems. The Company
intends to expand its component offerings to enable the Company to increase the
number of products addressing each wireless application. In addition, with its
Multi-Layer Stripline, Ball Grid Array and Thick Film Ceramic manufacturing
technologies, the Company intends to continue to increase the functionality of
its products, thereby enabling its wireless and space and defense customers to
continue to reduce the size and cost of their platforms, while the Company
increases its content value.

Strengthen and Expand Customer Relationships. Today, a limited number of large
systems manufacturers drive the wireless and space and defense markets. The
Company has developed, and plans to continue to expand, customer relationships
with many of these manufacturers, including Andrew, Ericsson, Huawei Lucent,
Motorola, Nokia and Nortel Networks, for wireless communications and Boeing,
Lockheed Martin, Northrup Grumman and Raytheon for space and defense. The
Company intends to further strengthen its customer relationships by offering
complete outsourcing solutions, from research and development through product
design and production, thereby increasing the customers' reliance on the
Company.

Pursue Technology Leadership Position. The Company intends to use its
technological leadership in the mobile wireless and space and defense markets to
extend its competitive advantage. Anaren plans to pursue further technological
advances through continued investment in research and development, as well as
the utilization of a global supplier base. The Company will seek to advance its
leadership in wireless technology by developing next generation products for the
mobile and wireless networking markets. In addition, the Company will attempt to
build upon its relationships with key space and defense original equipment
manufacturers in order to develop state-of-the-art products.

Expand Business through Strategic Acquisitions. The Company intends to continue
to pursue opportunistic acquisitions of companies, product lines and
technologies that complement its business. The Company will focus on
acquisitions that compliment its technical expertise and business development
resources and provide a competitive advantage for its targeted markets.

Products


                                       6
<PAGE>

Wireless Communications

The Company provides microwave components, assemblies and subsystems to leading
wireless infrastructure equipment manufacturers. Traditionally, all of the
signal distribution, or combining and splitting, within a base station has been
accomplished with discrete signal distribution components and coaxial cables.
Through the use of its Multi-Layer Stripline and ceramic technologies, the
Company provides microwave components, assemblies and subsystems that eliminate
the need for discrete components and interconnecting cables. These integrated
assemblies, which range from simple splitting and combining networks to complete
microwave backplanes that distribute microwave signals throughout the base
stations, from reception at the antenna, to multiple radios, to multiple
amplifiers, and back to the antenna for transmission.

The Company has developed its product offerings to enable customers to reduce
the size and cost, while enhancing the performance of their equipment. The
Company continually invests capital and resources to enhance existing products
and develop new products to address the latest market demands. The Company has
developed and continues to market a full line of standard products, as well as
custom products, to wireless original equipment manufacturers. A brief
description of the Company's major product categories is as follows:

Component Products

Xinger(R) Surface Mount Components. The Company's Xinger(R) line of products
consists of off-the-shelf surface mount microwave components which provide
passive microwave signal distribution functions. They were developed to provide
a low-cost signal distribution component, which could be placed on standard
printed circuit boards with automated production equipment. The primary
application of these products is in radio frequency power amplifiers, but they
are also found in low-noise amplifiers and radios. The Company believes it is
currently the market leader in this product area, supplying industry leading
original equipment manufacturers and leading power amplifier manufacturers. The
Company continues to invest heavily in the expansion of this product line, as
well as its addressable market. During fiscal 2004, the Company introduced its
Xinger II product line offering significantly improved RF performance and power
handling in a package that supports the latest global environment friendly
initiatives. The Company has recently announced several products specifically
designed to address the consumer components Wireless local area network market,
cellular telephone and Bluetooth applications. These products are 1/50th the
size of our typical Xinger(R) type of product and offer performance and cost
advantages over traditional components.

Ferrite Products. The Company's ferrite components are used in various wireless
and defense applications. They are a key component in base station amplifiers,
and their primary function is to protect the sensitive electronics from damage
by isolating them electronically from potentially harmful signal levels.

Resistive Products. The Company's resistive product line includes resistors,
power terminations, and attenuators for use in high power wireless and medical
imaging applications. They are typically found in power amplifiers and are used
in conjunction with ferrite products as well as Xinger(R) surface mount
components. The products are manufactured using specialized material substrates
designed for optimum heat transfer.

Custom Splitting and Combining Products. In addition to its standard products,
the Company offers a wide range of custom signal splitting solutions. These
custom solutions are typically used to distribute signals to and from radio
transceivers and power amplifiers. The Company's custom products offer
consistent performance and can be designed in unique configurations, allowing
base station designers an opportunity to greatly reduce space, complexity and
cost while enhancing performance.

Custom Radio Frequency Backplane Assemblies. The Company's radio frequency
backplanes provide efficient connections of microwave signals between subsystems
in wireless base stations. Radio frequency backplanes are conceptually similar
to the motherboard in a personal computer, which efficiently connects signals
between multiple subsystems. These assemblies range from radio frequency-


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<PAGE>

only to fully integrated radio frequency, direct current power, and signal
routing solutions. They are typically used in conjunction with radio
transceivers and radio frequency power amplifiers. The Company also offers
backplane assemblies with fully integrated radio-frequency signal switching
capability.

Hybrid Matrix Assemblies. The Company's hybrid matrix assemblies allow customers
to effectively reduce the number of amplifiers in their base stations. Base
station amplifier systems are designed to handle peak usage, when maximum calls
are made over a network. Due to the sector coverage of typical base stations,
some amplifiers are heavily used while others are not. The Company's matrices
allow the spreading of high usage volume over all base station amplifiers,
permitting a reduction in the total number of amplifiers needed. These products
are offered in a number of packaging configurations, including backplanes.

High Frequency Etched Thick Film and LTCC Circuits. The Company's ceramic
capabilities include etched thick film circuits and Low Temperature Co-fired
Ceramic circuits built to customer specifications. These circuits are suitable
for wireless, defense, aerospace, and medical applications.

Space and Defense

The Company is a supplier of radar countermeasure subsystems and beamforming
networks for use in missile guidance systems, electronic surveillance, radar
countermeasures and communications systems. The Company's Multi-Layer Stripline
and Ball Grid Array technologies enable the Company to provide customers with
highly complex electronic subsystems and beamforming networks that maintain high
performance, while reducing size, cost and weight. Each of these products is
specifically designed for a particular program. A brief description of the
Company's major Space and Defense product categories is as follows:

Radar Countermeasure Subsystems. Defense radar countermeasure subsystems
digitally measure, locate and counter enemy radar systems.

Beamformers. Beamformers determine the number, size and quality of beams that
are produced from an antenna array. The Company supplies passive and active
beamformers. Passive beamformers produce fixed beam locations while active
beamformers allow for real-time reconfiguration of the beam pattern.

Switch Matrices. Switch matrices route radio frequency signals from a single
location to one or multiple end user locations. These products allow system
operators to allocate capacity as required, thereby increasing utilization and
revenue generation.

Radar Feed Networks. Radar feeds are power dividers that distribute radio
frequency energy to the antenna elements of the radar. The power dividers are
frequently arranged to provide two or three inputs and several thousand outputs.

Customers

During the fiscal year ended June 30, 2005, approximately 68% of the Company's
sales were to customers in the wireless markets and approximately 32% of its
sales were to customers in the space and defense markets. The Company had one
customer in fiscal 2005 who accounted for more than 10.0% of net sales, Nokia,
who represented approximately 13.8%.

Wireless Communications. The Company sells its standard line of Xinger(R)
components, resistive components, and ferrite components to leading original
equipment manufacturers and a broad range of other wireless equipment contract
manufacturers. In addition, the Company sells its custom wireless products to
major wireless infrastructure original equipment manufacturers. In general,
customers have purchased the Company's products directly from the Company or
through distributors or sales representatives. The following is a list of the
Company's Wireless customers who generated $500,000 or


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more in revenues in the fiscal year ended June 30, 2005:

o     Alcatel
o     Avnet
o     BAE Optilas
o     Celestica Corp.
o     EG Components
o     MKS Instruments
o     Motorola
o     Nokia
o     Nortel
o     Richardson Electronics Inc.
o     Ricoh Printing
o     RMPI, LLC
o     Sanmina
o     St. Jude
o     Solectron
o     Telecom International
o     Venture Manufacturing

Space and Defense. The Company currently sells passive components and electronic
subsystems to prime contractors serving the United States and foreign
governments. The following is a list of Space and Defense customers who
generated $500,000 or more in revenues in the fiscal year ended June 30, 2005:

o     BAE
o     Boeing Inc.
o     ITT
o     Lockheed Martin
o     NEX 1 Future, Co., Ltd.
o     Northrup Grumman
o     Raytheon

Sales and Marketing

The Company markets its products worldwide to original equipment manufacturers
in the wireless and space and defense markets primarily through a sales and
marketing force of 27 people as of June 30, 2005. The Company has regional sales
offices located in Sacramento, California; Woolwich Township, New Jersey;
Waterlooville, England; and Suzhou, China. In addition, as of June 30, 2005, the
Company had contracts with three major distributors, with 14 manufacturers'
representatives in the United States, and with nine international
representatives located in Western Europe, the Middle East and Asia. As part of
its marketing efforts, the Company advertises in major trade publications and
attends major industry shows. The Company has also invested significantly in its
Internet website which contains an electronic version of its entire catalog. In
addition, the website enables users to download important device parameter
files. These files contain the performance information for the catalog parts in
a format which is compatible with commonly used computer aided design/computer
aided modeling, or CAD/CAM equipment. The Company also provides mechanical
drawings and applications notes for proper use of the parts. This service allows
designers to get the information they require and to easily incorporate the
Company's parts into their designs.

After identifying key potential customers, the Company makes sales calls with
its own sales, management and engineering personnel and with manufacturers'
representatives. To promote widespread acceptance of the Company's products and
provide customers with support for their wireless communications needs, the
sales and engineering teams work closely with the customers to develop solutions
tailored for their wireless requirements. The Company believes that its
engineering team, comprised of 140 design and engineering professionals as of
June 30, 2005, is a key competitive advantage.


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<PAGE>

The Company uses distributors for its standard products, most notably the
Xinger(R) line of surface mount components. In the United States, Canada, Asia
and most of Europe, the Company has agreements with Richardson and Avnet, with
the latter operating under the name of BFI Optilas in Europe. The Company has an
agreement with Zenetron in Asia for distribution of commercial products. The
Scandinavian countries are serviced by E.G. Components, Inc., a subsidiary of
Elektronikgruppen. Distribution has become an important part of the Company's
sales efforts by providing the Company with a larger sales force to promote its
catalog offerings.

Backlog

The Company's backlog of orders for the Wireless group was $14.4 million as of
June 30, 2005, versus $15.6 million as of June 30, 2004. Backlog for the
Wireless group primarily represents firm orders for component products and
signed purchase orders (i.e., orders for specific custom sub-assemblies) for
custom components due to ship within eight to twelve weeks. The Company does not
believe that its Wireless backlog as of any particular date is representative of
actual sales for any succeeding period. Typically, large original equipment
manufacturers including Ericsson, Motorola, Nokia and Nortel, who use the
Company's component and custom products, negotiate set prices for estimated
annual volumes. The Company then receives a firm delivery commitment prior to
shipment. The Company does not recognize backlog until it has received a firm
order.

As part of the Company's close working relationships with major wireless
communications customers, the customers expect the Company to respond quickly to
changes in the volume and delivery schedule of their orders and, if necessary,
to inventory products at its facilities for just-in-time delivery. Therefore,
although contracts with these customers typically specify aggregate dollar
volumes of products to be purchased over an extended time period, these
contracts also provide for delivery flexibility, on short notice. In addition,
these customers may cancel or defer orders without significant penalty.

Backlog of orders for the Space and Defense group was $47.5 million as of June
30, 2005 versus $37.1 million as of June 30, 2004. The increase in Space and
Defense backlog year over year, was due largely to the volume of new Space and
Defense product orders in fiscal 2005 ($40.8 million) and fiscal 2004 ($37.6
million). During fiscal year 2006, the Company expects to ship between $34.0
million and $36.0 million of its June 30, 2005 backlog. All of the orders
included in the Space and Defense group backlog are covered by signed contracts
or purchase orders. However, backlog is not necessarily indicative of future
sales. Accordingly, the Company does not believe that its backlog as of any
particular date is representative of actual sales for any succeeding period.

Research and Development

The Company's research and development efforts are focused on the design,
development and engineering of both products and manufacturing processes. The
Company intends to focus its future research and development efforts on next
generation products and technologies. The current development efforts of the
Company include:

o     products for use in mobile and fixed wireless applications;

o     advanced manufacturing technology to produce microwave stripline
      structures for broadband Millimeter wave, or extremely high frequency,
      communications satellite applications;

o     advanced low temperature co-fired ceramic for use in low-cost, light
      weight integrated substrates; and

o     miniature components for wireless networking and subscriber applications.

These activities include customer-funded design and development, as well as
efforts funded directly by the Company. Research and development expenses funded
by the Company were $6.3 million in fiscal 2005, $5.9 million in fiscal 2004 and
$6.1 million in fiscal 2003. Research and development costs are


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<PAGE>

charged to expense as incurred.

Manufacturing

The Company currently maintains manufacturing locations in Syracuse, New York;
Salem, New Hampshire; and Suzhou, China. During fiscal 2005, the Company
consolidated its Amitron operation located in North Andover, Massachusetts and
its RF Power operation located in Bohemia, New York into one facility located in
Salem, New Hampshire, operating under a wholly owned subsidiary, Anaren
Ceramics, Inc. This facility includes significantly more space for future
expansion, and a State-of-the-Art Class 10,000 clean room for manufacturing.
During fiscal 2004, the Company closed and liquidated its Almelo, Netherlands
circuit board facility.

The Company continues to develop capability to produce highly engineered,
complex microwave subassemblies to support its Space and Defense business. In
fiscal 2004 and 2005, the Company continued to invest in equipment and processes
required to manufacture assemblies utilizing high-density and frequency Ball
Grid Array technology, supporting high reliability requirements suitable for
both defense and space based platforms.

A continued focus of the Company is to provide the lowest cost manufacturing
solutions. Part of this strategy has evolved with the opening of a facility in
Suzhou, China. Certain manufacturing product lines from the Syracuse and the
Salem operations have been successfully transitioned to Suzhou over the past two
years. Manufacturing of newly released products will be initiated in Suzhou
going forward. During fiscal 2005 the Suzhou facility also provided support in
identifying and qualifying new lower-cost and local Asian sources of parts and
raw materials for all of the Company's businesses, and will continue to do so in
the future.

All of the Company's facilities (Syracuse, New York; Salem, New Hampshire; and
Suzhou, China) are ISO 9001 certified. In addition, the East Syracuse facility
is certified to IPC 6010 for manufacture of high-reliability printed circuit
boards.

The Company manufactures its products from standard components, as well as from
items which are manufactured by vendors to its specifications. The raw materials
utilized in the various product areas are generally accessible and common to
both of the Company's business segments. The Company purchases most of its raw
materials from a variety of vendors and most of these raw materials are
available from a number of sources. During fiscal year 2005, the Company had one
vendor from which it purchased more than 10% of its total raw materials, and the
Company believes that alternate sources of supply are generally available for
all raw materials supplied by this and all other Company vendors.

Competition

The microwave component and subsystems industry continues to be highly
competitive. The Company competes against many companies, both foreign and
domestic, many of which are larger and have greater financial and other
resources. Direct competitors of the Company in the wireless market include
Aeroflex, M/A-com, a division of Tyco International, Merrimac Industries,
Filtronic PLC, Radiall, Smith Industries, Soshin and Mini-Circuits. As a direct
supplier to original equipment manufacturers, the Company also faces significant
competition from the in-house capabilities of its customers. However, the
current trend in the wireless marketplace has been for the original equipment
manufacturers to outsource more design and production work, thereby freeing up
their internal resources for other use. Thus, the Company believes that internal
customer competition exists predominantly in its Space and Defense businesses.

In the wireless market, increased price pressure from the Company's customers is
a continuing challenge. It is anticipated that this pricing pressure will
continue indefinitely.

The principal competitive factors in both the foreign and domestic markets are
technical performance, reliability, ability to produce in volume, on-time
delivery and most critically, price. Based on these factors, the Company
believes that it competes favorably in its markets. The Company believes that it
is particularly strong in the area of technical performance in the wireless
marketplace. With the introduction


                                       11
<PAGE>

of manufacturing capability in Suzhou, China, and new innovative design
techniques, the Company believes that it now competes favorably on price as
well.

Government Regulation

The Company's products are incorporated into wireless communications systems
that are subject to regulation domestically by the Federal Communications
Commission and internationally by other government agencies. In addition,
because of its participation in the defense industry, the Company is subject to
audit from time to time for compliance with government regulations by various
governmental agencies. The Company is also subject to a variety of local, state
and federal government regulations relating to environmental laws, as they
relate to toxic or other hazardous substances used to manufacture the Company's
products. The Company believes that it operates its business in material
compliance with applicable laws and regulations. However, any failure to comply
with existing or future laws or regulations could have a material adverse effect
on the Company's business, financial condition and results of operations.

Intellectual Property

The Company's success depends to a significant degree upon the preservation and
protection of its product and manufacturing process designs and other
proprietary technology. To protect its proprietary technology, the Company
generally limits access to its technology, treats portions of such technology as
trade secrets, and obtains confidentiality or non-disclosure agreements from
persons with access to the technology. The Company's agreements with its
employees prohibit them from disclosing any confidential information, technology
developments and business practices, and from disclosing any confidential
information entrusted to the Company by other parties. Consultants engaged by
the Company who have access to confidential information generally sign an
agreement requiring them to keep confidential and not disclose any non-public
confidential information.

The Company currently has 8 active patents and has filed 9 other patent
applications that are currently pending before the United States Patent and
Trademark Office to protect both the construction and design of its products.
The Company plans to pursue intellectual property protection in foreign
countries, primarily in the form of international patents, in instances where
the technology covered is considered important enough to justify the added
expense. By agreement, Company employees who initiate or contribute to a
patentable design or process are obligated to assign their interest in any
potential patent to the Company.

Employees

As of June 30, 2005, the Company employed 587 full-time people, including 78
temporary employees. Of these employees, 140 were members of the engineering
staff, 378 were in manufacturing positions, 27 were in sales and marketing
positions, and 42 were in management and support functions. None of these
employees are represented by a labor union, and the Company has not experienced
any work stoppages. The Company considers its employee relations to be
excellent.

Item 2. Properties

The principal real estate of the Company is a 105,000 square foot building,
which the Company owns, located on a 30-acre parcel in East Syracuse, New York.
The Company's principal subsidiary, Anaren Microwave, Inc., utilizes this
facility which houses a substantial portion of the Company's marketing,
manufacturing, administrative, research and development, systems design and
engineering activities. In May 2004 the Company, through a wholly owned
subsidiary, Anaren Properties, LLC, purchased a 65,000 square foot building
situated on approximately 12 acres in Salem, New Hampshire for $4.8 million. The
Company moved its Amitron and RF Power operations to this facility during the
second quarter of fiscal 2005 and is presently operating them under a newly
formed, wholly owned subsidiary, Anaren Ceramics, Inc. This facility was
acquired to provide adequate space for future growth of these businesses and to
achieve administrative cost savings through consolidation of two businesses into
one entity. In conjunction with the decision to move to this


                                       12
<PAGE>

new facility, the Company negotiated (a) a buyout of the remaining lease of the
Amitron facility in North Andover, Massachusetts for a one-time charge of
$350,000 and accelerated amortization of leasehold improvements and certain
intangibles related to the lease of approximately $500,000, and (b) a buyout of
the lease of the RF Power facility in Bohemia, New York amounting to $91,000.
These expenses were recorded and recognized in the fourth quarter of fiscal 2004
and the first six months of fiscal 2005.

In March 2002, the Company's Anaren Suzhou Communications Inc. subsidiary signed
a lease for a 12,300 square foot first floor facility in Suzhou, China to begin
light manufacturing and assembly activities for the Company's Asian customers.
This facility has an annual rent of $23,200. In February 2003 Anaren Suzhou
exercised an option to lease the second floor of this same facility
(approximately 12,300 square feet) at an annual rent of $23,200. In March 2005,
the lease for both floors was renewed for an additional three year period
through March 2008.

The Company leases a 20,000 square foot building in Frimley, England. Annual
rental cost of this facility is approximately $471,000 and the Company is
currently subletting the building. During the fiscal year ended June 30, 2005,
payments to the Company under this sublease were more than 95.0% of the full
lease value. The existing lease term on this building runs to 2014. There is no
assurance that the Company will be able to continuously sublet the building
during the remaining lease term so as to offset its rental cost in whole or in
part.

Management considers the foregoing facilities adequate for the current and
anticipated short-term future requirements of the Company, and expects that
suitable additional space will be available to the Company, as needed, at
reasonable commercial terms.

Item 3. Legal Proceedings

There are no material legal proceedings pending against the Company.

Item 4. Submission of Matters to a Vote of Security Holders

During the fourth quarter of the fiscal year ended June 30, 2005, there were no
matters submitted to a vote of security holders.

Item 4A. Executive Officers of the Registrant

Executive officers of Anaren, Inc., their respective ages as of June 30, 2005,
and their positions held with the Company are as follows:

Name                  Age                          Position
Lawrence A. Sala      42     President, Chief Executive Officer, Chairman
                               and Director
Carl W. Gerst, Jr     67     Chief Technical Officer, Vice Chairman and Director
Gert R. Thygesen      49     Vice President, Technology
Joseph E. Porcello    53     Vice President, Finance, Treasurer
Mark P. Burdick       47     Vice President and General Manager
Timothy P. Ross       45     Vice President, Business Development
Amy B. Tewksbury      41     Vice President, Human Resources

Lawrence A. Sala joined the Company in 1984. He has been President since May
1995, has served as Chief Executive Officer since September 1997, and has been
Chairman of the Board of Directors since November 2001. Mr. Sala became a member
of the Board of Directors of the Company in 1995. He holds a Bachelor's Degree
in Computer Engineering, a Master's Degree in Electrical Engineering and a
Master's Degree in Business Administration, all from Syracuse University.

Carl W. Gerst, Jr. has been a member of the Board of Directors of the Company
since its founding. Mr.


                                       13
<PAGE>

Gerst has served as Chief Technical Officer and Vice Chairman of the Board since
May 1995 and served as Treasurer from May 1992 to November 2001. Mr. Gerst
previously served as Executive Vice President of the Company from its founding
until May 1995. He holds a Bachelor's Degree from Youngstown University and a
Master's Degree in Business Administration from Syracuse University.

Gert R. Thygesen joined the Company in 1981 and has served as Vice President of
Technology since September 2000. He previously served as Vice President,
Operations from April 1995 to September 2000, as Operations Manager of the
Company from 1992 until 1995 and as Program Manager, Digital RF Memories &
Advanced Systems, from 1988 to 1992. Mr. Thygesen holds a Bachelor of Science
Degree and a Master's Degree in Electrical Engineering from Aalborg University
Center, Denmark.

Joseph E. Porcello joined the Company in 1977 and has served as Vice President,
Finance since May 1995 and Treasurer since November 2001. He previously served
as the Company's Controller from 1981 to 1999. Mr. Porcello holds a Bachelor's
Degree from the State University of New York at Buffalo and is a Certified
Public Accountant.

Mark P. Burdick has been with the Company since 1978 and has served as Vice
President and General Manager since September 2000. He served as Vice President
and General Manager, Wireless Group from November 1999 until September 2000, as
Business Unit Manager -- Commercial Products from 1994 to 1999, and as Group
Manager for Defense Radar Countermeasure Subsystems from 1991 to 1994. Mr.
Burdick holds a Bachelor of Science Degree in Electrical Engineering from the
Rochester Institute of Technology, and a Master's of Business Administration
from the University of Rochester.

Timothy P. Ross has been with the Company since 1982 and has served as Vice
President -- Business Development since September 2000. He served as Vice
President and General Manager, Space and Defense Group, of the Company from
November 1999 until September 2000. Mr. Ross served as Business Unit Manager --
Satellite Communications from 1995 to 1999 and as a Program Manager from 1988 to
1995. Mr. Ross holds an Associate's Degree in Engineering Science, a Bachelor of
Science in Electrical Engineering from Clarkson University, and a Master's in
Business Administration from the University of Rochester.

Amy Tewksbury joined the Company in October 2002 as Vice President of Human
Resources. Prior to joining Anaren, Ms. Tewksbury was employed by Wegmans Food
Markets, Inc. for 16 years. She held various positions with Wegmans including
Syracuse Division Human Resources Manager, Corporate Human Resources Project
Manager, and Store Operations. Ms. Tewksbury holds a Bachelor of Science Degree
in Management from Syracuse University.


                                       14
<PAGE>

                                     PART II

Item 5. Market For the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities

The common stock of the Company is quoted on The Nasdaq National Market under
the symbol "ANEN." The following table sets forth the range of quarterly high
and low sales prices reported on The Nasdaq National Market for the Company's
common stock for the quarters indicated. Quotations represent prices between
dealers and do not include retail mark-ups, mark-downs or commissions.

<TABLE>
<CAPTION>
                            Fiscal 2005                         Fiscal 2004
                              Quarter                             Quarter
                            -----------                         -----------
                  1st      2nd      3rd      4th       1st      2nd      3rd      4th
                  ---      ---      ---      ---       ---      ---      ---      ---
<S>             <C>       <C>      <C>      <C>      <C>       <C>      <C>      <C>
High ........   $16.50    14.91    13.33    13.57    $14.68    16.03    21.34    18.78
Low .........   $10.50    11.96    10.54     9.29    $ 9.25    12.20    14.21    14.50
</TABLE>

The Company had approximately 375 holders of record of its common stock at
August 16, 2005.

The Company has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, to support the
development of its business and does not anticipate paying cash dividends for
the foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Board of Directors after taking into account various factors,
including the Company's financial condition, operating results and current and
anticipated cash needs.

Issuer Purchases of Equity Securities

On May 10, 2005, the Board of Directors increased by 2,000,000 the number of
shares that the Company was authorized to repurchase in open market or by
privately negotiated transactions through its previously announced stock
repurchase program. The program, which may be suspended at any time without
notice, has no expiration date. The following table sets forth information
regarding shares repurchased and purchasable under the program during and as of
the end of the periods indicated. On June 30, 2005, 1,774,464 shares remained
authorized for purchase.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
      Period          Total Number of       Average Price Paid       Total Number of      Maximum Number (or
                     Shares (or Units)     per Share (or Unit)      Shares (or Units)     Approximate Dollar
                         Purchased                                Purchased as Part of   Value) of Shares (or
                                                                   Publicly Announced     Units) that May Yet
                                                                    Plans or Programs     Be Purchased Under
                                                                                         the Plans or Programs
--------------------------------------------------------------------------------------------------------------
<S>                           <C>                      <C>                   <C>                  <C>
April 2005                    179,500                  $11.51                179,500              1,046,464
--------------------------------------------------------------------------------------------------------------
May 2005                      831,500                  $11.33                831,500              2,214,964
--------------------------------------------------------------------------------------------------------------
June 2005                     440,500                  $12.58                440,500              1,774,464
--------------------------------------------------------------------------------------------------------------
Total                       1,451,500                       -              1,451,500                      -
--------------------------------------------------------------------------------------------------------------
</TABLE>

Item 6. Selected Consolidated Financial Data

The selected consolidated financial data set forth below with respect to the
Company's statements of operations for each of the years in the three year
period ended June 30, 2005, and with respect to the balance sheets at June 30,
2005 and 2004, are derived from the consolidated financial statements that have
been audited by KPMG LLP, independent registered public accounting firm, which
are included elsewhere in this Annual Report on Form 10-K, and are qualified by
reference to such consolidated financial statements. The statements of
operations data for the years ended June 30, 2001 and June 30, 2002, and the
balance sheet data at June 30, 2001, June 30, 2002 and June 30, 2003, are
derived from audited consolidated financial statements not included in this
Annual Report on Form 10-K. The following selected financial data should be read
in conjunction with the consolidated financial statements for the Company and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere herein.


                                       15
<PAGE>

<TABLE>
<CAPTION>
                                                                          Years Ended
                                                   -------------------------------------------------------------
                                                    June 30,     June 30,    June 30,      June 30,     June 30,
                                                      2005         2004        2003         2002         2001
                                                      ----         ----        ----         ----         ----
                                                               (In thousands, except per share data)

<S>                                                <C>          <C>          <C>          <C>          <C>
Statement of Income Data:
Net sales ......................................   $  94,461    $  85,079    $  75,520    $  70,638    $  84,825
Cost of sales ..................................      64,591       55,070       51,821       45,713       52,527
                                                   ---------    ---------    ---------    ---------    ---------
Gross profit ...................................      29,870       30,009       23,699       24,925       32,298
                                                   ---------    ---------    ---------    ---------    ---------
Operating expenses:
  Marketing ....................................       6,858        6,723        6,160        6,771        6,584
  Research and development .....................       6,288        5,861        6,140        6,283        5,023
  General and administrative ...................       8,685        8,731        8,392        7,617        8,392
  Restructuring ................................         458           --          795           --          688
                                                   ---------    ---------    ---------    ---------    ---------
Total operating expenses .......................      22,289       21,315       21,487       20,671       20,687
                                                   ---------    ---------    ---------    ---------    ---------
Operating income ...............................       7,581        8,694        2,212        4,254       11,611
                                                   ---------    ---------    ---------    ---------    ---------
Other income (expense):
  Interest expense .............................         (29)         (10)         (50)         (93)        (159)
  Other, primarily interest income .............       1,599        1,678        2,211        3,745        7,162
                                                   ---------    ---------    ---------    ---------    ---------
    Total other income, net ....................       1,570        1,668        2,161        3,652        7,003
                                                   ---------    ---------    ---------    ---------    ---------
Income before income taxes .....................       9,151       10,362        4,373        7,906       18,614
Income taxes ...................................       1,738        2,695          798        1,179        6,400
                                                   ---------    ---------    ---------    ---------    ---------
Income from continuing operations ..............       7,413        7,667        3,575        6,727       12,214
Discontinued operations:
(Loss) from discontinued
  operations of Anaren Europe ..................          --       (1,510)      (8,029)        (872)          --
Income tax benefit .............................          --       (1,800)        (662)      (1,584)          --
                                                   ---------    ---------    ---------    ---------    ---------
Net income (loss) from discontinued
  operations ...................................          --          290       (7,367)         712           --
                                                   ---------    ---------    ---------    ---------    ---------
 Net income (loss) .............................   $   7,413    $   7,957    $  (3,792)   $   7,439    $  12,214
                                                   =========    =========    =========    =========    =========
Basic earnings (loss) per share:
  Income from continuing operations ............   $     .38    $     .37    $     .16    $     .30    $     .55
  Income (loss) from discontinued
    operations .................................          --          .01         (.33)         .03           --
                                                   ---------    ---------    ---------    ---------    ---------
  Net income (loss) ............................   $     .38    $     .38    $    (.17)   $     .33    $     .55
                                                   =========    =========    =========    =========    =========
Diluted earnings (loss) per share:
  Income from continuing operations ............   $     .37    $     .35    $     .16    $     .29    $     .52
  Income (loss) from discontinued
    operations .................................          --          .01         (.33)         .03           --
                                                   ---------    ---------    ---------    ---------    ---------
  Net income (loss) ............................   $     .37    $     .36    $    (.17)   $     .32    $     .52
                                                   =========    =========    =========    =========    =========
Shares used in computing net earnings per share:
  Basic ........................................      19,346       21,026       22,214       22,323       22,134
  Diluted ......................................      19,832       21,808       22,701       23,090       23,455
Balance Sheet Data:
Cash and cash equivalents ......................   $   5,901    $  23,303    $  11,063    $  12,565    $  11,748
Working capital ................................      84,554      105,987      126,235      144,023      146,677
Total assets ...................................     175,482      207,482      213,088      221,586      209,055
Long-term debt, less current installments ......          --           --           --           --           --
Stockholders' equity ...........................     159,079      190,364      200,597      209,553      199,454
</TABLE>

Item 7. 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-K. The following discussion, other than historical facts, contains
forward-looking statements that involve a number of risks and uncertainties. The
Company's results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including factors
described elsewhere in this Annual Report on Form 10-K.


                                       16
<PAGE>

Overview

The consolidated financial statements present the financial condition of the
Company as of June 30, 2005 and 2004, and the consolidated results of operations
and cash flows of the Company for the years ended June 30, 2005, 2004 and 2003.

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. In 2004 and 2005, the Company
introduced new components addressing consumer wireless applications such as
wireless local area networks, Bluetooth, 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, 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 have 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 July 2003, after several restructurings, the Company announced its decision
to dispose of its Anaren Europe subsidiary, due to continuing low sales levels
and large operating losses. This facility ceased production during the first
quarter of fiscal 2004, an auction was held and all remaining equipment was sold
in September 2003. This subsidiary is accounted for as a discontinued operation
in the statements of earnings for the three years ended June 30, 2005, 2004 and
2003.

On August 3, 2004, the Company acquired a 65,000 square foot building situated
on approximately 12 acres in Salem, New Hampshire for a purchase price of $4.8
million. The Company commenced the move of its Amitron operation to the new
facility in September 2004 and is operating the business under the name of
Anaren Ceramics, Inc., a wholly owned subsidiary of the Company. The New
Hampshire facility will provide adequate space for anticipated future growth of
that business. In conjunction with the decision to move to this new facility,
the Company negotiated a buy out of the remaining lease of the Amitron facility
for a one-time charge in fiscal 2004 of $350,000 and the Company also
accelerated amortization of the Amitron leasehold improvements and lease related
intangibles amounting to $250,000 recognized in the fourth quarter of fiscal
2004, and $250,000 recognized in the first quarter of fiscal 2005.

In October, 2004 the Company announced that in order to accelerate ceramic
product growth initiatives and improve operating efficiency, it had decided to
consolidate its RF Power


                                       17
<PAGE>

subsidiary with the Company's Amitron subsidiary and close RF Power's facility
in Bohemia, New York. The consolidated company, Anaren Ceramics, Inc., operates
at the Company's newly acquired Salem, New Hampshire facility, which will fully
accommodate the current capacity needs of the combined entity as well as
significant future growth. The move of the RF Power operation to the Salem, New
Hampshire facility was completed during the second quarter ended December 31,
2004. As a result of the RF Power facility closure and move, the Company
recognized consolidation costs of $458,335 for severance and outplacement
expenses, $91,000 for lease cancellation and $300,000 for additional inventory
write-downs during the second quarter of fiscal 2005. Additionally, the Company
incurred further consolidation costs totaling approximately $397,000, including
equipment write-downs of $272,000, in the third quarter of fiscal 2005, related
to integrating the RF Power operation into the Anaren Ceramics operation.

Results of Operations

Net sales from continuing operations for the year ended June 30, 2005 were $94.5
million, up 11.0% from $85.1 million for fiscal 2004. Income from continuing
operations for fiscal 2005 was $7.4 million, or 7.8% of net sales, down $254,000
from income from continuing operations of $7.7 million in fiscal 2004.

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

                                                        Years Ended June 30,
                                                      -------------------------
                                                       2005     2004      2003
                                                       ----     ----      ----
Net sales                                             100.0%   100.0%    100.0%
Cost of sales                                          68.4     64.7      68.6
                                                      -----    -----     -----
Gross profit                                           31.6     35.3      31.4
                                                      -----    -----     -----
Operating expenses:
     Marketing                                          7.2      7.9       8.2
     Research and development                           6.7      6.9       8.1
     General and administrative                         9.2     10.3      11.1
     Restructuring                                      0.5       --       1.1
                                                      -----    -----     -----
       Total operating expenses                        23.6     25.1      28.5
                                                      -----    -----     -----
Operating income                                        8.0     10.2       2.9
                                                      -----    -----     -----
Other income (expense):
     Interest expense                                    --       --        --
     Other, primarily interest income                   1.7      2.0       2.9
                                                      -----    -----     -----
       Total other income                               1.7      2.0       2.9
                                                      -----    -----     -----
Income from continuing operations before
  Income taxes                                          9.7     12.2       5.8
Income taxes                                            1.9      3.2       1.1
                                                      -----    -----     -----
Net income from continuing operations                   7.8      9.0       4.7
Discontinued operations:
  Income (loss) from discontinued operations of
    Anaren Europe                                        --     (1.8)    (10.6)
  Income tax benefit                                     --     (2.1)     (0.9)
                                                      -----    -----     -----
    Net income (loss) from discontinued operations       --       .3      (9.7)
                                                      -----    -----     -----
  Net income (loss)                                     7.8%     9.3%     (5.0%)
                                                      -----    -----     -----

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

                                                   Years Ended June 30,
                                         ---------------------------------------
                                           2005            2004            2003
                                           ----            ----            ----
                                                      (In thousands)

Wireless                                 $64,169         $58,078         $46,629
Space & Defense                           30,292          27,001          28,891
                                         -------         -------         -------
                                         $94,461         $85,079         $75,520
                                         =======         =======         =======


                                       18
<PAGE>

Year Ended June 30, 2005 Compared to Year Ended June 30, 2004

Net Sales. Net sales increased $9.4 million, or 11.0%, to $94.5 million for the
year ended June 30, 2005, compared to $85.1 million for fiscal 2004. This
increase resulted from a $6.1 million rise in sales of Wireless infrastructure
products and a $3.3 million rise in sales of Space and Defense products.

The increase in sales of Wireless products, which consisted of standard
components, ferrite components, and custom subassemblies for use in building
wireless base station equipment, was a result of a $6.8 million increase in
sales to Nokia of Wireless custom subassemblies due to a design win in fiscal
2004. This new custom assembly contract resulted in total revenue of $9.3
million in fiscal 2005, compared to $2.9 million in fiscal 2004. Sales of
standard component Wireless products were flat at $42.1 million in fiscal 2005,
compared to $42.7 million in fiscal 2004, reflecting the steady annual worldwide
demand for Wireless infrastructure components over the two year period.

Space and Defense products consist of custom components and assemblies for
communication satellites and defense radar and countermeasure subsystems for the
military. Sales in the Space and Defense products rose $3.3 million, or 12.2% in
fiscal 2005 compared to the previous fiscal year. This increase consisted of a
$6.4 million rise in sales of defense products, which was partially off-set by a
$3.1 million decline in Space product shipments during the current fiscal year
compared to the same period in fiscal 2004. Defense product sales are increasing
due to the higher level of new defense business booked by the Company in fiscal
2004 and 2005, which is now in production. Defense product bookings in fiscal
2004 were $37.7 million compared to $40.9 million in fiscal 2005. Sales of Space
and Defense products in fiscal 2006 are expected to range between $8.5 million
and $9.0 million, quarterly, as a result of the rise in new order levels over
the last two fiscal years.

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 fiscal 2005 was $29.9 million (31.6%
of net sales), compared to $30.0 million (35.3% of net sales) for the prior
year. Gross margins as a percent of sales declined 3.7 percentage points due to
a change in sales mix from higher margin standard Wireless component products to
lower margin custom Wireless products. Additionally, margins were eroded by a
one-time write-down of inventory at RF Power in conjunction with the closure of
the Bohemia, New York facility and general production inefficiencies during the
period of actual consolidation of the two operations in Salem, New Hampshire.

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 increased 2.0% to $6.9
million (7.2% of net sales) for fiscal 2005, from $6.7 million (7.9% of net
sales) for fiscal 2004. This increase is a result of higher commission expense
caused by the sales increase, and rising travel and support costs due to the
higher volume of business.

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 $6.3 million
(6.7% of net sales) in fiscal 2005, up 7.3% from $5.9 million (6.9% of net
sales) for fiscal 2004. Research and development expenditures are supporting
further development of Wireless infrastructure products and consumer component
opportunities.


                                       19
<PAGE>

Research and Development expenditures have increased in fiscal 2005 over fiscal
2004 levels due to the higher level of opportunities in the marketplace, which
the Company has responded to by adding new product development engineering
personnel over the past fiscal year. Although quarterly research and development
expenditures are expected to fluctuate based on customer funded engineering
requirements in our Space and Defense group, the company does not expect to
reduce its current research and development efforts and is presently working on
a number of new Defense and Wireless products.

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 were $8.7 million (9.2% of net sales) for fiscal 2005 compared to $8.7
million (10.3% of net sales) for fiscal 2004. General and administrative costs
were flat in fiscal 2005 compared with fiscal 2004 despite increased
expenditures for compliance with Sarbanes-Oxley regulations and one-time charges
associated with the consolidation of the Company's RF Power and Amitron
operations due primarily to the cost savings realized from that consolidation in
the second half of fiscal 2005. General and administrative costs are expected to
decline in fiscal 2006 as a result of further cost savings and the absence of
new consolidation charges.

Restructuring. Restructuring costs which consisted of wages, health insurance
payroll taxes and outplacement costs were $458,000 (0.5% of net sales) in fiscal
2005. These costs were related to the termination of 79 people in conjunction
with the closure of RF Power's facility and the move of that operation to Salem,
New Hampshire in December 2004. There were no restructuring costs in fiscal
2004.

Operating Income: Operating income decreased in fiscal 2005 to $7.6 million
(8.0% of net sales) from $8.7 million (10.2% of net sales) for fiscal 2004. On a
reporting segment basis, Wireless operating income was $2.2 million for fiscal
2005, a decline of $2.2 million from Wireless operating income of $4.4 million
for fiscal 2004.

Wireless operating income fell in fiscal 2005 compared to fiscal 2004, (despite
the increase in Wireless product sales) due to the $1.5 million of consolidation
charges related to the facility closure, and move of the RF Power and Amitron
operations to Salem, New Hampshire, and the additional $250,000 first quarter
accelerated write-off of certain Amitron lease intangibles.

Space and Defense operating income rose $1.0 million in fiscal 2005 to $5.3
million compared to $4.3 million in fiscal 2004. This increase resulted from
higher sales volume in fiscal 2005 compared to fiscal 2004, and better
production efficiencies within the Space and Defense group in the current fiscal
year.

Other Income. Other income decreased 4.7% to $1.6 million (1.7% of net sales)
for fiscal 2005 from $1.7 million (2.0% of net sales) for fiscal 2004. This
decrease was caused mainly by a $67,000 loss on the sale of capital equipment
and a $343,000 loss on the disposal of 777,300 shares of Celeritek, Inc. common
stock owned by the Company. Additionally, Company cash balances were reduced
$38.0 million during fiscal 2005 due to $37.9 million used to repurchase
treasury shares and the purchase of the Salem, New Hampshire facility for $4.8
million. The decrease in other income caused by the loss on Celeritek stock and
the sale of equipment was partially offset by higher interest rates resulting in
an increase in interest income of approximately $331,000 in fiscal 2005 compared
to fiscal 2004. Interest income fluctuate based on interest rates and the level
of investable cash balances.


                                       20
<PAGE>

Interest Expense. The Company does not have any long term debt and interest
expense represents interest paid on a deferred obligation. Interest expense for
fiscal 2005 was $29,000 (0.0% of net sales) compared to $10,000 (0.0% of net
sales) for fiscal 2004.

Income Taxes: Income taxes for fiscal 2005 were $1.7 million (1.9% of net
sales), representing an effective tax rate of 19.0%. This compares to income tax
expense of $2.7 million (3.2% of net sales) for fiscal 2004, representing an
effective tax rate of 26.1%. 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 decrease in the effective tax rate in fiscal 2005 compared to fiscal 2004
resulted from higher foreign sales benefits due to a rise in foreign export
sales levels this year.

Discontinued Operations. In July 2003, the Company announced its decision to
dispose of its Anaren Europe operation. During the first quarter of fiscal 2004,
the Company ceased production at Anaren Europe and liquidated the remaining net
assets of that operation. The results of operations for Anaren Europe for fiscal
2003 and fiscal 2004 have been classified as discontinued operations in the
statements of earnings filed as part of this Annual Report on Form 10-K.

Year Ended June 30, 2004 Compared to Year Ended June 30, 2003

Net Sales. Net sales increased $9.6 million, or 12.7%, to $85.1 million for the
year ended June 30, 2004, compared to $75.5 million for fiscal 2003. This
increase resulted from a $11.4 million rise in sales of Wireless infrastructure
products which more than offset a $1.9 million decline in sales of Space and
Defense products.

The increase in sales of Wireless products was the result of a significant
increase in worldwide demand for wireless base station components during fiscal
2004. This demand generated increased orders from a majority of the Company's
base station infrastructure original equipment manufacturing customers. Sales of
standard components and custom subassemblies rose $14.7 million, or 47% in
fiscal 2004 compared to fiscal 2003. This increase was partially offset by a
$3.2 million, or 39% decrease in sales of ferrite component products in fiscal
2004, compared to fiscal 2003 as a result of the Company's efforts to eliminate
unprofitable and low margin ferrite products.

Sales in the Space and Defense group fell $1.9 million, or 7.0% in fiscal 2004
to $27.0 million, compared to fiscal 2003. This decrease in sales resulted
primarily from the completion of shipments under the Boeing Spaceway program in
the fourth quarter of fiscal 2003. This program accounted for over $4.8 million
in shipments in fiscal 2003. This decline in commercial space revenue in fiscal
2004 was partially off-set by a $2.9 million increase in military space and
defense product sales.

Gross Profit. Gross profit for fiscal 2004 was $30.0 million (35.3% of net
sales), up $6.3 million from $23.7 million (31.4% of net sales) for fiscal 2003.
The rise in gross margin as a percent of sales was a result of the $3.2 million
decrease in sales of unprofitable and low margin ferrite products, coupled with
a $14.7 million increase in sales of higher margin standard components and
custom wireless products in fiscal 2004 compared to fiscal 2003.

Marketing. Marketing expenses were $6.7 million (7.9% of net sales) for fiscal
2004, up $500,000 from $6.2 million (8.2% of net sales) for fiscal 2003. This
increase was the result of the addition of three new geographic product line
marketing positions and a general increase in sales and marketing support costs
to meet the increased demand in both the Wireless and Space and Defense markets
that the Company experienced over fiscal 2004.

Research and Development. Research and development expenses were $5.9 million
(6.9% of net sales) in fiscal 2004, down 4.6% from $6.1 million (8.1% of net
sales) for fiscal 2003. Research and development


                                       21
<PAGE>

expenditures fell in fiscal 2004 compared to the prior year due to a
significantly higher level of customer funded development activity in the Space
and Defense group, resulting in a higher level of engineering costs being
included in cost of goods sold.

General and Administrative. General and administrative expenses increased 4.0%
to $8.7 million (10.3% of net sales) for fiscal 2004, from $8.4 million (11.1%
of net sales) for fiscal year 2003. This increase resulted primarily from rising
administrative costs due to compliance with Sarbanes-Oxley regulations, a rise
in corporate donations to a local university to support development of new
microwave engineering talent, and a one-time charge of $350,000 to recognize the
cost of settling the existing lease of Amitron's facility in North Andover,
Massachusetts net of offsetting decreases resulting from fiscal 2004 cost
cutting initiatives.

Restructuring. There were no restructuring charges in fiscal 2004. In fiscal
2003, the Company recorded a restructuring charge of $795,000 related to the
Company's restructuring plans at its RF Power and Anaren Microwave, Inc.
subsidiaries. These plans were primarily aimed at reducing the cost of excess
personnel and included the termination of 46 employees.

Operating Income. Operating income increased in fiscal 2004 to $8.7 million
(10.2% of sales) from $2.2 million (2.9% of net sales) for fiscal 2003. On a
reporting segment basis, Wireless operating income was $4.4 million for fiscal
2004, an improvement of $6.9 million from a Wireless operating loss of ($2.5
million) for fiscal 2003. The main reasons for the increase in Wireless income
in fiscal 2004 were the Company's restructuring and cost reduction activities in
the second half of fiscal 2003 (which lowered Wireless operating costs), the
discontinuation of some unprofitable and low margin wireless ferrite products,
and the $11.5 million increase in Wireless sales in fiscal 2004 compared to
fiscal 2003.

Space and Defense operating income fell $412,000 in fiscal 2004 to $4.3 million,
compared to $4.7 million in fiscal 2003. This decrease resulted from the lower
sales volume and a change in product mix during fiscal 2004 compared to fiscal
2003. Fiscal 2004 sales included more volume attributable to military programs,
while sales for fiscal 2003 consisted of more profitable shipments for
commercial space programs.

Other Income. Other income is primarily interest income received on invested
cash balances. Other income decreased 24.1% to $1.7 million (2.0% of net sales)
for fiscal 2004, from $2.2 million (2.9% of net sales) for fiscal 2003. This
decrease was caused by the decline in market interest rates in fiscal 2004
brought about by reductions in the Federal Funds rate, and the decrease in
investable cash balances due to the $22.1 million expenditure to repurchase
shares of the Company's common stock for Treasury shares during fiscal 2004.

Income Taxes. Income taxes for fiscal 2004 were $2.7 million (3.2% of net
sales), representing an effective tax rate of 26.1%. This compares to income tax
expense of $798,000 (1.1% of net sales) for fiscal 2003, representing an
effective tax rate of 18.2%. The Company's effective tax rate is a direct result
of the proportion of federally exempt state municipal bond income, federal tax
credits and export tax benefits in relation to the anticipated levels of taxable
income for the entire fiscal year.

Discontinued Operations. During the first quarter of fiscal 2004, the Company
announced its decision to dispose of its Anaren Europe operation, ceased
production at the Netherlands facility and liquidated the remaining net assets.
The results of operations for Anaren Europe for both the current and prior years
have been reclassified as discontinued operations in the statement of earnings.
Discontinued operations for the year ended June 30, 2004 included a loss from
discontinued operations of ($1.5) million and a tax benefit of $1.8 million from
the write-off of the Company's investment resulting in a net gain of $290,000.
For fiscal 2003, the Company had a net loss from discontinued operations of
($8.0) million and a tax benefit of $662,000 resulting in a net loss of ($7.4)
million.


                                       22
<PAGE>

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 Anaren'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; 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


                                       23
<PAGE>

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.

Liquidity and Capital Resources

Net cash provided by operations for the years ended June 30, 2005, 2004 and 2003
was $8.4 million, $15.2 million and $12.2 million, respectively. The positive
cash flow from operations was due primarily to profit before depreciation in
each year. In both fiscal 2005 and 2004, the positive cash flow from earnings
was offset by a combined rise in receivables and inventory in each year of $3.8
million and $6.5 million, respectively. In fiscal 2003, cash flows were
increased due to a combined $7.3 million decline in receivables and inventory.

Net cash provided by investing activities for fiscal 2005 was $11.9 million and
consisted of net maturities of marketable debt securities of $18.1 million and
proceeds from the sale of Celeritek, Inc. equity securities of $2.7 million, net
of capital expenditures of $9.1 million, including $4.8 million for the new
Salem, New Hampshire facility.

Net cash provided by investing activities for fiscal 2004 was $17.5 million and
consisted of net maturities of marketable debt securities of $16.8 million, and
a return of capital dividend on Celeritek, Inc. equity securities of $3.5
million, less $4.3 million used to fund capital equipment acquisitions.
Additionally, in fiscal 2004, $1.5 million was generated by the discontinued
operations in Europe from proceeds from the auction sale of surplus capital
equipment. Net cash used in investing activities in fiscal 2003 was $8.6 million
and consisted of $3.9 million used to acquire capital equipment and net
purchases of marketable debt securities amounting to $4.0 million.

Net cash used in financing activities in fiscal 2005, 2004 and 2003 was $37.7
million, $20.5 million and $5.1 million, respectively. In fiscal 2005, $225,000
was provided by the exercise of stock options and $37.9 million was expended to
repurchase 3.2 million shares of the Company's common stock under the Board
approved repurchase plan.

Of the fiscal 2004 amount, $1.6 million was provided by the exercise of stock
options and $22.1 million was used to repurchase 1.6 million shares of the
Company's common stock under a previously approved repurchase plan. And in
fiscal 2003, $248,000 was generated from the exercise of stock options and $5.4
million was expended to repurchase 643,000 of the Company's common stock.

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 June 30, 2005, there
were 1,774,464 shares remaining under the current Board repurchase
authorization.

At June 30, 2005, the Company had approximately $82.0 million in cash, cash
equivalents, and marketable securities and no debt, and has had positive
operating cash flow for over nine 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.


                                       24
<PAGE>

Disclosures About Contractual Obligations and Commercial Commitments

Accounting standards require disclosure concerning the Company's obligations and
commitments to make future payments under contracts, such as debt and lease
agreements, and under contingent commitments, such as debt guarantees. The
Company's obligations and commitments are as follows:

<TABLE>
<CAPTION>
                                                    Less
                                     Total        Than 1 Yr.      2 - 3 Yrs.   4 - 5 Yrs.    Over 5 Yrs.
                                     -----        ----------      ----------   ----------    -----------
                                                          Payment Due by Period
                                                          ---------------------
Contractual obligations
-----------------------
<S>                                <C>             <C>           <C>            <C>          <C>
Operating leases -- facilities     $4,249,304      $517,450      $1,023,301     $942,105     $1,766,448
Deferred compensation                 392,037        65,000         130,000      130,000         67,037
</TABLE>

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123R, a revision to Statement No. 123, "Accounting for Stock-Based
Compensation." This standard requires the Company to measure the cost of
employee services received in exchange for equity awards based on the grant date
fair value of the awards. The cost will be recognized as compensation expense
over the vesting period of the awards. The Company is required to adopt SFAS
123R at the beginning of the first quarter of fiscal 2006. The standard provides
for a prospective application. Under this method, the Company will begin
recognizing compensation cost for equity based compensation for all new or
modified grants after July 30, 2005. In addition, the Company will recognize the
unvested portion of the grant date fair value of awards issued prior to adoption
based on the fair values previously calculated for disclosure purposes. At June
30, 2005, the aggregate value of unvested options, as determined using a
Black-Scholes option valuation model, was $6,928,000. Upon adoption of SFAS
123R, a majority of this amount will be recognized over the remaining 1-4 year
vesting period of these options.

In November 2004, the FASB published Statement of Financial Accounting Standards
No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151
amends the guidance in Chapter 4, "Inventory Pricing" of ARB No. 43 and
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Statement 151 requires that
those items be recognized as current-period charges. Statement 151 also requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. Statement 151 is
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Statement 151 is effective for the Company's 2006 fiscal year and is
not expected to have a material impact on the Company's financial statements.

In May 2005, the FASB published Statement of Financial Accounting Standards No.
154, Accounting Changes and Error Corrections, Statement 154 replaces APB No.
20, Accounting Changes, and FASB Statement No. 3, Reporting Changes in Interim
Financial Statements. The Statement changes the accounting for, and reporting
of, a change in accounting principle. Statement 154 requires retrospective
application to prior period's financial statements of voluntary changes in
accounting principle and changes required by new accounting standards when the
standard does not include specific transition provisions, unless it is
impracticable to do so. Statement 154 is effective for accounting changes and
corrections of errors in fiscal years beginning after December 15, 2005 (the
Company's fiscal 2007). Early application is permitted for accounting changes
and corrections of errors during fiscal years beginning after June 1, 2005 (the
Company's fiscal 2006).


                                       25
<PAGE>

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The following discusses the Company's possible exposure to market risk related
to changes in interest rates, equity prices and foreign currency exchange rates.
This discussion contains forward-looking statements that are subject to risks
and uncertainties. Results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including
factors described elsewhere in this Annual Report on Form 10-K.

As of June 30, 2005, the Company had cash, cash equivalents and marketable
securities of $82.0 million, all of which consisted of highly liquid investments
in marketable debt securities. The marketable debt securities at date of
purchase normally have maturities between one and 18 months, are exposed to
interest rate risk and will decrease in value if market interest rates increase.
A hypothetical decrease in market interest rate of 10.0% from June 30, 2005
rates, or 0.225%, would have reduced net income and cash flow by approximately
$46,000, or $0.002 per share for the quarter. Due to the relatively short
maturities of the securities and its ability to hold those investments to
maturity, the Company does not believe that an immediate decrease in interest
rates would have a significant effect on its financial condition or results of
operations. Over time, however, declines in interest rates will reduce the
Company's interest income.

Item 8. Financial Statements and Supplementary Data

The financial statements and financial statement schedules called for by this
Item are provided under "Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K," which information is incorporated herein by reference. The
unaudited supplementary financial information required by this Item is contained
in note 22 to the consolidated financial statements of the Company which are
included elsewhere in this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

Item 9A. Controls and Procedures

      1.    Evaluation of disclosure controls and procedures. Based on their
            evaluation of the Company's disclosure controls and procedures (as
            defined in Rule 13a-15(e) and 15d-15(e) under the Securities
            Exchange Act of 1934) as of the end of the period covered by this
            Annual Report on Form 10-K, the Company's chief executive officer
            and chief financial officer have concluded that the Company's
            disclosure controls and procedures are designed to ensure that
            information required to be disclosed by the Company in the reports
            that it files or submits under the Exchange Act is recorded,
            processed, summarized and reported within the time periods specified
            in the SEC's rules and forms and are operating in an effective
            manner.

      2.    Management's Report on Internal Control over Financial Reporting.
            Anaren's management is responsible for establishing and maintaining
            adequate internal control over financial reporting. The Company's
            internal control system was designed to provide reasonable assurance
            to management and the Board of Directors regarding the preparation
            and fair presentation of published financial statements in
            accordance with generally accepted accounting principles. For the
            fiscal year ended June 30, 2005, the Company engaged the accounting
            firm of Fust Charles Chambers LLP to help the Company document its
            internal controls over financial reporting.

            A company's internal control over financial reporting includes those
            policies and procedures that (a) pertain to the maintenance of
            records that, in reasonable detail, accurately and fairly


                                       26
<PAGE>

            reflect the transactions and dispositions of the assets of the
            company; (b) provide reasonable assurance that transactions are
            recorded as necessary to permit preparation of financial statements
            in accordance with generally accepted accounting principles, and
            that receipts and expenditures of the company are being made only in
            accordance with authorizations of management and directors of the
            company; and (c) provide reasonable assurance regarding prevention
            or timely detection of unauthorized acquisition, use or disposition
            of the company's assets that could have a material effect on the
            financial statements.

            All internal control systems, no matter how well designed, have
            inherent limitations. Therefore, even those systems determined to be
            effective can provide only reasonable assurance with respect to
            financial statement preparation and presentation. Because of
            inherent limitations due to, for example, the potential for human
            error or circumvention of controls, internal controls over financial
            reporting may not prevent or detect misstatements. Also, projections
            of any evaluation of effectiveness to future periods are subject to
            the risk that controls may become inadequate because of changes in
            conditions, or that the degree of compliance with the policies or
            procedures may deteriorate.

            Anaren's management assessed the effectiveness of the Company's
            internal control over financial reporting as of June 30, 2005. In
            making this assessment, management used the criteria set forth by
            the Committee of Sponsoring Organizations of the Treadway Commission
            (COSO) in Internal Control - Integrated framework. Based on its
            assessment, management believes that, as of June 30, 2005, the
            Company's internal control over financial reporting is effective
            based on those criteria.

            Anaren's independent registered public accounting firm, KPMG LLP,
            has issued a report on the Company's assessment of its internal
            control over financial reporting. This report appears below.

      3.    Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Anaren, Inc.:

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Anaren,
Inc. and subsidiaries maintained effective internal control over financial
reporting as of June 30, 2005, based on criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Anaren, Inc.'s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of


                                       27
<PAGE>

the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, management's assessment that Anaren, Inc. and subsidiaries
maintained effective internal control over financial reporting as of June 30,
2005, is fairly stated, in all material respects, based on criteria established
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, Anaren,
Inc. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of June 30, 2005, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Anaren, Inc. and subsidiaries as of June 30, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended June 30, 2005, and our report dated August 31, 2005 expressed an
unqualified opinion on those consolidated financial statements.

                                                                    /s/ KPMG LLP

Syracuse, New York
August 31, 2005

      4.    Changes in internal controls. During the period covered by this
            Annual Report on Form 10-K, there were no changes in the Company's
            internal control over financial reporting (as defined in Rule
            13a-15(f)) that have materially affected, or are reasonably likely
            to materially affect, the Company's internal control over financial
            reporting.

Item 9B. Other Information

None.


                                       28
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Information required by this Item is contained in the Company's proxy statement
filed with respect to the 2005 Annual Meeting of Shareholders and is
incorporated by reference herein. Certain information regarding executive
officers of the Company required by this Item is included in Item 4A hereof.

On August 13, 2002, the Board of Directors adopted Anaren's Code of Ethics and
Business Conduct, which outlines the ethical principles that provide the
foundation for the Company's dealings with customers, suppliers, shareholders,
the investment community and employees. The Code is applicable to all employees
including officers, and to the Company's directors. The Code as revised in
February 2004, has been distributed to all employees and is available for review
on the Company's website, www.anaren.com.

Item 11. Executive Compensation

Information required by this Item is contained in the Company's proxy statement
filed with respect to the 2005 Annual Meeting of Shareholders and is
incorporated by reference herein.

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters Information required by this Item is contained in
the Company's proxy statement filed with respect to the 2005 Annual Meeting of
Shareholders and is incorporated by reference herein.

Item 13. Certain Relationships and Related Transactions

Information required by this Item is contained in the Company's proxy statement
filed with respect to the 2005 Annual Meeting of Shareholders and is
incorporated by reference herein.

Item 14. Principal Accounting Fees and Services

Information required by this Item is contained in the Company's proxy statement
filed with respect to the 2005 Annual Meeting of Shareholders and is
incorporated by reference herein.


                                       29
<PAGE>

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)   1. and 2.   Financial Statements and Schedules:
                  Reference is made to the Index of Financial Statements
                  hereinafter contained
      3.          Exhibits:
                  Reference is made to the list of Exhibits hereinafter
                  contained
(b)   Current Reports on Form 8-K:
      The Company filed a Current Report on Form 8-K on April 29, 2005 with
      respect to its results of operations for the third quarter ended March 31,
      2005. The Company filed a Current Report on Form 8-K on May 12, 2005
      announcing that the Board of Directors had increased the authorization
      under the Company's share repurchase program.
(c)   Exhibits:

      Index to Exhibits

Exhibit No.                              Description
-----------                              -----------

    3.1     Certificate of Incorporation, as amended (1)
    3.2     Restated By-Laws (2)
    4.1     Specimen Certificate of Common Stock (3)
    4.2     Shareholder Protection Rights Agreement dated as of April 20, 2001,
            between the Company and American Stock Transfer & Trust Company,
            including forms of Rights Certificate and Election to Exercise (4)
    10.1    Employment Agreement, dated as of July 1, 2001, between the Company
            and Lawrence A. Sala (5)
    10.2    Pension Plan and Trust (6)
    10.3    Anaren Microwave, Inc. Incentive Stock Option Plan, as amended (7)
    10.4    Anaren Microwave, Inc. 1989 Non-statutory Stock Option Plan, as
            amended (8)
    10.5    Credit Facility Agreement, dated as of December 23, 1997, between
            the Company and Manufacturers and Traders Trust Company, together
            with the Revolving Credit Note dated December 23, 1997 executed by
            the Company in favor of Manufacturers and Traders Trust Company (9)
    10.8    Amendment dated January 1, 2002 to Credit Facility Agreement, dated
            as of December 23, 1997, between the Company and Manufacturers and
            Traders Trust Company (10)
    10.8    Anaren Microwave, Inc. Incentive Stock Option Plan for Key Employees
            (11)
    10.9    Anaren Microwave, Inc. Stock Option Plan (12)
    10.10   Form of Change of Control Agreements dated March 15, 2002 with
            Joseph Porcello, Mark Burdick, Timothy Ross, Stanley Slingerland and
            Gert Thygesen (13)
    10.11   Employment Agreement, dated as of August 31, 2001, between the
            Company and Raymond C. Simione (14)
    10.12   Employment Agreement, dated as of February 14, 2004, between the
            Company and Carl W. Gerst, Jr. (15)
    10.13   Anaren, Inc. Comprehensive Long-term Incentive Plan (16)
    21      Subsidiaries of the Company
    23      Consent of KPMG LLP
    31      Rule 13a-14(a) Certifications
    32      Section 1350 Certifications

----------
(1)   (A) Restated Certificate of Incorporation of the Company, filed on August
      11, 1967, is incorporated herein by reference to Exhibit 3(a) to Company's
      Registration Statement on Form S-1 (Registration No. 2-42704); (B)
      Amendment, filed on December 19, 1980, is incorporated herein by reference
      to Exhibit 4.1(ii) to the Company's Registration Statement on Form S-2
      (Registration No. 2-86025); (C) Amendment, filed on March 18, 1985, is
      incorporated herein by


                                       30
<PAGE>

      reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
      (Commission File No. 0-6620) for the fiscal year ended June 30, 1987; (D)
      Amendment, filed on December 14, 1987, is incorporated herein by reference
      to Exhibit 4(a)(iv) to the Company's Registration Statement on Form S-8
      (Registration No. 33-19618); (E) Amendment, filed on April 8, 1999, is
      incorporated herein by reference to Exhibit 3.1 to the Company's Annual
      Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended
      June 30, 1999; (F) Amendment, filed on February 8, 2000, is incorporated
      herein reference to Exhibit 4.1 to the Company's Registration Statement on
      Form S-3 (Registration No. 333-31460) filed with the Securities and
      Exchange Commission on March 2, 2000; and (G) Amendment, filed on November
      22, 2000, is incorporated by reference to Exhibit 3.1 to the Company's
      Quarterly Report on Form 10-Q (Commission File No. 0-6620) for the three
      months ended December 31, 2000.

(2)   Incorporated herein reference to Exhibit 4.2 to the Company's Registration
      Statement on Form S-3 (Registration No. 333-31460) filed with the
      Securities and Exchange Commission on March 2, 2000.

(3)   Incorporated herein reference to Exhibit 4.3 to the Company's Registration
      Statement on Form S-3 (Registration No. 333-31460) filed with the
      Securities and Exchange Commission on March 2, 2000.

(4)   Incorporated herein by reference to Exhibits 4.1 and 4.2 to the Company's
      Registration Statement on Form 8-A (Commission File No. 0-6620) filed with
      the Securities and Exchange Commission on April 26, 2001.

(5)   Incorporated herein by reference to Exhibit 10.1 to the Company's Annual
      Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended
      June 30, 2001.

(6)   Incorporated herein by reference to Exhibit 4(b) to the Company's
      Registration Statement on Form S-8 (Registration No. 33-19618).

(7)   Incorporated herein by reference to Appendix A to the Company's definitive
      proxy statement for its 1998 annual meeting of the shareholders
      (Commission File No. 0-6620), filed with the Securities and Exchange
      Commission on September 25, 1998.

(8)   Incorporated herein by reference to Appendix B to the Company's definitive
      proxy statement for its 1998 annual meeting of the shareholders
      (Commission File No. 0-6620), filed with the Securities and Exchange
      Commission on September 25, 1998.

(9)   Incorporated herein by reference to Exhibit 10.13 to the Company's
      Quarterly Report on Form 10-Q for the three months ended December 31,
      1997. (10) Incorporated herein by reference to Exhibit 10.1 to the
      Company's Quarterly Report on Form 10-Q for the three months ended
      December 31, 2001. (11) Incorporated herein by reference to Appendix A to
      the Company's definitive proxy statement for its 2000 annual meeting of
      the shareholders (Commission File No. 0-6620), filed with the Securities
      and Exchange Commission on September 18, 2000.

(12)  Incorporated herein by reference to Appendix B to the Company's definitive
      proxy statement for its 2000 annual meeting of the shareholders
      (Commission File No. 0-6620), filed with the Securities and Exchange
      Commission on September 18, 2000.

(13)  Incorporated herein by reference to Exhibit 10.11 to the Company's Annual
      Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended
      June 30, 2002.

(14)  Incorporated herein by reference to Exhibit 10.13 to the Company's Annual
      Report on Form 10-K (Commission File No. 0-6620) for the fiscal year ended
      June 30, 2002.

(15)  Incorporated herein by reference to Exhibit 10.12 to the Company's
      Quarterly Report on Form 10-Q for the three months ended March 31, 2004.

(16)  Incorporated herein by reference to Appendix A to the Company's definitive
      proxy statement for its 2004 annual meeting of the shareholders
      (Commission File No. 0-6620), filed with the Securities and Exchange
      Commission on September 17, 2004.


                                       31
<PAGE>

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                    ANAREN, INC.

                                    /s/ LAWRENCE A. SALA
                                    ----------------------
                                    Name: Lawrence A. Sala
                                    Title: President and Chief Executive Officer

Date: September 12, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:

           Signature                Title                           Date
           ---------                -----                           ----
/s/ Lawrence A. Sala     President, Chief Executive Officer   September 12, 2005
                         and Chairman of the Board, Director
                         (Principal Executive Officer)

/s/ Joseph E. Porcello   Vice President of Finance and        September 12, 2005
                         Treasurer (Principal Financial
                         and Accounting Officer)

/s/ Carl W. Gerst, Jr.   Chief Technical Officer,             September 12, 2005
                         Vice Chairman of the Board
                         and Director

/s/ Herbert I. Corkin    Director                             September 12, 2005

/s/ Dale F. Eck          Director                             September 12, 2005

/s/ Matthew S. Robison   Director                             September 12, 2005

/s/ David Wilemon        Director                             September 12, 2005

/s/James Gould           Director                             September 12, 2005


                                       32
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES

                        Consolidated Financial Statements

                             June 30, 2005 and 2004

                  (With Report of Independent Registered Public
                            Accounting Firm Thereon)


                                       33
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES

                                      Index

                                                                            Page

Report of Independent Registered Public Accounting Firm                       35

Consolidated Balance Sheets as of June 30, 2005 and 2004                      36

Consolidated Statements of Operations for the years
  ended June 30, 2005, 2004, and 2003                                         37

Consolidated Statements of Stockholders' Equity and
  Comprehensive Income (Loss) for the years
  ended June 30, 2005, 2004, and 2003                                         38

Consolidated Statements of Cash Flows for the years
  ended June 30, 2005, 2004, and 2003                                         39

Notes to Consolidated Financial Statements                               40 - 70


                                       34
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
Anaren, Inc and Subsidiaries:

We have  audited the  consolidated  financial  statements  of Anaren,  Inc.  and
subsidiaries as listed in the accompanying  index. These consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Anaren,  Inc. and
subsidiaries  as of June 30, 2005 and 2004, and the results of their  operations
and their cash flows for each of the years in the  three-year  period ended June
30, 2005, in conformity with U.S. generally accepted accounting principles.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States), the effectiveness of Anaren,  Inc.'s
internal control over financial reporting as of June 30, 2005, based on criteria
established in Internal  Control - Integrated  Framework issued by the Committee
of Sponsoring  Organizations of the Treadway  Commission  (COSO), and our report
dated  August  31,  2005  expressed  an  unqualified   opinion  on  management's
assessment of, and the effective  operation of, internal  control over financial
reporting.

Syracuse, New York
August 31, 2005

                                                                    /s/ KPMG LLP


                                       35
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                             June 30, 2005 and 2004

                Assets                               2005             2004
                                                 -------------    -------------
Current assets:
  Cash and cash equivalents                      $   5,900,841    $  23,303,263
  Securities available for sale (note 5)            16,200,000       27,712,134
  Securities held to maturity (note 5)              36,307,880       34,326,499
  Receivables, less allowance for doubtful
    accounts of $213,099 and $145,500 in
    2005 and 2004, respectively                     14,780,146       13,812,853
  Inventories (note 6)                              19,403,348       16,608,055
  Other receivables                                  1,144,680        1,040,838
  Prepaid expenses                                     662,247          995,590
  Deferred income taxes (note 19)                      686,411        1,037,103
  Other current assets                                 423,000          230,784
                                                 -------------    -------------
      Total current assets                          95,508,553      119,067,119

Securities available for sale (note 5)               3,500,000        9,800,000
Securities held to maturity (note 5)                20,100,547       25,313,068
Property, plant, and equipment, net (note 7)        24,983,653       21,342,554
Goodwill (note 3)                                   30,715,861       30,715,861
Other intangible assets, net of accumulated
  amortization of $2,351,725 and $1,781,080
  in 2005 and 2004, respectively (notes 1
  and 3)                                               673,241        1,243,886
                                                 -------------    -------------
      Total assets                               $ 175,481,855    $ 207,482,488
                                                 =============    =============
   Liabilities and Stockholders' Equity

Current liabilities:
  Accounts payable                               $   6,077,313    $   7,198,252
  Accrued expenses (note 8)                          2,331,885        3,092,370
  Income taxes payable                               1,501,088        1,331,895
  Customer advance payments                                 --          411,486
  Other current liabilities (note 10)                1,044,759        1,045,784
                                                 -------------    -------------
      Total current liabilities                     10,955,045       13,079,787

Deferred income taxes (note 19)                      1,627,304        1,584,251
Pension and postretirement benefit
  obligation (notes 17 and 18)                       3,253,188        2,012,992
Other liabilities (note 10)                            567,755          441,190
                                                 -------------    -------------
      Total liabilities                             16,403,292       17,118,220
                                                 -------------    -------------
Commitments and concentrations (notes 20,
  21, and 22)

Stockholders' equity:
  Common stock, $0.01 par value. Authorized
    200,000,000 shares (notes 12 and 16);
    issued 26,070,804 and 25,950,704 in 2005
    and 2004, respectively                             260,708          259,507
  Additional paid-in capital                       171,333,975      171,165,180
  Unearned compensation (note 14)                     (248,578)         (95,388)
  Retained earnings                                 58,659,807       51,247,271
  Accumulated other comprehensive income
    (loss) (note 15)                                  (747,539)          41,110
                                                 -------------    -------------
                                                   229,258,373      222,617,680
  Less cost of 8,553,058 and 5,400,026
    treasury shares in 2005 and 2004,
    respectively                                    70,179,810       32,253,412
                                                 -------------    -------------
      Total stockholders' equity                   159,078,563      190,364,268
                                                 -------------    -------------
      Total liabilities and stockholders'
        equity                                   $ 175,481,855    $ 207,482,488
                                                 =============    =============

See accompanying notes to consolidated financial statements.


                                       36
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                    Years ended June 30, 2005, 2004, and 2003

<TABLE>
<CAPTION>
                                                                             2005                   2004                   2003
                                                                         ------------           ------------           ------------
<S>                                                                      <C>                    <C>                    <C>
Net sales                                                                $ 94,461,065           $ 85,078,939           $ 75,520,020
Cost of sales                                                              64,590,866             55,069,793             51,820,520
                                                                         ------------           ------------           ------------
      Gross profit                                                         29,870,199             30,009,146             23,699,500
                                                                         ------------           ------------           ------------
Operating expenses:
  Marketing                                                                 6,857,974              6,723,478              6,160,557
  Research and development                                                  6,287,514              5,860,493              6,140,157
  General and administrative                                                8,685,332              8,731,580              8,392,023
  Restructuring (note 9)                                                      458,335                     --                794,527
                                                                         ------------           ------------           ------------
      Total operating expenses                                             22,289,155             21,315,551             21,487,264
                                                                         ------------           ------------           ------------
      Operating income                                                      7,581,044              8,693,595              2,212,236
                                                                         ------------           ------------           ------------
Other income (expense):
  Interest expense                                                            (29,422)               (10,195)               (49,950)
  Other, primarily interest income                                          1,598,914              1,678,414              2,210,482
                                                                         ------------           ------------           ------------
      Total other income, net                                               1,569,492              1,668,219              2,160,532
                                                                         ------------           ------------           ------------
      Income before income taxes                                            9,150,536             10,361,814              4,372,768
Income tax expense (note 19)                                                1,738,000              2,695,000                798,268
                                                                         ------------           ------------           ------------
      Income from continuing operations                                     7,412,536              7,666,814              3,574,500

Discontinued operations:
  Loss from discontinued operations of
    Anaren Europe (note 4)                                                         --             (1,509,686)            (8,029,222)
  Income tax benefit                                                               --             (1,800,000)              (662,268)
                                                                         ------------           ------------           ------------
      Net income (loss) from discontinued
        operations                                                                 --                290,314             (7,366,954)
                                                                         ------------           ------------           ------------
      Net income (loss)                                                  $  7,412,536           $  7,957,128           $ (3,792,454)
                                                                         ============           ============           ============
Basic net income (loss) per common and
  common equivalent share:
  Income from continuing operations                                      $       0.38           $       0.37           $       0.16
  Income (loss) from discontinued operations                                       --                   0.01                  (0.33)
                                                                         ------------           ------------           ------------
      Net income (loss)                                                  $       0.38           $       0.38           $      (0.17)
                                                                         ============           ============           ============
Diluted net income (loss) per common and
  common equivalent share:
  Income from continuing operations                                      $       0.37           $       0.35           $       0.16
  Income (loss) from discontinued operations                                       --                   0.01                  (0.33)
                                                                         ------------           ------------           ------------
      Net income (loss)                                                  $       0.37           $       0.36           $      (0.17)
                                                                         ============           ============           ============
Shares used in computing net income (loss)
  per common and common equivalent share:
    Basic                                                                  19,346,491             21,026,001             22,214,181
    Diluted                                                                19,831,710             21,807,538             22,701,245
</TABLE>

See accompanying notes to consolidated financial statements.


                                       37
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
                    Years ended June 30, 2005, 2004, and 2003

<TABLE>
<CAPTION>
                                                                                   Common stock     Additional
                                                                   Comprehensive  -------------       paid-in          Unearned
                                                                   income (loss)      Amount          capital        compensation
                                                                  --------------  -------------    -------------    --------------
<S>                                                               <C>             <C>              <C>              <C>
Balance at June 30, 2002                                                          $     256,364    $ 168,901,645    $  (1,086,669)
Comprehensive income (loss):
  Net income (loss)                                               $  (3,792,454)             --               --               --
  Other comprehensive income
    (loss):
    Foreign currency translation
      adjustment                                                         (8,072)             --               --               --
    Minimum pension liability
      adjustment, net of tax
      benefit of $456,355                                              (885,867)             --               --               --
    Unrealized gain on securities
      available-for-sale                                                505,039              --               --               --
                                                                  -------------
      Other comprehensive loss                                         (388,900)             --               --               --
                                                                  -------------
      Total comprehensive income
        (loss)                                                    $  (4,181,354)
                                                                  =============
Purchase of treasury stock                                                                   --               --               --
Stock options exercised (note 13)                                                           513          247,522               --
Tax benefit from exercise of
  stock options (note 19)                                                                    --           71,477               --
Amortization of unearned
  compensation (note 14)                                                                     --               --          575,640
Forfeiture of restricted stock
  grants                                                                                    (59)        (253,691)         129,441
Tax impact of restricted stock
  activity                                                                                   --         (161,800)              --
                                                                                  -------------    -------------    -------------
Balance at June 30, 2003                                                                256,818      168,805,153         (381,588)
Comprehensive income (loss):
  Net income (loss)                                               $   7,957,128              --               --               --
  Other comprehensive income
    (loss):
    Foreign currency translation
      adjustment                                                         56,426              --               --               --
    Minimum pension liability
      adjustment, net of tax
      of $255,181                                                       424,345              --               --               --
    Unrealized gain on securities
      available-for-sale                                                777,300              --               --               --
                                                                  -------------
      Other comprehensive income                                      1,258,071              --               --               --
                                                                  -------------
      Total comprehensive income
        (loss)                                                    $   9,215,199
                                                                  =============
Purchase of treasury stock                                                                   --               --               --
Stock options exercised (note 13)                                                         2,689        1,562,397               --
Tax benefit from exercise of
  stock options (note 19)                                                                    --          797,630               --
Amortization of unearned
  compensation (note 14)                                                                     --               --          286,200
                                                                                  -------------    -------------    -------------
Balance at June 30, 2004                                                                259,507      171,165,180          (95,388)
Comprehensive income (loss):
  Net income (loss)                                               $   7,412,536              --               --               --
  Other comprehensive income
    (loss):
    Foreign currency translation
      adjustment                                                          1,950              --               --               --
    Minimum pension liability
      adjustment, net of tax
      benefit of $468,112                                              (917,734)             --               --               --
    Unrealized gain on sale of
      securities available-for-sale                                     127,135              --               --               --
                                                                  -------------
      Other comprehensive loss                                         (788,649)             --               --               --
                                                                  -------------
      Total comprehensive income
        (loss)                                                    $   6,623,887
                                                                  =============

Purchase of treasury stock                                                                   --               --               --
Stock options exercised (note 13)                                                           985          223,762               --
Tax benefit from exercise of
  stock options (note 19)                                                                    --           29,308               --
Issuance of restricted stock                                                                235          319,365         (319,600)
Forfeiture of restricted stock                                                              (19)        (100,681)              --
Amortization of unearned
  compensation (note 14)                                                                     --               --          166,410
Tax impact of restricted stock
  activity                                                                                   --         (302,959)              --
                                                                                  -------------    -------------    -------------
Balance at June 30, 2005                                                          $     260,708    $ 171,333,975    $    (248,578)
                                                                                  =============    =============    =============

<CAPTION>
                                                                                   Accumulated
                                                                                      other        Treasury stock       Total
                                                                     Retained     comprehensive    -------------    stockholders'
                                                                     earnings     income (loss)       Amount           equity
                                                                  --------------  -------------    -------------    -------------
<S>                                                               <C>             <C>              <C>              <C>
Balance at June 30, 2002                                          $  47,082,597   $    (828,061)   $  (4,772,638)   $ 209,553,238
Comprehensive income (loss):
  Net income (loss)                                                  (3,792,454)             --               --       (3,792,454)
  Other comprehensive income
    (loss):
    Foreign currency translation
      adjustment                                                             --              --               --               --
    Minimum pension liability
      adjustment, net of tax
      benefit of $456,355                                                    --              --               --               --
    Unrealized gain on securities
      available-for-sale                                                     --              --               --               --

      Other comprehensive loss                                               --        (388,900)              --         (388,900)

      Total comprehensive income
        (loss)

Purchase of treasury stock                                                   --              --       (5,383,522)      (5,383,522)
Stock options exercised (note 13)                                            --              --               --          248,035
Tax benefit from exercise of
  stock options (note 19)                                                    --              --               --           71,477
Amortization of unearned
  compensation (note 14)                                                     --              --               --          575,640
Forfeiture of restricted stock
  grants                                                                     --              --               --         (124,309)
Tax impact of restricted stock
  activity                                                                   --              --               --         (161,800)
                                                                  -------------   -------------    -------------    -------------
Balance at June 30, 2003                                             43,290,143      (1,216,961)     (10,156,160)     200,597,405
Comprehensive income (loss):
  Net income (loss)                                                   7,957,128              --               --        7,957,128
  Other comprehensive income
    (loss):
    Foreign currency translation
      adjustment                                                             --              --               --               --
    Minimum pension liability
      adjustment, net of tax
      of $255,181                                                            --              --               --               --
    Unrealized gain on securities
      available-for-sale                                                     --              --               --               --

      Other comprehensive income                                             --       1,258,071               --        1,258,071

      Total comprehensive income
        (loss)

Purchase of treasury stock                                                   --              --      (22,097,252)     (22,097,252)
Stock options exercised (note 13)                                            --              --               --        1,565,086
Tax benefit from exercise of
  stock options (note 19)                                                    --              --               --          797,630
Amortization of unearned
  compensation (note 14)                                                     --              --               --          286,200
                                                                  -------------   -------------    -------------    -------------
Balance at June 30, 2004                                             51,247,271          41,110      (32,253,412)     190,364,268
Comprehensive income (loss):
  Net income (loss)                                                   7,412,536              --               --        7,412,536
  Other comprehensive income
    (loss):
    Foreign currency translation
      adjustment                                                             --              --               --               --
    Minimum pension liability
      adjustment, net of tax
      benefit of $468,112                                                    --              --               --               --
    Unrealized gain on sale of
      securities available-for-sale                                          --              --               --               --

      Other comprehensive loss                                               --        (788,649)              --         (788,649)

      Total comprehensive income
        (loss)

Purchase of treasury stock                                                   --              --      (37,926,398)     (37,926,398)
Stock options exercised (note 13)                                            --              --               --          224,747
Tax benefit from exercise of
  stock options (note 19)                                                    --              --               --           29,308
Issuance of restricted stock                                                 --              --               --               --
Forfeiture of restricted stock                                               --              --               --         (100,700)
Amortization of unearned
  compensation (note 14)                                                     --              --               --          166,410
Tax impact of restricted stock
  activity                                                                   --              --               --         (302,959)
                                                                  -------------   -------------    -------------    -------------
Balance at June 30, 2005                                          $  58,659,807   $    (747,539)   $ (70,179,810)   $ 159,078,563
                                                                  =============   =============    =============    =============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       38
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                    Years ended June 30, 2005, 2004, and 2003

<TABLE>
<CAPTION>
                                                                          2005                    2004                    2003
                                                                      -------------           -------------           -------------
<S>                                                                   <C>                     <C>                     <C>
Cash flows from operating activities:
  Net income (loss)                                                   $   7,412,536           $   7,957,128           $  (3,792,454)
  Net income (loss) from discontinued
    operations                                                                   --                 290,314              (7,366,954)
                                                                      -------------           -------------           -------------
        Net income from continuing
          operations                                                      7,412,536               7,666,814               3,574,500
  Adjustments to reconcile net income
    to net cash provided by operating
    activities:
    Depreciation                                                          4,887,154               4,296,999               3,904,308
    Impairment loss                                                         272,118                      --                      --
    Loss on sale of equipment                                                98,332                      --                      --
    Loss on sale of equity securities                                       342,715                      --                      --
    Amortization of intangibles                                             570,645                 709,539                 499,539
    Deferred income taxes                                                   558,902                (140,784)              1,094,390
    Unearned compensation                                                    65,710                 286,200                 451,331
    Provision for doubtful accounts                                          67,599                 (16,532)                 53,243
    Tax benefit from exercise of
      stock options                                                          29,308                 797,630                 (90,323)
    Changes in operating assets and
      liabilities, net of acquisition:
      Receivables                                                        (1,034,892)             (5,071,555)              3,408,410
      Inventories                                                        (2,795,293)             (1,426,801)              3,933,842
      Other receivables                                                    (103,842)                 91,484                 383,207
      Other current assets, including
        prepaids                                                            141,127                (405,611)               (233,872)
      Refundable income taxes                                                    --                 876,220                (876,220)
      Accounts payable                                                   (1,120,939)              3,379,732                (109,542)
      Accrued expenses                                                     (760,485)                919,259                (134,591)
      Income taxes payable                                                  169,193               3,065,301                (464,263)
      Customer advance payments                                            (411,486)                411,486                (244,831)
      Other liabilities                                                     142,849               1,468,336                  15,237
      Pension and postretirement
        benefit obligation                                                 (162,963)             (1,290,722)                440,706
                                                                      -------------           -------------           -------------
        Net cash provided by operating
          activities from continuing
          operations                                                      8,368,288              15,616,995              15,605,071
  Net cash used in operating activities
    from discontinued operations                                                 --                (404,886)             (3,366,389)
                                                                      -------------           -------------           -------------
        Net cash provided by operating
          activities                                                      8,368,288              15,212,109              12,238,682
                                                                      -------------           -------------           -------------
Cash flows from investing activities:
  Capital expenditures                                                   (9,058,703)             (4,274,681)             (3,899,549)
  Proceeds from sale of equity securities                                 2,746,130                      --                      --
  Proceeds from sale of fixed assets                                        160,000                      --                      --
  Dividend return of capital in
    equities held for resale                                                     --               3,497,850                      --
  Maturities of marketable debt
    securities                                                          117,321,661             194,358,406             203,186,757
  Purchase of marketable debt and
    equity securities                                                   (99,240,097)           (177,570,000)           (205,645,297)
  Purchase of equity securities                                                  --                      --              (1,356,279)
                                                                      -------------           -------------           -------------
        Net cash provided by (used in)
          investing activities from
          continuing operations                                          11,928,991              16,011,575              (7,714,368)
  Net cash provided by (used in)
    investing activities from
    discontinued operations                                                      --               1,492,657                (883,517)
                                                                      -------------           -------------           -------------
        Net cash provided by (used in)
          investing activities                                           11,928,991              17,504,232              (8,597,885)
                                                                      -------------           -------------           -------------
Cash flows from financing activities:
  Stock options exercised                                                   224,747               1,565,086                 248,035
  Purchase of treasury stock                                            (37,926,398)            (22,097,252)             (5,383,522)
                                                                      -------------           -------------           -------------
        Net cash used in financing
          activities from continuing
          operations                                                    (37,701,651)            (20,532,166)             (5,135,487)
  Net cash used in financing activities
    from discontinued operations                                                 --                      --                      --
                                                                      -------------           -------------           -------------
        Net cash used in financing
          activities                                                    (37,701,651)            (20,532,166)             (5,135,487)
                                                                      -------------           -------------           -------------
Effect of exchange rates                                                      1,950                  56,426                  (8,072)
                                                                      -------------           -------------           -------------
        Net increase (decrease) in
          cash and cash equivalents                                     (17,402,422)             12,240,601              (1,502,762)
Cash and cash equivalents at beginning
  of year                                                                23,303,263              11,062,662              12,565,424
                                                                      -------------           -------------           -------------
Cash and cash equivalents at end of year                              $   5,900,841           $  23,303,263           $  11,062,662
                                                                      =============           =============           =============
Supplemental disclosures of cash flow
  information:
  Cash paid during the period for:
    Interest                                                          $      29,422           $       7,519           $      50,610
</TABLE>

See accompanying notes to consolidated financial statements.


                                       39
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(1)   Summary of Significant Accounting Policies

      (a)   Principles of Consolidation

            The  consolidated  financial  statements  include  the  accounts  of
            Anaren,  Inc. and its wholly owned  subsidiaries (the Company).  All
            significant   intercompany   balances  and  transactions  have  been
            eliminated in consolidation.

      (b)   Operations

            The Company is engaged in the design,  development,  and manufacture
            of  microwave  and  radio  frequency  components,   assemblies,  and
            subsystems  which receive,  process,  and transmit  radar,  wireless
            communications,  and other  wireless  signals  and  other  microwave
            transmissions. Its primary products include devices and systems used
            in  the  wireless  communications,   satellite  communications,  and
            defense electronics markets.

      (c)   Revenue Recognition

            The Company generally  recognizes  revenue when products are shipped
            and  the  customer  takes   ownership  and  assumes  risk  of  loss,
            collection  of  the  relevant  receivable  is  probable,  persuasive
            evidence  of an  arrangement  exists and the sales price is fixed or
            determinable.   Payments  received  from  customers  in  advance  of
            products  delivered are recorded as customer  advance payments until
            earned.  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.

      (d)   Cash Equivalents

            Cash  equivalents of $3,470,927 and $20,407,660 at June 30, 2005 and
            2004,  respectively,  consist of  certificates  of deposit and money
            market  instruments  having  original  maturities of three months or
            less. Cash  equivalents are stated at cost which  approximates  fair
            value.

      (e)   Marketable Securities

            The Company  classifies its securities as either  available-for-sale
            or held to  maturity,  as the Company  does not hold any  securities
            considered to be trading. Held to maturity securities are those debt
            securities  for which the  Company has the  positive  intent and the
            ability to hold until maturity. All other securities not included in
            held to maturity are  classified as  available-for-sale.  Management
            determines the appropriate  classification of securities at the time
            of purchase  and  reevaluates  such  designation  as of each balance
            sheet date.

            Held to maturity  securities are recorded at amortized cost adjusted
            for  the   amortization  of  accretion  of  premiums  or  discounts.
            Available-for-sale securities are recorded at fair value. Unrealized
            holding  gains  and  losses,  net  of the  related  tax  effect,  on
            available-for-sale  securities  are excluded  from  earnings and are
            reported as  accumulated  other  comprehensive  income or loss until
            realized.

                                                                     (Continued)


                                       40
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

            The Company invests its excess cash  principally in municipal bonds,
            commercial  paper,  corporate bonds and notes,  and U.S.  government
            agency  securities.   The  Company  also  invests  in  auction  rate
            securities.   Auction  rate  securities  have  long-term  underlying
            maturities.  However,  the market is highly  liquid and the interest
            rates  reset ever 7, 28, or 35 days.  In prior  years,  the  Company
            classified  a  portion  of  its  auction  rate  securities  as  cash
            equivalents;   however,  such  amounts  have  been  reclassified  as
            available-for-sale  securities  for all  periods  presented  in this
            report.

            A decline  in the fair  value of any  available-for-sale  or held to
            maturity security,  that is deemed other than temporary,  is charged
            to earnings  resulting in the  establishment of a new cost basis for
            the security,  and dividend and interest  income are recognized when
            earned.

      (f)   Trade Accounts Receivable

            Trade accounts receivable are recorded at the invoiced amount and do
            not bear  interest.  The  allowance  for  doubtful  accounts  is the
            Company's  best estimate of the amount of probable  credit losses in
            the Company's existing accounts receivable.  The Company reviews its
            allowance for doubtful accounts  monthly.  Past due balances over 90
            days are reviewed individually for collectibility.  Account balances
            are charged off against the allowance  after all means of collection
            have been  exhausted  and the  potential  for recovery is considered
            remote.  The  Company  does not have  any  off-balance-sheet  credit
            exposure related to its customers.

      (g)   Inventories

            Inventories  are stated at the lower of cost or  market,  cost being
            determined on a first-in, first-out basis.

      (h)   Property, Plant, and Equipment

            Property,  plant, and equipment are stated at cost.  Depreciation of
            land  improvements and buildings is calculated by the  straight-line
            method over an  estimated  service life of 25 years.  Machinery  and
            equipment  are  depreciated  primarily by the  straight-line  method
            based on estimated useful lives of 5 to 10 years.

      (i)   Goodwill

            Goodwill  represents  the  excess of cost over the fair value of the
            net tangible assets and identifiable intangible assets of businesses
            acquired.

            Goodwill is tested  annually for  impairment at the  reporting  unit
            level  in the  fourth  quarter  of the  Company's  fiscal  year,  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 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. No impairment losses were recorded through June 30,
            2005.

                                                                     (Continued)


                                       41
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      (j)   Long-Lived Assets

            The Company accounts for long-lived assets,  excluding goodwill,  in
            accordance  with the  provisions  of Statement  144,  Impairment  on
            Disposal of Long-Lived Assets.  Statement 144 sets forth criteria to
            determine  when a long-lived  asset is held for sale.  Such criteria
            specify that the asset must be available for  immediate  sale in its
            present condition subject only to terms that are usual and customary
            for sales of such assets. In addition, the sale of the asset must be
            probable,  and its transfer expected to qualify for recognition as a
            completed sale,  generally  within one year.  Statement 144 requires
            recognition of an impairment  loss only if the carrying  amount of a
            long-lived  asset  is not  recoverable  from its  undiscounted  cash
            flows. An impairment loss is measured as the difference  between the
            carrying amount and fair value of the asset.  The Company  evaluates
            its long-lived assets if impairment indicators arise.

      (k)   Net Income Per Share

            Basic  income per share is based on the weighted  average  number of
            common shares outstanding.  Diluted income per share is based on the
            weighted  average  number of common shares  outstanding,  as well as
            dilutive  potential  common  shares which,  in the  Company's  case,
            comprise shares issuable under the stock option and restricted stock
            plans  described in notes 13 and 14. The weighted  average number of
            common shares  utilized in the calculation of the diluted income per
            share does not include  antidilutive  shares aggregating  1,927,922,
            583,582,   and  1,868,680  at  June  30,  2005,   2004,   and  2003,
            respectively.  The  treasury  stock  method  is  used  to  calculate
            dilutive shares which reduces the gross number of dilutive shares by
            the number of shares  purchasable  from the  proceeds of the options
            assumed to be exercised.

            The following  table sets forth the computation of basic and diluted
            earnings per share as of June 30:

                                         2005           2004           2003
                                     ------------   ------------   ------------
Numerator:
  Earnings (loss) available
    to  common stockholders          $  7,412,536   $  7,957,128   $ (3,792,454)
                                     ============   ============   ============
Denominator:
  Denominator for basic
    earnings per share:
    Weighted average shares
      outstanding                      19,346,491     21,026,001     22,214,181
                                     ============   ============   ============
Denominator for diluted
  earnings per share:
  Weighted average shares
    outstanding                        19,346,491     21,026,001     22,214,181
  Common stock options and
    restricted stock                      485,219        781,537        487,064
                                     ------------   ------------   ------------
    Weighted average shares
      and conversions                  19,831,710     21,807,538     22,701,245
                                     ============   ============   ============

                                                                     (Continued)


                                       42
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      (l)   Research and Development Costs

            Research and development costs are expensed as incurred.

      (m)   Income Taxes

            The Company  utilizes the asset and  liability  method of accounting
            for  income  taxes.  Under  this  method,  deferred  tax  assets and
            liabilities   are  recognized   for  the  future  tax   consequences
            attributable to differences between the financial statement carrying
            amounts of existing assets and liabilities and their  respective tax
            bases  and  tax  credit  carryforwards.   Deferred  tax  assets  and
            liabilities  are  measured  using  enacted tax rates.  The effect on
            deferred  tax  assets  and  liabilities  of a change in tax rates is
            recognized in income in the period that includes the enactment date.

      (n)   Financial Instruments

            The  Company's  financial  instruments,  which include cash and cash
            equivalents,  receivables,  and accounts payable, are stated at cost
            which  approximates  fair  value at June  30,  2005  and  2004.  The
            Company's  available-for-sale  equity securities are stated at their
            fair value,  as determined by quoted market prices on June 30, 2005.
            The Company's  marketable  debt  securities  are stated at amortized
            cost, and their fair values,  as determined by quoted market prices,
            are presented in note 5.

                                                                     (Continued)


                                       43
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      (o)   Stock-Based Compensation

            At June 30,  2005 the  Company  had a  stock-option  based  employee
            compensation  plan,  which is  described  more fully in note 13. The
            Company accounts for this plan under the recognition and measurement
            principles  of APB Opinion No. 25,  Accounting  for Stock  Issued to
            Employees,  and  related  interpretations.   No  stock-option  based
            employee  compensation  cost  is  reflected  in net  income,  as all
            options granted under those plans had an exercise price equal to the
            underlying  common stock on the date of grant.  The following  table
            illustrates  the effect on net income and  earnings per share if the
            Company had applied the fair value  recognition  provisions  of FASB
            Statement  No. 123,  Accounting  for  Stock-Based  Compensation,  to
            stock-option based employee compensation.

                                               Year ended June 30
                                -----------------------------------------------
                                     2005            2004             2003
                                -------------    -------------    -------------
Net income (loss), as
  reported                      $   7,412,536    $   7,957,128    $  (3,792,454)
Deduct total stock option
  based employee compensation
  expense determined under fair
  value based method for all
  awards, net of related tax
  effects                          (5,523,596)      (7,114,460)      (5,919,733)
                                -------------    -------------    -------------
Pro forma net income (loss)     $   1,888,940    $     842,668    $  (9,712,187)
                                =============    =============    =============
Earnings (loss) per share:
  Basic - as reported           $        0.38    $        0.38    $       (0.17)
  Basic - pro forma                      0.10             0.04            (0.44)
  Diluted - as reported                  0.37             0.36            (0.17)
  Diluted - pro forma                    0.10             0.04            (0.43)

            In  the  aforementioned  table,  the   stock-option-based   employee
            compensation expense amounts for fiscal years June 30, 2004 and 2003
            have been reduced by $2,216,713  and  $2,828,924,  respectively,  to
            reflect prior years' forfeitures and cancellations.

            Upon  issuance  of  shares  of  stock   pursuant  to  the  Company's
            Restricted Stock Program, an unearned compensation charge equivalent
            to the market value of the shares on the date of grant is charged to
            stockholders'  equity  and  is  amortized  over  the  related  share
            restriction period.

      (p)   Use of Estimates

            The preparation of consolidated  financial  statements in conformity
            with  U.S.  generally  accepted   accounting   principles   requires
            management  to  make  estimates  and  assumptions  that  affect  the
            reported amounts of certain assets and liabilities and disclosure of
            contingent  assets  and  liabilities  at the  date of the  financial
            statements and the reported amounts of sales and expenses during the
            reporting period. Actual results could differ from those estimates.

                                                                     (Continued)


                                       44
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      (q)   Recent Pronouncements

            In December 2004, the Financial  Accounting  Standards  Board (FASB)
            issued  Statement  No.  123R,  a  revision  to  Statement  No.  123,
            Accounting for Stock-Based Compensation.  This standard requires the
            Company  to  measure  the  cost of  employee  services  received  in
            exchange for equity awards based on the grant date fair value of the
            awards. The cost will be recognized as compensation expense over the
            vesting period of the awards.  The Company is required to adopt SFAS
            123R at the  beginning  of the first  quarter  of fiscal  2006.  The
            standard provides for a prospective application.  Under this method,
            the   Company   will  begin   recognizing   compensation   cost  for
            equity-based  compensation for all new or modified grants after July
            30, 2005.  In  addition,  the Company  will  recognize  the unvested
            portion  of the grant  date fair  value of  awards  issued  prior to
            adoption  based  on  the  fair  values  previously   calculated  for
            disclosure  purposes.  At June  30,  2005,  the  aggregate  value of
            unvested  options,  as  determined  using  a  Black-Scholes   option
            valuation  model,  was  $6,928,000.  Upon  adoption of SFAS 123R,  a
            majority of this amount will be  recognized  over the  remaining 1-4
            year vesting period of these options.

            In  November  2004,  the  FASB  published   Statement  of  Financial
            Accounting  Standards No. 151,  Inventory Costs, an amendment of ARB
            No. 43,  Chapter 4.  Statement 151 amends the guidance in Chapter 4,
            "Inventory  Pricing" of ARB No. 43 and clarifies the  accounting for
            abnormal amounts of idle facility  expense,  freight handling costs,
            and wasted  material  (spoilage).  Statement 151 requires that those
            items be recognized as  current-period  charges.  Statement 151 also
            requires that allocation of fixed production  overheads to the costs
            of  conversion  be based on the normal  capacity  of the  production
            facilities.  Statement 151 is effective for inventory costs incurred
            during fiscal years beginning after June 15, 2005.  Statement 151 is
            effective for the Company's  2006 fiscal year and is not expected to
            have a material impact on the Company's financial statements.

            In May 2005, the FASB published SFAS No. 154, Accounting Changes and
            Error  Corrections.  Statement  154 replaces APB No. 20,  Accounting
            Changes,  and FASB  Statement  No. 3,  Reporting  Changes in Interim
            Financial Statements.  The Statement changes the accounting for, and
            reporting of, a change in accounting principle.

            Statement 154 requires  retrospective  application to prior period's
            financial  statements of voluntary  changes in accounting  principle
            and changes  required by new accounting  standards when the standard
            does  not  include  specific  transition  provisions,  unless  it is
            impracticable  to do so.  Statement 154 is effective for  accounting
            changes and  corrections of errors in fiscal years  beginning  after
            December 15, 2005 (the Company's fiscal 2007).  Early application is
            permitted for  accounting  changes and  corrections of errors during
            fiscal  years  beginning  after June 1, 2005 (the  Company's  fiscal
            2006).

      (r)   Reclassifications

            Certain 2004 amounts have been reclassified to conform with the 2005
            presentation.

      (s)   Statement of Cash Flows

            Included in the June 30, 2004 net cash used in investing  activities
            is an $847,216  write-off of fully  depreciated fixed assets and its
            related accumulated depreciation.

                                                                     (Continued)


                                       45
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(2)   Adoption of Accounting Pronouncements

      In July 2002,  the  Financial  Accounting  Standards  Board (FASB)  issued
      Statement  of  Financial  Accounting  Standards  No. 146,  Accounting  for
      Restructuring  Costs (SFAS 146). SFAS 146 applies to costs associated with
      an  exit  activity  (including   restructuring)  or  with  a  disposal  of
      long-lived  assets.  Those activities can include  eliminating or reducing
      product lines,  terminating employees and contracts,  and relocating plant
      facilities or personnel. Under SFAS 146, a company will record a liability
      for a cost  associated  with  an  exit  or  disposal  activity  when  that
      liability  is incurred  and can be  measured at fair value.  SFAS 146 will
      require a company  to  disclose  information  about its exit and  disposal
      activities,  the related costs, and changes in those costs in the notes to
      the interim and annual  financial  statements  that  include the period in
      which an exit activity is initiated and in any subsequent period until the
      activity is completed.  SFAS 146 was effective  prospectively  for exit or
      disposal  activities  initiated  after  December  31,  2002.  The  Company
      accounted for all of its exit activities initiated after December 31, 2002
      under  the  requirements  of SFAS  146 as  described  in  note 9.  The new
      Statement  grandfathers  the accounting for liabilities that a company had
      previously recorded under EITF 94-3.

      In December 2002, the Financial  Accounting  Standards Board (FASB) issued
      Statement No. 148,  Accounting  for Stock Based  Compensation - Transition
      and  Disclosure,  an amendment of FASB Statement No. 123 (SFAS 148).  SFAS
      148 addresses the various  methods of transition  for voluntary  change to
      the fair value based  method of  accounting  for stock  compensation,  and
      amends the disclosure  provisions of that statement.  SFAS 148 is required
      for fiscal years ending after  December 15, 2002. The Company has reviewed
      the  provisions  of SFAS 148 and while  they have not  adopted  fair value
      accounting,  they have complied with the  disclosure  requirements  of the
      standard.

      During 2004,  the FASB issued FASB Staff  Position  106-2,  Accounting and
      Disclosure   Requirements  Related  to  the  Medicare  Prescription  Drug,
      Improvement and Modernization  Act of 2003 (FSP 106-2).  FSP 106-2 relates
      to the Medicare Prescription Drug,  Improvement,  and Modernization Act of
      2003 (the Act),  signed into law in December  2003.  The Act  introduced a
      prescription drug benefit under Medicare known as Medicare Part D. The Act
      also  established  a federal  subsidy to sponsors  of retiree  health care
      plans that provide a benefit that is at least  actuarially  equivalent  to
      Medicare  Part D.  During  fiscal  year  2005,  the  Company  adopted  the
      provisions of FSP 106-2.  The reduction in the accumulated  postretirement
      benefit for the subsidy related to benefits  attributed to past service as
      of June 30, 2005 is $547,592.

      In April 2003, the FASB issued SFAS No. 149 Amendment of Statement No. 133
      on Derivative Instruments and Hedging Activities.  SFAS No. 149 amends and
      clarifies financial  accounting and reporting for derivative  instruments,
      including certain derivative instruments embedded in other contracts. SFAS
      No. 149 is effective for contracts entered into or modified after June 30,
      2003,  except as stated below,  and for hedging  relationships  designated
      after June 30, 2003. In addition,  except as stated below,  all provisions
      of SFAS No. 149 should be applied  prospectively.  The  provisions of SFAS
      No. 149  relating  to SFAS No. 133  Implementation  Issues  that have been
      effective for fiscal  quarters  beginning  prior to June 15, 2003,  should
      continue  to be applied in  accordance  with  their  respective  effective
      dates.  Adoption  of SFAS No.  149 did not have a  material  impact on our
      consolidated financial position, results of operations or cash flows.

                                                                     (Continued)


                                       46
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial
      Instruments with  Characteristics of both Liabilities and Equity. SFAS No.
      150  establishes  standards  for how an  issuer  classifies  and  measures
      certain financial instruments with characteristics of both liabilities and
      equity. It requires that an issuer classify a financial instrument that is
      within its scope as a liability (or an asset in some circumstances).  Many
      of these instruments were previously  classified as temporary equity. SFAS
      No. 150 is effective  for financial  instruments  entered into or modified
      after May 31, 2003,  and  otherwise  is effective at the  beginning of the
      first  interim  period  beginning  after  June  15,  2003.  For  financial
      instruments  created  before the  issuance  date of SFAS No. 150 and still
      existing at the  beginning of the interim  period of adoption,  transition
      shall be  achieved  by  reporting  the  cumulative  effect  of a change in
      accounting  principle by initially measuring the financial  instruments at
      fair  value or  other  measurement  attribute  required  by SFAS No.  150.
      Instruments  with  characteristics  of both  liabilities  and  equity  not
      addressed  in SFAS No.  150  will be  addressed  in the next  phase of the
      project.  Adoption  of SFAS No. 150 did not have a material  impact on the
      Company's consolidated  financial position,  results of operations or cash
      flows.

      In  December  2003,  the FASB  issued  SFAS No. 132  (revised)  Employers'
      Disclosures about Pensions and Other Postretirement Benefits, which revise
      employers'  disclosures  about  pension  plans and other  post  retirement
      benefits.  The disclosure provisions are effective for fiscal years ending
      after June 15, 2004. The Company has provided the required disclosures.

      EITF Issue No 03-1 The Meaning of Other-Than-Temporary  Impairment and Its
      Application to Certain  Investments  must be applied in reporting  periods
      beginning after June 15, 2004. The disclosure  requirements  are effective
      for all fiscal years after  December  15,  2003.  The Company has complied
      with the disclosure requirements.

(3)   Other Intangible Assets

      Other intangible assets as of June 30 are as follows:

<TABLE>
<CAPTION>
                                                                       2005                                      2004
                                                         --------------------------------          --------------------------------
                                                           Gross                                     Gross
                                                          carrying           Accumulated            carrying           Accumulated
                                                           amount            amortization            amount            amortization
                                                         ----------          ------------          ----------          ------------
<S>                                                      <C>                  <C>                  <C>                  <C>
Patent                                                   $  574,966           $  431,225           $  574,966           $  359,354
Customer base                                             1,350,000              862,500            1,350,000              637,500
Trade name                                                  320,000              320,000              320,000              302,226
Noncompetition agreements                                   180,000              138,000              180,000              102,000
Favorable lease                                             600,000              600,000              600,000              380,000
                                                         ----------           ----------           ----------           ----------
      Total                                              $3,024,966           $2,351,725           $3,024,966           $1,781,080
                                                         ==========           ==========           ==========           ==========
</TABLE>

      During fiscal year 2004, the Company entered an agreement to terminate the
      lease at its Amitron  facility as of August 31, 2004. There was a $600,000
      intangible  asset  associated with this lease due to favorable lease terms
      that  existed  when  the  Company  purchased  Amitron.   The  amortization
      associated with the favorable lease  intangible has been  accelerated such
      that it was fully amortized at the termination of the lease.

                                                                     (Continued)


                                       47
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      Intangible asset  amortization  expense for the years ended June 30, 2005,
      2004, and 2003 aggregated $570,645, $709,539, and $499,539,  respectively.
      Amortization  expense related to intangible assets for the next five years
      is as follows:

                       Year ending June 30:
                         2006                    $332,869
                         2007                     302,874
                         2008                      37,498
                         2009                         --
                         2010                         --

(4)   Discontinued Operations

      On July 10,  2003,  the Company  announced  its decision to dispose of its
      Anaren  Europe  operation.  After  completing  production of the remaining
      customer  orders under  contract  during the first quarter of fiscal 2004,
      production  at Anaren  Europe  ceased and the remaining net assets of that
      operations were liquidated through the sale of equipment via auction.  The
      results  of  operations  for Anaren  Europe for the prior  years have been
      reclassified  as  discontinued  operations in the statement of operations.
      Components of the loss from  discontinued  operations of Anaren Europe for
      the years ended June 30 are as follows:

                                        2005           2004            2003
                                       -------     -----------      -----------
Net sales                              $    --     $   675,340      $ 4,433,989
Income (expense)                            --      (1,402,737)      (9,742,585)
Impairment charges                          --              --       (2,720,626)
Loss on sale of equipment                   --        (782,289)              --
                                       -------     -----------      -----------
  Net losses from
    discontinued operations            $    --     $(1,509,686)     $(8,029,222)
                                       =======     ===========      ===========

      Included in losses from discontinued  operations are impairment charges in
      the amount of $2,720,626 for the year ending June 30, 2003 attributable to
      certain assets of Anaren Europe,  B.V. The Company performed an evaluation
      to determine if the fixed assets used by Anaren  Europe were subject to an
      impairment  loss as required by FAS 144. It was determined that a possible
      impairment  existed  and as a  result,  the  Company  had  an  independent
      appraisal  performed  of the  assets of Anaren  Europe.  The basis of this
      appraisal was current market value in an arm's-length  transaction between
      a willing  buyer and seller in an unforced  sale.  An  impairment  loss of
      $2,720,626  was  identified,  which was  recorded as a charge for the year
      ended June 30, 2003.

      The Company  also  recorded  income tax benefits  related to  discontinued
      operations of $1,800,000 and $662,268 for fiscal years ended June 30, 2004
      and 2003, respectively.

                                                                     (Continued)


                                       48
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(5)   Securities

      The amortized cost and fair value of securities are as follows:

<TABLE>
<CAPTION>
                                                                                         June 30, 2005
                                                           ------------------------------------------------------------------------
                                                                                 Gross               Gross
                                                            Amortized          unrealized         unrealized
                                                               cost              gains              losses              Fair value
                                                           -----------           ------           -----------           -----------
<S>                                                        <C>                   <C>              <C>                   <C>
Securities available for sale:
  Auction rate securities                                  $19,700,000           $   --           $        --           $19,700,000
                                                           -----------           ------           -----------           -----------
      Total securities
        available-for-sale                                 $19,700,000           $   --           $        --           $19,700,000
                                                           ===========           ======           ===========           ===========
Securities held to maturity:
  Municipal bonds                                          $37,746,195           $1,702           $  (198,447)          $37,549,450
  Commercial paper                                           2,141,851               --                    --             2,141,851
  Corporate bonds                                           10,792,879              185               (50,276)           10,742,788
  Zero coupon bonds                                          1,977,785               --               (11,205)            1,966,580
  Federal agency bonds                                       3,749,717               --               (21,627)            3,728,090
                                                           -----------           ------           -----------           -----------
      Total securities
        held to maturity                                   $56,408,427           $1,887           $  (281,555)          $56,128,759
                                                           ===========           ======           ===========           ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                         June 30, 2004
                                                           ------------------------------------------------------------------------
                                                                                 Gross               Gross
                                                            Amortized          unrealized         unrealized
                                                               cost              gains              losses              Fair value
                                                           -----------           ------           -----------           -----------
<S>                                                        <C>                   <C>              <C>                   <C>
Securities available for sale:
  Common stock                                             $ 3,088,845          $    --           $  (127,135)          $ 2,961,710
  Auction rate securities                                   34,550,424               --                    --            34,550,424
                                                           -----------          -------           -----------           -----------
      Total securities
        available-for-sale                                 $37,639,269          $    --           $  (127,135)          $37,512,134
                                                           ===========          =======           ===========           ===========
Securities held to maturity:
  Municipal bonds                                          $41,270,695          $    --           $  (347,624)          $40,923,071
  Commercial paper                                           2,596,712               83                    --             2,596,795
  Corporate bonds                                            5,581,257           83,188                    --             5,664,445
  Zero coupon bonds                                          5,138,853               --               (21,952)            5,116,901
  Federal agency bonds                                       5,052,050            9,684               (24,720)            5,037,014
                                                           -----------          -------           -----------           -----------
      Total securities
        held to maturity                                   $59,639,567          $92,955           $  (394,296)          $59,338,226
                                                           ===========          =======           ===========           ===========
</TABLE>

                                                                     (Continued)


                                       49
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      Contractual  maturities of marketable  debt securities held to maturity at
      June 30 are summarized as follows:

<TABLE>
<CAPTION>
                                                                     2005                                        2004
                                                       ---------------------------------           ---------------------------------
                                                                             Fair market                                 Fair market
                                                          Cost                  value                 Cost                  value
                                                       -----------           -----------           -----------           -----------
<S>                                                    <C>                   <C>                   <C>                   <C>
Within one year                                        $36,307,880           $36,176,998           $34,326,499           $34,268,425
One year to five years                                  20,100,547            19,951,761            25,313,068            25,069,801
                                                       -----------           -----------           -----------           -----------
                 Total                                 $56,408,427           $56,128,759           $59,639,567           $59,338,226
                                                       ===========           ===========           ===========           ===========
</TABLE>

      Contractual  maturities of auction rate  securities  available for sale at
      June 30 are summarized as follows:

<TABLE>
<CAPTION>
                                                                     2005                                        2004
                                                       ---------------------------------           ---------------------------------
                                                                             Fair market                                 Fair market
                                                          Cost                  value                 Cost                  value
                                                       -----------           -----------           -----------           -----------
<S>                                                    <C>                   <C>                   <C>                   <C>
Within one year                                        $16,200,000           $16,200,000           $24,750,424           $24,750,424
One year to five years                                   3,500,000             3,500,000             9,800,000             9,800,000
                                                       -----------           -----------           -----------           -----------
                 Total                                 $19,700,000           $19,700,000           $34,550,424           $34,550,424
                                                       ===========           ===========           ===========           ===========
</TABLE>

      The Company  invests in auction rate  securities.  Auction rate securities
      have long-term underlying maturities; however, the market is highly liquid
      and the interest rates reset every 7, 28, or 35 days. In prior years,  the
      Company  classified  a portion  of its  auction  rate  securities  as cash
      equivalents;   however,   such   amounts   have   been   reclassified   as
      available-for-sale securities for all periods presented in this report.

      On July 11, 2002, the Company filed a Schedule 13D with the Securities and
      Exchange   Commission  to  disclose  that  it  had,  through  open  market
      purchases,  acquired an ownership  position of approximately  6.35% of the
      common stock of  Celeritek,  Inc. The  Company's  original  investment  in
      Celeritek common stock averaged $8.47 a share and totaled $6.6 million. In
      March 2004, the Company received a non-taxable  return of capital dividend
      of $4.50 per share reducing the Company's  basis in Celeritek to $3.97 per
      share.  On June 30, 2004 the  Company's  cost basis in  Celeritek  totaled
      approximately  $3.1  million.  The  investment  had a market value of $3.0
      million on June 30, 2004, an increase of $777,300, for the year ended June
      30,  2004,  which has been  recorded as a component of  accumulated  other
      comprehensive loss.

      During  the first  half of  fiscal  year  2005,  the  remaining  shares of
      Celeritek  were sold and the Company  recorded a realized loss of $342,715
      that is included in other income in the Company's fiscal 2005 statement of
      operations. The Company used the average cost method in order to determine
      the realized loss.

                                                                     (Continued)


                                       50
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(6)   Inventories

      Inventories at June 30 are summarized as follows:

                                                  2005                 2004
                                              ------------         ------------
Component parts                               $ 10,369,049         $  9,136,401
Work in process                                  7,709,465            6,138,068
Finished goods                                   2,766,157            2,349,585
                                              ------------         ------------
                                                20,844,671           17,624,054
Reserve for obsolescence                        (1,441,323)          (1,015,999)
                                              ------------         ------------
        Net inventories                       $ 19,403,348         $ 16,608,055
                                              ============         ============

(7)   Property, Plant, and Equipment

      Components  of property,  plant,  and  equipment at June 30 consist of the
      following:

                                                  2005                 2004
                                              ------------         ------------
Land and land improvements                    $  2,207,823         $  1,874,323
Buildings, furniture, and fixtures              16,654,351           13,200,633
Machinery and equipment                         51,680,883           48,213,982
                                              ------------         ------------
                                                70,543,057           63,288,938
Less accumulated depreciation
  and amortization                              45,559,404           41,946,384
                                              ------------         ------------
                                              $ 24,983,653         $ 21,342,554
                                              ============         ============

(8)   Accrued Expenses

      Accrued expenses at June 30 consist of the following:

                                                  2005                 2004
                                              ------------         ------------
Compensation                                  $  1,222,891         $  1,698,411
Commissions                                        620,990              386,075
Restructuring (note 9)                              19,863               32,870
Health insurance                                   271,561              371,010
Lease buyout                                            --              350,000
Other                                              196,580              254,004
                                              ------------         ------------
                                              $  2,331,885         $  3,092,370
                                              ============         ============

                                                                     (Continued)


                                       51
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(9)   Restructuring and Impairment

      Fiscal 2003 Restructuring

      In  September  2002,  March  2003,  April 2003 and June 2003,  the Company
      recorded  restructuring  and  other  nonrecurring  charges  at its  Anaren
      Europe, RF Power and Anaren Microwave,  Inc. subsidiaries  associated with
      the Company's  strategic  restructuring  plan. The  restructuring  plan is
      designed to improve both financial  results and the long-term value of the
      business.  The restructuring charges consisted of workforce reductions and
      asset write-offs.

      As a result of this plan, the Company recorded total pretax  restructuring
      charges of $2,537,291 for the year ended June 30, 2003, as follows:

      RF Power                                                        $  295,706
      Anaren Microwave, Inc.                                             498,821
                                                                      ----------
        Restructuring costs included in
          continuing operations                                          794,527

      Anaren Europe                                                    1,742,764
                                                                      ----------
                                                                      $2,537,291
                                                                      ==========

      Anaren Europe includes  charges related to employee  separation  costs (91
      position),  and  inventory  write-offs.  On July  10,  2003,  the  Company
      announced its decision to dispose of its Anaren Europe  operation.  Anaren
      Europe  operations  were  discontinued  during the first quarter of fiscal
      2004, as described in note 4.

      RF Power and Anaren Microwave,  Inc. include employee separation costs (16
      and 30 positions, respectively).

      Additionally, the Company recognized asset impairment charges (included in
      discontinued  operations)  in the amount of $2,720,626 for the year ending
      June 30,  2003  attributable  to  certain  assets  of  Anaren  Europe,  as
      discussed in note 4.

      Reconciliation of the restructuring liability is as follows:

<TABLE>
<CAPTION>
                                                                               Year ending June 30, 2003
                                                                           ----------------------------------              Balance
                                                       2003                    Cash                 Noncash                June 30,
                                                     provision             expenditures            write-offs               2003
                                                    -----------            ------------           -----------            -----------
<S>                                                 <C>                    <C>                    <C>                    <C>
Severance                                           $ 1,850,460            $(1,173,209)           $        --            $   677,251
Outplacement services                                   112,540                (78,906)                    --                 33,634
Inventory write-off                                     428,000                     --               (428,000)                    --
Other                                                   146,291               (155,291)                 9,000                     --
                                                    -----------            -----------            -----------            -----------
                                                    $ 2,537,291            $(1,407,406)           $  (419,000)           $   710,885
                                                    ===========            ===========            ===========            ===========
</TABLE>

                                                                     (Continued)


                                       52
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

<TABLE>
<CAPTION>
                                                                                Year ending June 30, 2004
                                                      Balance              ----------------------------------              Balance
                                                     June 30,                  Cash                 Noncash                June 30,
                                                       2003                expenditures            write-offs               2004
                                                    -----------            ------------           -----------            -----------
<S>                                                 <C>                    <C>                    <C>                    <C>
Severance                                           $   677,251            $  (644,381)           $        --            $    32,870
Outplacement services and
  other                                                  33,634                (33,634)                    --                     --
                                                    -----------            -----------            -----------            -----------
                                                    $   710,885            $  (678,015)           $        --            $    32,870
                                                    ===========            ===========            ===========            ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                Year ending June 30, 2005
                                                      Balance              ----------------------------------              Balance
                                                     June 30,                  Cash                 Noncash                June 30,
                                                       2004                expenditures            write-offs               2005
                                                    -----------            ------------           -----------            -----------
<S>                                                 <C>                    <C>                    <C>                    <C>
Severance                                           $    32,870            $   (32,870)           $        --            $        --
                                                    -----------            -----------            -----------            -----------
                                                    $    32,870            $   (32,870)           $        --            $        --
                                                    ===========            ===========            ===========            ===========
</TABLE>

      Fiscal 2005 Restructuring

      RF Power Components, Inc.

      On October 26, 2004,  the Company  announced  that in order to  accelerate
      ceramic product growth  initiatives and improve operating  efficiency,  it
      had  decided to  consolidate  its RF Power  operation  with the  Company's
      Amitron operation and close RF Power's facility in Bohemia,  New York. The
      consolidated operation,  Anaren Ceramics,  Inc., operates at the Company's
      newly  acquired  Salem,  NH  facility,  which will fully  accommodate  the
      current  capacity  needs of the  combined  entity  as well as  significant
      future  growth.  The  move of the RF  Power  operation  to the  Salem,  NH
      facility was completed  during the second quarter ended December 31, 2004.
      As a result of the  facility  closure  and move,  the  Company  recognized
      consolidation  costs of $458,335 for severance and  outplacement,  $91,000
      for lease cancellation  (included in general and  administrative  expense)
      and $300,000 for  additional  inventory  write-downs  (included in cost of
      sales) during the second quarter.  All of RF Power's employees were either
      terminated or transferred to the New Hampshire facility.

      Additionally,  included in general  and  administrative  expenses  for the
      wireless  segment is a $272,000  write-down  of RF Power Custom  automated
      equipment  that became  impaired in the third quarter of fiscal year 2005.
      The remaining  market value of the custom  equipment was determined  based
      upon quoted values of similar types of equipment.

<TABLE>
<CAPTION>
                                                                                Year ending June 30, 2005
                                                     Balance               -----------------------------------            Balance
                                                     June 30,                 Costs                   Cash                June 30,
                                                       2004                 incurred              expenditures              2005
                                                    -----------            -----------            ------------           -----------
<S>                                                 <C>                    <C>                    <C>                    <C>
Severance payments                                  $        --            $   391,575            $  (371,712)           $    19,863
Outplacement services and                                    --                 66,760                (66,760)                    --
                                                    -----------            -----------            -----------            -----------
                                                    $        --            $   458,335            $  (438,472)           $    19,863
                                                    ===========            ===========            ===========            ===========
</TABLE>

                                                                     (Continued)


                                       53
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(10)  Other Liabilities

      Other liabilities as of June 30 consist of the following:

                                                  2005                 2004
                                              ------------         ------------
Deferred compensation                         $    650,064         $    506,190
Pension liability                                  675,000              750,000
Other                                              287,450              230,784
                                              ------------         ------------
                                                 1,612,514            1,486,974
Less current portion                             1,044,759            1,045,784
                                              ------------         ------------
                                              $    567,755         $    441,190
                                              ============         ============

      During fiscal 1998, the Company  implemented a deferred  compensation plan
      for an employee. Under the plan, the Company will pay $65,000 annually for
      fifteen years upon the employee's retirement or, in the event of death, to
      the employee's beneficiary.  During fiscal 2002, the employee was deceased
      and  the  annual  compensation  is  being  paid to the  former  employee's
      beneficiary.

      In  fiscal  year  2004,   the  Company  began   accruing  for  a  deferred
      compensation  agreement that the Company  entered into with an employee in
      March 2004. Under the terms of this contract the Company has agreed to pay
      $250,000, annually, to this employee beginning in July 2007.

(11)  Long-Term Debt

      The Company had a $10,000,000  unsecured working capital revolving line of
      credit bearing  interest at prime. The line of credit was cancelled by the
      Company on September 30, 2002.

      Cash payments for annual fees relating to  maintaining  the line of credit
      were $9,375 during fiscal 2003.

(12)  Common Stock

      On December 2, 2000, the Company's  shareholders  approved an amendment to
      the Certificate of Incorporation to increase the total number of shares of
      common stock from 25,000,000 to 200,000,000.

(13)  Stock Option Plans

      Under the Company's Key Employee Incentive Stock Option Plan (Key Employee
      Plan),  options are granted at a price not less than fair market  value of
      shares at the date of grant,  become  exercisable  20% six months from the
      date of grant and 20% per year  thereafter,  and must be exercised  within
      ten years of the date of grant.

      In November 2000, the Company  established the  Company-Wide  Stock Option
      Plan   (Company-Wide   Plan).  All  Company   employees  are  eligible  to
      participate in the Company-Wide  Plan in any given fiscal year, except for
      employees who have been granted options under the Key Employee Plan in any
      given fiscal  year.  Options are granted at a price not less than the fair
      market value of shares at the date of grant,  become exercisable 36 months
      from the date of grant,  and must be  exercised  within  five years of the
      date of grant.

                                                                     (Continued)


                                       54
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      The Company also has a  Nonstatutory  Stock Option Plan (NSO) which allows
      for the granting of options to Board members and  nonemployees.  Under the
      Plan,  shares of common stock were reserved for the granting of options at
      prices to be determined by the Board (options granted to Board members may
      not be less  than the fair  market  value on the date of  grant).  Options
      become exercisable  immediately and must be exercised within five years of
      the date of grant.

      In November 2004, the shareholders  approved the amendment and restatement
      of the Company's  three existing stock option plans,  which combined these
      plans under one single  consolidated equity compensation plan, the Anaren,
      Inc.  Comprehensive  Long-Term Incentive Plan. The effect of the amendment
      and  restatement  was to combine the separate  shares pools  available for
      grant under the three existing plans into a single grant pool,  expand the
      type of  equity-based  awards the Company may grant and extend the term of
      the  combined  plan to October 31,  2014.  Under the  restated  plan,  the
      Company may issue  incentive  stock options,  nonstatutory  stock options,
      stock  appreciation  rights,  restricted stock,  performance  shares,  and
      performance  units.  At June 30, 2005,  the Company had  1,652,318  shares
      available for grant under the restated plan.

      Information  for the three years ended June 30, 2005 with respect to these
      plans are as follows:

<TABLE>
<CAPTION>
                                                                       Shares
                                   ----------------------------------------------------------------------------------
                                              ISO                                                                         Weighted
                                   ---------------------------                                                             average
                                      Key             Company-                                            Option          exercise
                                   Employee            Wide              NSO            Total              price            price
                                   ---------          --------         -------        ---------       ---------------      ------
<S>                                <C>                <C>              <C>            <C>             <C>                  <C>
Outstanding at
  June 30, 2002                    2,170,250          131,900          191,500        2,493,650       1.38 to 62.44        $16.15

  Issued                             342,000           37,100           32,000          411,100       8.57 to 10.18          9.46
  Exercised                          (24,300)              --          (27,000)         (51,300)      1.38 to 7.10           4.83
  Expired                            (49,450)         (25,400)              --          (74,850)      9.51 to 53.00         24.96
  Canceled                           (49,220)              --          (12,000)         (61,220)      12.42 to 53.00        26.38
                                   ---------          -------          -------        ---------
Outstanding at
  June 30, 2003                    2,389,280          143,600          184,500        2,717,380       $1.38 to $62.44       14.88

  Issued                             328,500           37,900           29,000          395,400       $14.73 to 17.24       14.77
  Exercised                         (228,250)              --          (40,500)        (268,750)      $1.38 to 16.35         5.81
  Expired                            (23,438)          (1,100)              --          (24,538)      $9.51 to 53.00        23.59
  Canceled                           (14,430)          (8,400)              --          (22,830)      $9.51 to 53.00        28.66
                                   ---------          -------          -------        ---------
Outstanding at
  June 30, 2004                    2,451,662          172,000          173,000        2,796,662       $1.38 to 62.44        15.53

  Issued                             315,500           45,100           29,000          389,600       $12.05 to 13.43       12.05
  Exercised                          (98,460)              --               --          (98,460)      $1.38 to 9.51          1.26
  Expired                           (163,092)         (20,100)         (37,500)        (220,692)      $8.57 to 62.44        26.90
  Canceled                           (34,330)         (50,000)              --          (84,330)      $9.51 to 62.44        11.28
                                   ---------          -------          -------        ---------
Outstanding at
  June 30, 2005                    2,471,280          147,000          164,500        2,782,780       $2.27 to $57.59       14.73
                                   =========          =======          =======        =========
Shares exercisable at
     June 30, 2005                 1,476,188           68,500          164,500        1,709,188       $2.27 to $57.59      $14.89
</TABLE>

                                                                     (Continued)


                                       55
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      The following  table  summarizes  significant  ranges of  outstanding  and
      exercisable options at June 30, 2005:

                    Options outstanding                      Options exercisable
----------------------------------------------------------   -------------------
                                     Weighted     Weighted              Weighted
    Range of                         average      average               average
    exercise                        remaining     exercise              exercise
     prices            Shares     life in years    price       Shares    price
----------------      ---------   -------------   --------   ---------  --------
$  1.00 - $5.00         182,800        1.48        $ 2.45      182,800   $ 2.45
$  5.01 - $15.00      2,207,250        5.70         11.42    1,212,390    10.62
$ 15.01 - $40.00        198,630        5.80         22.22      149,598    20.37
$ 40.01 - $65.00        194,100        4.93         54.48      164,400    53.11
                      ---------                              ---------
                      2,782,780                              1,709,188
                      =========                              =========

      The per share weighted  average fair value of stock options granted during
      fiscal  years  2005,  2004,  and  2003  was  $7.79,   $10.78,  and  $6.48,
      respectively.  The fair  value of  options  at the date of the  grant  was
      estimated using the Black-Scholes model with the following assumptions for
      the respective fiscal year:

                                                    2005       2004       2003
                                                   ------     ------     ------
Expected option life - key employee plan               5          5          5
Expected option life - company-wide plan               3          3          3
Weighted average risk-free interest rate            3.22%      3.15%      3.20%
Weighted average expected volatility               87.57%     98.00%     89.00%
Expected dividend yield                               --         --         --

(14)  Restricted Stock Program

      On November 17, 2004,  the Company  issued a new grant of 23,500 shares of
      restricted stock. The per-share price of the grant was $13.60.  The shares
      of restricted stock vest after a 36-month period.

      As of June 30,  2005,  2004,  and 2003,  the  Company  has  issued  shares
      aggregating 23,500, 21,600, and 21,600, respectively, under its Restricted
      Stock Program.  During fiscal year 2005, there were 1,900 shares forfeited
      and 19,700  shares that  matured.  There were 5,888 shares  forfeited  and
      75,488 shares that matured  during 2003.  The shares of  restricted  stock
      vest  after a period of 36 and 48  months.  For the years  ended  June 30,
      2005,  2004,  and  2003  the  Company  recognized   compensation   expense
      associated with the lapse of restrictions (net of forfeitures) aggregating
      $65,710, $286,200, and $451,331, respectively.

                                                                     (Continued)


                                       56
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(15)  Accumulated Other Comprehensive Income (Loss)

      The   cumulative   balance  of  each   component  of   accumulated   other
      comprehensive income (loss) is as follows:

<TABLE>
<CAPTION>
                                                                                          Unrealized
                                                      Foreign            Minimum        gain/(loss) on      Accumulated
                                                     currency            pension          securities           other
                                                    translation         liability       available-for-     comprehensive
                                                     adjustment         adjustment          sale           income (loss)
                                                    -----------        -----------      --------------     -------------
<S>                                                 <C>                <C>               <C>                <C>
Balances at June 30, 2004                           $   736,021        $  (567,776)      $  (127,135)       $    41,110
Current period change                                     1,950           (917,734)          127,135           (788,649)
                                                    -----------        -----------       -----------        -----------
Balances at June 30, 2005                           $   737,971        $(1,485,510)      $        --        $  (747,539)
                                                    ===========        ===========       ===========        ===========
</TABLE>

(16)  Shareholder Protection Rights Plan

      In April 2001,  the board of directors  adopted a  Shareholder  Protection
      Rights Plan. The plan provides for a dividend distribution of one right on
      each outstanding share of the Company's stock, distributed to shareholders
      of record on April 27, 2001. The rights will be exercisable and will allow
      the shareholders to acquire common stock at a discounted price if a person
      or group acquires 20% or more of the  outstanding  shares of common stock.
      Rights  held by  persons  who exceed the 20%  threshold  will be void.  In
      certain circumstances, the rights will entitle the holder to buy shares in
      an acquiring entity at a discounted  price. The board of directors may, at
      its  option,  redeem  all rights for $0.001 per right at any time prior to
      the rights becoming exercisable. The rights will expire on April 27, 2011,
      unless earlier redeemed, exchanged or amended by the Board.

                                                                     (Continued)


                                       57
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(17)  Employee Benefit Plans

      The Company has a  noncontributory  defined  benefit pension plan covering
      substantially all of its employees. Effective August 15, 2000 the plan was
      closed for new participants.  Benefits under this plan generally are based
      on the employee's years of service and  compensation.  The following table
      presents  the changes in the  defined  benefit  pension  plan and the fair
      value of the Plan's assets for the years ended June 30:

<TABLE>
<CAPTION>
                                                                            2005                   2004                   2003
                                                                        ------------           ------------           ------------
<S>                                                                     <C>                    <C>                    <C>
Change in benefit obligation:
  Benefit obligation at beginning of year                               $  9,350,523           $  9,011,361           $  7,277,360
  Service cost                                                               247,301                262,849                212,865
  Interest cost                                                              564,361                540,825                504,758
  Actuarial (gain) loss                                                    1,737,221               (169,012)             1,280,223
  Benefits paid                                                             (362,295)              (295,500)              (263,845)
                                                                        ------------           ------------           ------------
  Benefit obligation at end of year                                     $ 11,537,111           $  9,350,523           $  9,011,361
                                                                        ============           ============           ============
Change in plan assets:
  Fair value of plan assets at beginning
    of year                                                             $  7,234,214           $  6,334,848           $  6,106,958
  Actual return on plan assets                                               594,742                790,353                231,104
  Employer contributions                                                     685,182                365,130                260,631
  Benefits paid                                                             (362,295)              (256,117)              (263,845)
                                                                        ------------           ------------           ------------
  Fair value of plan assets at end of year                              $  8,151,843           $  7,234,214           $  6,334,848
                                                                        ============           ============           ============
Under funded status                                                     $ (3,385,268)          $ (2,116,309)          $ (2,676,513)
Unrecognized net loss                                                      3,449,148              1,729,576              2,300,138
Unrecognized net obligation existing at
  initial application                                                             --                     --                     --
Unrecognized prior service cost                                               (4,530)                 5,960                 24,199
Adjustment required to recognize minimum
  liability                                                               (2,237,066)              (823,787)            (1,503,213)
                                                                        ------------           ------------           ------------
        Accrued pension cost                                            $ (2,177,716)          $ (1,204,560)          $ (1,855,389)
                                                                        ============           ============           ============
Weighted average assumptions:

  Discount rate at year-end                                                     5.25%                  6.25%                  6.00%
  Rate of increase in compensation levels
    at year end                                                                 4.00                   4.00                   4.00
  Expected return on plan assets during
    the year                                                                    8.50                   8.50                   8.50
  Measurement date                                                           June 30                June 30                June 30
</TABLE>

                                                                     (Continued)


                                       58
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      Components of net periodic pension cost for the years ended June 30 are as
      follows:

<TABLE>
<CAPTION>
                                                                            2005                   2004                   2003
                                                                        ------------           ------------           ------------
<S>                                                                     <C>                    <C>                    <C>
Service cost                                                            $    247,301           $    262,849           $    212,865
Interest cost                                                                564,361                540,825                504,758
Expected return on plan assets                                              (626,751)              (536,451)              (513,035)
Amortization of initial unrecognized
  obligation                                                                      --                     --                  9,463
Amortization of unrecognized prior
  service cost                                                                10,490                 18,239                 18,239
Amortization of unrecognized (gain) loss                                      49,658                108,265                  5,634
                                                                        ------------           ------------           ------------
        Net periodic pension cost                                       $    245,059           $    393,727           $    237,924
                                                                        ============           ============           ============
Weighted average assumptions:

  Discount rate                                                                 6.25%                  6.00%                  7.00%
  Expected increase in compensation levels
    at year end                                                                 4.00                   4.00                   4.00
  Expected return on plan assets during
    the year                                                                    8.50                   8.50                   8.50
</TABLE>

      Plan Assets

<TABLE>
<CAPTION>
                                                                         2005                                 2004
                                                             -----------------------------        -----------------------------
                                                                Actual          Percentage          Actual           Percentage
                                                              allocation        allocation        allocation         allocation
                                                             -----------        ----------        -----------        ----------
<S>                                                          <C>                    <C>           <C>                    <C>
Money market                                                 $   218,514            2.68%         $    53,973            0.75%
Common equities                                                  329,835            4.05              326,569            4.51
Corporate debt securities                                      1,370,775           16.82            1,088,944           15.05
Government debt securities                                     1,769,844           21.71            1,650,367           22.82
Global equity mutual fund                                        471,510            5.78              429,000            5.93
Closed end equity mutual funds                                 3,991,365           48.96            3,685,361           50.94
                                                             -----------          ------          -----------          ------
                                                             $ 8,151,843          100.00%         $ 7,234,214          100.00%
                                                             ===========          ======          ===========          ======
</TABLE>

      Plan's  Investment  Policy:  Investments  shall  be made  pursuant  to the
      following  objectives:  1) preserve purchasing power of plan's assets base
      adjusted for inflation;  2) provide long term growth; 3) avoid significant
      volatility.  Asset  allocation  shall be  determined  based on a long term
      target  allocation  having 30% of assets  invested in  Large-Cap  domestic
      equities,  12% in mid-cap  domestic  equities,  12% in small-cap  domestic
      equities, 8% in international  equities, and 40% in the broad bond market,
      with  little or none  invested in cash.  Both  investment  allocation  and
      performance shall be reviewed periodically.

                                                                     (Continued)


                                       59
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      Determination of Assumed Rate of Return

      The  Corporation  has  selected  the assumed  rate of return  based on the
      following:

                                                    Expected
                                                    compound
                                      Target       annualized        Expected
                                    percentage       5-year          weighted
                                    allocation   (index) return   average return
                                    ----------   --------------   --------------
Large-cap stocks                       30.00%        11.30%            3.39%
Mid-cap stocks                         11.00         12.80             1.41
Small-cap stocks                       11.00         13.10             1.44
International common stocks             8.00         10.40             0.83
Broad bond market                      40.00          4.70             1.88
                                      ------                           ----
        Total                         100.00%                          8.95%
                                      ======                           ====

      The  Company  estimated  investment  expenses of  approximately  1% of the
      portfolio annually.

      Expected Contributions

      Expected contributions for fiscal 2006 are $675,000.

      Estimated Future Benefit Payments

      The following estimated benefit payments, which reflect future service, as
      appropriate, are expected to be paid:

             July 1, 2005 - June 30, 2006              $  402,899
             July 1, 2006 - June 30, 2007                 405,260
             July 1, 2007 - June 30, 2008                 472,452
             July 1, 2008 - June 30, 2009                 483,474
             July 1, 2009 - June 30, 2010                 521,588
             Years 2010-2014                            2,981,761

      The Company  maintains a voluntary  contributory  salary  savings  plan to
      which  participants may contribute up to 15% of their total  compensation.
      The  Company's   matching   contribution  is  75%  of  the   participants'
      contribution  up to a  maximum  of 5% of the  participants'  compensation.
      During fiscal 2005,  2004,  and 2003,  the Company  contributed  $530,626,
      $445,766, and $568,721 respectively, to this plan.

      The  Company  maintains  a profit  sharing  plan which  provides an annual
      contribution by the Company based upon a percentage of operating earnings,
      as defined.  Eligible  employees  are  allocated  amounts under the profit
      sharing   plan  based  upon  their   respective   earnings,   as  defined.
      Contributions under the plan were approximately  $176,000,  $258,947,  and
      $240,500 in fiscal 2005, 2004, and 2003,  respectively.  While the Company
      intends to continue this plan, it reserves the right to terminate or amend
      the Plan at any time.

                                                                     (Continued)


                                       60
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(18)  Postretirement Benefits

      The Company  provides  medical  coverage  for current and future  eligible
      retirees  of  the  Company  plus  their  eligible  dependents.   Employees
      generally  become eligible for retiree  medical  coverage by retiring from
      the  Company  after  attaining  at least  age 55 with 15 years of  service
      (active  employees  at June 27,  1993  were  eligible  by  retiring  after
      attaining at least age 55 with 10 years of service).  Retirees at June 27,
      1993 pay  approximately  $30 per month for health  care  coverage  and the
      Company is responsible for paying the remaining costs. For this group, any
      increase  in health care  coverage  costs for  retired  employees  will be
      shared by the  Company  and  retirees on a  fifty-fifty  basis,  while any
      increase in coverage costs for retiree  dependents will be totally paid by
      the retirees.  For eligible  employees  retiring  after June 26, 1993, the
      Company  contributes a fixed dollar amount towards the cost of the medical
      plan. Any future cost increases for the retiree  medical program for these
      participants will be charged to the retiree.

      The following  table  presents the changes in the  postretirement  benefit
      obligation and the funded status of the Plan at June 30:

<TABLE>
<CAPTION>
                                                                            2005                   2004                   2003
                                                                        ------------           ------------           ------------
<S>                                                                     <C>                    <C>                    <C>
Benefit obligation at beginning of year                                 $  1,910,271           $  1,915,728           $  1,720,753
Service cost                                                                  57,139                 61,145                 48,018
Interest cost                                                                185,309                111,207                119,861
Plan participants' contributions                                             119,636                 61,362                 53,498
Actuarial (gain) loss                                                        854,315                (98,279)               194,229
Benefits paid                                                               (245,196)              (140,892)              (220,631)
                                                                        ------------           ------------           ------------
Benefit obligation at end of year                                       $  2,881,474           $  1,910,271           $  1,915,728
                                                                        ============           ============           ============
Fair value of plan assets                                               $         --           $         --           $         --
Under funded status                                                       (2,881,474)            (1,910,271)            (1,915,728)
Unrecognized actuarial loss                                                1,131,002                351,839                468,585
                                                                        ------------           ------------           ------------
        Accrued postretirement
          benefit cost                                                  $ (1,750,472)          $ (1,558,432)          $ (1,447,143)
                                                                        ============           ============           ============
</TABLE>

       Net periodic postretirement benefit cost includes the following
components:

<TABLE>
<CAPTION>
                                                                            2005                   2004                   2003
                                                                        ------------           ------------           ------------
<S>                                                                     <C>                    <C>                    <C>
Service cost                                                            $     57,139           $     61,145           $     48,018
Interest cost                                                                185,309                111,207                119,861
Amortized loss                                                                75,152                 18,467                  6,312
                                                                        ------------           ------------           ------------
        Net periodic postretirement
          benefit cost                                                  $    317,600           $    190,819           $    174,191
                                                                        ============           ============           ============
</TABLE>

                                                                     (Continued)


                                       61
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      The weighted  average  discount rate used in determining  the  accumulated
      postretirement  benefit obligation was 5.25%, 6.25%, and 6.00%, at the end
      of fiscal 2005, 2004, and 2003,  respectively.  For measurement  purposes,
      the annual rate of  increase  in the per capita  cost of covered  benefits
      (i.e.,  health care cost trend rate) was assumed to be 5% for 2005,  2004,
      and  2003.  The  health  care  cost  trend  rate  assumption  may  have  a
      significant effect on the amounts reported.  A one-percentage point change
      in assumed health care cost trend rates would have the following effects:

                                                 1% increase    1% decrease
                                                 -----------    -----------
Effect on total of service and interest
  cost components                                  $ 19,246      $ (16,995)
Effect on postretirement benefit
  obligation                                        247,000       (218,169)

      Estimated Future Benefit Payments

      Shown  below  are  the  expected   gross   benefit   payments   (including
      prescription  drug  benefits)  and the  expected  gross  amount of subsidy
      receipts.

                                                         Gross         Subsidy
                                                        payments       receipts
                                                       ----------      ---------
2006                                                   $  193,340       (17,501)
2007                                                      204,568       (39,381)
2008                                                      199,315       (48,950)
2009                                                      214,433       (53,689)
2010                                                      216,942       (59,938)
2010-2015                                               1,127,470      (402,612)

                                                                     (Continued)


                                       62
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

(19)  Income Taxes

      The following table presents the Domestic and Foreign components of income
      (loss) before  income taxes and  discontinued  operations  and the expense
      (benefit)  for income  taxes as well as the taxes  charged or  credited to
      stockholders' equity:

<TABLE>
<CAPTION>
                                                                                            Year ended June 30
                                                                        ----------------------------------------------------------
                                                                            2005                   2004                   2003
                                                                        ------------           ------------           ------------
<S>                                                                     <C>                    <C>                    <C>
Income (loss) before income taxes
  and discontinued operations:
    Domestic                                                            $  8,620,237           $ 11,873,719           $  4,761,726
    Foreign                                                                  530,299             (1,511,905)              (388,958)
                                                                        ------------           ------------           ------------
                                                                        $  9,150,536           $ 10,361,814           $  4,372,768
                                                                        ============           ============           ============
Income tax expense (benefit) charged
  (credited) to the income statement
  from continuing operations:
    Current:
      Federal                                                           $    951,453           $  2,827,536           $   (411,978)
      State and local                                                        227,645                  8,246               (181,700)
      Foreign                                                                     --                     --                     --
                                                                        ------------           ------------           ------------
        Total current                                                      1,179,098              2,835,782               (593,678)
                                                                        ------------           ------------           ------------
    Deferred:
      Federal                                                                558,457               (523,921)               747,754
      State and local                                                            445                383,139                644,192
      Foreign                                                                     --                     --                     --
                                                                        ------------           ------------           ------------
        Total deferred                                                       558,902               (140,782)             1,391,946
                                                                        ------------           ------------           ------------
        Subtotal                                                           1,738,000              2,695,000                798,268
                                                                        ------------           ------------           ------------
Income taxes charged (credited)
  to the income statement from
  discontinued operations:
    Foreign                                                                       --             (1,800,000)              (662,268)
                                                                        ------------           ------------           ------------
        Subtotal                                                                  --             (1,800,000)              (662,268)
                                                                        ------------           ------------           ------------
        Total income taxes charged
          (credited) to the income
          statement                                                        1,738,000                895,000                136,000
                                                                        ------------           ------------           ------------
</TABLE>

                                                                     (Continued)


                                       63
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

<TABLE>
<CAPTION>
                                                                                            Year ended June 30
                                                                        ----------------------------------------------------------
                                                                            2005                   2004                   2003
                                                                        ------------           ------------           ------------
<S>                                                                     <C>                    <C>                    <C>
Income taxes charged (credited)
  to stockholders' equity:
    Current benefit of stock based
      compensation                                                      $    (29,308)          $   (794,500)          $    (68,477)
    Deferred taxes (benefit) of
      stock based compensation                                               302,959                 (3,130)               158,800
    Deferred taxes (benefit) from
      recognition of minimum pension
      liability                                                             (468,112)               255,081               (456,355)
                                                                        ------------           ------------           ------------
        Income taxes charged (credited)
          to stockholders' equity                                           (194,461)              (542,549)              (366,032)
                                                                        ------------           ------------           ------------
        Total income taxes                                              $  1,543,539           $    352,451           $   (230,032)
                                                                        ============           ============           ============
</TABLE>

      A reconciliation of the expected consolidated income tax expense, computed
      by applying the U.S.  Federal  corporate  income tax rate of 34% to income
      before income taxes and discontinued operations, to income tax expense, is
      as follows:

<TABLE>
<CAPTION>
                                                                            2005                   2004                   2003
                                                                        ------------           ------------           ------------
<S>                                                                     <C>                    <C>                    <C>
Expected consolidated income tax expense                                $  3,111,182           $  3,523,017           $  1,486,741
State taxes, net of Federal benefit                                          150,539                258,314                305,245
Nontaxable interest income                                                  (403,498)              (382,546)              (518,750)
Increase in valuation allowance                                               40,827                226,786                 58,344
Foreign tax rate differential                                               (154,965)               287,262                 73,902
Adjustment of prior years' taxes                                                  --                     --               (158,420)
Export tax benefits                                                         (708,640)              (808,124)              (278,123)
Research credits                                                            (175,380)              (371,870)              (184,939)
Other, net                                                                  (122,065)               (37,839)                14,268
                                                                        ------------           ------------           ------------
                                                                        $  1,738,000           $  2,695,000           $    798,268
                                                                        ============           ============           ============
</TABLE>

                                                                     (Continued)


                                       64
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

       The tax effects of temporary differences that give rise to the deferred
       tax assets and deferred tax liabilities at June 30 are presented below:

                                                  2005                 2004
                                              ------------         ------------
Deferred tax assets:
  Inventories                                 $    800,096         $    535,459
  Deferred compensation                            362,833              280,050
  Retirement benefits                              554,509              396,046
  Postretirement benefits                          665,179              592,204
  Restricted stock                                  26,988              398,772
  Nondeductible reserves                            94,019              418,548
  Net unrealized loss on investments                    --               48,311
  Federal and state tax attribute
    carryforwards                                1,073,508            1,268,463
  Foreign and state net operating
    loss carryforwards                             184,748              327,574
                                              ------------         ------------
        Gross deferred tax assets                3,761,880            4,265,427

  Valuation allowance                             (368,400)            (375,884)
                                              ------------         ------------
        Net deferred tax assets                  3,393,480            3,889,543
                                              ------------         ------------
Deferred tax liabilities:
  Plant and equipment, principally
    due to differences in
    depreciation                                (2,361,348)          (2,647,279)
  Intangible assets including
    goodwill                                    (1,973,025)          (1,789,412)
                                              ------------         ------------
        Net deferred tax liabilities            (4,334,373)          (4,436,691)
                                              ------------         ------------
        Net deferred taxes                    $   (940,893)        $   (547,148)
                                              ============         ============

                                                  2005                 2004
                                              ------------         ------------
Presented as:
  Current deferred tax asset                  $    686,411         $  1,037,103
  Long-term deferred tax liability              (1,627,304)          (1,584,251)
                                              ------------         ------------
                                              $   (940,893)        $   (547,148)
                                              ============         ============

      In  assessing  the  realizability  of  deferred  tax  assets,   management
      considers  whether it is more likely than not that some  portion or all of
      the deferred tax assets will not be realized.  The ultimate realization of
      deferred tax assets is dependent  upon the  generation  of future  taxable
      income  during the periods in which  those  temporary  differences  become
      deductible.  Management  considers the scheduled  reversal of deferred tax
      liabilities,  projected future taxable income, and tax planning strategies
      in making this assessment.

      At June 30, 2005,  the Company has a valuation  allowance of $368,400 with
      respect to capital loss  carryforwards and foreign and state net operating
      loss carryforwards, representing a decrease of $7,484 from June 30, 2004.

                                                                     (Continued)


                                       65
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      At June  30,  2004,  the  Company  had  unrealized  losses  on  securities
      available-for-sale  of  $127,135  and a  related  valuation  allowance  of
      $48,311.  During 2005, the  securities  were sold resulting in $342,715 of
      losses  characterized for income tax purposes as capital losses, which may
      only be used to offset  capital  gains and expire in 2010.  As a result of
      these limitations,  at June 30, 2005 the Company has a valuation allowance
      of $130,231 with respect to these losses.

      The Company has state net  operating  loss  carryforwards  of  $2,478,742,
      which  begin to  expire  in 2007.  At June 30,  2005,  the  Company  had a
      valuation  allowance of $139,057 with respect to these losses representing
      an increase of $96,613 from June 30, 2004. As a result of  relocating  its
      Amitron operation from Massachusetts to New Hampshire, management believes
      it is more  likely  than not  that the  Company  will  not  realize  these
      deferred tax benefits.

      The Company's  subsidiary in China has net operating loss carryforwards of
      $304,609.  At June 30,  2005 the  Company  has a  valuation  allowance  of
      $99,112 with respect to the net operating loss carryforwards, representing
      a decrease of $186,017.  The subsidiary will be eligible for a tax holiday
      for five years  beginning  with the first year taxable  income exceeds the
      net  operating  loss  carryforwards.  The tax  benefit  varies  during the
      five-year holiday once it begins.

      Based upon the level of  historical  taxable  income and  projections  for
      future taxable income,  management believes it is more likely than not the
      Company will  realize the benefits of the deferred tax assets,  net of the
      existing valuation allowance.

      At June 30,  2005,  the  Company  has  Federal  and  State  tax  attribute
      carryforwards of $1,064,083, the majority of which expire at various dates
      from 2010 through 2025. Cash payments  (receipts) for income taxes (net of
      refunds) were $890,601,  $(1,903,464),  and $678,329 in fiscal 2005, 2004,
      and 2003, respectively.

(20)  Segment and Related Information

      (a)   Segments

            The Company operates  predominately in the wireless  communications,
            satellite communications, and space and defense electronics markets.
            The Company's two reportable segments are the Wireless Group and the
            Space and Defense Group.  These segments have been determined  based
            upon the nature of the products and services offered, customer base,
            technology, availability of discrete internal financial information,
            homogeneity of products,  and delivery  channel,  and are consistent
            with  the  way  the  Company   organizes  and  evaluates   financial
            information  internally for purposes of making  operating  decisions
            and assessing performance.

            The wireless segment designs,  manufactures,  and markets commercial
            products  used mainly by the  wireless  communications  market.  The
            space and defense segment of the business designs, manufactures, and
            markets   specialized   products   for  the  radar   and   satellite
            communications  markets.  The revenue  disclosures for the Company's
            reportable segments depict products that are similar in nature.

                                                                     (Continued)


                                       66
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

            The following  table reflects the operating  results of the segments
            consistent with the Company's internal financial  reporting process.
            The  following  results  are used in part,  by  management,  both in
            evaluating the performance of, and in allocating  resources to, each
            of the segments:

<TABLE>
<CAPTION>
                                                                                      Corporate
                                                                    Space and            and
                                                  Wireless           defense         unallocated        Consolidated
                                                 -----------       -----------       -----------        ------------
<S>                                              <C>               <C>               <C>                <C>
Net sales:
     2005                                        $64,169,326       $30,291,739       $         --       $ 94,461,065
     2004                                         58,078,091        27,000,848                 --         85,078,939
     2003                                         46,629,492        28,890,528                 --         75,520,020

Operating income (loss):
     2005                                          2,233,614         5,347,430                 --          7,581,044
     2004                                          4,373,892         4,319,703                 --          8,693,595
     2003                                         (2,519,188)        4,731,424                 --          2,212,236

Goodwill and intangible assets:
     June 30, 2005                                31,389,102                --                 --         31,389,102
     June 30, 2004                                31,959,747                --                 --         31,959,747

Identifiable assets:*
     June 30, 2005                                21,497,591        12,685,903        109,909,259        144,092,753
     June 30, 2004                                19,591,043        10,829,864        145,101,834        175,522,741

Depreciation:**
     2005                                          2,839,280         2,047,874                 --          4,887,154
     2004                                          2,420,370         1,876,629                 --          4,296,999
     2003                                          2,348,567         1,555,741                 --          3,904,308

Intangibles amortization:***
     2005                                            570,645                --                 --            570,645
     2004                                            709,539                --                 --            709,539
     2003                                            499,539                --                 --            499,539
</TABLE>

            *     Segment assets primarily include receivables, and inventories.
                  The Company does not segregate  other assets on a products and
                  services   basis  for  internal   management   reporting  and,
                  therefore, such information is not presented.  Assets included
                  in corporate  and  unallocated  principally  are cash and cash
                  equivalents, marketable securities, other receivables, prepaid
                  expenses,  deferred income taxes, and property,  and plant and
                  equipment  not  specific to business  acquisitions  and assets
                  associated with discontinued operations of Anaren Europe.

            **    Depreciation   expense   related  to  acquisition  -  specific
                  property,  plant,  and  equipment  is  included in the segment
                  classification of the acquired business.  Depreciation expense
                  related  to  nonbusiness   combination   assets  is  allocated
                  departmentally  based  on an  estimate  of  capital  equipment
                  employed  by each  department.  Depreciation  expense  is then
                  further  allocated  within the department as it relates to the
                  specific  business  segment impacted by the consumption of the
                  capital  resources  utilized.  Due  to the  similarity  of the
                  property,  plant, and

                                                                     (Continued)


                                       67
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

                  equipment utilized, the Company does not specifically identify
                  these  assets by  individual  business  segment  for  internal
                  reporting purposes.

            ***   Amortization  of  intangible   assets  arising  from  business
                  combinations,  and patent  amortization,  is  allocated to the
                  segments based on the segment  classification  of the acquired
                  or applicable operation.

      (b)   Geographic Information

            Net sales by geographic region are as follows:

<TABLE>
<CAPTION>
              United                                                                                       Consolidated
              States           Asia Pacific          Europe            Americas            Other            net sales
            -----------        ------------       -----------        -----------        -----------        ------------
<S>         <C>                <C>                <C>                <C>                <C>                <C>
2005        $46,558,563        $25,530,705        $18,114,496        $ 3,070,760        $ 1,186,541        $94,461,065
2004         45,562,351         16,746,852         16,656,740          6,112,996                 --         85,078,939
2003         44,299,529         14,650,219         13,850,396          2,719,876                 --         75,520,020
</TABLE>

      (c)   Customers

            In 2005,  sales to one customer  totaled  approximately  $13,023,652
            (related to the wireless  segment) and exceeded 10% of  consolidated
            net sales.  In 2004,  sales to two customers  totaled  approximately
            $21,800,000,   ($12,100,000   related  to  the  space  and   defense
            electronics  segment and $9,700,000 related to the wireless segment)
            and exceeded 10% of consolidated  net sales.  In 2003,  sales to one
            customer (approximately $9,427,000, related to the space and defense
            electronics segment) exceeded 10% of consolidated net sales.

(21)  Commitments

      The Company is obligated under contractual  obligations and commitments to
      make future payments such as lease agreements and contingent  commitments.
      The Company's obligations and commitments are as follows:

               Year ending June 30:
                 2006                                 $   582,450
                 2007                                     582,450
                 2008                                     570,851
                 2009                                     536,053
                 2010                                     536,053
                 Thereafter                             1,833,484
                                                      -----------
                                                        4,641,341

                 Less sublease income                   1,131,948
                                                      -----------
                                                      $ 3,509,393
                                                      ===========

                                                                     (Continued)


                                       68
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

      Rent  expense  for the  years  ended  June 30,  2005,  2004,  and 2003 was
      $760,410,  $874,965, and $932,033,  respectively.  Rent expense for fiscal
      2005, 2004, and 2003 was offset by sublease income of $485,121,  $430,311,
      and $399,930, respectively.

(22)  Concentrations

      The  Company and others,  which are engaged in  supplying  defense-related
      equipment to the United States Government (the Government), are subject to
      certain  business  risks  peculiar to the defense  industry.  Sales to the
      Government  may be affected  by changes in  procurement  policies,  budget
      considerations,   changing   concepts  of  national   defense,   political
      developments abroad, and other factors.  Sales to the Government accounted
      for  approximately  22%, 26%, and 20% of consolidated  net sales in fiscal
      2005, 2004, and 2003,  respectively.  While management believes there is a
      high probability of continuation of the Company's current  defense-related
      programs,  it is  attempting  to  reduce  its  dependence  on sales to the
      Government through development of its commercial electronics business.

(23)  Quarterly Financial Data (Unaudited)

      The  following  table sets forth  certain  unaudited  quarterly  financial
      information for the years ended June 30, 2005 and 2004:

<TABLE>
<CAPTION>
                                                                                      2005 quarter ended
                                                            ------------------------------------------------------------------------
                                                            September 30         December 31          March 31             June 30
                                                             -----------         -----------         -----------         -----------
<S>                                                          <C>                 <C>                 <C>                 <C>
Net sales                                                    $24,907,357         $23,650,022         $21,783,418         $24,120,268
Gross profit                                                   7,890,818           6,761,172           7,152,648           8,065,561
Net income                                                     1,981,165             980,884           1,860,530           2,589,957

Net income (loss) per common share:
  Basic income (loss) per share                              $      0.10         $      0.05         $      0.10         $      0.14
  Diluted income (loss) per share                                   0.10                0.05                0.09                0.14
</TABLE>

                                                                     (Continued)


                                       69
<PAGE>

                          ANAREN, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                          June 30, 2005, 2004, and 2003

<TABLE>
<CAPTION>
                                                                                      2004 quarter ended
                                                            ------------------------------------------------------------------------
                                                            September 30         December 31          March 31             June 30
                                                             -----------         -----------         -----------         -----------
<S>                                                          <C>                 <C>                 <C>                 <C>
Net sales                                                    $18,270,673         $19,593,930         $22,387,222         $24,827,114

Gross profit                                                   5,958,895           6,641,227           7,913,937           9,495,087
Net income (loss) from continuing
  operations                                                   1,197,252           1,590,998           2,222,327           2,656,237
Net income (loss) from discontinued
  operations                                                     586,655            (335,053)             38,579                 133
Net income (loss) per common share
  from continuing operations:
    Basic income (loss) per share
      from continuing operations                             $      0.05         $      0.08         $      0.11         $      0.13
    Diluted income (loss) per share
      from continuing operations                                    0.05                0.07                0.10                0.12

Net income (loss) per common from
  discontinued operations:
    Basic income (loss) per share
      from discontinued operations                                  0.03               (0.02)                 --                  --
    Diluted income (loss) per share
      from discontinued operations                                  0.03               (0.01)                 --                  --
</TABLE>

      Income per share  amounts  for each  quarter  are  required to be computed
      independently. As a result, their sum does not necessarily equal the total
      year income per share amounts.


                                       70