Exhibit 10.3
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                             HERLEY INDUSTRIES, INC.
                             1998 Stock Option Plan


SECTION 1.  GENERAL PROVISIONS

1.1.  Name and General Purpose

         The name of this plan is the Herley Industries,  Inc. 1998 Stock Option
Plan  (hereinafter  called  the  "Plan").  The  purpose of the Plan is to enable
Herley  Industries,  Inc. (the "Company") and its subsidiaries and affiliates to
foster and promote the  interests  of the Company by  attracting  and  retaining
officers and employees of the Company who contribute to the Company's success by
their ability,  ingenuity and industry, to enable such officers and employees of
the Company to participate in the long-term success and growth of the Company by
giving them a  proprietary  interest  in the  Company  and to provide  incentive
compensation opportunities competitive with those of competing corporations.

1.2  Definitions

         a.     "Affiliate"  means any person or entity  controlled  by or under
                common  control with the Company,  by virtue of the ownership of
                voting securities, by contract or otherwise.

         b.     "Board" means the Board of Directors of the Company.

         c.     "Change in Control" means a change of control of the Company, or
                in any person  directly or indirectly  controlling  the Company,
                which shall mean:

                (a) a change in  control  as such term is  presently  defined in
                Regulation  240.12b-(f)  under the  Securities  Exchange  Act of
                1934, as amended (the "Exchange Act"); or

                (b) if any "person"  (as such term is used in Section  13(d) and
                14(d)  of the  Exchange  Act)  other  than  the  Company  or any
                "person"  who on the date of this  Agreement  is a  director  or
                officer  of the  Company,  becomes  the  "beneficial  owner" (as
                defined in Rule  13(d)-3  under the  Exchange  Act)  directly or
                indirectly,  of  securities of the Company  representing  twenty
                percent (20%) or more of the voting power of the Company's  then
                outstanding securities; or

                (c) if during any period of two (2) consecutive years during the
                term of this  Plan,  individuals  who at the  beginning  of such
                period  constitute the Board of Directors,  cease for any reason
                to constitute at least a majority thereof.

         d. "Code" means the Internal Revenue Code of 1986, as amended.

         e.  "Committee"  means the Committee  referred to in Section 1.3 of the
Plan.

         f.     "Common Stock" means shares of the Common Stock,  par value $.10
                per share, of the Company.

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         g.     "Company" means Herley Industries, Inc., a corporation organized
                under  the  laws of the  State  of  Delaware  (or any  successor
                corporation).

         h.     "Fair  Market  Value" means the market price of the Common Stock
                on the National  Association  of  Securities  Dealers  Automated
                Quotation  ("NASDAQ")  system on the date of the grant or on any
                other date on which the Common Stock is to be valued  hereunder.
                If no sale shall have been reported on NASDAQ on such date, Fair
                Market Value shall be  determined by the Committee in accordance
                with the Treasury  Regulations  applicable  to  incentive  stock
                options under Section 422 of the Code.

         i.     "Incentive Stock  Option"  means an  Incentive  Stock  Option as
                described in Section 2.1 of the Plan.

         j.     "Non-Employee Director" shall have the meaning set forth in Rule
                16(b)  promulgated  by the  Securities  and Exchange  Commission
                ("Commission").

         k.     "Non-Qualified  Stock Option" means a Non-Qualified Stock Option
                as described in Section 2.1 of the Plan.

         l.     "Option" means any option to purchase Common Stock under Section
                2 of the Plan.

         m.     "Participant"  means any officer or employee of the  Company,  a
                Subsidiary  or an Affiliate  who is selected by the Committee to
                participate in the Plan.

         n.     "Subsidiary"   means  any   corporation  in  which  the  Company
                possesses  directly or  indirectly  50% or more of the  combined
                voting power of all classes of stock of such corporation.

         o.     "Total  Disability"  means accidental  bodily injury or sickness
                which  wholly  and  continuously   disabled  an  optionee.   The
                Committee,   whose  decisions  shall  be  final,  shall  make  a
                determination of Total Disability.

1.3  Administration of the Plan

         The Plan shall be administered by the Committee  appointed by the Board
consisting of two or more members of the Board all of who shall be  Non-Employee
Directors. The Committee shall serve at the pleasure of the Board and shall have
such powers as the Board may, from time to time, confer upon it.

         Subject to this Section 1.3, the Committee shall have sole and complete
authority to adopt, alter, amend or revoke such administrative rules, guidelines
and  practices  governing  the  operation of the Plan as it shall,  from time to
time, deem advisable, and to interpret the terms and provisions of the Plan.

         The Committee shall keep minutes of its meetings and of action taken by
it without a meeting. A majority of the Committee shall constitute a quorum, and
the acts of a majority of the  members  present at any meeting at which a quorum
is present,  or acts  approved in writing by all of the members of the Committee
without a meeting, shall constitute the acts of the Committee.




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1.4  Eligibility

         Stock  options  may be granted  only to officers  or  employees  of the
Company or a Subsidiary or Affiliate. Subject to Section 2.3, any person who has
been  granted  any  Option  may,  if he is  otherwise  eligible,  be  granted an
additional Option or Options.

1.5  Shares

         The aggregate  number of shares  reserved for issuance  pursuant to the
Plan shall be 1,500,000 shares of Common Stock, or the number and kind of shares
of stock or other  securities  which shall be substituted  for such shares or to
which such shares shall be adjusted as provided in Section 1.6.

         Such  number of  shares  may be set  aside  out of the  authorized  but
unissued shares of Common Stock or out of issued shares of Common Stock acquired
for and held in the Treasury of the Company, not reserved for any other purpose.
Shares  subject  to, but not sold or issued  under,  any Option  terminating  or
expiring  for any reason  prior to its  exercise in full will again be available
for Options thereafter granted during the balance of the term of the Plan.

1.6  Adjustments Due to Stock Splits,
      Mergers, Consolidation, Etc.

         If, at any time,  the Company  shall take any action,  whether by stock
dividend,  stock split,  combination of shares or otherwise,  which results in a
proportionate  increase  or  decrease  in the  number of shares of Common  Stock
theretofore issued and outstanding,  the number of shares which are reserved for
issuance  under the Plan and the  number  of shares  which,  at such  time,  are
subject to Options shall, to the extent deemed appropriate by the Committee,  be
increased or  decreased  in the same  proportion,  provided,  however,  that the
Company shall not be obligated to issue fractional shares.

         Likewise,  in the  event of any  change  in the  outstanding  shares of
Common  Stock  by  reason  of  any  recapitalization,   merger,   consolidation,
reorganization, combination or exchange of shares or other corporate change, the
Committee shall make such substitution or adjustments, if any, as it deems to be
appropriate,  as to the  number  or kind of  shares  of  Common  Stock  or other
securities  which are  reserved  for  issuance  under the Plan and the number of
shares or other securities which, at such time are subject to Options.

         In the  event of a Change  in  Control,  at the  option of the Board or
Committee,  (a) all  options  outstanding  on the date of such Change in Control
shall, for a period of sixty (60) days following such Change in Control,  become
immediately  and fully  exercisable,  and (b) an optionee  will be  permitted to
surrender for  cancellation  within sixty (60) days after such Change in Control
any option or portion of an option  which was  granted  more than six (6) months
prior to the date of such  surrender,  to the extent not yet  exercised,  and to
receive a cash  payment in an amount  equal to the  excess,  if any, of the Fair
Market Value (on the date of surrender) of the shares of Common Stock subject to
the option or portion thereof surrendered, over the aggregate purchase price for
such Shares under the option.

1.7  Non-Alienation of Benefits

         Except  as herein  specifically  provided,  no right or unpaid  benefit
under the Plan shall be subject to alienation,  assignment, pledge or charge and
any attempt to alienate, assign, pledge or charge the same shall


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be void.  If any  Participant  or other  person  entitled to benefits  hereunder
should attempt to alienate, assign, pledge or charge any benefit hereunder, then
such benefit shall, in the discretion of the Committee, cease.

1.8  Withholding or Deduction for Taxes

         If,  at any  time,  the  Company  or any  Subsidiary  or  Affiliate  is
required,  under  applicable laws and regulations,  to withhold,  or to make any
deduction for any taxes,  or take any other action in connection with any Option
exercise,  the  Participant  shall be  required  to pay to the  Company  or such
Subsidiary or Affiliate, the amount of any taxes required to be withheld, or, in
lieu thereof,  at the option of the Company,  the Company or such  Subsidiary or
Affiliate may accept a sufficient  number of shares of Common Stock to cover the
amount required to be withheld.

1.9  Administrative Expenses

         The  entire  expense  of  administering  the Plan shall be borne by the
Company.

1.10 General Conditions

          a.   The Board or the Committee may, from time to time, amend, suspend
               or terminate any or all of the  provisions of the Plan,  provided
               that, without the Participant's  approval,  no change may be made
               which would prevent an Incentive  Stock Option  granted under the
               Plan from  qualifying as an Incentive  Stock Option under Section
               422 of the Code or result in a  "modification"  of the  Incentive
               Stock Option under Section 424(h) of the Code or otherwise  alter
               or impair any right theretofore  granted to any Participant ; and
               further  provided  that,  without the consent and approval of the
               holders of a majority of the  outstanding  shares of Common Stock
               of the  Company  present at a meeting  at which a quorum  exists,
               neither the Board nor the Committee may make any amendment  which
               (i)  changes  the class of persons  eligible  for  options;  (ii)
               increases  (except as provided under Section 1.6 above) the total
               number of shares or other securities  reserved for issuance under
               the Plan;  (iii)  decreases  the minimum  option prices stated in
               Section   2.2  hereof   (other  than  to  change  the  manner  of
               determining  Fair Market Value to conform to any then  applicable
               provision of the Code or any regulation thereunder); (iv) extends
               the expiration date of the Plan, or the limit on the maximum term
               of Options;  or (v) withdraws the administration of the Plan from
               a committee consisting of two or more members,  each of whom is a
               non-employee director.

          b.   With  the  consent  of  the  Participant  affected  thereby,  the
               Committee  may  amend or  modify  any  outstanding  Option in any
               manner not  inconsistent  with the terms of the Plan,  including,
               without  limitation,   and  irrespective  of  the  provisions  of
               Sections 2.3(c) and 2.4(b) below, to accelerate the date or dates
               as of which an installment of an Option becomes exercisable.

          c.   Nothing  contained in the Plan shall  prohibit the Company or any
               Subsidiary  or  Affiliate  from  establishing   other  additional
               incentive compensation  arrangements for employees of the Company
               or such Subsidiary or Affiliate.

          d.   Nothing  in the Plan  shall be deemed to limit,  in any way,  the
               right of the Company or any  Subsidiary or Affiliate to terminate
               a   Participant's   employment   with   the   Company   (or  such
               Subsidiary or Affiliate) at any time.


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<PAGE>

          e.   Any  decision  or  action  taken by the  Board  or the  Committee
               arising  out  of  or  in   connection   with  the   construction,
               administration,  interpretation  and  effect of the Plan shall be
               conclusive  and  binding  upon all  Participants  and any  person
               claiming under or through any Participant.

          f.   No member of the Board or of the  Committee  shall be liable  for
               any act or action, whether of commission or omission, (i) by such
               member except in  circumstances  involving  actual bad faith, nor
               (ii) by any other member or by any officer, agent or employee.

1.11  Compliance with Applicable Law

         Notwithstanding  any other provision of the Plan, the Company shall not
be  obligated  to issue any shares of Common  Stock,  or grant any  Option  with
respect thereto, unless it is advised by counsel of its selection that it may do
so without violation of the applicable  Federal and State laws pertaining to the
issuance of  securities  and the Company  may require any stock  certificate  so
issued to bear a legend, may give its transfer agent  instructions  limiting the
transfer  thereof,  and may  take  such  other  steps,  as in its  judgment  are
reasonably required to prevent any such violation.

1.12  Effective Dates

         The Plan  was  adopted  by the  Board on May 1,  1997.  The Plan  shall
terminate on April 30, 2007.



Section 2.  OPTION GRANTS

2.1  Authority of Committee

         Subject to the  provisions of the Plan,  the  Committee  shall have the
sole and complete  authority to determine (i) the  Participants  to whom Options
shall be granted;  (ii) the number of shares to be covered by each  Option;  and
(iii) the conditions and limitations,  if any, in addition to those set forth in
Sections 2 and 3 hereof,  applicable  to the  exercise  of an Option,  including
without limitation,  the nature and duration of the restrictions,  if any, to be
imposed upon the sale or other  disposition of shares  acquired upon exercise of
an Option.

         Stock options  granted under the Plan may be of two types: an incentive
stock  option  ("Incentive  Stock  Option");  and a  non-qualified  stock option
("Non-Qualified Stock Option").

         It is intended that the Incentive Stock Options granted hereunder shall
constitute incentive stock options within the meaning of Section 422 of the Code
and shall be subject to the tax treatment described in Section 422 of the Code.

         Anything in the Plan to the contrary  notwithstanding,  no provision of
the Plan relating to Incentive  Stock Options shall be  interpreted,  amended or
altered,  nor shall any  discretion  or authority  granted  under the Plan be so
exercised,  so as to disqualify  either the Plan or,  without the consent of the
optionee, any Incentive Stock Option under Section 422 of the Code.



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<PAGE>

         The  Committee  shall  have  the  authority  to grant  Incentive  Stock
Options,  or to grant  Non-Qualified  Stock  Options,  or to grant both types of
Options.  To the extent that any Option does not qualify as an  Incentive  Stock
Option, in whole or in part, it shall constitute a separate  Non-Qualified Stock
Option to the extent of such disqualification.

2.2  Option Exercise Price

         The price of stock  purchased  upon the  exercise  of  Options  granted
pursuant to the Plan shall be the Fair Market Value thereof at the time that the
Option is granted.

         If an employee  owns or is deemed to own (by reason of the  attribution
rules applicable under Section 424(d) of the Code) more than 10% of the combined
voting  power  of  all  classes  of  the  stock  of the  Company  or any  parent
corporation  of the Company or Subsidiary and an Option granted to such employee
is  intended  to qualify as an  Incentive  Stock  Option  within the  meaning of
Section 422 of the Code,  the  exercise  price shall be no less than 110% of the
Fair Market  Value of the Common  Stock on the date the Option is  granted.  The
purchase price is to be paid in full in cash,  certified or bank cashier's check
or, at the option of the  Company,  Common Stock valued at its Fair Market Value
on the date of exercise,  or a combination thereof, when the Option is exercised
and stock certificates will be delivered only against such payment.

2.3  Incentive Stock Option Grants

         Each   Incentive   Stock  Option  will  be  subject  to  the  following
provisions:

         a.     Term of Option

                An  Incentive  Stock  Option will be for a term of not more than
                ten  years  from the  date of  grant,  except  in the case of an
                employee  described in the second paragraph of Section 2.2 above
                in which case an  Incentive  Stock  Option will be for a term of
                not more than five years from the date of the grant.

         b.     Annual Limit

                To the  extent the  aggregate  Fair  Market  Value of the Common
                Stock (determined as of the date of grant) with respect to which
                any options  granted  hereunder are intended to be designated as
                Incentive  Stock Options under the Plan (or any other  incentive
                stock option plan of the Company or any Subsidiary) which may be
                exercisable  for the first time by the  optionee in any calendar
                year  exceeds  $100,000,  such options  shall not be  considered
                incentive stock options.

         c.     Exercise

                Subject  to the power of the  Committee  under  Section  1.10(b)
                above and except in the manner described below upon the death of
                the optionee, an Incentive Stock Option may be exercised only in
                installments as follows: up to one-half of the subject shares on
                and after the first  anniversary of the date of grant, up to all
                of the subject  shares on and after the second such  anniversary
                of the date of the grant of such  Option  but in no event  later
                than the expiration of the term of the Option.


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<PAGE>

                An  Incentive  Stock  Option  shall be  exercisable  during  the
                optionee's  lifetime  only  by the  optionee  and  shall  not be
                exercisable by the optionee unless,  at all times since the date
                of  grant  and at the  time of  exercise,  such  optionee  is an
                employee of the Company,  any parent  corporation of the Company
                or  any  Subsidiary,   except  that,  upon  termination  of  all
                employment (other than by death,  Total Disability,  or by Total
                Disability  followed  by  death  in the  circumstances  provided
                below) with the Company,  any parent  corporation of the Company
                and any  Subsidiary or  Affiliate,  the optionee may exercise an
                Incentive   Stock   Option  at  any  time  within  three  months
                thereafter  but only to the extent such Option is exercisable on
                the date of such termination.

                Upon  termination  of all  employment by Total  Disability,  the
                Optionee may  exercise  such options at any time within one year
                thereafter, but only to the extent such option is exercisable on
                the date of such termination.

                In the event of the death of an  optionee  (i) while an employee
                of the  Company,  any parent  corporation  of the Company or any
                Subsidiary  or  Affiliate,  or (ii) within  three  months  after
                termination  of all  employment  with the  Company,  any  parent
                corporation  of the  Company  and any  Subsidiary  or  Affiliate
                (other than for Total Disability) or (iii) within one year after
                termination  on account of Total  Disability  of all  employment
                with the Company,  any parent corporation of the Company and any
                Subsidiary or Affiliate,  such  optionee's  estate or any person
                who  acquires  the right to  exercise  such option by bequest or
                inheritance  or by  reason  of the  death  of the  optionee  may
                exercise such optionee's Option at any time within the period of
                three  years from the date of death.  In the case of clauses (i)
                and (iii) above,  such Option shall be  exercisable  in full for
                all the remaining  shares  covered  thereby,  but in the case of
                clause (ii) such Option shall be exercisable  only to the extent
                it was exercisable on the date of such termination.

                Notwithstanding the foregoing  provisions regarding the exercise
                of an Option in the event of death,  Total  Disability  or other
                termination  of  employment,  in no  event  shall an  Option  be
                exercisable  in  whole or in part  after  the  termination  date
                provided in the Option.

         d.     Transferability

                An Incentive  Stock Option  granted  under the Plan shall not be
                transferable  otherwise  than by will or by the laws of  descent
                and distribution.

2.4  Non-Qualified Stock Option Grants

         Each  Non-Qualified  Stock  Option  will be  subject  to the  following
provisions:

         a.     Term of Option

                A Non-Qualified Stock Option will be for a term of not more than
                ten years from the date of grant.



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<PAGE>

         b.     Exercise

                The exercise of a Non-Qualified Stock Option shall be subject to
                the same terms and  conditions as provided  under Section 2.3(c)
                above  except that (i) upon  termination  of all  employment  by
                Total Disability,  the Optionee may exercise such options at any
                time within three years  thereafter and (ii) in the event of the
                death of an Optionee  within  three years after  termination  on
                account of Total  Disability of all employment with the Company,
                or any subsidiary or affiliate,  such  Optionee's  estate or any
                person who acquires the right to exercise such option by bequest
                or  inheritance  or by reason of the death of the  Optionee  may
                exercise such  Optionee's  option at any time within a period of
                three years from the date of death.

         c.     Transferability

                A Non-Qualified Stock Option granted under the Plan shall not be
                transferable  otherwise  than by will or by the laws of  descent
                and distribution, except as may be permitted by the Board or the
                Committee.

2.5  Agreements

         In  consideration  of any Options  granted to a  Participant  under the
Plan,  each such  Participant  shall  enter  into an Option  Agreement  with the
Company  providing,  consistent  with the Plan,  such terms as the Committee may
deem advisable.





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