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 July 29, 2001

                                       OR

          [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
          For the transition period from ............to .............

                           Commission File No. 0-5411

                             Herley Industries, Inc.
                             -----------------------
             (Exact name of registrant as specified in its charter)

    Delaware                                                  23-2413500
    --------                                              -------------------
    State or other jurisdiction                           (I.R.S. Employer
    of incorporation or organization                      Identification No.)

    3061 Industry Drive, Lancaster, Pennsylvania                 17603
    --------------------------------------------                --------
    (Address of Principal Executive Offices )                  (Zip Code)

    Registrant's telephone number, including area code:         (717) 397-2777
                                                                --------------

Securities registered pursuant to Section 12(b) of the Act:

 Title of each class                      Name of Exchange on which registered
 -------------------                      ------------------------------------
        None                                             None

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $ .10 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.[X]

Based on the closing  sale price of $17.08 as of October 11, 2001 the  aggregate
market value of the voting stock held by  non-affiliates  of the  registrant was
$162,884,752.

The number of shares  outstanding of registrant's  common stock, $ .10 par value
as of October 11, 2001 was 10,626,576.

Documents incorporated by reference:
-----------------------------------
Registrant's definitive proxy statement  to be filed  pursuant to Regulation 14A
of the Securities Exchange Act of 1934.


<PAGE>



                             HERLEY INDUSTRIES, INC.

                                TABLE OF CONTENTS


                                                                            Page
                                                                            ----
PART I
   Item 1     Business                                                        1
   Item 2     Properties                                                     11
   Item 3     Legal Proceedings                                              11
   Item 4     Submission of Matters to a Vote of Security Holders            12

PART II
   Item 5     Market for Registrant's Common Equity and Related
                 Stockholder Matters                                         12
   Item 6     Selected Financial Data                                        13
   Item 7     Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                         14
   Item 7A    Quantitative and Qualitative Disclosures About Market Risk     17
   Item 8     Financial Statements and Supplementary Data                    18
   Item 9     Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure                         18
PART III
   Item 10    Directors and Executive Officers of the Registrant             18
   Item 11    Executive Compensation                                         18
   Item 12    Security Ownership of Certain Beneficial
                 Owners and Management                                       18
   Item 13    Certain Relationships and Related Transactions                 18

PART IV
   Item 14    Exhibits, Financial Statement Schedules and Reports
                    on Form 8K                                               19

SIGNATURES                                                                   20

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES                    F-1


<PAGE>



PART I

Forward-Looking Statements

All statements  other than statements of historical fact included in this Annual
Report, including without limitation statements under,  "Management's Discussion
and Analysis of Financial  Condition and Results of Operations"  and "Business,"
regarding  the Company's  financial  position,  business  strategy and plans and
objectives   of   management   of  the  Company  for  future   operations,   are
forward-looking  statements.  When used in this  Annual  Report,  words  such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they  relate  to the  Company  or its  management,  identify  forward-looking
statements.  Such  forward-looking  statements  are based on the  beliefs of the
Company's  management,  as well as assumptions made by and information currently
available to the Company's  management.  Actual results could differ  materially
from those contemplated by the forward-looking statements as a result of certain
factors including but not limited to, competitive factors and pricing pressures,
changes  in  legal  and  regulatory   requirements,   technological   change  or
difficulties,   product   development   risks,   commercialization   and   trade
difficulties  and  general  economic  conditions.  Such  statements  reflect the
current  views of the Company with  respect to future  events and are subject to
these and other risks, uncertainties and assumptions relating to the operations,
results of  operations,  growth  strategy  and  liquidity  of the  Company.  All
subsequent  written  and oral  forward-looking  statements  attributable  to the
Company  or  persons  acting on its  behalf  are  expressly  qualified  in their
entirety by this paragraph.

Item 1.  Business

Herley  Industries,  Inc.  ("Herley" or  "Company") a Delaware  corporation  was
incorporated  in 1965.  The Company's  headquarters  and  executive  offices are
located at 3061 Industry Drive,  Lancaster, PA 17603. The Company's common stock
is listed on The Nasdaq National Market under the symbol "HRLY".

With  approximately  650 employees,  including over 100 microwave  engineers and
engineering aides,  Herley is one of the largest suppliers of microwave products
and systems to defense and aerospace industries  worldwide.  With seven domestic
manufacturing  sites and one  facility in Israel,  the Company is a  significant
supplier  to  almost  all of the  larger  domestic  and  international  military
suppliers. Herley also has teaming and partnering agreements with several of the
major  domestic  and  international  aerospace  companies,  whereby  each of the
companies agrees to sell the other's products.

Herley has grown four fold through  internal  growth and strategic  acquisitions
over the past nine years and has  evolved  from a  component  manufacturer  to a
systems and service  provider.  The Company has been  successful in  integrating
these  acquisitions by adhering to its basic strategic plan, which is to acquire
microwave  technology  companies  and fuse  their  strengths  into the  existing
Company.  All of the previous  acquisitions  have added value by permitting  the
Company to offer additional  products to additional  markets.  Herley expects to
continue to implement this business plan through continued internal growth along
with selective  acquisitions of additional  specialized  microwave  companies or
product lines, both domestically and internationally.

Since its inception in 1965, the Company has designed and manufactured microwave
devices for use in various military programs. In June 1986, the Company acquired
a small  engineering  company,  Mission  Design Inc.,  engaged in the design and
development of transponders.  This acquisition  enabled the Company to enter the
flight  instrumentation  business  beginning with the design and  manufacture of
range safety transponders. In September 1992, the Company acquired substantially
all of the assets of Micro-Dynamics,  Inc. ("MDI") of Woburn,  Massachusetts,  a
microwave  subsystem  designer  and  manufacturer.  In June  1993,  the  Company
acquired Vega Precision Laboratories,  Inc. of Vienna,  Virginia, a manufacturer
of flight  instrumentation  products. In March 1994, the Company entered into an
exclusive  license  agreement  for the  manufacture,  marketing  and sale of the
Multiple  Aircraft GPS Integrated  Command & Control (MAGIC2)  systems.  In July
1995,  the Company  acquired  certain  assets and the business of Stewart Warner
Electronics Corp. of Chicago,  Illinois,  a manufacturer of high frequency radio
and IFF interrogator  systems.  In August 1997, the Company  acquired  Metraplex
Corporation ("Metraplex") of Frederick,  Maryland, which has enabled the Company
to enter the airborne PCM and FM telemetry  and  data acquisition systems market

                                        1

<PAGE>



market.  In January 1999, the Company acquired all of the issued and outstanding
common stock of General Microwave  Corporation ("GMC") expanding its offering of
microwave  components  and  electronic  systems,  and its  customer  base in the
industrial sector as well as in the defense industry.

In  January  2000,  the  Company  acquired  substantially  all of the  assets of
Robinson  Laboratories,  Inc., a New Hampshire  Corporation.  Robinson  designs,
develops and  manufactures  microwave  components and  assemblies  primarily for
defense applications.

In  September  2000,  the Company  acquired  certain  assets and the business of
American Microwave Technology,  Inc. ("AMT"), which enabled the Company to enter
the area of high power,  solid state  amplifiers  for the scientific and medical
markets.

In September 2000, the Company acquired Terrasat, Inc., Morgan Hill, California.
Terrasat designs and manufactures transceivers and receiver/transmitter  modules
for digital microwave radio companies and a complete range of C and Ku Band VSAT
"block transceivers" for the commercial and military satellite markets.

Herley  has  over 35  years of  experience  in the  design  and  manufacture  of
sophisticated  RF,  microwave and millimeter wave  electronic  components in the
defense industry.  Herley's  technology range covers the entire RF spectrum from
900 MHz through 18.0 GHz, and millimeter wave frequencies from 20 Ghz through 40
Ghz.

Company Products

Command and Control Systems

The Company's command and control systems have been used to fly remotely a large
variety of unmanned  airborne  vehicles  ("UAVs"),  typically  aircraft  used as
target drones or Remotely  Piloted  Vehicles  ("RPVs") and some surface targets.
Operations  have been conducted by users on the open ocean,  remote land masses,
and  instrumented  test and training ranges.  The Company's  command and control
systems  are  currently  in  service   throughout   the  world.   The  Company's
pulse-positioned-coded  ("PPC")  concept  enables  the  use  of  standard  radar
technology to track and control unmanned vehicles.  Using the radar beacon mode,
PPC pulse  groups are  transmitted  and  received  for  transfer  of command and
telemetry  data while  employing the location  precision and advantages of radar
techniques. Command and control systems permit a ground operator to fly a target
or a UAV through a pre-planned  mission.  The mission may be for reconnaissance,
where the vehicle is equipped with high  definition TV sensors and the necessary
data links to send  information  back to its command and control  systems ground
station.  The UAV may also be used as a decoy, since the operator can direct the
flight  operations  that will make the small drone appear to be a larger  combat
aircraft.

With  the 1994  licensing  of the  MAGIC2  system,  the  Company  increased  the
selection of command and control  systems.  The 6104 TTCS  (Target  Tracking and
Control  System)  unit is a  line-of-sight  command and  control  system with an
installed base of equipment worldwide. The Company's engineers and marketers are
now able to offer the MAGIC2 system as a supplement to, or replacement for, this
installed base of equipment.  The MAGIC2 system affords over-the-horizon command
and control  using GPS  guidance  and control of multiple  targets from a single
ground station.  The ability to control multiple targets at increased  distances
represents a significant product improvement. The increasing demand for enhanced
performance  by the U.S.  Navy as well as  foreign  navies in  littoral  warfare
scenarios can be satisfied by the use of the MAGIC2 system.

The new Model 6104 TTCS is a highly  flexible,  multiple  processor  design with
high resolution graphics, which can be field configured within minutes to fly or
control any selected vehicle for which it is equipped. The system is designed to
operate with a large variety of vehicles. A basic TTCS configuration is normally
supplied with a standard Company command panel and the software  peculiar to one
vehicle. Telemetry display software is embedded for the specified vehicle, and a
magnetic hard drive is supplied with a mission map prepared in accordance with a
customer  supplied  detailed  map of the area.  The TTCS is used in  support  of
missile,  aircraft  and  other  weapons systems  development and testing. Herley

                                        2

<PAGE>



Herley   continues  to  provide  this  system  to  customers  to  support  their
requirement.

The MAGIC2 system meets a growing  requirement to test against  multiple threats
with the automated defense  capabilities of ships like the AEGIS cruiser and the
E-2C aircraft.  Military  surveillance  operations  typically use UAVs, RPVs, or
drones to avoid the cost and risk of manned  surveillance  vehicles in the event
of an  accident  or if the vehicle is shot down.  These  inexpensive  drones are
controlled  in flight  by a Herley  command  and  control  system,  which may be
mounted  in a trailer  that may be moved from  place to place by  helicopter  or
truck. The Company also  manufactures  portable command and control systems that
are mounted on tripods that can be easily  transported by an  operational  team.
The portable  units permit ready  deployment  in rugged  terrain and may also be
used on ships during open ocean exercises.

In recent years, teaming arrangements between prime military contractors and the
Company have increased.  Large companies bidding on major programs seek to align
themselves with parts and systems manufacturers such as the Company for economic
reasons  as well as for the  technical  expertise  afforded  by such  alliances.
Teaming arrangements with BAE Systems (formerly Tracor Corporation) and Northrop
Grumman  Corporation  have  resulted  in awards to the  Company  for command and
control  systems in  Australia  and  Singapore,  and the  Company  is  presently
negotiating additional teaming arrangements.

Telemetry Systems

Missile,  UAV,  or target  testing on  domestic  and  international  test ranges
requires  flight safety and  performance  data  transmission  to maximize flight
safety during the test operation.  Surveillance and intelligence  gathering UAVs
also  require a data  transmission  downlink  and a command and control  systems
uplink to accomplish their mission. The Company has developed a telemetry system
capability that can be configured to meet individual  customers' needs.  Various
components  of  the  system  include  data  encoders,  transmitters  and  flight
termination  receivers.  Each  has a  distinctive  role  and  each is key to the
success of the mission.

In 1972,  Metraplex began developing data encoding and  acquisition,  and signal
conditioning  equipment.  Metraplex is now a leading  manufacturer of PCM and FM
telemetry  and data  acquisition  systems for severe  environment  applications,
whose   products  are  used   worldwide   for  testing   space  launch   vehicle
instrumentation,   aircraft  flight  testing,  and  amphibian,   industrial  and
automotive vehicle testing.  The product portfolio ranges in size and complexity
from miniature encoders to completely programmable data acquisition systems.

The  Company's  1997  acquisition  of  Metraplex  allows the  Company to offer a
complete airborne data link system.  With the digital capability of Metraplex in
data  encoding  and  acquisition  elements  combined  with the  radio  frequency
capability  of the Company in providing its  telemetry  transmitters  and flight
termination  receivers,  the Company  offers a full line of narrow and wide band
airborne  telemetry  systems to meet a wide variety of  industrial  needs,  both
domestically and internationally.


Transponders

The Company manufactures a variety of expendable  transponders,  including range
safety,  identification friend or foe ("IFF"),  command and control, and scoring
systems.

Transponders  are  small,   expendable,   electronic  systems  consisting  of  a
transmitter,   sensitive  receiver  and  internal  signal  processing  equipment
comprised of active and passive components,  including  microwave  subassemblies
such as  amplifiers,  oscillators  and  circulators.  The  transponder  receives
signals from radars,  changes and amplifies  the  frequency of the signals,  and
sends back a reply on a different frequency and signal level. This reply will be
a strong,  noise free signal upon which the  tracking  radar can "lock," and one
which is far superior to skin reflection  tracking,  particularly  under adverse
weather conditions after the launch.


                                        3

<PAGE>



In range safety  applications,  transponders  enable accurate  tracking of space
launch and  unmanned  airborne  vehicles,  missiles,  and target  drones so that
position and direction are known  throughout its flight.  In the case of several
defense and commercial  space launch vehicles  (i.e.,  Delta,  Atlas,  Titan and
Pegasus),  the Herley  transponder  is tracked by the ground launch team all the
way to space  orbit,  and in certain  instances  through  several  orbits,  as a
reference  location  point in space to assure  that the launch  payload has been
properly placed in orbit.

IFF transponders, which are used in conjunction with the FAA Air Traffic Control
System,  enable ground controllers to identify the unmanned targets,  drones and
cruise  missiles on which these units fly and to vector  other  manned  aircraft
safely away from the flight path of the unmanned aerial vehicle.

Command and control  transponders  provide the link through the telemetry system
for relaying ground signals to direct the vehicle's flight.  The uplink from the
ground control station, a series of coded pulse groups, carries the signals that
command the flight control  guidance system of the vehicle.  The downlink to the
ground   provides   both  tracking   signals  for  range  safety,   as  well  as
acknowledgment and status of the uplink commands and their implementation in the
vehicle.  The  transponder  is therefore  the means to fly the vehicle.  Scoring
systems are mounted on both  airborne and sea targets.  Scoring  systems  enable
test and  evaluation  engineers  to  determine  the  "miss-distance"  between  a
projectile and the target at which it has been launched.

Flight Termination Receiver

A flight  termination  receiver  ("FTR") is  installed in a test  missile,  UAV,
target  or space  launch  vehicle  as a safety  device.  The FTR has a  built-in
decoder that enables it to receive a complex  series of audio tones which,  when
appropriate,  will set off an explosive charge that will destroy the vehicle.  A
Range Safety Officer ("RSO") using the range safety  transponder  will track the
vehicle in flight to  determine  if it is  performing  as  required.  If the RSO
detects a malfunction  in the test or launch vehicle that causes it to veer from
a planned trajectory in a manner that may endanger personnel or facilities,  the
RSO will transmit a coded signal to the onboard FTR to explode the vehicle.

HF Communications and IFF Interrogators

The  Company  also  designs  and  manufactures  high  frequency  radio  and  IFF
interrogators.  This high frequency communications equipment is used by the U.S.
Navy and foreign  navies that conduct  joint  military  exercises  with the U.S.
Navy. The IFF interrogators are used as part of shipboard equipment and are also
placed on coastlines,  where they are employed as silent  sentries.  The Company
has been a significant supplier to the Republic of Korea ("ROK") for over twenty
years and has a large,  established installed base of equipment. The Company has
been, and continues to be, a supplier to the ROK KDX destroyer program.

High Power Amplifiers

The  Company  has  design and  production  capabilities  to  produce  high power
amplifier  systems  with  frequencies  ranging  from 1.5 MHz to 12GHz with power
levels from multi-kilowatts up to 15W, depending on the frequency.

Herley's  high  power  amplifier  applications  include  but are not  limited to
defense  communication,  electronic warfare,  SATCOM  communications,  radar and
avionics.

Microwave Products

Herley  manufactures  microwave devices at its New England facilities in Woburn,
Massachusetts  and  Nashua  New  Hampshire;  in  Farmingdale,  New York;  and in
Jerusalem,  Israel for existing long-term military programs,  for new production
units, as well as for spare parts and repair services.  These microwave  devices
are  used in a  variety  of  radar,  communications  and  missile  applications,
including airborne and shipboard navigation and missile guidance systems.


                                        4

<PAGE>



The Company  designs and  manufactures  complex  microwave  integrated  circuits
("MICs"), which consist of sophisticated assemblies that perform many functions,
primarily  involving  switching of microwave  signals.  MICs manufactured by the
Company are employed in many  defense  electronics  military  systems as well as
missile  programs.  Herley  also  manufactures  magnetrons,  which are the power
source utilized in the production of the Company's transponders.

The  Company's  four  microwave  product  facilities  all share  certain  common
engineering  and  manufacturing  capabilities  as well as  maintaining  areas of
specialization   unique  to  each  location.   Herley  seeks  the  more  limited
production,  higher  unit  cost  microwave  subsystem  applications,  where  the
Company's engineering experience is of primary advantage to its customers.

In Woburn, Herley specializes in high power microwave devices,  generally narrow
band,  that are used in radar system  transmitters  and in long range  missiles.
While there are many  suppliers  of low power  microwave  components,  there are
relatively few companies  with the  expertise,  or facilities to design and test
high power devices.  High power devices  frequently use small amounts of nuclear
material to enhance  breakdown  of high energy  pulses and Herley is one of very
few companies with an active nuclear  license that permits the handling of these
trace amounts of nuclear materials.

The Company has become the preeminent supplier of solid state receiver protector
devices,  that are able to  withstand  high  energy  pulses  without  the use of
nuclear  materials.  These  high power  devices  protect a radar  receiver  from
transient  bursts of microwave  energy and are employed in almost every military
and commercial  radar system.  For its  engineering  efforts in designing  solid
state receiver  protectors for the F-16, the United States Air Force awarded the
Company cash awards as part of the government's value engineering program.

In  Farmingdale,  Herley produces lower power,  broad band microwave  integrated
assemblies for the electronic  defense business area.  These complex  assemblies
combine  microwave  functions such as amplification,  attenuation,  switching of
multiple signals,  and phase and amplitude control.  Their applications  include
Rear Warning Receivers (RWR's),  Electronics  Countermeasure  (ECM) systems, and
highly sensitive receiver systems.

The Company's Israel division supplies microwave sources, which generate signals
that are used in  microwave  oscillators.  Herley's  Israel  operation  sells to
various  foreign  governments  and to the U.S.  defense  industry.  The  Company
specializes in digitally tuned oscillators (DTO's), a critical component of many
ECM systems.  The Company also produces microwave  components in Israel that are
sold  through its  catalog,  which for almost  forty years has been the industry
leader  and  microwave  engineer's  handbook  for  attenuating  devices  and  IQ
modulation and phase shifters.

Commercial Technologies

Herley  Commercial  Technologies  is  comprised  of  communication  and  medical
products. Engineering,  manufacturing, and marketing functions for communication
products,  including  microwave  and  millimeter  wave  systems for the wireless
industry  which are used in the  digital  microwave  radio and VSAT (Very  Small
Aperture Satellite Terminals) markets,  are located in Morgan Hill,  California.
Engineering,  manufacturing,  and  marketing  functions  for  medical  products,
including  custom  radio  frequency  (RF) power  amplifiers  for the medical and
scientific  industries  are  located  in  Anaheim,   California  and  Lancaster,
Pennsylvania.

Medical Products

Herley's  medical  products  vary in  complexity  from single  modules,  to rack
mounted amplifiers, to complete systems. The rack-mounted amplifiers and systems
typically include detection/protection circuitry, built-in power supplies, front
panel metering and digital  and/or analog  interface  controls.  Both forced air
and/or water cooling are used, depending on the customer's requirements.

All  products  feature  highly  reliable   technical   solutions   designed  for
producibility  and  reliability.  Producibility  is enhanced  through the use of
surface  mount  components  and  circuit  designs  and  eliminate  the  need for

                                        5

<PAGE>



excessive   alignment   during  the  production   cycle.   High  reliability  is
accomplished  through the implementation of conservative  thermal and RF circuit
design  and  sophisticated   self-protection  schemes.  Reliability  is  further
enhanced during the design phase by employing detailed environmental testing.

Herley's  medical products are used  extensively in Magnetic  Resonance  Imaging
(MRI) systems.  These amplifiers cover the frequency ranges of 10 MHz to 200 MHz
with power levels as high as 12.0KW peak power at 10% duty cycle.

All amplifiers  have dual mode capability and can be operated in either a pulsed
or CW mode. Custom products or private labeling is available.  Medical customers
include both OEM systems manufacturers, universities and research centers.

Scientific Products

Herley's  scientific products are used extensively in Nuclear Magnetic Resonance
(NMR) systems.  These amplifiers cover the frequency ranges of 6 MHz to 950 MHz,
with power levels as high as 2.0KW peak power at 10% duty cycle.

All amplifiers  have dual mode capability and can be operated in either a pulsed
or CW mode.  Custom  products  or  private  labeling  is  available.  Scientific
customers include both OEM system manufacturers and research centers.

Communication Products

Herley's  core  technology  is in the design of microwave  assemblies  from 3GHz
through 18 GHz. Products include single function amplifier modules, transceivers
for microwave radios and complete satcom outdoor  transceivers with built-in 40W
power  amplifiers,  monitor and control and  redundancy all controlled via RS485
and FSK.

Satcom

Herley manufactures a complete range of C and Ku Band VSAT "Block Transceivers".
Transceivers are Outdoor Units mounted at the antenna of the satellite  terminal
and are  used to  convert  high  frequency  signals  to/from  the  satellite  to
intermediate frequencies required by the Indoor Units (Modems). Traditional VSAT
Transceivers  use 70 MHz or 140 MHz to link to the Indoor  section of  Satellite
Terminals.  "Block Transceivers"  utilize L Band (950-1525 MHz) instead of 70MHz
or 140 MHz.  "Block  Transceivers"  result in cost  savings  and also  allow for
Single  Channel  Per  Carrier  (SCPC),  Multi-Channel  Per  Carrier  (MCPC)  and
simultaneous  multi-  transponder  transmissions.  Herley  supports  products to
domestic and international equipment companies for VSAT networks.

Digital Microwave Radios

Herley supplies subsystems  (transceivers and  receiver/transmitter  modules) to
digital  microwave radio companies.  Herley's  products are used as "front-ends"
for   high   data   communications   including   the   following   applications:
Point-to-point  (7GHz through 38 GHz),  point-to-multipoint  (3.5, 10.5,  26GHz,
28GHz and 42GHz),  Internet access  (2.5GHz-MmDS) and non-licensed band (2.4GHz,
5.2GHz,  5.8GHz).  Herley's products are best suited for higher-level modulation
and higher data rate digital  microwave  radios (QPSK,  16QAM,  64QAM,  34MG and
155MB).

Strategy

The  Company's  strategy is to attempt to continue to leverage  its  proprietary
technology,  microwave  development  and  manufacturing  capabilities to further
expand its  penetration  in defense and medical  markets.  Key components of the
Company's strategy include the following:

                                        6

<PAGE>



Increase Levels of Component Integration and Value Added Content

Due to acquisitions,  product  development and growth of engineering  expertise,
the Company has increased its capability to provide more component  integration.
Component  integration adds value and will enable Herley to increase content and
revenue levels on wireless and defense systems.

Maintain Leadership in Microwave Technology

The Company intends to pursue further  technological  advances through continued
investment  in  product  development.  The  Company  will  seek to  advance  its
leadership in microwave  technology by continuing its  participation in selected
defense programs that involve highly  sophisticated  state-of-the-art  microwave
technology.

Strengthen and Expand Customer Relationships

The Company has developed  mutually  beneficial  relationships  with defense and
commercial  companies.  The Company  expects to continue to build and strengthen
relationships  with industry  leaders by  recognizing  their needs and providing
them with timely and cost effective solutions.

Enhance Manufacturing Capabilities

The Company intends to continue to implement  process  manufacturing  automation
and believes  that its ability to develop a high level of  automated  production
and test capability will help to further improve its cost effectiveness and time
to market.

Pursue Strategic Acquisitions

The  Company  intends to continue to augment  its  existing  technology  base by
acquiring specialized technology companies that complement its product offerings
and  market  strategies.  The  Company  believes  that  expansion  of  its  core
competencies through the acquisition of such specialized  technology  companies,
when combined with its  technological  and  manufacturing  skills,  will provide
improved  levels of  integration,  leading to  subsystems  and complete  systems
products.

Customers

During the fiscal year ended July 29, 2001,  approximately  18% of the Company's
sales were  attributable  to  contracts  with  offices and agencies of the U. S.
Government.  No other  customers  accounted  for  shipments  in excess of 10% of
consolidated net sales.

During fiscal year 2001, sales to foreign customers  accounted for approximately
26% of the Company's consolidated net sales. All of the Company's contracts with
foreign customers are payable in U. S. dollars.  Sales to foreign customers were
$20,683,000,  $16,506,000  and  $17,680,000  in  fiscal  2001,  2000  and  1999,
respectively.

The Company  provides  defense  electronics  equipment  to major  defense  prime
contractors  for  integration  into larger  systems.  Some of its  customers for
defense electronics equipment include:

                Boeing/McDonnell Douglas
                British Aerospace
                Harris
                Lockheed Martin
                Litton/Amecon
                Northrop Grumman
                Raytheon

                                        7

<PAGE>



Business Acquisition

The Company  entered  into an  agreement  effective  as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common stock of
Terrasat, Inc. ("Terrasat"),  a California corporation. The transaction provides
for the payment of  $6,000,000  in cash,  $3,000,000  which was paid in December
2000  and  $3,000,000  to be paid  in  December  2001,  and  the  assumption  of
approximately $1,025,000 in liabilities. In addition, the agreement provides for
additional cash payments in the future up to $2,000,000, based on gross revenues
through  December 31, 2001.  The  transaction  has been  accounted for under the
purchase method. Accordingly, the consolidated balance sheet includes the assets
and liabilities of Terrasat at July 29, 2001, and the consolidated  statement of
income includes the results of Terrasat  operations from October 1, 2000. Excess
cost over the fair value of net assets acquired of  approximately  $4,845,000 is
being amortized over 20 years.

The Company entered into an agreement as of September 1, 2000 to acquire certain
assets and the business,  subject to the assumption of certain  liabilities,  of
American Microwave Technology,  Inc., ("AMT"), a California  corporation,  which
operates as a division of Herley Industries,  Inc. The transaction  provided for
the  payment  of  $5,400,000  in  cash,  and  the  assumption  of  approximately
$1,153,000 in  liabilities.  In addition,  the Company entered into an exclusive
license agreement for certain products providing for a royalty of 10% on the net
shipments of such  products  through  October  2004.  The  transaction  has been
accounted for under the purchase method.  Accordingly,  the consolidated balance
sheet  includes  the assets and  liabilities  of AMT at July 29,  2001,  and the
consolidated  statement of income includes the results of AMT's  operations from
September  1, 2000.  Excess  cost over the fair value of net assets  acquired of
approximately $4,112,000 is being amortized over 20 years.

Sales and Marketing

The Company markets its products worldwide to OEMs, service providers,  research
institutions  and universities in commercial  markets and prime  contractors and
various countries in defense markets.  Sales are primarily through a sales force
generally  organized  by  geographic  territory  and markets.  In addition,  the
Company has contracts with  manufacturers'  representatives in the United States
and international  representatives who are 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  industrial  shows  in the  commercial,
medical, satcom and defense markets.

After the Company has  identified  key  potential  customers,  the Company makes
sales calls with its own sales,  management  and  engineering  personnel and its
manufacturers' representative.

In order to promote widespread  acceptance of its products and provide customers
with support,  the Company's sales and  engineering  teams work closely with its
customers  to develop  tailored  solutions  to their  requirements.  The Company
believes  that  its  customer   engineering  support  provides  it  with  a  key
competitive advantage.

Manufacturing

The Company manufactures its products from standard components,  as well as from
items  that are  manufactured  by  vendors to the  company's  specifications.  A
majority of the Company's  commercial  and defense  electronics  assemblies  and
subsystems products contain proprietary  technology which is designed and tested
by the Company's  engineers and technicians and is manufactured at the Company's
own facilities.

The  Company   continues  to  invest  in  the  advancement  of  its  proprietary
manufacturing  processes  and  in  automation  of the  manufacturing  processes.
Automation   is   critical  in  meeting   its   customers'   demands  for  price
competitiveness,  world class quality and on-time delivery.  The Company is also
investing  to  enhance  its   responsiveness  to  production  demands  from  its
customers.

Electronic components and other raw materials used in the Company's products are
purchased  by the  Company  from a large  number  of  suppliers  and all of such
materials are readily available from alternate sources.

                                        8

<PAGE>



The Company maintains minimal levels of finished products  inventory to meet the
needs of it's medical products customers.  Raw materials are generally purchased
for specific  contracts and common  components  are purchased for stock based on
the Company's firm fixed backlog.

There are no significant  environmental  control procedures  required concerning
the discharge of materials into the  environment  that would require the Company
to invest in any  significant  capital  equipment  or that would have a material
effect on the earnings of the Company or its competitive position.

Quality  assurance  checks are performed on manufacturing  processes,  purchased
items,  work-in-process  and finished  products.  Due to the  complexity  of the
Company's products, final tests are performed on some products by highly skilled
engineers and technicians.

Herley's primary manufacturing facilities have earned the ISO 9001 Registration.
The ISO 9000 series standards are internationally  recognized quality management
system requirements.  ISO 9001, the most comprehensive  Standard in the ISO 9000
Series covers design, manufacturing, installation, and servicing systems.

Assembly,  test,  package and  shipment of  products  are done at the  Company's
manufacturing facilities located in the following cities:

                Lancaster, Pennsylvania
                Farmingdale, New York
                Woburn, Massachusetts
                Nashua, New Hampshire
                Anaheim, CA
                Morgan Hill, CA
                Jerusalem, Israel

Backlog

The Company's total backlog of orders was approximately  $87,743,000 on July 29,
2001 as compared to $53,127,000 on July 30, 2000. Of the Company's total backlog
of $87,743,000 at July 29, 2001,  $52,944,000 is attributable to domestic orders
and $34,799,000 is attributable to foreign orders.  Management  anticipates that
approximately  $68,440,000 of its backlog will be shipped during the fiscal year
ending July 28, 2002.

All of the  orders  included  in backlog  are  covered  by signed  contracts  or
purchase   orders.   Backlog  is  not  directly   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.

Substantially all of the Company's contracts are fixed price contracts,  some of
which require  delivery over time periods in excess of one year.  With this type
of contract,  the Company agrees to deliver products at a fixed price except for
costs incurred because of change orders issued by the customer.

In accordance with  Department of Defense  procedures,  all contracts  involving
government programs may be terminated by the government, in whole or in part, at
the  government's  discretion.  In  the  event  of  such  a  termination,  prime
contractors on such contracts are required to terminate  their  subcontracts  on
the program and the  government or the prime  contractor is obligated to pay the
costs incurred by the Company under the contract to the date of termination plus
a fee based on the work completed.

Product Development

The Company  believes that its growth depends,  in part, on its ability to renew
and expand its technology, products, and design and manufacturing processes with
an emphasis on cost effectiveness.  The Company's primary efforts are focused on
engineering design and product development activities rather than pure research.
A substantial portion of the Company's development activities has been funded by
the Company's customers.

                                        9

<PAGE>



Certain of the  Company's  officers and  engineers are involved at various times
and in varying degrees in these  activities.  The Company's  policy is to assign
the required  engineering and support people, on an ad hoc basis, to new product
development as needs require and budgets permit.  The cost of these  development
activities,  including employees' time and prototype development, net of amounts
paid by customers, were approximately  $2,070,000,  $1,727,000 and $1,685,000 in
fiscal 2001, 2000 and 1999, respectively.

Competition

The microwave  component and subsystems  industry is highly  competitive and the
Company  competes  against many  companies,  both foreign and domestic.  Many of
these are larger,  have greater  financial  resources and are better known. As a
supplier, the Company also experiences significant competition from the in-house
capabilities of its actual prospective customers.

Competition  is  generally  based  upon  technology,   design,  price  and  past
performance.  The Company's ability to compete depends,  in part, on its ability
to offer better design and performance than its competitors and its readiness in
facilities, equipment and personnel to undertake to complete the programs.

Government Regulation

The Company's  wireless  communications  products are incorporated into wireless
telecommunications  systems that are subject to regulation  domestically  by the
FCC 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  its  compliance  with  government  regulations  by  various
government  agencies.  The Company is also subject to a variety of local,  state
and federal government regulations relating to, among other things, the storage,
discharge, handling, omission, generation,  manufacture and disposal of 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 impact on the Company's
business, financial condition and result of operations.

Intellectual Property

While the Company  holds  several  patents,  the Company  relies  primarily on a
combination of trade secret, employee and third-party  nondisclosure  agreements
to  protect  its  intellectual  property,  as well  as  limiting  access  to the
distribution  of  proprietary  information.  There can be no assurance  that the
steps taken by the Company to protect its  intellectual  property rights will be
adequate to prevent  misappropriation of the Company's technology or to preclude
competitors from independently  developing such technology.  Furthermore,  there
can be no assurance that, in the future,  third parties will assert infringement
claims against the Company or with respect to its products for which the Company
has  indemnified  certain of its  customers.  Asserting the Company's  rights or
defending  against  third  party  claims  could  involve  substantial  costs and
diversion of resources,  thus  materially and adversely  affecting the Company's
business,  financial  condition and results of operations.  In the event a third
party were  successful in a claim that one of the Company's  products  infringed
its proprietary  rights,  the Company may have to pay  substantial  royalties or
damages,  remove that product from the marketplace or expand substantial amounts
in order to modify the product so that it no longer  infringes such  proprietary
rights,  any of which  could have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

Employees

As of September 30, 2001,  the Company  employed 640 persons full time. Of these
employees,  93 comprise the  engineering  staff,  470  constitute  manufacturing
personnel,  25 occupy sales and  marketing  positions,  and 52 are in executive,
management,  and support functions.  None of the Company's employees are covered
by  collective  bargaining  agreements  and the Company  considers  its employee
relations to be satisfactory.  The Company believes that its future success will
depend, in part, on its continued ability  to recruit and retain  highly skilled

                                       10

<PAGE>



technical,  managerial  and marketing  personnel.  To assist in  recruiting  and
retaining  such  personnel,  the Company has  established  competitive  benefits
programs, including a 401k employee savings plan and stock option plans.

Item 2.  Properties

The Company's properties are as follows:
<TABLE>
<CAPTION>

                                                                                                 Owned
                                                                                                   or
Location                                Purpose of Property                         Area         Leased
--------                                -------------------                         ----         ------
<S>                         <C>                                                 <C>              <C>
Lancaster, PA (1)           Production, engineering, administrative             71,200 sq. ft.   Owned
                            and executive offices

Woburn, MA                  Production, engineering and administration          60,000 sq. ft.   Owned

Farmingdale, NY (2)         Production, engineering and administration          46,000 sq. ft.   Leased

Jerusalem, Israel           Production, engineering and administration          12,000 sq. ft..  Owned

Nashua, NH (3)              Production, and engineering                         20,000 sq. ft.   Leased

Chicago, IL                 Engineering and administration                        3,000 sq. ft.  Leased

Morgan Hill, CA (4)         Production, and engineering                         11,000 sq. ft.   Leased

Anaheim, CA (5)             Engineering                                           4,000 sq. ft.  Leased

Lancaster, PA               Land held for expansion                                20.4 Acres    Owned
--------------
<FN>

     (1) The Company's  executive offices occupy  approximately 4,000 sq. ft. of
space at this facility with  engineering and  administrative  offices  occupying
10,000 sq. ft. each.

     (2) On September 23, 1999 the Company closed on the sale of its prior owned
facility in  Amityville,  NY and relocated the plant to this leased  facility in
Farmingdale,  NY. The  Company  entered  into a 10 year lease  agreement  with a
partnership owned by the children of certain officers of the Company.  The lease
provides for initial  minimum annual rent of $312,390,  subject to escalation of
approximately 4% annually throughout the 10 year term.

     (3) As of January 3, 2000 the  Company  acquired  substantially  all of the
assets of  Robinson  Laboratories,  Inc.  which  operates  as a division at this
location.

     (4) As of September  30, 2000 the Company  acquired all of the  outstanding
common stock of Terrasat,  Inc. which  operates as a wholly owned  subsidiary at
this location.

     (5) As of September 1, 2000 the Company acquired  substantially  all of the
assets of American  Microwave  Technology,  Inc. which operates as a division at
this location.
</FN>
</TABLE>

In addition to the above operating facilities,  the Company has an idle facility
in Billerica,  MA which is under lease.  The Company is looking to sublease this
facility.

The  Company  believes  that its  facilities  are  adequate  for its current and
presently anticipated future needs.

Item 3.  Legal Proceedings

On August  14,  2001,  Robinson  Laboratories,  Inc.  ("RLI")  and Ben  Robinson
("Robinson") filed an amended complaint against the Company in the United States
District Court for the  Eastern District of New York. The core  allegations  are

                                       11

<PAGE>



(i) that the Company has not issued 146,761 (as adjusted) shares of common stock
in connection with certain earn out requirements  contained in an asset purchase
agreement dated February 1, 2000;  (ii) that the Company  breached an employment
agreement  with Robinson by  terminating  his  employment on August 5, 2001; and
(iii) that the Company  breached a stock option agreement dated January 31, 2000
with  Robinson.  On  September  17,  2001,  the  Company  filed  an  answer  and
affirmative  defenses  and  counterclaims  in this matter  denying the  material
allegations  of the  amended  complaint.  The Company  also filed  counterclaims
against  both RLI and  Robinson.  In these  counterclaims,  the  Company's  core
allegations  concern Robinson's  misconduct (i) in connection with the manner he
attempted to satisfy RLI's earn out requirements;  (ii)  misrepresentations made
in connection with the asset purchase  agreement;  (iii) wrongdoing as a Company
employee leading to his termination; and (iv) post-Company employment wrongdoing
in connection with a new company. In addition to seeking a declaratory judgment,
the Company also  asserted  claims for,  among other  things,  fraud,  breach of
contract, breach of fiduciary duty, unfair competition and tortious interference
with  actual and  prospective  contractual  relationships.  The  parties are now
engaged in discovery and expect a trial date in 2002. The Company  believes that
it has meritorious defenses to this action.

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

     Not Applicable.

PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholders
           Matters

     (a)   The Company's Common Stock is traded in the NASDAQ National Market
           under the symbol HRLY. The following table sets forth the high and
           low sales price as reported by the NASDAQ National Market for the
           Company's Common Stock for the periods indicated and gives effect to
           the three-for- two stock split of the Common Stock on September 10,
           2001.


                                                      Common Stock
                                                      ------------
                                                    High          Low
                                                    ----          ---
     Fiscal Year 2000
         First Quarter...........................$ 10.00        $  8.13
         Second Quarter..........................  10.33           7.42
         Third Quarter...........................  12.92           9.25
         Fourth Quarter..........................  12.71          10.46
     Fiscal Year 2001
         First Quarter...........................  15.17          11.63
         Second Quarter..........................  15.46           8.79
         Third Quarter...........................  10.89           8.38
         Fourth Quarter..........................  13.15           9.97
     Fiscal Year 2002
         First Quarter (through October 11, 2001)  18.50          11.17

     The closing price on October 11, 2001 was $17.08.

     (b)   As of October 11, 2001, there were approximately 1,000 record holders
           of the Company's Common Stock.
     (c)   There have been no cash dividends declared or paid by the Company on
           its Common Stock during the past two fiscal years.



                                       12

<PAGE>



Item 6.  Selected Financial Data (in thousands except per share data)
<TABLE>
<CAPTION>

                                                                         52 Weeks ended
                                                   -----------------------------------------------------------
                                                   July 29,     July 30,    August 1,    August 2,   August 3,
                                                   2001 (2)     2000 (3)     1999 (4)       1998        1997
                                                   --------     --------     --------       -----       ----
<S>                                             <C>                <C>         <C>          <C>         <C>
Net sales                                       $    80,597        70,537      61,036       40,798      32,195
                                                     ======        ======      ======       ======      ======

Net income                                      $     7,405         7,639       7,735        5,497       4,804
                                                     ======        ======      ======      =======     =======

Earnings per common share (1)
     Basic                                      $       .73          1.05         .99          .74         .79
                                                       ====          ====        ====          ===        ====
     Assuming Dilution                          $       .68           .96         .91          .68         .67
                                                       ====         =====        ====         ====        ====

Total Assets                                    $   114,597        86,656      74,056       57,553      39,257
Total Current Liabilities                       $    18,732        12,783      10,513        9,843       9,813
Long-Term Debt net of current portion           $     2,740         2,931      15,437        4,111       2,890

<FN>


     (1) As adjusted to give effect to a 3-for-2 stock split effective September
         10, 2001.

     (2) As of September  1, 2000 and  September  30, 2000 the Company  acquired
         American Microwave Technology, Inc.  and  Terrasat, Inc., respectively.
         See Note B of the financial statements.

     (3) On January 3, 2000, the Company acquired  Robinson  Laboratories,  Inc.
         See Note B of the financial statements.

     (4) On January 4, 1999, the Company acquired General Microwave Corporation.
         See Note B of the financial statements.
</FN>
</TABLE>


                                       13

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations

Results of Operations

The following table sets forth for the periods indicated certain financial
information derived from the Company's consolidated statements of income
expressed as a percentage of net sales. There can be no assurance that trends in
sales growth or operating results will continue in the future.
<TABLE>
<CAPTION>

                                                                             52 weeks ended
                                                                     ------------------------------
                                                                 July 29,       July 30,       August 1,
                                                                   2001           2000           1999
                                                                   ----           ----           ----

<S>                                                               <C>            <C>            <C>
Net sales                                                         100.0%         100.0%         100.0%

Cost of products sold                                              67.2%          62.9%          60.2 %
                                                                   -----          -----          ------
Gross profit                                                       32.8%          37.1 %         39.8 %
Selling and administrative expenses                                19.3%          19.2 %         19.5%
                                                                   -----          ------         ----

Operating income                                                   13.5%          17.9 %         20.3%
                                                                   -----          ------         -----

Other income (expense), net:
     Investment income                                              0.8%           0.3 %          0.5 %
     Interest expense                                            (0.3)%         (1.6)%         (1.2)%
                                                                 ------         ------         ------
                                                                    0.5%        (1.3)%         (0.7)%
                                                                   -----       -------        -------

Income before income taxes and extraordinary item                  14.0%          16.6 %         19.6 %
Provision for income taxes                                          4.8%           5.8 %          6.7 %
                                                                   -----         -------        -------
Income before extraordinary item                                    9.2%          10.8 %         12.9 %
Extraordinary item                                                  0.0%           0.0%        (0.2)%
                                                                    ----           ----        ------
Net income                                                          9.2 %         10.8 %         12.7 %
                                                                    =====         ======         ======

</TABLE>

                                       14

<PAGE>



     Fiscal 2001 Compared to Fiscal 2000

Net sales for the 52 weeks  ended July 29, 2001 were  approximately  $80,597,000
compared to  $70,537,000  for fiscal  2000.  The sales  increase of  $10,060,000
(14.3%) is  attributable  to the  acquisitions  of Terrasat and AMT in the first
quarter of fiscal 2001 which contributed  $10,915,000 in revenues, as well as an
increase in net sales of  approximately  $3,997,000  in  microwave  products and
$4,573,000 in commercial products. Microwave systems products experienced a drop
in revenue of approximately $9,425,000.

Gross  profit of 32.8%  for the 52 weeks  ended  July 29,  2001 is less than the
prior year of 37.1%.  The  decline in margin of 4.3% is due  primarily  to lower
margins on microwave and commercial  products as compared to microwave  systems.
Margins  have  also  been  impacted  by  certain  inefficiencies  at the  Nashua
facility.  This  operation  is now being  consolidated  into the New England and
Farmingdale facilities.

Selling and  administrative  expenses  for the 52 weeks ended July 29, 2001 were
$15,592,000  compared to $13,497,000 for fiscal 2000, an increase of $2,095,000.
The primary  increase is due to businesses  acquired  which added  $2,345,000 in
fiscal 2001 and $486,000 in additional  personnel expenses associated with power
amplifier marketing costs. Incentive compensation decreased $707,000.

Investment income increased approximately $447,000 from the prior year primarily
from the  investment  of  proceeds  from the  exercise  of  warrants  in May and
November 2000.  Interest expense  decreased  $906,000 as compared to fiscal 2000
due to the repayment of bank  borrowings  out of the proceeds of the exercise of
the warrants.

The  effective  income tax rate  decreased to 34.4% in fiscal 2001 from 35.0% in
2000 due to various favorable tax benefits  including a lower effective tax rate
on foreign-source income.

     Fiscal 2000 Compared to Fiscal 1999

Net sales for the 52 weeks  ended July 30, 2000 were  approximately  $70,537,000
compared to  $61,036,000  for fiscal  1999.  The sales  increase  of  $9,501,000
(15.6%) is partially  attributable  to the  acquisition  of Robinson  Labs as of
January 3, 2000 which contributed $4,690,000 in revenues, and the acquisition of
GMC as of January 4, 1999 which contributed  $5,101,000  additional revenue over
the volume  generated  in fiscal  1999,  as well as an  increase in net sales of
approximately   $2,478,000  in  microwave  products.  Space  and  communications
products experienced a drop in revenue of approximately $2,768,000.

Gross  profit of 37.1%  for the 52 weeks  ended  July 30,  2000 is less than the
prior year of 39.8%.  The  decline in margin of 2.7% is due  primarily  to lower
margins on microwave  products,  which  includes the revenues from Robinson Labs
and GMC.

Selling and  administrative  expenses  for the 52 weeks ended July 30, 2000 were
$13,497,000  compared to $11,877,000 for fiscal 1999, an increase of $1,620,000.
The primary  increase  is due to the  acquisition  of Robinson  Labs which added
$1,069,000  in  selling  and  administrative  expenses  in  fiscal  2000.  As  a
percentage of revenues, expenses declined from 19.5% in 1999 to 19.2% in 2000.

Interest  expense  increased  approximately  $390,000  due  to  additional  bank
borrowings to fund the acquisitions of GMC and Robinson.

The  effective  income tax rate  increased to 35.0% in fiscal 2000 from 34.3% in
1999 due primarily to a decreased  benefit  received from the Company's  foreign
sales corporation in fiscal 2000.


                                       15

<PAGE>



Liquidity and Capital Resources

As of July 29,  2001  and  July 30,  2000,  working  capital  was  approximately
$46,804,000 and  $35,476,000,  respectively,  and the ratio of current assets to
current liabilities was 3.50 to 1 and 3.78 to 1, respectively. At July 29, 2001,
the Company had cash and cash equivalents of approximately $13,041,000.

The Company  entered  into an  agreement  effective  as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common stock of
Terrasat, Inc. ("Terrasat"),  a California corporation. The transaction provides
for the payment of  $6,000,000  in cash,  $3,000,000  which was paid in December
2000  and  $3,000,000  to be paid  in  December  2001,  and  the  assumption  of
approximately $1,025,000 in liabilities. In addition, the agreement provides for
additional cash payments in the future up to $2,000,000, based on gross revenues
through December 31, 2001.

The Company entered into an agreement as of September 1, 2000 to acquire certain
assets and the business,  subject to the assumption of certain  liabilities,  of
American Microwave Technology,  Inc., ("AMT"), a California  corporation,  which
operates as a division of Herley Industries,  Inc. The transaction  provided for
the  payment  of  $5,400,000  in  cash,  and  the  assumption  of  approximately
$1,153,000 in  liabilities.  In addition,  the Company entered into an exclusive
license agreement for certain products providing for a royalty of 10% on the net
shipments of such products through October 2004.

As of January 3, 2000, the Company acquired  substantially  all of the assets of
Robinson  Laboratories,  Inc.  ("Robinson" or "Robinson  Labs"), a New Hampshire
corporation,  which is being operated as a division of Herley  Industries,  Inc.
The transaction  provided for the payment of $6,000,000 in cash, the issuance of
50,762 (as adjusted) shares of Common Stock of the Company valued at $10.125 per
share,  and the  assumption  of  approximately  $3,140,000  in  liabilities.  In
addition, the agreement provides for the issuance of additional shares of Common
Stock at a future date, up to a maximum of 146,761(as adjusted) shares, based on
new orders booked through January 2001. The Company believed  previously,  based
upon  preliminary  data,  that it was  obligated to issue  additional  shares to
Robinson  Labs.  The Company has since  determined,  based upon a  comprehensive
inquiry,  that  Robinson  Labs is not  entitled  to any stock under the earn out
provisions of the Asset Purchase Agreement.  See "Item 3. Legal Proceedings".

In connection with the  acquisition of all of the issued and outstanding  common
stock of GMC in  January  1999,  the  Company  issued  1,450,013  (as  adjusted)
three-year  warrants to purchase one share of the  Company's  common stock at an
exercise price of $10.40 per share. The warrants were to expire in January 2002,
subject to a call  provision  after  October 11, 2000 at $.67 per warrant if the
average  last  reported  sales price of the common stock of the Company has been
not less than $11.73 per share for fifteen  consecutive trading days immediately
preceding the call date.  The warrants were called for redemption as of November
13, 2000, and  approximately  1,419,525 of the warrants were exercised at $10.40
per share of common stock resulting in proceeds of approximately $14,759,000.

As is customary  in the defense  industry,  inventory  is partially  financed by
advance  payments.  The  unliquidated  balance  of these  advance  payments  was
approximately $261,000 in 2001, and $1,006,000 in 2000.

Net cash provided by operations was approximately $2,210,000, and $9,854,000, in
2001 and 2000  respectively.  Significant  variances  from the prior fiscal year
include  additional  increases  in  inventory  of  $6,626,000  and a decrease in
customer deposits of $940,000.

Net cash  used in  investing  activities  in 2001 of  approximately  $11,740,000
relates  primarily to the  acquisitions  of Terrasat and certain  assets and the
business  of AMT,  net of cash  acquired,  which was  funded by  available  cash
balances  and  borrowings  under the bank line of credit.  Capital  expenditures
amounted to $3,679,000. Included in capital expenditures is the purchase of land
for $747,000 for expansion of the Lancaster, PA facility.

Net  cash  used in  investing  activities  in 2000 of  approximately  $4,571,000
relates to the  acquisition of Robinson Labs, in part for cash of  approximately
$6,000,000  which was funded by  borrowings  under the bank line of credit,  and


                                       16

<PAGE>



capital   expenditures   of   $2,618,000,   including   building  and  leasehold
improvements of $1,676,000 to accommodate the move of GMC from Amityville, NY to
a leased  facility  in  Farmingdale,  NY,  and  consolidation  of the GMC leased
facilities in Billerica,  MA with the Company's Woburn, MA facility.  Offsetting
the cash  outflows  were the net  proceeds  from  the  sale of the  facility  in
Amityville of $4,125,000.

Net cash  flows from  financing  activities  in fiscal  2001  included:  (1) the
exercise of approximately  1,419,500 warrants aggregating $14,759,000 which were
issued in connection  with the  acquisition  of GMC in 1999; (2) the exercise of
103,950  underwriter   warrants   aggregating  $998,000  which  were  issued  in
connection with the public offering of common stock in fiscal 1998; (3) proceeds
from the  exercise of 37,251 stock  options  aggregating  $250,000;  and (4) the
acquisition of treasury stock in the aggregate amount of $194,000.

Net cash  flows from  financing  activities  in fiscal  2000  included:  (1) net
payments  under the bank line of credit of  $12,500,000;  (2) proceeds  from the
exercise of stock options and warrants of $21,574,000, including the exercise of
approximately  1,314,000 of the warrants  issued in connection  with the sale of
common  stock to the  public in 1997  resulting  in  proceeds  of  approximately
$20,492,000;  and (3) the acquisition of treasury stock in the aggregate  amount
of $7,565,000.

The Company  maintains a revolving  credit facility with a bank for an aggregate
of $30,000,000,  as amended in February 2001, which expires January 31, 2003. No
borrowings were outstanding as of July 29, 2001 and July 30, 2000.

During  the  fiscal  years  ended July 29,  2001 and July 30,  2000 the  Company
acquired 10,800  (pre-split) and 512,000  (pre-split)  shares of its outstanding
common stock for  approximately  $194,000 and $7,565,000,  respectively  through
open  market  purchases,  pursuant to a stock  repurchase  plan to acquire up to
1,250,000 (pre- split) shares of Common Stock.

The Company  also  acquired  8,982 and 410,593  shares of common stock in fiscal
2000 and 1999, respectively, valued at $80,000, and $5,989,000, respectively, in
connection  with certain  "stock-for-stock"  exercises of stock options by which
certain  employees  elected to surrender  "mature" shares owned in settlement of
the option  price.  Such  exercises are treated as an exercise of a stock option
and the acquisition of treasury  shares by the Company.  See "Management - Stock
Plans."

The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities.

Subsequent Events

On August 7, 2001 the Board of Directors declared a 3-for-2 stock split effected
as a stock  dividend  payable  September 10, 2001 to holders of record on August
28, 2001. The effect of the split is presented  within  shareholders'  equity at
July 29,  2001.  As of the date of the split,  the  distribution  increased  the
number of  shares  outstanding  from  7,027,553  to  10,541,329.  The  amount of
$351,373 was transferred from the additional paid-in capital to the common stock
account to record this distribution.  Unless otherwise indicated,  all share and
per share data (other  than  common  stock  issued and  outstanding  on the 2000
Consolidated  Balance  Sheet  and  1999  and  2000  Consolidated  Statements  of
Shareholders'  Equity),  including stock options and warrants,  included in this
annual  report have been  restated  to reflect the stock split on a  retroactive
basis.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to market risk  associated with changes in interest rates
and stock  prices.  The Company has not entered  into any  derivative  financial
instruments  to manage the above risks and the Company has not entered  into any
market risk  sensitive  instruments  for trading  purposes.  The Company's  debt
consists of a working  capital  credit  facility  with a bank having an interest
rate that is set at 1.65%  over the FOMC  Federal  Funds  Target  Rate  based on
tangible  net worth in excess of  $25,000,000,  or at an  increment  of 1.80% if
tangible net worth is less than  $25,000,001,  and a mortgage on its facility in
Lancaster, Pa. at a  fixed rate of 7.43%. The  FOMC Federal Funds Target Rate at

                                       17

<PAGE>



at July 29, 2001 was 5.55%.  The credit  line is  reviewed  on an annual  basis.
Since the  acquisition  of GMC,  the Company is subject to  movements in foreign
currency rate changes related to GMC's Israel  operations.  The Company does not
anticipate  any other  material  changes in its primary market risk exposures in
fiscal 2001.

As of July 29, 2001,  the Company  holds an  investment in the common stock of a
public company that is exposed to price risk with a cost basis and a fair market
value basis of $143,330.

The table below provides  information about the Company's debt that is sensitive
to  changes  in  interest  rates.  The table  presents  principal  cash flows by
maturity  date.  Future  principal  payment cash flows by maturity date required
under the  mortgage  and line of credit,  and  corresponding  fair values are as
follows:

          Fiscal year ending during:                     Mortgage
          -------------------------                      --------
                   2002                                  $     75
                   2003                                        80
                   2004                                        86
                   2005                                        93
                   2006                                       101
                   2007 and later                           2,330
                                                            -----
                                                           $2,765
                                                            =====
          Fair value                                       $2,765
                                                            =====

Item 8.  Financial Statements and Supplementary Data

The financial statements  and supplementary data listed in the Index on Page F-1
are filed as a part of this report.

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

Not applicable

PART III

The  information  required  by Part  III is  incorporated  by  reference  to the
Company's  definitive  proxy  statement in connection with its Annual Meeting of
Stockholders  scheduled  to be  held in  January  2002,  to be  filed  with  the
Securities  and Exchange  Commission  within 120 days  following  the end of the
Company's fiscal year ended July 29, 2001.


                                       18

<PAGE>



PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  Exhibits

3.1   Certificate  of  Incorporation,  as  amended  (Exhibit  3(a) of  Form  S-1
      Registration Statement No. 2- 87160).

3.2   By-Laws, as amended August 7, 2001.

10.1  1996 Stock Option Plan (Exhibit 10.1 of Annual Report on Form 10-K for the
      fiscal year ended July 28, 1996).

10.2  1997 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated June 10,
      1997).

10.3  1998 Stock Option Plan (Exhibit 10.3 of Annual Report on Form 10-K for the
      fiscal year ended August 1, 1999).

10.4  2000 Stock Option Plan  (Exhibit 4.1 of Report  on  Form S-8 dated October
      12, 2001).

10.5  Amendments dated January 26,1999 and July 30, 1999 to Employment Agreement
      between  Herley Industries,  Inc.  and Lee N. Blatt dated as of October 1,
      1998 (Exhibit 10.4 of Annual Report on Form 10-K for the fiscal year ended
      August 1, 1999).

10.6  Amendments dated January 26,1999 and July 30, 1999 to Employment Agreement
      between Herley Industries, Inc. and Myron Levy dated as of October 1, 1998
      (Exhibit  10.5 of  Annual Report on Form 10-K for the  fiscal  year  ended
      August 1, 1999).

10.7  Agreement  and Plan of Reorganization  dated as of July 8, 1997  among the
      Company,   Metraplex Acquisition  Corporation  and  Metraplex  Corporation
      (Exhibit 2.1 of Registration Statement Form S-3 dated September 4, 1997).

10.8  Agreement  and Plan of Merger dated as of August 21,  1998  among  General
      Microwave  Corp.,  Eleven  General  Microwave  Corp.,   Shareholders,  GMC
      Acquisition  Corporation  and Registrant  (Exhibit 1 of Schedule 13D dated
      August 28, 1998).

10.9  Lease Agreement dated September 1, 1999 between  Registrant and RSK Realty
      LTD. (Exhibit 10.8 of Annual Report on Form 10-K for the fiscal year ended
      August 1, 1999).

10.10 Loan Agreement  dated  February 16, 1999 between  Registrant and The First
      National Bank of Maryland, a division of FMB Bank. (Exhibit 10.9 of Annual
      Report on Form 10-K for the fiscal year ended August 1, 1999).

10.11 Asset Purchase  Agreement dated as of February 1, 2000 between  Registrant
      and Robinson Laboratories, Inc. (Exhibit 10.2 of Form 10-Q dated March 13,
      2000).

10.12 Amendment to Loan Agreement dated January 11, 2000 between  Registrant and
      Allfirst Bank,  successor to The First National Bank of Maryland  (Exhibit
      10.1 of Form 10-Q dated March 13, 2000).

10.13 Amendment to Loan Agreement dated February 15, 2001 between Registrant and
      Allfirst Bank,  successor to The First National Bank of Maryland  (Exhibit
      10.1 of Form 10-Q dated March 13, 2001).

10.14 Asset Purchase  Agreement dated as of October 12, 2000 between  Registrant
      and American  Microwave  Technology  Inc. (Exhibit 10.1 of Form 10-Q dated
      December 12, 2000).

10.15 Common  Stock  Purchase  Agreement dated as of  December  4, 2000  between
      Registrant and Terrasat, Inc. (Exhibit 10.2 of Form 10-Q dated December 12
      2000).

10.16 Lease Agreement dated March 1, 2000 between  Registrant and RSK Realty LTD
      (Exhibit 10.13  of  Annual Report  on  Form 10-K for the fiscal year ended
      July 30, 2000).

23.1  Consent of Arthur Andersen LLP.

(b)  Financial Statements

         See Index to Consolidated Financial Statements at Page F-1.

(c)  Reports on Form 8-K

         None


                                       19

<PAGE>



SIGNATURES:

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized  on the 23rd day of October, 2001.

                                     HERLEY  INDUSTRIES,  INC.

                                     By:          /S/  Lee N. Blatt
                                           -----------------------------------
                                           Lee N. Blatt, Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on October 23, 2001 by the following persons in the
capacities indicated:


By:    /S/  Lee N. Blatt                       Chairman of the Board
   -------------------------------------------
      Lee N. Blatt

By:    /S/  Myron Levy                         Chief Executive Officer and
   ------------------------------------------- Director
      Myron Levy                               (Principal Executive Officer)

By:    /S/  Anello C. Garefino                 Vice President Finance,
   ------------------------------------------- CFO/Treasurer
      Anello C. Garefino                       (Principal Financial Officer)

By:    /S/  David H. Lieberman                 Secretary and Director
   -------------------------------------------
      David H. Lieberman

By:    /S/  Thomas J. Allshouse                Director
   -------------------------------------------
      Thomas J. Allshouse

By:    /S/  John A. Thonet                     Director
   -------------------------------------------
      John A. Thonet

By:    /S/ Alvin M. Silver                     Director
   -------------------------------------------
      Alvin M. Silver

By:    /S/ Edward K. Walker, Jr.               Director
   -------------------------------------------
      Edward K. Walker, Jr.



                                       20

<PAGE>



Item 8.  Financial Statements and Supplementary Data


                             HERLEY INDUSTRIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                     F-2

FINANCIAL STATEMENTS:

     Consolidated Balance Sheets, July 29, 2001 and July 30, 2000            F-3

     Consolidated Statements of Income for the 52 weeks ended
        July 29, 2001, July 30, 2000, and August 1, 1999                     F-4

     Consolidated Statements of Shareholders' Equity for the 52 weeks
        ended July 29, 2001, July 30, 2000, and August 1, 1999               F-5

     Consolidated Statements of Cash Flows for the 52 Weeks Ended
        July 29, 2001, July 30, 2000, and August 1, 1999                     F-6

     Notes to Consolidated Financial Statements                              F-7



Schedules have been omitted as not applicable.


















                                       F-1



<PAGE>




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



     To the Board of Directors of
     Herley Industries, Inc.

     We have  audited the  accompanying  consolidated  balance  sheets of Herley
     Industries, Inc and Subsidiaries as of July 29, 2001 and July 30, 2000, and
     the related  consolidated  statements of income,  shareholders'  equity and
     cash flows for the 52 weeks ended July 29,  2001,  July 30, 2000 and August
     1, 1999. These financial statements are the responsibility of the Company's
     management.  Our responsibility is to express an opinion on these financial
     statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
     accepted in the United  States.  Those  standards  require that we plan and
     perform  the  audit  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  consolidated  financial
     position of Herley  Industries,  Inc. and  Subsidiaries as of July 29, 2001
     and July 30, 2000,  and the  consolidated  results of their  operations and
     their cash flows for the 52 weeks  ended July 29,  2001,  July 30, 2000 and
     August 1, 1999 in conformity with accounting  principles generally accepted
     in the United States.



                             /S/ ARTHUR ANDERSEN LLP

     Lancaster, PA
     October 3, 2001





                                       F-2
<PAGE>
                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands except share data)

                                                             July 29,   July 30,
                                                               2001       2000
                                                             --------   --------
                        ASSETS
Current Assets:
         Cash and cash equivalents                           $ 13,041   $  7,665
         Accounts receivable                                   17,047     14,315
         Costs incurred and income recognized in excess
            of billings on uncompleted contracts                  541        146
         Other receivables                                        166        293
         Inventories                                           32,768     23,045
         Deferred taxes and other                               1,973      2,795
                                                              -------    -------
                               Total Current Assets            65,536     48,259
Property, Plant and Equipment, net                             21,312     18,004
Intangibles, net of amortization of $4,639 in 2001
         and $3,095 in 2000                                    26,766     18,096
Available-For-Sale Securities                                     146        146
Other Investments                                                 773      1,020
Other Assets                                                       64      1,131
                                                              -------    -------
                                                             $114,597   $ 86,656
                                                              =======    =======
         LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
         Current portion of long-term debt                   $    213   $    282
         Accounts payable and accrued expenses                 16,194      9,602
         Billings in excess of costs incurred and
             income recognized on uncompleted contracts           531       --
         Income taxes payable                                   1,061      1,426
         Reserve for contract losses                              472        467
         Advance payments on contracts                            261      1,006
                                                              -------    -------
                               Total Current Liabilities       18,732     12,783
Long-term Debt                                                  2,740      2,931
Deferred Income Taxes                                           4,452      5,571
                                                              -------    -------
                                                               25,924     21,285
                                                              -------    -------
Commitments and Contingencies
Shareholders' Equity:
         Common stock, $.10 par value; authorized
           20,000,000 shares; issued and outstanding
           10,537,289 in 2001 and 5,993,870 in 2000             1,054        599
         Additional paid-in capital                            45,250     29,808
         Retained earnings                                     42,369     34,964
                                                              -------    -------
                               Total Shareholders' Equity      88,673     65,371

                                                              -------    -------
                                                             $114,597   $ 86,656
                                                              =======    =======

The accompanying notes are an integral part of these financial statements.


                                       F-3
<PAGE>
                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (In thousands except per share data)


                                                        52 weeks ended
                                                   -------------------------
                                               July 29,    July 30,    August 1,
                                                 2001        2000        1999
                                               --------    --------    ---------

Net sales                                      $ 80,597    $ 70,537    $ 61,036
                                                -------     -------     -------

Cost and expenses:
     Cost of products sold                       54,159      44,382      36,749
     Selling and administrative expenses         15,592      13,497      11,877
                                                -------     -------     -------
                                                 69,751      57,879      48,626
                                                -------     -------     -------

         Operating income                        10,846      12,658      12,410
                                                -------     -------     -------

Other income (expense), net:
     Investment income                              679         232         298
     Interest expense                              (232)     (1,138)       (748)
                                                -------     -------     -------
                                                    447        (906)       (450)
                                                -------     -------     -------

         Income before income taxes and
            extraordinary item                   11,293      11,752      11,960
Provision for income taxes                        3,888       4,113       4,098
                                                -------     -------     -------
         Income before extraordinary item         7,405       7,639       7,862
Extraordinary item - loss on extinguishment
     of debt (net of income tax benefit
     of $ 68)                                      --          --           127
                                                -------     -------     -------

         Net income                            $  7,405    $  7,639    $  7,735
                                                =======     =======     =======

Earnings per common share - Basic
     Earnings before extraordinary item         $ .73      $ 1.05       $1.00
     Extraordinary loss on extinguishment
         of debt                                   --          --         .01
                                                 ----        ----        ----
     Net earnings per common share - Basic      $ .73      $ 1.05       $ .99
                                                 ====        ====        ====

     Basic weighted average shares               10,082      7,308       7,849
                                                 ======      =====       =====

Earnings per common share - Diluted
     Earnings before extraordinary item         $ .68       $ .96       $ .92
     Extraordinary loss on extinguishment
         of debt                                   --          --         .01
                                                 ----        ----        ----
     Net earnings per common share - Diluted    $ .68       $ .96       $ .91
                                                 ====        ====        ====

     Diluted weighted average shares             10,956      7,928       8,490
                                                 ======      =====       =====


The accompanying notes are an integral part of these financial statements.



                                       F-4
<PAGE>

                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
         52 weeks ended July 29, 2001, July 30, 2000 and August 1, 1999
                        (In thousands except share data)
<TABLE>
<CAPTION>

                                                     Common Stock         Additional
                                                     ------------           Paid-in        Retained       Treasury
                                                  Shares      Amount        Capital        Earnings        Stock       Total
                                                ---------     ------        -------        --------        -----       -----
<S>                                             <C>          <C>             <C>            <C>                      <C>
Balance at August 2, 1998                       5,266,159    $   527         20,324         19,590          --       $ 40,441

Net income                                                                                   7,735                      7,735
Issuance of warrants in
  connection with business acquired                                           1,450                                     1,450
Exercise of stock options
  and warrants                                    735,767         73          4,752                       (5,989)      (1,164)
Tax benefit upon exercise of stock
  options                                                                     2,127                                     2,127
Purchase of 561,050 shares
  of treasury stock                                                                                       (7,689)      (7,689)
Retirement of treasury shares                    (971,643)       (97)       (13,581)                      13,678          --
                                                ---------      -----         ------         ------        ------       ------
Balance at August 1, 1999                       5,030,283    $   503         15,072         27,325          --       $ 42,900

Net income                                                                                   7,639                      7,639
Issuance of common stock in
  connection with business acquired                33,841          3            511                                       514
Exercise  of warrants issued in
  connection with public offering
   in 1998                                      1,313,613        131         20,361                                    20,492
Exercise of stock options
  and warrants                                    137,115         14          1,213                         (140)       1,087
Tax benefit upon exercise of stock
  options                                                                       304                                       304
Purchase of 512,000 shares
  of treasury stock                                                                                       (7,565)      (7,565)
Retirement of treasury shares                    (520,982)       (52)        (7,653)                       7,705          --
                                                ---------      -----         ------         ------         -----       ------
Balance at July 30, 2000                        5,993,870    $   599         29,808         34,964           --      $ 65,371

Net income                                                                                   7,405                      7,405
Exercise  of warrants issued in
  connection with business acquired
   in 1999                                        946,349         95         14,664                                    14,759
Exercise of stock options
  and warrants                                     94,134         10          1,239                                     1,249
Tax benefit upon exercise of stock
  options                                                                        83                                        83
Purchase of 10,800 shares
  of treasury stock                                                                                         (194)        (194)
Retirement of treasury shares                     (10,800)        (1)          (193)                         194          --
Three-for-two stock split                       3,513,736        351           (351)                                      --
                                               ----------     ------         ------         ------         -----       ------
Balance at July 29, 2001                       10,537,289    $ 1,054         45,250         42,369           --      $ 88,673
                                               ==========     ======         ======         ======         =====       ======
</TABLE>


The accompanying notes are an integral part of these financial statements.







                                       F-5

<PAGE>


                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>

                                                                             52 weeks ended
                                                                       -------------------------
                                                                   July 29,    July 30,    August 1,
                                                                     2001        2000        1999
                                                                   --------    --------    ---------
<S>                                                                <C>         <C>         <C>
Cash flows from operating activities:
     Net Income                                                    $  7,405    $  7,639    $  7,735
                                                                    -------     -------     -------
     Adjustments to reconcile net income
        to net cash provided by operations:
         Depreciation and amortization                                4,772       3,998       3,289
         Loss (gain) on sale of fixed assets                              4         (21)       --
         Extraordinary loss on extinguishment
            of debt, net of income taxes                               --          --           127
         Equity in income of limited partnership                        (49)        (71)        (99)
         Decrease (increase) in deferred tax assets                     962        (148)        483
         (Decrease) increase in deferred tax liabilities             (1,119)        342        (141)
         Changes in operating assets and liabilities:
            (Increase) in accounts receivable                        (1,525)     (1,568)       (361)
            (Increase) decrease in costs incurred
                and income recognized in excess of
                billings on uncompleted contracts                      (395)       (146)      1,665
            Decrease (increase) in other receivables                    127         (20)         36
            Decrease in prepaid income taxes                           --          --           377
            (Increase) decrease in inventories                       (8,251)     (1,625)        729
            Decrease in prepaid expenses and other                       10           4         199
            Increase (decrease) in accounts payable and
                accrued expenses                                      1,978         685      (2,119)
            Increase in billings in excess of costs incurred and
               income recognized on uncompleted contracts               531        --          --
            (Decrease) increase in income taxes payable                (281)      1,458       2,019
            (Decrease) increase in reserve for contract losses       (1,201)     (1,038)        360
            (Decrease) increase in advance payments
                on contracts                                           (745)        195      (1,620)
            Other, net                                                  (13)        170          44
                                                                    -------     -------     -------
                Total adjustments                                    (5,195)      2,215       4,988
                                                                    -------     -------     -------
         Net cash provided by operations                              2,210       9,854      12,723
                                                                    -------     -------     -------

Cash flows from investing activities:
     Acquisition of business, net of cash acquired                   (8,373)     (6,095)    (20,101)
     Proceeds from sale of fixed assets                                  16       4,142           6
     Partial distribution from limited partnership                      296        --          --
     Capital expenditures                                            (3,679)     (2,618)     (1,662)
                                                                    -------     -------     -------
         Net cash used in investing activities                      (11,740)     (4,571)    (21,757)
                                                                    -------     -------     -------

Cash flows from financing activities:
     Borrowings under bank line of credit                             7,100      13,900      29,500
     Proceeds from refinance of mortgage note                          --          --         2,915
     Proceeds from exercise of stock options and warrants, net       16,008      21,574      (1,164)
     Payments under bank line of credit                              (7,100)    (26,400)    (18,500)
     Payments of long-term debt                                        (908)     (1,868)       (970)
     Extinguishment of debt                                            --          --        (3,006)
     Purchase of treasury stock                                        (194)     (7,565)     (7,689)
                                                                    -------     -------     -------
         Net cash provided by (used in) financing activities         14,906        (359)      1,086
                                                                    -------     -------     -------

         Net increase (decrease) in cash and cash equivalents         5,376       4,924      (7,948)
Cash and cash equivalents at beginning of period                      7,665       2,741      10,689
                                                                    -------     -------     -------

Cash and cash equivalents at end of period                         $ 13,041    $  7,665    $  2,741
                                                                    =======     =======     =======
Supplemental cash flow information:
     Cashless exercise of stock options                            $   --      $     80    $  5,989
                                                                    =======     =======     =======
     Stock issued for business acquired                            $   --      $    514    $   --
                                                                    =======     =======     =======
     Warrants issued for business acquired                         $   --      $   --      $  1,450
                                                                    =======     =======     =======
     Tax benefit related to stock options                          $     83    $    304    $  2,127
                                                                    =======     =======     =======
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       F-6



<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.     Nature of Operations

       The Company, a Delaware corporation, is engaged in research, engineering,
       product  development,   and  manufacturing  of  complex  microwave  radio
       frequency  (RF)  and  millimeter   wave  components  and  subsystems  for
       commercial wireless, defense and space customers worldwide.

2.     Fiscal Year

       The Company's fiscal year ends on the Sunday closest to July 31. Normally
       each  fiscal year  consists of 52 weeks,  but every five or six years the
       fiscal  year  will  consist  of 53  weeks.  All  fiscal  years  presented
       consisted of 52 weeks.

3.     Basis of Financial Statement Presentation

       The  consolidated  financial  statements  include the  accounts of Herley
       Industries, Inc. and its subsidiaries, all of which are wholly-owned. All
       significant  inter-company accounts and transactions have been eliminated
       in consolidation.  The presentation of financial statements in conformity
       with  accounting  principles  generally  accepted  in the  United  States
       requires  management to make  estimates and  assumptions  that affect the
       reported  amounts of assets and  liabilities and disclosure of contingent
       assets and liabilities as of the date of the financial statements as well
       as revenues and expenses  during the period.  Actual results could differ
       from those estimates.

4.     Cash and Cash Equivalents

       The Company considers all liquid investments with an original maturity of
       three months or less at the date of acquisition  to be cash  equivalents.
       Short-term  investments  are recorded at the amortized  cost plus accrued
       interest which  approximates  market value. The Company limits its credit
       risk to an  acceptable  level by  evaluating  the  financial  strength of
       institutions  at which  significant  investments  are made and based upon
       credit ratings.

5.     Concentration of Credit Risk

       Financial  instruments  which  potentially  subject the Company to credit
       risk consist primarily of trade accounts receivable.  Accounts receivable
       are  principally  from  the  U.S.   Government,   major  U.S.  Government
       contractors,  several foreign governments,  and domestic customers in the
       aerospace,  communications,  and defense  industries.  Credit is extended
       based  on  an  evaluation  of  the  customer's  financial  condition  and
       generally  collateral is not required.  In many cases irrevocable letters
       of credit  accompanied  by advanced  payments are  received  from foreign
       customers,  and progress  payments are received from domestic  customers.
       The Company  performs  periodic  credit  evaluations of its customers and
       maintains reserves for potential credit losses.

6.     Inventories

       Inventories,  other than inventory costs relating to long-term  contracts
       and  programs,  are  stated  at  lower  of  cost  (principally  first-in,
       first-out) or market. Inventory costs relating to long-term contracts and
       programs are stated at the actual  production  costs,  including  factory
       overhead,  reduced by amounts identified with revenue recognized on units
       delivered or progress completed.


                                       F-7

<PAGE>



       Inventory costs relating to long-term  contracts and programs are reduced
       by any  amounts  in  excess  of  estimated  realizable  value.  The costs
       attributed to units delivered under long-term  contracts and programs are
       based on the average costs of all units produced.

7.     Property, Plant and Equipment

       Property,  plant  and  equipment  are  stated at cost.  Depreciation  and
       amortization are provided  principally by the  straight-line  method over
       the  estimated  useful  lives of the  related  assets.  Gains and  losses
       arising from the sale or disposition of property, plant and equipment are
       recorded in income.

8.     Intangibles

       Intangibles  are comprised of customer lists,  installed  products bases,
       drawings,   patents,  licenses,  certain  government  qualifications  and
       technology and goodwill in connection with the  acquisitions of Terrasat,
       Inc. and certain assets of American Microwave  Technology,  Inc. in 2001,
       certain assets of Robinson Laboratories,  Inc. in 2000, General Microwave
       Corporation  in 1999,  Metraplex  Corporation in 1997, and Vega Precision
       Laboratories,  Inc. in 1993.  Intangibles are being amortized over twenty
       years.  Amortization charges totaled $1,544,000,  $1,109,000 and $754,000
       in fiscal 2001, 2000 and 1999, respectively.

       The carrying  amount of  intangibles  is evaluated on a recurring  basis.
       Current  and  future   profitability   as  well  as  current  and  future
       undiscounted cash flows of the acquired businesses are primary indicators
       of recoverability.  For the three fiscal years ended July 29, 2001, there
       were no adjustments  to the carrying  amount of the cost in excess of net
       assets acquired resulting from these evaluations.

9.     Marketable Securities

       The Company  accounts for its  investments  in  marketable  securities in
       accordance  with  Statement of Financial  Accounting  Standards  No. 115,
       "Accounting for Certain Investments in Debt and Equity Securities."

       Management  determines the appropriate  classification of debt securities
       at the time of  purchase  and  reevaluates  such  designation  as of each
       balance sheet date. Debt  securities are classified as held-to-  maturity
       when  the  Company  has the  positive  intent  and  ability  to hold  the
       securities to maturity.  Marketable equity securities and debt securities
       not classified as held-to-maturity are classified as  available-for-sale.
       Available-for-sale  securities are carried at fair value.  Realized gains
       and losses and  declines in value judged to be  other-than-temporary  are
       included in other income , net. The cost of  securities  sold is based on
       the specific  identification method. Interest and dividends on securities
       are included in other income, net.

10.    Other Investments

       The Company is a limited partner in a nonmarketable  limited  partnership
       in  which  it owns  approximately  a 10%  interest.  This  investment  is
       accounted for under the equity method.

11.    Revenue and Cost Recognition

       Under  fixed-price  contracts,  revenue  and related  costs are  recorded
       primarily  as  deliveries  are  made.   Certain  costs  under  long-term,
       fixed-price contracts (principally either directly or indirectly with the
       U.S. Government),  which include non-recurring billable engineering,  are
       deferred  until these costs are  contractually  billable.  Revenue  under
       certain  long-term,   fixed  price  contracts  is  recognized  using  the
       percentage  of completion  method of  accounting.  Revenue  recognized on
       these contracts is based on

                                       F-8

<PAGE>



       estimated  completion to date (the total  contract  amount  multiplied by
       percent of  performance,  based on total  costs  incurred  in relation to
       total  estimated  cost at  completion).  Prospective  losses on long-term
       contracts  are  based  upon  the  anticipated   excess  of  inventoriable
       manufacturing  costs over the selling price of the remaining  units to be
       delivered and are recorded  when first  reasonably  determinable.  Actual
       losses could differ from those  estimated  due to changes in the ultimate
       manufacturing costs and contract terms.

       Contract  costs  include  all direct  material  and labor costs and those
       indirect  costs  related to contract  performance.  Selling,  general and
       administrative costs are charged to expense as incurred.

12.    Income Taxes

       Income  taxes  are  accounted  for by  the  asset/liability  approach  in
       accordance  with  Statement of Financial  Accounting  Standards  No. 109,
       "Accounting  for Income  Taxes."  Deferred  taxes  represent the expected
       future  tax  consequences   when  the  reported  amounts  of  assets  and
       liabilities are recovered or paid. They arise from temporary  differences
       between the financial  reporting and tax bases of assets and  liabilities
       and are adjusted for changes in tax laws and tax rates when those changes
       are  enacted.  The  provision  for income taxes  represents  the total of
       income  taxes paid or payable  for the current  year,  plus the change in
       deferred taxes during the year.

13.    Stock-Based Compensation

       Statement of Financial  Accounting  Standards  No. 123,  "Accounting  for
       Stock-Based  Compensation," encourages, but does not require companies to
       record compensation cost for stock-based  employee  compensation plans at
       fair value. The Company has chosen to continue to account for stock-based
       compensation  using the intrinsic  value method  prescribed in Accounting
       Principles  Board  Opinion  No.  25,  "Accounting  for  Stock  Issued  to
       Employees," and related Interpretations.  Accordingly,  compensation cost
       for stock options is measured as the excess, if any, of the quoted market
       price of the Company's  stock at the date of the grant over the amount an
       employee must pay to acquire the stock. Because the exercise price of the
       Company's   employee  stock  options  equals  the  market  price  of  the
       underlying  stock  on the  date of  grant,  no  compensation  expense  is
       recognized.

14.    Product Development

       The  Company's  primary  efforts  are focused on  engineering  design and
       product  development  activities  rather than pure research.  The cost of
       these  development  activities,  including  employees' time and prototype
       development,   net  of  amounts  paid  by  customers,  was  approximately
       $2,070,000,  $1,727,000,  and $1,685,000 in fiscal 2001,  2000, and 1999,
       respectively.

15.    New Accounting Standards

       In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
       No. 141  "Business  Combinations"  and SFAS No. 142  "Goodwill  and Other
       Intangible Assets." SFAS No. 141 requires business combinations initiated
       after June 30,  2001 to be  accounted  for using the  purchase  method of
       accounting,  and broadens the criteria for  recording  intangible  assets
       separate   from   goodwill.   SFAS  No.  142   requires   the  use  of  a
       non-amortization  approach to account for purchased  goodwill and certain
       intangibles.  Under a  non-amortization  approach,  goodwill  and certain
       intangibles will not be amortized into results of operations, but instead
       would be reviewed for  impairment and written down and charged to results
       of operations only in the periods in which the recorded value of goodwill
       and certain  intangibles  is more than its fair value.  The provisions of
       each  statement  will be adopted by the  Company  on July 30,  2001.  The
       adoption of SFAS No.142 will result in the Company's  discontinuation  of
       amortization  of its goodwill  and  intangible  assets which  amounted to
       $1,504,000 in fiscal 2001.

                                       F-9

<PAGE>



       However, the Company will be required to test its goodwill for impairment
       under the new  standard  beginning in the second  quarter of 2002,  which
       could  have  an  adverse  effect  on  the  Company's  future  results  of
       operations if an impairment occurs.

NOTE B - ACQUISITIONS

       The  Company  entered  into an  agreement  effective  as of the  close of
       business September 30, 2000, to acquire all of the issued and outstanding
       common stock of Terrasat,  Inc. ("Terrasat"),  a California  corporation.
       The  transaction   provides  for  the  payment  of  $6,000,000  in  cash,
       $3,000,000  which was paid in December 2000 and  $3,000,000 to be paid in
       December  2001,  and  the  assumption  of  approximately   $1,025,000  in
       liabilities.  In addition,  the agreement  provides for  additional  cash
       payments in the future up to $2,000,000,  based on gross revenues through
       December 31,  2001.  The  transaction  has been  accounted  for under the
       purchase method. Accordingly, the consolidated balance sheet includes the
       assets and liabilities of Terrasat at July 29, 2001, and the consolidated
       statement  of income  includes  the results of Terrasat  operations  from
       October 1, 2000.  Excess cost over the fair value of net assets  acquired
       of approximately $4,845,000 is being amortized over 20 years.

       The Company  entered into an agreement as of September 1, 2000 to acquire
       certain  assets and the  business,  subject to the  assumption of certain
       liabilities,   of  American  Microwave   Technology,   Inc.,  ("AMT"),  a
       California   corporation,   which   operates  as  a  division  of  Herley
       Industries,  Inc. The transaction  provided for the payment of $5,400,000
       in cash, and the assumption of  approximately  $1,153,000 in liabilities.
       In addition,  the Company entered into an exclusive license agreement for
       certain  products  providing for a royalty of 10% on the net shipments of
       such products  through  October 2004. The  transaction has been accounted
       for under the purchase  method.  Accordingly,  the  consolidated  balance
       sheet  includes the assets and  liabilities  of AMT at July 29, 2001, and
       the  consolidated  statement  of income  includes  the  results  of AMT's
       operations from September 1, 2000. Excess cost over the fair value of net
       assets  acquired of  approximately  $4,112,000 is being amortized over 20
       years.

       The   acquisitions   of  Terrasat  and  AMT   contributed   approximately
       $10,915,000 in revenues in the fiscal year ended July 29, 2001.

       The  allocation of the aggregate  estimated  purchase price in connection
       with  these  acquisitions  may  be  revised  as  additional   information
       concerning asset and liability valuations is obtained. Adjustments, which
       could be significant,  will be made during the allocation period based on
       detailed  reviews of the fair values of assets  acquired and  liabilities
       assumed and could  result in a  substantial  change in the excess of cost
       over the fair value of net assets acquired.

       The Company entered into an agreement,  as of January 3, 2000, to acquire
       substantially   all  of  the  assets  of  Robinson   Laboratories,   Inc.
       ("Robinson"  or "Robinson  Labs"),  a New  Hampshire  corporation,  which
       operates  as a  division  of  Herley  Industries,  Inc.  The  transaction
       provided for the payment of  $6,000,000  in cash,  the issuance of 50,762
       (as adjusted) shares of Common Stock of the Company valued at $10.125 per
       share, and the assumption of approximately $3,140,000 in liabilities.  In
       addition, the agreement provides for the issuance of additional shares of
       Common Stock at a future date,  up to a maximum of 146,761 (as  adjusted)
       shares,  based on new orders booked  through  January  2001.  The Company
       believed  previously,  based upon preliminary data, that it was obligated
       to issue  additional  shares to  Robinson  Labs.  The  Company  has since
       determined, based upon a comprehensive inquiry, that Robinson Labs is not
       entitled to any stock under the earn out provisions of the Asset Purchase
       Agreement.  The  transaction  has been  accounted  for under the purchase
       method.  The  consolidated  statement  of income  includes the results of
       Robinson's  operations  from  January 3, 2000.  Excess cost over the fair
       value of net assets  acquired of  approximately  $6,722,000  (as adjusted
       based on final asset and liability valuations) is being amortized over 20
       years.


                                      F-10

<PAGE>



       On the basis of a pro forma consolidation of the results of operations as
       if the  acquisition  had taken  place at the  beginning  of fiscal  1999,
       unaudited  consolidated net sales, net income,  basic earnings per share,
       and diluted  earnings per share for the  fifty-two  weeks ended August 1,
       1999 would have been  approximately  $69,283,000,  $7,272,000,  $.93, and
       $.85,  and  approximately  $73,246,000,   $7,275,000,   $.99,  and  $.92,
       respectively,  for the fifty-two weeks ended July 30, 2000. The pro forma
       information includes adjustments for additional depreciation based on the
       estimated fair value of the property,  plant, and equipment acquired, the
       amortization of intangibles,  and additional  interest on bank borrowings
       arising from the transaction.  The pro forma financial information is not
       necessarily  indicative  of the results of  operations as they would have
       been had the transaction been affected at the beginning of fiscal 1999.

       As of January 4, 1999,  the Company  completed the  acquisition of all of
       the issued and outstanding common stock of General Microwave  Corporation
       ("GMC"), a New York corporation, including outstanding stock options, for
       $18.00 per share and 1,450,013  three-year warrants to purchase one share
       of  the  Company's  common  stock,  at an  aggregate  purchase  price  of
       approximately   $24,556,000.   GMC  designs,   manufactures  and  markets
       microwave  components and  subsystems,  and related  electronic  test and
       measurement  equipment.  This  transaction  was  accounted  for under the
       purchase  method.  The purchase price includes  shares of common stock of
       GMC purchased in the open market,  acquisition of the remaining shares of
       common  stock  outstanding,  an estimate of the fair market  value of the
       warrants based on the trading price of similar warrants  currently on the
       market, and transaction expenses. The warrants were exercisable at $10.40
       per share of common  stock of the  Company,  subject to a call  provision
       after  October 11, 2000 at $.67 per warrant if the average last  reported
       sales  price of the common  stock of the  Company  has been not less than
       $11.73  per  share  for  fifteen  consecutive  trading  days  immediately
       preceding the call date.  The warrants  were called for  redemption as of
       November  13, 2000,  and  approximately  1,419,500  of the warrants  were
       exercised  at $10.40 per share of common  stock  resulting in proceeds of
       approximately $14,759,000.

       The  consolidated  statements  of  income  include  the  results  of  GMC
       operations from January 4, 1999.

       On the basis of a pro forma consolidation of the results of operations as
       if the  acquisition  had taken  place at the  beginning  of fiscal  1999,
       unaudited  consolidated net sales, net income,  basic earnings per share,
       and diluted  earnings per share for the  fifty-two  weeks ended August 1,
       1999 would have been  approximately  $70,349,000,  $7,481,000,  $.95, and
       $.88,  respectively.  The pro forma information  includes adjustments for
       additional  depreciation  based on the estimated fair market value of the
       property,   plant,  and  equipment  acquired,  and  the  amortization  of
       intangibles  arising  from  the  transaction.  The  pro  forma  financial
       information is not necessarily indicative of the results of operations as
       they would have been had the  transaction  been effected at the beginning
       of fiscal 1999.

NOTE C - INVENTORIES

       The major components of inventories are as follows (in thousands):

                                                  July 29,         July 30,
                                                    2001             2000
                                                    ----             ----
           Purchased parts and raw materials      $ 17,128         $ 12,804
           Work in process                          13,645            9,358
           Finished products                         1,995              883
                                                  --------          -------
                                                  $ 32,768         $ 23,045
                                                    ======           ======

NOTE D - OTHER INVESTMENTS

       In July 1994, the Company invested  $1,000,000 for a limited  partnership
       interest in M.D. Sass Municipal

                                      F-11

<PAGE>



       Finance Partners-I, a Delaware limited partnership. The objectives of the
       partnership  are the  preservation  and protection of its capital and the
       earning  of  income  through  the  purchase  of   certificates  or  other
       documentation  that  evidence  liens for unpaid local taxes on parcels of
       real  property.  At July 29,  2001 and July 30,  2000 the  percentage  of
       ownership  was   approximately   10%.  The  Company's   interest  in  the
       partnership  may be transferred  to a substitute  limited  partner,  upon
       written notice to the managing general partners,  only with the unanimous
       consent of both general partners at their sole  discretion.  In July 2001
       the Company  received a partial  distribution of  approximately  $296,000
       from  the  Partnership.  As  of  July  29,  2001  the  Company's  limited
       partnership interest had a carrying value of $773,000.

NOTE E - PROPERTY, PLANT AND EQUIPMENT

       Property,  plant  and  equipment  are  comprised  of  the  following  (in
       thousands):

                                           July 29,    July 30,   Estimated
                                             2001        2000     Useful Life
                                             ----        ----     -----------
       Land                               $  2,908    $  1,161
       Building and building
            improvements                     8,643       8,418    10-40 years
       Machinery and equipment              30,403      26,293     5-8  years
       Furniture and fixtures                1,049         915     5-10 years
       Automobiles                              91         108      3   years
       Tools                                    34          34      5   years
       Leasehold improvements                1,586       1,351     5-10 years
                                            ------      ------
                                            44,714      38,280
       Less accumulated depreciation        23,402      20,276
                                            ------      ------
                                          $ 21,312    $ 18,004
                                            ======      ======

       Depreciation  charges totaled $3,127,000,  $2,889,000,  and $2,535,000 in
       fiscal 2001, 2000, and 1999, respectively.

NOTE F - COMMITMENTS AND CONTINGENCIES

       Leases

       The Company  leases  office,  production  and warehouse  space as well as
       computer equipment and automobiles under noncancellable operating leases.

       Rent  expense for the 52 weeks ended July 29, 2001,  July 30,  2000,  and
       August 1, 1999, was approximately $1,506,000,  $1,053,000,  and $519,000,
       respectively.

       Minimum  annual  rentals  under  noncancellable  operating  leases are as
       follows (in thousands):

                                                        Amount
                                                        ------
                 Year ending fiscal 2002               $ 1,446
                                    2003                 1,223
                                    2004                   957
                                    2005                   856
                                    2006                   803
                                  Future                 2,572




                                      F-12

<PAGE>



       Employment Agreements

       The Company has  employment  agreements  with certain  executives  of the
       Company,  which, as amended, expire at various dates through December 31,
       2004,  subject to extension  each  January 1 for three years,  commencing
       January 1, 2000. These  agreements  provide for aggregate annual salaries
       as of July 29, 2001 of $1,088,000,  as adjusted. These agreements provide
       for an  annual  cost of living  adjustment  based on the  consumer  price
       index, and also provide for incentive compensation based on pretax income
       of the Company in excess of  $2,000,000.  Incentive  compensation  in the
       amount of $971,000,  and $969,000, was expensed in fiscal years 2000, and
       1999,  respectively.  The  executives  waived their  incentive for fiscal
       2001.

       The  agreements  also  provide  that,  in the event  there is a change in
       control of the Company,  as defined,  the  executives  have the option to
       terminate the agreements and receive a lump-sum  payment of approximately
       three times their annual salary.  As of July 29, 2001, the amount payable
       in the event of such termination would be approximately $3,265,000.

       One of the  employment  contracts  provides  for a  consulting  agreement
       commencing  at the end of the  employment  period which became  effective
       October 1, 1998, and terminating  December 31, 2010 at the annual rate of
       $100,000.  Another one of the employment contracts, as amended October 1,
       1998,  provides  for a  consulting  period  commencing  at the end of the
       period of active  employment and continuing for a period of five years at
       the annual rate of $100,000. Seven officers of the Company have severance
       agreements  providing for a lump-sum payment of $2,120,000 through fiscal
       2002 in the event of a change of control of the Company as defined in the
       agreements.

       Litigation

       On August 14, 2001, Robinson Laboratories,  Inc. and Ben Robinson filed a
       complaint against the Company alleging, among other allegations, that the
       Company has not issued  146,761 (as  adjusted)  shares of common stock in
       connection with certain  provisions of the asset purchase  agreement.  On
       September 17, 2001, the Company filed an answer and affirmative  defenses
       and counterclaims in this matter denying the material  allegations of the
       complaint.  The parties are now engaged in  discovery  and expect a trial
       date in 2002. The Company  believes that it has  meritorious  defenses to
       this action.

       The  Company is involved in various  other legal  proceedings  and claims
       which arise in the ordinary course of its business.  While any litigation
       contains an element of uncertainty,  management believes that the outcome
       of such litigation, including the action described above, will not have a
       material adverse effect on the Company's financial position or results of
       operations.

       Stand-by Letters of Credit

       The  Company  maintains  a letter  of  credit  facility  with a bank that
       provides for the issuance of stand-by  letters of credit and requires the
       payment of a fee of 1.0% per annum of the amounts  outstanding  under the
       facility.  The  facility  expires  January  31,  2003.  At July 29,  2001
       stand-by  letters of credit  aggregating  approximately  $4,479,000  were
       outstanding under this facility.



                                      F-13

<PAGE>



NOTE G - INCOME TAXES

       Income tax provision consisted of the following (in thousands):

                                               52 Weeks ended
                                 -------------------------------------------
                                 July 29,         July 30,         August 1,
                                   2001             2000             1999
                                   ----             ----             ----
              Current
                  Federal        $ 3,071          $ 3,573          $ 3,328 (1)
                  State              275              192              399
                  Foreign            202              154               29
                                   -----            -----            -----
                                   3,548            3,919            3,756
                                   -----            -----            -----
              Deferred
                  Federal            248              215              540
                  State               92              (21)            (198)
                                   -----            -----            -----
                                     340              194              342
                                   -----            -----            -----

                                 $ 3,888          $ 4,113          $ 4,098
                                   =====            =====            =====

       (1)    Excludes  benefit of $68 from  extraordinary  loss  incurred  as a
              result of early extinguishment of long term debt (See Note H).

       The Company paid income taxes of  approximately  $4,427,000,  $2,241,000,
       and  $1,324,000  in  fiscal  2001,  2000,  and  1999,  respectively.  The
       following is a reconciliation  of the U. S. statutory income tax rate and
       the effective tax rate on pretax income:

                                                         52 Weeks ended
                                           -------------------------------------
                                           July 29,      July 30,      August 1,
                                             2001          2000          1999
                                             ----          ----          ----
         U.S. Federal statutory rate         34.0 %        34.0 %        34.0 %
         State taxes, net of
            federal tax benefit               2.4           0.9           1.4
         Benefit of foreign sales
            corporation                      (2.6)         (2.1)         (3.2)
         Non-deductible expenses              2.5           1.8           1.4
         Benefit of foreign and
            foreign-source income            (2.3)         (1.8)         (1.2)
         Other, net                           0.4           2.2           1.9
                                             ----          -----         ----
            Effective tax rate               34.4 %        35.0 %        34.3 %
                                             ====          ====          ====

       Income taxes have not been provided on undistributed  earnings of foreign
       subsidiaries.  If remitted as  dividends,  these  earnings  could  become
       subject  to  additional  tax.  The  Company's  intention  is to  reinvest
       unremitted   earnings  of   subsidiaries   outside   the  United   States
       permanently.

       Deferred income taxes reflect the impact of temporary differences between
       the amount of assets and liabilities  recognized for financial  reporting
       purposes and such amounts recognized for tax purposes.


                                      F-14

<PAGE>



       Components  of  deferred  tax assets and  liabilities  are as follows (in
       thousands):
<TABLE>
<CAPTION>

                                                      July 29, 2001                      July 30, 2000
                                               ----------------------------       ---------------------------
                                               Deferred          Deferred         Deferred         Deferred
                                                  Tax               Tax              Tax              Tax
                                                Assets          Liabilities        Assets         Liabilities
                                                ------          -----------        ------         -----------
<S>                                             <C>               <C>              <C>               <C>
         Intangibles                            $  -              $ 1,943          $  -              $ 1,766
         Accrued vacation pay                       446              -                 323              -
         Accrued bonus                               39              -                 578              -
         Warranty costs                             100              -                  95              -
         Inventory                                  838              -               1,011              -
         Depreciation                              -                2,873             -                3,770
         Contract losses                            146              -                 345              -
         Net operating loss
            carryforwards                           230              -                  96              -
         Other                                      342                99              201               195
                                                  -----             -----            -----             -----
                                                $ 2,141           $ 4,915          $ 2,649           $ 5,731
                                                  =====             =====            =====             =====
</TABLE>

         As of July 29,  2001 the  Company  has  available  net  operating  loss
         carryforwards   for   federal   and  state   income  tax   purposes  of
         approximately  $489,000 and  $956,000,  respectively  which expire from
         fiscal 2002 through 2020.  The Federal net operation loss arose through
         the  acquisition of Terrasat and its  utilization is subject to certain
         limitations.

NOTE H- LONG-TERM DEBT

       Long-term debt is summarized as follows (in thousands):
                                                         July 29,    July 30,
                                             Rate          2001        2000
                                      -----------------    ----        ----
       Revolving loan facility (a)    7.20% and 8.15%    $  -        $   -
       Mortgage note (b)                        7.43%      2,765       2,840
       Other                                 -               188         373
                                                           -----       -----
                                                           2,953       3,213
       Less current portion                                  213         282
                                                           -----       -----
                                                         $ 2,740     $ 2,931
                                                           =====       =====

       (a) In  February  2001,  the Company  entered  into an  amendment  to its
           revolving  loan  agreement  with a bank that provides for a revolving
           unsecured loan in the aggregate principal amount of $30,000,000 which
           may be  used  for  general  corporate  purposes,  including  business
           acquisitions.  The revolving credit facility  requires the payment of
           interest  only on a monthly  basis  and  payment  of the  outstanding
           principal balance on January 31, 2003.  Interest is set at 1.65% over
           the FOMC  Federal  Funds  Target Rate based on tangible  net worth in
           excess of  $25,000,000,  or at an  increment of 1.80% if tangible net
           worth is less than  $25,000,001.  The FOMC Federal  Funds Target Rate
           was 5.55% at July 29,  2001.  There is a fee of 15 basis  points  per
           annum  on the  unused  portion  of  the  credit  line  in  excess  of
           $20,000,000 payable quarterly. There are no borrowings under the line
           at July 29, 2001 and July 30, 2000.

           The agreement contains various financial covenants,  including, among
           other  matters,  minimum  tangible  net worth,  debt to tangible  net
           worth, debt service  coverage,  and restrictions on other borrowings.
           The Company is in compliance with all covenants at July 29, 2001.

       (b) The mortgage loan is for a term of ten years commencing  February 16,
           1999  with  fixed  monthly  principal  and  interest  installments of

                                      F-15

<PAGE>



           $23,359,  including  interest at a fixed rate of 7.43%,  and is based
           upon a twenty year amortization. The loan is secured by a mortgage on
           the Company's land and building in Lancaster,  Pennsylvania  having a
           net book  value of  approximately  $1,899,000.  The  proceeds  of the
           mortgage  loan were used to prepay the existing  mortgage note having
           an  outstanding  balance of $2,890,000  plus a prepayment  premium of
           $115,600.

           The mortgage note agreement  contains  various  financial  covenants,
           including,  among other matters,  the maintenance of specific amounts
           of tangible  net worth,  debt to  tangible  net worth,  debt  service
           coverage,  and restrictions on other  borrowings.  In connection with
           this loan, the Company paid approximately $45,000 in financing costs.
           Such  costs  are  included  in  Other  Assets  in  the   accompanying
           consolidated  balance  sheets at July 29, 2001 and July 30, 2000, and
           are being amortized over the term of the loan (10 years). Unamortized
           debt  expenses  of  $79,226  related  to the prior  mortgage  and the
           $115,600  prepayment  premium  were  charged to expense in 1999 as an
           extraordinary loss in connection with the prepayment of this mortgage
           note.

       The Company paid interest of approximately  $289,000 in 2001,  $1,200,000
       in 2000, and $730,000 in 1999.

       Future payments required on long-term debt are as follows (in thousands):

                    Fiscal year ending during:              Amount
                    -------------------------               ------
                              2002                        $    213
                              2003                             108
                              2004                             108
                              2005                              93
                              2006                             101
                              Future                         2,330
                                                             -----
                                                           $ 2,953
                                                             =====
NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

       Accounts   payable  and  accrued   expenses  include  the  following  (in
       thousands):

                                                   July 29,       July 30,
                                                     2001           2000
                                                     ----           ----
         Accounts payable                        $   7,386         $ 3,812
         Accrued payroll and bonuses                 3,159           3,430
         Due for business acquired                   3,000            -
         Accrued commissions                           591             710
         Accrued interest                             -                 19
         Accrued legal expenses                        174             129
         Accrued warranty costs                        255             220
         Accrued severance                             780             594
         Accrued rent expense                          132            -
         Lease termination cost                         54             134
         Other accrued expenses                        663             554
                                                 ---------         -------
                                                  $ 16,194         $ 9,602
                                                   =======          ======

NOTE J - EMPLOYEE BENEFIT PLANS

       In August 1985, the Board of Directors  approved an Employee Savings Plan
       ("Plan")  which  qualified as a thrift plan under  Section  401(k) of the
       Internal Revenue Code. This Plan, as amended and restated,

                                      F-16

<PAGE>



       allows  employees to contribute  between 2% and 15% of their  salaries to
       the Plan. The Company, at its discretion can contribute 100% of the first
       2% of the  employees'  contribution  and 25% of the next  4%.  Additional
       Company  contributions  can be made  depending on profits.  The aggregate
       benefit   payable  to  an  employee  is   dependent   upon  his  rate  of
       contribution,  the  earnings  of the  fund,  and the  length of time such
       employee continues as a participant.  The Company has recognized expenses
       of approximately $164,000,  $415,000, and $266,000 under the Plan for the
       52 weeks  ended  July 29,  2001,  July 30,  2000,  and  August  1,  1999,
       respectively

       Employees of GMC became  eligible to participate in the Plan as of May 1,
       1999. The existing  savings and investing plan of GMC did not provide for
       company matching contributions and has been frozen.

       At the time of the acquisition,  GMC also had a  noncontributory  defined
       benefit pension plan covering all eligible  employees of the company.  As
       part of the  acquisition  plan,  the Company froze all benefits under the
       plan  effective  April 30, 1999 and elected to  terminate  the plan as of
       November 1, 1999. All plan assets were liquidated and distributed to plan
       participants or used to purchase  annuities on their behalf.  Excess plan
       assets in the  amount  of  approximately  $470,000  were  transferred  in
       January 2001  directly  into the Plan  discussed  above and inured to the
       benefit of Plan employees.

       Net  pension  (income)  expense  recorded  by the  Company in fiscal 2000
       includes the following components (in thousands):

                                                       July 30,
                                                         2000
                                                         ----
            Service cost - benefits earned
              during the period                        $   -
            Interest cost                                 237
            Return on assets                             (736)
                                                         ----
                 Net pension income                    $ (499)
                                                         ====

       The  following  table  sets forth the plan's  funded  status and  amounts
       recognized  in the  consolidated  balance  sheet  at July  30,  2000  (in
       thousands):

                                                                        July 30,
                                                                          2000
                                                                          ----
       Projected benefit obligation at beginning of period              $ 4,841
              Service costs                                                 -
              Interest cost                                                 237
              Actuarial gain                                               (348)
              Benefit payments                                             (214)
       Projected benefit obligation, end of year                        $ 4,516
                                                                          -----

       Change in fair value of plan assets:
       Fair value at beginning of period                                $ 4,342
              Return on assets                                              823
              Benefit payments                                             (214)
                                                                          -----
       Fair value at end of year                                          4,951
                                                                          -----
       Funded status                                                       (435)
              Unrecognized net gain                                         435
                                                                          -----
       Accrued pension costs                                            $   -
                                                                          =====
       Assumptions used were:
              Discount rate                                                5.00%
              Expected return on plan assets                              10.00%

                                      F-17

<PAGE>



NOTE K - RELATED PARTY TRANSACTIONS

       On January 16, 2001,  the Board of directors  approved the purchase of an
       industrial parcel of land adjacent to the existing facility in Lancaster,
       PA for  $747,000  from a  partnership  of which the  Chairman  is general
       partner.  Settlement on the property was on July 27, 2001. The Company is
       using this land for a 15,000 square foot addition.

       In connection with the move of the Amityville facilities of GMC in fiscal
       1999,  the  Company  entered  into  a 10  year  lease  agreement  with  a
       partnership owned by the children of certain officers of the Company. The
       lease  provides for initial  minimum  annual rent of $312,000  subject to
       escalation  of  approximately  4% annually  throughout  the 10 year term.
       Additionally,  in March 2000,  The Company  entered  into another 10 year
       lease with the same partnership for additional space. The initial minimum
       annual  rent of  $92,000 is subject to  escalation  of  approximately  4%
       annually.

NOTE L - COMPUTATION OF PER SHARE EARNINGS

       The following table shows the calculation of basic earnings per share and
       earnings  per share  assuming  dilution  (in  thousands  except per share
       data):
<TABLE>
<CAPTION>

                                                                                 52 Weeks ended
                                                              ------------------------------------------------
                                                              July 29, 2001     July 30, 2000   August 1, 1999
                                                              -------------     -------------   --------------
<S>                                                             <C>               <C>              <C>
Numerator:
      Income before extraordinary item                          $ 7,405           $ 7,639          $ 7,862
      Extraordinary loss                                           -                 -                 127
                                                                  -----             -----            -----
      Net Income                                                $ 7,405           $ 7,639          $ 7,735
                                                                  =====             =====            =====

Denominator:
      Basic weighted-average shares                              10,082             7,308            7,849
      Effect of dilutive securities:
         Employee stock options and warrants                        874               620              641
                                                                 ------             -----            -----
      Diluted weighted-average shares                            10,956             7,928            8,490
                                                                 ======             =====            =====

Stock options and warrants not included in computation              544             2,472            4,570
                                                                    ===             =====            =====
</TABLE>

       The number of stock options and warrants not included in the  computation
       of diluted EPS  relates to stock  options and  warrants  having  exercise
       prices  that are  greater  than the  average  market  price of the common
       shares during the period,  and therefore,  are antidilutive.  The options
       and warrants with exercise  prices  ranging from $11.87 to $13.67,  which
       expire at various  dates through  April 28, 2010 were  outstanding  as of
       July 29, 2001.

NOTE M - SHAREHOLDERS' EQUITY

       At the annual  meeting of  stockholders  held on February 18,  1998,  the
       stockholders of the Company  approved a proposal to amend the Certificate
       of Incorporation  to increase the authorized  shares of Common Stock from
       10,000,000 to 20,000,000 shares.

       On August 7, 2001 the Board of Directors  declared a 3-for-2  stock split
       effected as a stock  dividend  payable  September  10, 2001 to holders of
       record on August 28, 2001.  The effect of the split is  presented  within
       shareholders'  equity at July 29, 2001.  The  distribution  increased the
       number of shares outstanding from 7,027,553 to 10,541,329.  The amount of
       $351,373  was  transferred  from the  additional  paid-in  capital to the
       common stock account to record this distribution. All share and per share
       data  (other  than  common  stock  issued  and  outstanding  on the  2000
       Consolidated  Balance Sheet and 1999 and 2000 Consolidated  Statements of
       Shareholders' Equity), including stock options and warrants,  included in
       this  annual  report  have been  restated to reflect the stock split on a
       retroactive basis.

                                      F-18

<PAGE>



       In December 1997, the Company  completed the sale of 1,650,000  shares of
       common stock to the public,  of which  1,050,000  shares were sold by the
       Company and 600,000 shares were sold by certain selling stockholders.  In
       addition,  the Company also sold 1,897,500 Common Stock Purchase Warrants
       ("Warrant(s)").  The Company  received net proceeds of  $7,451,579  after
       underwriting   discounts  and  commissions  and  other  expenses  of  the
       offering.  Each  Warrant  entitles  the holder to  purchase  one share of
       common stock at $10.40 per share  (subject to  adjustment  under  certain
       conditions) through May 2000, as extended. The Company also issued to the
       underwriters,  for their own accounts,  Managing  Underwriters'  Warrants
       which  entitle the holder to purchase  165,000  shares of common stock of
       the Company  (subject to adjustment  under certain  circumstances),  at a
       price of $9.60 per share through December 2002, and the right to purchase
       165,000  Warrants  (as  described  above) at a price of $.08 per  Warrant
       through May 2000, as extended.

       Approximately  1,971,000 of the warrants which were due to expire May 18,
       2000 were  exercised  during  fiscal  2000 at $10.40  per share of common
       stock resulting in proceeds of  approximately  $20,492,000.  The proceeds
       were used to pay off bank debt under the revolving credit facility.

       The Company has various fixed option plans which reserve shares of common
       stock for  issuance to  executives,  key  employees  and  directors.  The
       Company  applies  APB  Opinion  No.  25 and  related  Interpretations  in
       accounting for these plans.  Statement of Financial  Accounting Standards
       No.123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued
       by the FASB in 1995 and , if  fully  adopted,  changes  the  methods  for
       recognition of cost on plans similar to those of the Company. The Company
       has adopted the disclosure-only  provisions of SFAS 123. Accordingly,  no
       compensation  cost has been  recognized  for the stock option plans.  Pro
       forma information regarding net income and earnings per share is required
       by Statement 123, and has been determined as if the Company had accounted
       for its  employee  stock  options  under  the fair  value  method of that
       Statement.

       The fair  value for  options  granted is  estimated  at the date of grant
       using a  Black-Scholes  option pricing model.  The  Black-Scholes  option
       valuation  model was developed  for use in  estimating  the fair value of
       traded  options  which  have  no  vesting   restrictions  and  are  fully
       transferable.  In addition,  option valuation models require the input of
       highly  subjective   assumptions   including  the  expected  stock  price
       volatility.   Because  the   Company's   employee   stock   options  have
       characteristics significantly different from those of traded options, and
       because changes in the subjective input assumptions can materially affect
       the fair value estimate, in management' s opinion, the existing models do
       not  necessarily  provide a reliable  single measure of the fair value of
       its employee stock options.

       For  purposes  of  computing  pro-forma   (unaudited)   consolidated  net
       earnings, the following assumptions were used to calculate the fair value
       of each option granted:

                                                 52 Weeks ended
                                  ----------------------------------------------
                                  July 29, 2001   July 30, 2000   August 1, 1999
                                  -------------   -------------   --------------
       Expected life of options      .73 years       .71 years        .65 years
       Volatility                          .70             .72              .58
       Risk-free interest rate            3.4%            6.1%             5.1%
       Dividend yield                     zero            zero             zero

       Had  compensation  cost for stock  options  granted in fiscal years 2001,
       2000, and 1999 been determined  based on the fair value at the grant date
       consistent  with the provisions of SFAS 123, the Company's net income and
       earnings  per share  would  have been  reduced  to the pro forma  amounts
       indicated below using the statutory  income tax rate of 34% (in thousands
       except per share data):


                                      F-19

<PAGE>




                                                  2001       2000       1999
                                                  ----       ----       ----
           Net income  -  as reported           $ 7,405    $ 7,639    $ 7,735
           Net income  -  pro forma               5,795      5,952      5,940
           Earnings per share  -  as reported
                Basic                              $.73      $1.05       $.99
                Diluted                             .68        .96        .91
           Earnings per share  - pro forma
                Basic                              $.57       $.81       $.76
                Diluted                             .53        .75        .70

       The effects of  applying  the pro forma  disclosures  of SFAS 123 are not
       likely to be  representative  of the effects on  reported  net income for
       future years due to the various vesting schedules.

       In September 2000, the Board of Directors  approved the 2000 Stock Option
       Plan which covers 1,500,000 shares of the Company's common stock. Options
       granted under the plan are non-qualified  stock options.  Under the terms
       of the plan, the exercise  price for options  granted under the plan will
       be the fair  market  value at the date of grant.  The nature and terms of
       the options to be granted is determined at the time of grant by the Board
       of Directors.  The options  expire not later than ten years from the date
       of grant,  subject to certain  restrictions.  Options for 375,000  shares
       were granted during the fiscal year ended July 29, 2001.

       In April 1998, the Board of Directors approved the 1998 Stock Option Plan
       which covers  2,250,000  shares of the Company's  common  stock.  Options
       granted  under the plan may be incentive  stock options  qualified  under
       Section 422 of the Internal Revenue Code of 1986 or  non-qualified  stock
       options.  Under the terms of the plan,  the  exercise  price for  options
       granted  under  the  plan  will be the fair  market  value at the date of
       grant.  Prices for incentive  stock options  granted to employees who own
       10% or more of the  Company's  stock are at least 110% of market value at
       date of grant.  The  nature  and terms of the  options  to be  granted is
       determined  at the time of grant by the Board of  Directors.  The options
       expire  not later  than ten  years  from the date of  grant,  subject  to
       certain  restrictions.  Options for 440,250,  969,750 and 562,500  shares
       were granted  during the fiscal years ended July 29, 2001,  July 30, 2000
       and August 1, 1999, respectively.

       In May 1997,  the Board of Directors  approved the 1997 Stock Option Plan
       which covers  2,500,000  shares of the Company's  common  stock.  Options
       granted  under the plan may be incentive  stock options  qualified  under
       Section 422 of the Internal Revenue Code of 1986 or  non-qualified  stock
       options.  Under the terms of the plan,  the  exercise  price for  options
       granted  under  the  plan  will be the fair  market  value at the date of
       grant.  Prices for incentive  stock options  granted to employees who own
       10% or more of the  Company's  stock are at least 110% of market value at
       date of grant.  The  nature  and terms of the  options  to be  granted is
       determined  at the time of grant by the Board of  Directors.  The options
       expire  not later  than ten  years  from the date of  grant,  subject  to
       certain restrictions.  Options for 14,250,  129,000, and 1,313,250 shares
       were granted  during the fiscal years ended July 29, 2001,  July 30, 2000
       and August 1, 1999, respectively.

       In October  1995,  the Board of Directors  approved the 1996 Stock Option
       Plan which covers 1,000,000 shares of the Company's common stock. Options
       granted  under the plan may be incentive  stock options  qualified  under
       Section 422 of the Internal Revenue Code of 1986 or  non-qualified  stock
       options.  Under the terms of the Plan,  the  exercise  price for  options
       granted  under  the  plan  will be the fair  market  value at the date of
       grant.  Prices for incentive  stock options  granted to employees who own
       10% or more of the  Company's  stock are at least 110% of market value at
       date of grant.  The  nature  and terms of the  options  to be  granted is
       determined  at the  time of  grant  by the  Board  of  Directors.  If not
       specified, 100% of the shares can be exercised one year after the date of
       grant. The options expire ten years from the date of grant.

                                      F-20

<PAGE>


       A summary of stock option activity under all plans for the 52 weeks ended
       July 29, 2001, July 30, 2000 and August 1, 1999 follows:
<TABLE>
<CAPTION>

                                               Non-Qualified Stock Options
                                        ---------------------------------------
                                                                       Weighted        Warrant Agreements
                                                                       Average      ------------------------
                                          Number         Price Range   Exercise      Number      Price Range
                                        of shares         per share     Price       of shares     per share
                                        ---------       -------------   -----       ---------    -----------
<S>                                    <C>             <C>               <C>       <C>              <C>
       Outstanding August 2, 1998       1,291,271      $ 1.69 -  9.25   $ 4.43      420,000         $ 3.09
          Granted                       1,875,750        6.16 - 10.97     7.62
          Exercised                    (1,003,650)       1.69 -  6.62     4.37     (100,000)          3.09
          Canceled                        (71,446)       4.31 - 10.97     7.43
                                        ---------       ----------------------      -------           ----
       Outstanding August 1, 1999       2,091,925      $ 1.69 - 10.97   $ 7.15      320,000         $ 3.09
          Granted                       1,098,750        9.25 - 11.91    10.33
          Exercised                      (155,985)       1.69 -  9.83     4.68
          Canceled                        (20,550)       7.41 - 10.46     8.47
                                        ---------       -----------------------     -------           ----
       Outstanding July 30, 2000        3,014,140      $ 4.06 - 11.91   $ 8.43      320,000         $ 3.09
          Granted                         829,500        8.38 - 14.25     8.99
          Exercised                       (37,254)       4.06 - 10.46     6.72
          Canceled                        (48,600)       4.31 - 14.25    10.76
                                        ---------       ----------------------      -------           ----
       Outstanding July 29, 2001        3,757,786      $ 4.06 - 13.67   $ 8.55      320,000         $ 3.09
                                        =========                                   =======
</TABLE>

       Options Outstanding and Exercisable by Price Range as of July 29, 2001:
<TABLE>
<CAPTION>

                                                            Options Outstanding               Options Exercisable
                                       -----------------------------------------------  ----------------------------
                                                          Weighted
                                                           Average        Weighted                      Weighted
       Range of Exercise                  Number         Remaining         Average        Number         Average
            Prices                     Outstanding    Contractual Life  Exercise Price  Exercisable  Exercise Price
       -----------------               -----------    ----------------  --------------  -----------  --------------
<S>    <C>                               <C>                 <C>          <C>          <C>               <C>
       $ 4.06  - $  6.17                   759,286           6.6          $ 5.54          730,688        $ 5.59
         6.94  -    8.38                 1,252,500           7.5            8.18          845,550          8.16
         8.42  -   10.20                   718,950           7.8            9.22          504,150          9.22
        10.46  -   10.46                   844,050           7.1           10.46          606,450         10.46
        10.50  -   13.67                   183,000           5.9           12.03           27,900         11.17
       $ 4.06  -  $13.67                 3,757,786           7.2          $ 8.55        2,714,738        $ 8.21
                                         =========                                      =========
</TABLE>

       In December 1995,  common stock warrants were issued to certain  officers
       for the right to acquire 440,000 shares of common stock of the Company at
       the fair market  value of $3.09 per share at date of issue.  The warrants
       vest  immediately  and expire  December  13,  2005.  Warrants for 320,000
       shares are outstanding at July 29, 2001.

NOTE N - SIGNIFICANT SEGMENTS, MAJOR CUSTOMERS, AND EXPORT SALES

       The Company's  chief  operating  decision makers are considered to be the
       Chairman and the Chief Executive  Officer (CEO).  The Company's  Chairman
       and  CEO  evaluate  both   consolidated   and   disaggregated   financial
       information consisting of revenue information in deciding how to allocate
       resources and assess  performance.  The Chairman and CEO also use certain
       disaggregated financial information for the Company's product groups. The
       Company  does not  determine  a measure  of  operating  income or loss by
       product  group.  The  Company's  product  groups have  similar  long-term
       economic characteristics, such as application, and are similar in regards
       to  (a)  nature  of  products  and  production  processes,  (b)  type  of
       customers, and (c) method used to distribute products.  Accordingly,  the
       Company  is in a single  reportable  segment  as a  provider  of  complex
       microwave  radio  frequency  (RF)  and  millimeter  wave  components  and
       subsystems for defense, commercial wireless and space customers

                                      F-21

<PAGE>


       worldwide.  All  of the  Company's  revenues  result  from  sales  of its
       products.  Revenues  by product  group (as  defined by the  Company)  for
       fiscal  years  2001,  2000 and 1999 were as follows:  microwave  systems,
       $15,033,000,   $24,458,000  and  $31,062,000,   respectively;   microwave
       products,  $46,944,000,  $42,947,000 and $27,638,000,  respectively;  and
       commercial   products,    $18,620,000,    $3,132,000,   and   $2,336,000,
       respectively.

       Net sales to the U.S.  Government  in 2001,  2000 and 1999  accounted for
       approximately  18%,  26% and 17% of net  sales,  respectively.  No  other
       customer  accounted  for shipments in excess of 10% of  consolidated  net
       sales in fiscal 2001 or 2000. One customer accounted for 12% of net sales
       in 1999. Foreign sales amounted to approximately $20,683,000, $16,506,000
       and $17,680,000 in fiscal 2001, 2000 and 1999, respectively.

       Included in accounts receivable as of July 29, 2001 and July 30, 2000 are
       amounts due from the U.S.  Government  of  approximately  $2,003,000  and
       $2,269,000 respectively.

NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS

       The  following  methods  and  assumptions  were  used by the  Company  in
       estimating its fair value disclosures for financial instruments:

         Cash and cash equivalents:  The carrying amount reported in the balance
         sheet for cash and cash equivalents approximated its fair value.

         Available-for-sale  securities:  The fair  value of  available-for-sale
         securities was based on quoted market prices.

         Long-term debt: The fair value of the mortgage note was estimated using
         discounted  cash  flow  analysis,   based  on  the  Company's   current
         incremental borrowing rate for similar types of borrowing arrangements.

       The  carrying  amounts  and  fair  values  of  the  Company's   financial
       instruments are presented below (in thousands):

                                                        July 29, 2001
                                                 ---------------------------
                                                 Carrying Amount  Fair Value
                                                 ---------------  ----------
            Cash and cash equivalents               $ 13,041       $ 13,041
            Long-term debt                             2,740          2,740

                                      F-22