UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

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

                    For the fiscal year ended August 3, 2008

                                       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.)

101 North Pointe Blvd., Lancaster, Pennsylvania                            17601
-----------------------------------------------                            -----
(Address of Principal Executive Offices)                              (Zip Code)

Registrant's telephone number, including area code:  (717) 735-8117
                                                     --------------

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

Common Stock, $.10 par value                the NASDAQ Stock Market LLC
----------------------------               ----------------------------
      (Title of Class)                 Name of each exchange on which registered

        Securities registered pursuant to Section 12(g) of the Act: None
                                                                    ----

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [  ] No [X]

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]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

[ ] Large accelerated filer   [X] Accelerated filer    [ ] Non-accelerated filer

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

The  aggregate  market  value of the  Registrant's  voting  Common Stock held by
non-affiliates of the Registrant,  based on the closing sale price of the Common
Stock of $12.97 as reported on The Nasdaq  Global Market as of February 1, 2008,
the last business day of the Registrant's most recently  completed second fiscal
quarter, was approximately $166,514,000.

The number of shares  outstanding of Registrant's  Common Stock, $ .10 par value
on October 3, 2008 was 13,526,402.

Documents  incorporated by reference:  Portions of the  Registrant's  definitive
proxy statement in connection with its Annual Meeting of Stockholders to be held
in January  2009,  to be filed  pursuant  to  Regulation  14A of the  Securities
Exchange Act of 1934, are incorporated by reference into Part III of this Annual
Report on Form 10-K.
<PAGE>

                             HERLEY INDUSTRIES, INC.

                                TABLE OF CONTENTS
                                 ----------------
<TABLE>
<CAPTION>
                                                                            Page
                                                                           ----
PART I

<S>            <C>                                                           <C>
Item 1.        Business.                                                       3

Item 1A.       Risk Factors.                                                  11

Item 1B.       Unresolved Staff Comments.                                     15

Item 2.        Properties.                                                    15

Item 3.        Legal Proceedings.                                             16

Item 4.        Submission of Matters to a Vote of Security Holders.           18

PART II

Item 5.        Market for Registrant's Common Equity, Related Shareholder
                   Matters and Issuer Purchases of Equity Securities.         18

Item 6.        Selected Financial Data.                                       19

Item 7.        Management's Discussion and Analysis of Financial
                   Condition and Results of Operations.                       20

Item 7A.       Quantitative and Qualitative Disclosures about Market Risk.    32

Item 8.        Financial Statements and Supplementary Data.                   33

Item 9.        Changes in and Disagreements with Accountants on
                   Accounting and Financial Disclosure.                       33

Item 9A.       Controls and Procedures.                                       33

Item 9B.       Other Information.                                             37

PART III

Item 10.       Directors, Executive Officers and Corporate Governance.        37

Item 11.       Executive Compensation.                                        37

Item 12.       Security Ownership of Certain Beneficial Owners and
                  Management and Related Shareholder Matters.                 37

Item 13.       Certain Relationships and Related Transactions, and Director
                 Independence.                                                37

Item 14.       Principal Accountant Fees and Services.                        37

PART IV

Item 15.       Exhibits and Financial Statement Schedules.                    37

SIGNATURES                                                                    39

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                   F-1
</TABLE>
                                       2
<PAGE>
PART I

Item 1.  Business

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 our financial position, business strategy and our plans and objectives
of  management   for  future   operations,   are   forward-looking   statements.
Forward-looking   statements  involve  various  important  assumptions,   risks,
uncertainties  and other factors which could cause our actual  results to differ
materially   from   those   expressed   in  such   forward-looking   statements.
Forward-looking statements in this Annual Report can be identified by words such
as "anticipate,"  "believe,"  "could,"  "estimate,"  "expect," "plan," "intend,"
"may," "should" or the negative of these terms or similar expressions.  Although
we believe that the expectations reflected in the forward-looking statements are
reasonable,  we cannot  guarantee  future  results,  performance or achievement.
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,   cancellation   or  deferral  of  customer   orders,
technological change or difficulties,  difficulties in the timely development of
new  products,  difficulties  in  manufacturing,   commercialization  and  trade
difficulties and general economic conditions as well as the factors set forth in
our public filings with the Securities and Exchange Commission.

You are cautioned not to place undue reliance on the forward-looking statements,
which  speak  only as of the  date  of this  Annual  Report  or the  date of any
document  incorporated  by  reference,  in this Annual  Report.  We are under no
obligation,  and  expressly  disclaim  any  obligation,  to  update or alter any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

For  these  statements,   we  claim  the  protection  of  the  safe  harbor  for
forward-looking  statements  contained in Section 21E of the Securities Exchange
Act of 1934.

GENERAL

The  Company's  corporate  offices  are located at 101 North  Pointe  Boulevard,
Lancaster,  Pennsylvania  17601.  The  telephone  number of the  Company at that
location is (717) 735-8117. The Company's web site is located at www.herley.com.
The Company makes its periodic and current reports available, free of charge, on
its  web  site  as  soon  as  reasonably  practicable  after  such  material  is
electronically  filed  with,  or  furnished  to,  the  Securities  and  Exchange
Commission.  The  Company's  Common Stock is listed on The Nasdaq  Global Market
under the symbol "HRLY."

BACKGROUND

We are a leading  supplier  of  microwave  products  and  systems to defense and
aerospace entities worldwide.  Our primary customers include large defense prime
contractors   (including   Northrop   Grumman   Corporation,   Lockheed   Martin
Corporation,  Raytheon  Company,  The Boeing  Company,  BAE  Systems  and Harris
Corporation), the U.S. Government (including the Department of Defense, NASA and
other U.S.  Government  agencies) and  international  customers  (including  the
Egyptian,  German,  Japanese  and  South  Korean  militaries  and  suppliers  to
international  militaries).  We are a leading provider of microwave technologies
for use in command and control systems, flight instrumentation,  weapons sensors
and electronic  warfare systems.  We have served the defense industry since 1965
by designing  and  manufacturing  microwave  devices for use in high  technology
defense  electronics  applications.  Our  products  and  systems  are  currently
deployed on a wide range of high profile military platforms,  including the F-16
Falcon,  the F/A-18E/F  Super Hornet,  the E-2C/D Hawkeye,  EA-18G Growler,  the
AEGIS  class  surface  combatants,  the EA-6B  Prowler,  the  AMRAAM  air to air
missile, CALCM (Conventional Air Launch Cruise Missile),  Multi-mission Maritime
Aircraft  and  unmanned  aerial  vehicles,  or  UAVs,  as well as high  priority
national  security  programs such as National Missile Defense and the Trident II
D-5.

ACQUISITIONS

We have grown  internally and through  strategic  acquisitions  and have evolved
from a  component  manufacturer  to a  systems  and  service  provider.  We have
successfully  integrated these  acquisitions by targeting  microwave  technology
companies and focusing their strengths into our existing operations.  Since July
1995 our acquisitions have included the following:

- In July 1995,  we  acquired  Stewart  Warner  Electronics  Corp.  of  Chicago,
Illinois, a manufacturer of high frequency radio and IFF interrogator systems.

                                       3
<PAGE>
- In August 1997, we acquired Metraplex  Corporation of Frederick,  Maryland,  a
manufacturer of airborne PCM and FM telemetry and data acquisition systems.

- In January 1999, we acquired General Microwave Corporation of Farmingdale, New
York, a manufacturer of microwave components and electronic systems.  During the
fourth  quarter  of  fiscal  2008  we  decided  to  significantly  downsize  our
manufacturing facility in Farmingdale,  NY and transfer its contracts and assets
to  our  other  facilities  in  Whippany,  New  Jersey;  Woburn,  Massachusetts;
Lancaster,  Pennsylvania;  and  Jerusalem,  Israel.  It  is  expected  that  the
restructuring will be substantially completed by the end of December 2008.

- In January  2000,  we acquired  Robinson  Laboratories,  Inc.  of Nashua,  New
Hampshire,  a designer,  developer and manufacturer of microwave  components and
assemblies primarily for defense applications.

- In September 2000, we acquired American Microwave Technology, Inc. of Anaheim,
California,  a  manufacturer  of high  power,  solid  state  amplifiers  for the
scientific and medical markets, which enabled us to enter these markets.

- In September 2002, we acquired EW Simulation  Technology,  Limited ("EWST"), a
company located in Farnborough,  in the United Kingdom.  EWST designs,  develops
and produces  electronic warfare simulator systems for prime defense contractors
and countries worldwide.

- In  March  2004,  we  acquired  Communication  Techniques,  Inc.  ("CTI"),  of
Whippany, New Jersey. CTI designs, develops and produces state-of-the-art signal
generation  components  and  integrated  assemblies  for digital  radio,  SONET,
SatCom, test and instrumentation,  datacom, and wired and wireless  applications
to 45 Gigahertz ("GHz") and 45 Gigabits Per Second ("Gb/s").

- In September 2004, we acquired Reliable System Services  Corporation  ("RSS"),
of Melbourne,  Florida,  a manufacturer  of satellite  based command and control
systems for defense customers.  The RSS Iridium based command and control system
provides  secure  (encryption,  anti-spoof)  global service  coverage,  allowing
multiple target  operations,  and is  complementary  with the Company's  MONTAGE
command and control systems.

- In February 2005, we acquired Micro Systems,  Inc. ("MSI"), Fort Walton Beach,
Florida,  a market leader in the design and manufacturing of command and control
systems  for  operation  of unmanned  aerial,  seaborne  and ground  targets and
missiles.

- In  April  2005,  we  acquired  Innovative  Concepts,  Inc.  ("ICI"),  McLean,
Virginia,  which has a successful  history of developing and providing  wireless
communications technology and real-time embedded systems, software, hardware and
high-speed processing in support of the defense industry. On September 18, 2008,
the Company  executed an  agreement  (the  "Agreement")  with a foreign  defense
company to divest ICI. The Agreement provides for an all cash transaction valued
at approximately  $15 million and includes a significant  contingency  requiring
U.S.  Government approval on or before November 5, 2008 or the Agreement will be
void. The Company  believes it is reasonably  possible that the U.S.  Government
approval will be granted and the transaction will be completed.

- In September  2008, we acquired Eyal  Microwave  Industries  ("EMI"),  Kibbutz
Eyal,  Israel, a privately held Israeli company.  EMI is a leading supplier of a
broad range of innovative,  high-reliability,  RF, microwave and millimeter wave
components and customized subsystems for the global defense industry.

BUSINESS STRATEGY

Our goal is to  continue  to  leverage  our  proprietary  technology,  microwave
expertise and  manufacturing  capabilities  to further expand our penetration in
our market. Our strategies to achieve our objectives include:

- INCREASE  LEVELS OF  COMPONENT  INTEGRATION  AND VALUE ADDED  CONTENT.  Due to
growth of engineering expertise, new product development,  and acquisitions,  we
have increased our capability to provide more component integration.  Management
believes component integration adds value and will enable us to increase content
in  defense   platforms  and  systems,   thereby   increasing  our  revenue  and
profitability.

- MAINTAIN  LEADERSHIP  IN  MICROWAVE  TECHNOLOGY.  We intend to pursue  further
technological  advances through continued  investment in  internally-funded  and
customer-funded research and product development.

- STRENGTHEN  AND EXPAND  CUSTOMER  RELATIONSHIPS.  We have  developed  mutually
beneficial  relationships  with  various  agencies  of the U.S.  Government  and
defense and commercial companies.  We expect to continue to build and strengthen
these  relationships with industry leaders by anticipating and recognizing their
needs and providing them with on-time and cost-effective solutions.

                                       4
<PAGE>
- CAPITALIZE ON  OUTSOURCING  DYNAMICS IN THE  AEROSPACE  AND DEFENSE  INDUSTRY.
Microwave  technology has  traditionally  been an in-house resource of the prime
contractors.  However,  the prime  contractors  are  beginning to outsource  the
design  and  manufacture  of  this   specialized   engineering  work  to  system
sub-contractors.  We are well  positioned  to  generate  more  business as prime
contractors continue to focus primarily on integration of defense electronics.

- PURSUE STRATEGIC  ACQUISITIONS.  We intend to continue to augment our existing
technological base by acquiring  specialized companies that complement or expand
our product  offerings and market  strategies.  We believe that expansion of our
core  competencies  through  the  acquisition  of  such  specialized  technology
companies,  when  combined  with our  current  technological  and  manufacturing
skills,  will  provide  us with  improved  levels  of  horizontal  and  vertical
integration, leading to the creation of subsystems and complete system products.

- ENHANCE MANUFACTURING CAPABILITIES. We intend to continue to implement process
manufacturing  automation,  and believe that our ability to develop a high level
of automated  production and test  capability  will help to further  improve our
cost effectiveness and time to market.

- PURSUE  SELECTIVE  COMMERCIAL  OPPORTUNITIES.  We seek to identify  and pursue
selected commercial  applications for our products and technologies where we can
add value based on our microwave expertise.

COMPETITIVE STRENGTHS

Our competitive strengths include:

- TECHNICAL  EXPERTISE.  We have  developed  a leading  position in the field of
microwave  technology  through  more  than 40 years of  focus  on  research  and
development and through our state-of-the-art design and production capabilities.
We have a full range of  capabilities  including long and short run  production,
hardware  assembly and  full-service  engineering at our  facilities  located in
Lancaster,  Pennsylvania;  Woburn, Massachusetts;  Whippany, New Jersey; McLean,
Virginia;  Fort Walton Beach,  Florida;  Farnborough,  England;  and  Jerusalem,
Israel.

- HIGH PROPORTION OF LONG-TERM SOLE-PROVIDER  PRODUCTION PROGRAMS. We generate a
significant proportion of our revenue from continuing,  long-term programs, both
in the production and upgrade phases,  and continue to target high growth,  high
priority defense programs.  Typically, on such long-term defense programs we are
the sole provider of microwave equipment.

- DIVERSE  PRODUCT AND  CUSTOMER  BASE.  We have a diverse  product and customer
base. The U.S.  Government  accounted for  approximately  19% of our fiscal 2008
revenues. Lockheed Martin Corporation and Northrop Grumman Corporation accounted
for  approximately  12% each of net  sales in  fiscal  2008.  No other  customer
accounted  for  10% or  more  of  consolidated  net  sales  during  the  periods
presented. We are a first-tier supplier to all of the prime defense contractors,
as  well  as a  direct  supplier  to all of the  service  branches  of the  U.S.
military,  including  products found on over 120 individual  platforms.  Foreign
customers accounted for approximately 32% of our revenues in fiscal 2008.

-  LONG-STANDING  INDUSTRY  RELATIONSHIPS.  We  have  established  long-standing
relationships  with the U.S.  Government  and  other  key  organizations  in the
aerospace  and  defense  industry  after  more  than  40  years  in the  defense
electronic industry. Over this period, we have become recognized for our ability
to develop new technologies and meet stringent program requirements.

-  SUCCESSFUL  ACQUISITION  TRACK  RECORD.  We  have  demonstrated  that  we can
successfully  integrate  acquired  companies.  We are  experienced at evaluating
prospective  operations  in order to increase  efficiencies  and  capitalize  on
market and technological synergies.

-  EMPHASIS  ON  RESEARCH  AND  DEVELOPMENT.  In  fiscal  year  2008,  we  spent
approximately $28.8 million on new product  development,  of which our customers
funded  approximately  $9.6  million.  Our  emphasis on new product  development
enables us to maintain our  technological  leadership in current products and to
develop new  capabilities.  This  spending  helps  solidify and  strengthen  our
position  on  different  programs  and may  serve  as a  barrier  to  entry  for
competitors.

- EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over 25 years
of experience in the defense electronics industry.

PRODUCTS AND SERVICES

We are a leading  supplier  of  microwave  products  and  systems to defense and
aerospace entities worldwide. We design and manufacture microwave components and
subassemblies which are embedded in a variety of radars, flight instrumentation,

                                       5
<PAGE>
weapons sensors,  electronic warfare systems and guidance systems. Our microwave
devices are used on our subassemblies and integrated  systems (e.g.  command and
control systems, telemetry systems,  transponders,  flight termination receivers
and identification friend or foe, or IFF,  interrogators),  in addition to being
sold on a component basis.

The following are descriptions of our major systems and products:

Telemetry Systems.  Telemetry systems provide wireless data transmission between
two or more sites for recording and analysis. 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.
We have 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 the key to the success of the mission.

We are a leading  manufacturer of Pulse Code  Modulation,  or PCM, and Frequency
Modulation, or FM, telemetry and data acquisition systems for severe environment
applications,  and our  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.

We offer a complete  airborne data link system.  With our digital  capability in
data  encoding  and  acquisition  elements  combined  with our  radio  frequency
capability in providing telemetry transmitters and flight termination receivers,
we offer a full line of narrow and wide-band  airborne telemetry systems to meet
a wide variety of industrial needs, both domestically and internationally.

Command and Control Systems.  Our command and control ("C2") systems principally
are used to fly remotely a large variety of unmanned aerial  vehicles,  or UAVs,
typically aircraft used as target drones or Remotely Piloted Vehicles,  or RPVs.
Our C2 systems also control surface  targets.  Operations have been conducted by
users on the open ocean,  remote land masses, and instrumented test and training
ranges. Our C2 systems are currently in service throughout the world. C2 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 C2 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.

Our MONTAGE system affords over-the-horizon C2 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
MONTAGE 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 MONTAGE is used in support of
missile,  aircraft and other weapons systems development and testing. The 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.

In  September  2004,  we closed on the  purchase  of  Reliable  System  Services
Corporation ("RSS"). In addition to complementing and adding to our capabilities
in  Telemetry,  Electronic  Warfare  ("EW")  Simulation  Equipment,  EW  Jamming
Equipment and Range Safety Commanding  applications,  RSS significantly enhanced
our C2 capabilities for UAV platforms, in that RSS provides a C2 system for UAVs
that operates  through the Iridium  satellite  system.  The RSS Iridium based C2
system  provides  secure  (encryption,   anti-spoof)  global  service  coverage,
allowing  multiple  target  operations.  The addition of this RSS Iridium  based
alternate  for UAV C2 systems  enables us to provide a broader  array of systems
configuration  solutions  to our defense  industry  customers.  We closed  these
facilities  in  Melbourne,  Florida in August 2006 and moved the RSS  operations
into the Fort Walton Beach facility.

Transponders.  We  manufacture a variety of expendable  transponders,  including
range safety, IFF, command and control, and range 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 transmits  back a reply
on a different  frequency and signal level.  This reply is 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.

In range safety  applications,  transponders  enable accurate  tracking of space
launch  and  unmanned  aerial  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),  our  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.

                                       6
<PAGE>
IFF  transponders,  which  are used in  conjunction  with the  Federal  Aviation
Authority 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, or 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,  or 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.  We  design  and  manufacture  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. We have been a significant supplier to the Republic of Korea
for over twenty years and have a large, established installed base of equipment.
We have been,  and  continue to be, a supplier to the Republic of Korea DDX, LPX
and KDX destroyer programs.

High Power  Amplifier.  We design and manufacture  high power amplifier  systems
with frequencies ranging from 1.5 Megahertz ("MHz") to 12 Gigahertz ("GHz") with
power levels from  multi-kilowatts  up to 15W,  depending on the frequency.  Our
high  power  amplifier  applications  include  but are not  limited  to  defense
communication, electronic warfare, radar and avionics.

Microwave  Integrated  Circuits.  We design and  manufacture  complex  microwave
integrated  circuits,  or MICs, which consist of  sophisticated  assemblies that
perform many functions,  primarily involving switching of microwave signals. Our
MICs are employed in many defense electronics systems and missile programs.

High/Low Power Integrated Assembly. Our high power microwave devices are used in
radar  system  transmitters  and in  long-range  missiles.  High  power  devices
frequently  use small amounts of nuclear  material to enhance  breakdown of high
energy  pulses,  and we are one of very few  companies  with an  active  nuclear
license that permits the handling of these trace  amounts of nuclear  materials.
There are  relatively  few companies with the expertise or facilities to design,
manufacture and test high power devices. We also produce lower power, broad band
microwave  integrated  assemblies for the defense  electronics  industry.  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,   or  RWRs,  Electronics
Countermeasure, or ECM, systems and highly sensitive receiver systems.

Solid  State  Receiver  Protector.  We have  become  a  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.

Digitally  Tuned  Oscillators  (DTO's).  We  produce  microwave  sources,  which
generate signals that are used in microwave  oscillators.  Our microwave sources
are sold to the U.S.  defense  industry and to various foreign  governments.  We
specialize in digitally tuned oscillators, or DTOs, a critical component in many
ECM systems.

Simulation Equipment.  EW Simulation Technology Limited ("EWST"), a U.K. company
and  wholly  owned  subsidiary,   designs  and  manufactures  radar  threat  and
electronic  countermeasures simulation equipment for electronic warfare training
and test and evaluation applications. Radar threat and countermeasures simulator
products include but are not limited to the following:

- CHAMELEON is a real time electronic countermeasures ("ECM") jamming simulator.
It uses a variety of ECM techniques  and radar target  modeling for training and
testing of both radar and EW operators  and systems.  The system  offers a fully
programmable ECM capability using Digital RF Memories ("DRFM")  technology;  and
offers  fully  coherent  jamming in both range and  velocity  through the use of
8-bit DRFM  technology  together with GUI software.  The CHAMELEON is suited for
ground-based and airborne ECM test and training systems.

                                       7
<PAGE>
-  The  RSS8000  Series  Radar  Threat   Simulator   generates   real-time  user
programmable  radar  threats  and  provides  output  configurations  in  digital
(On-board  trainer-OBT) and RF (RSS series) formats.  The system can be used for
EW system test and evaluation as well as for EW operator  training in laboratory
and more rugged environments.  The RSS8000 equipment covers the 100MHz to 40 GHz
range and can be configured to suit any  application  from a portable  single RF
source unit to a multiple RF source and multiple port DF system.  The DF systems
are  available  in  amplitude,  DTOA and/or  phase  formats with the ports being
capable of angular rotation.

- Mobile EW and  Radar  Test  Systems  ("MERTS")  is a mobile EW and radar  test
system providing  complete jamming and radar threat test facility for field use.
It provides a turnkey test and evaluation  equipment for field  applications and
includes both the CHAMELEON and RSS8000 systems  integrated into one operational
unit.  The MERTS  equipment is housed  within an  air-conditioned  ISO container
mounted on a four-wheel  drive truck that allows  on-site test and evaluation of
radar and EW systems as well as operator training.

RF Simulation Equipment. Micro Systems Inc. ("MSI"), a Florida based company and
wholly owned subsidiary, designs and manufactures Digital RF Memories ("DRFM"s),
Radar Target Simulators,  and Radar Environment Simulators for operator training
and  critical  testing  of a variety of  electronic  warfare  systems  including
Radars,  Jammers, and ELINT/SIGINT systems. DRFM technology is also incorporated
into  Electronic  Counter  Measure  (ECM)  systems  worldwide.  These  simulator
products include but are not limited to the following:

- Digital RF Memories are subsystems that digitize RF waveforms, stores, delays,
modulates  and  eventually  replays  the RF  waveform.  These  items are used in
ECM/Jamming systems, Radar Target Simulators and ECM Simulators.

- Radar  Target  Generators  capture/replay  or  generate  radar  waveforms  and
transmits  signals back to the radar to simulate  what the radar would see in an
operational environment.  Aircraft, missiles, ships, buildings, weather, clutter
and ECM can be generated for radar  operator  training and  comprehensive  radar
system testing.

- Radar  Environment  Simulators  ("RES") also  capture/replay or generate radar
waveforms and injects them directly into the radar under test.  These simulators
use either DRFM or Synthesizer/Digital  Signal Processing technology to generate
the waveforms.  Complex graphical user interfaces are provided for the simulator
operator to aide in the development of complex environments for the radar. These
RES systems are  similar to Radar  Target  Generators,  but are  typically  more
complex due to the level of fidelity and processing required by the simulator.

Scientific  Products.  Our scientific  products are used  extensively in Nuclear
Magnetic  Resonance  (NMR)  systems.  These  amplifiers,  which  have  dual mode
capability and can be operated in either a pulsed or continuous  wave, cover the
frequency  ranges of 6 MHz to 950 MHz,  with power  levels as high as 2.0KW peak
power  at 10%  duty  cycle.  Scientific  customers  include  Original  Equipment
Manufacturers ("OEM"), system manufacturers and research centers.

Medical  Products.  Our medical products vary in complexity from single modules,
to rack-mounted amplifiers, to complete systems. The rack-mounted amplifiers and
complete 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.  Our medical  products are used in Magnetic  Resonance
Imaging,  or MRI,  systems.  All amplifiers have dual mode capability and can be
operated in either a pulsed or  continuous  wave mode,  and cover the  frequency
ranges of 10 MHz to 200 MHz with  power  levels as high as 12.0KW  peak power at
10% duty cycle.  Medical  customers  include  OEM, as well as  universities  and
research centers.

All products feature highly reliable  technical  solutions designed for improved
production and reliability. Producibility is enhanced through the use of surface
mount  components  and circuit  designs  which  eliminate the need for excessive
alignment during the production  cycle. High reliability is achieved 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.

CUSTOMERS

During the fiscal years ended  August 3, 2008 and July 29,  2007,  approximately
19%  and 20% of our net  sales  respectively,  were  attributable  to  contracts
directly  with  offices and  agencies of the U.S.  Government.  Lockheed  Martin
Corporation and Northrop Grumman  Corporation  accounted for  approximately  12%
each of net sales in fiscal 2008. No other customer accounted for 10% or more of
consolidated net sales during fiscal 2008 or 2007.

We provide defense electronics  equipment to major defense prime contractors for
integration into larger platforms and systems. Some of our customers for defense
electronics equipment include:

The Boeing Company            BAE Systems                     Harris Corporation
Lockheed Martin Corporation   Northrop Grumman Corporation    Raytheon Company

                                       8
<PAGE>
During fiscal 2008, sales to foreign  customers  accounted for approximately 32%
of our net  sales.  Sales  to  foreign  customers  from our  domestic  locations
accounted for 17% of net sales with the remaining  sales  generated from England
(2%) and Israel (13%). The governments of Egypt,  Japan, South Korea, Taiwan and
the United  Kingdom are all  significant  customers of ours. All of our domestic
contracts  with foreign  customers are payable in U.S.  dollars.  Contracts with
customers  originating  in Israel and England are either in U.S.  dollars or the
local functional  currency.  International  sales are subject to numerous risks,
including  political and economic  instability in foreign markets,  currency and
economic  difficulties in the Pacific Rim, restrictive trade policies of foreign
governments, inconsistent product regulation by foreign agencies or governments,
imposition  of product  tariffs and burdens and costs of  complying  with a wide
variety of international and U.S. export laws and regulatory  requirements.  Our
international  sales are also  subject  to our  obtaining  export  licenses  for
certain products and systems.

SALES AND MARKETING

We  market  our  products  worldwide  to the  United  States  Government,  prime
contractors  and various  countries  in defense  markets,  and to OEM,  research
institutions and universities in commercial markets. Sales are primarily through
a sales force  generally  organized by  geographic  territory  and  markets.  In
addition,  we have 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 our marketing  efforts,  we advertise in major
trade publications and attend major industrial shows in the commercial, medical,
satellite communications and defense markets.

After we have identified key potential  customers,  we make sales calls with our
own sales,  management and engineering personnel. In order to promote widespread
acceptance of our products and provide  customers  with  support,  our sales and
engineering teams work closely with our customers to develop tailored  solutions
to their requirements. We believe that our customer engineering support provides
us with a key competitive advantage.

We also produce  microwave  components that are sold through our catalog,  which
for more than forty  years has been an  industry  leader,  and sell  attenuating
devices and IQ modulation  and phase shifters  through the Microwave  Engineer's
Handbook.

MANUFACTURING

We manufacture our products from standard components, as well as from items that
are  manufactured  by vendors to our  specifications.  A majority of our defense
electronics  and  commercial   assemblies  and  subsystems  contain  proprietary
technology  which is designed and tested by our engineers and technicians and is
manufactured at our own facilities.

We continue to invest in improving our proprietary  manufacturing  processes and
the automation of the manufacturing processes. Automation is critical in meeting
our  customers'  demands  for price  competitiveness,  world  class  quality and
on-time  delivery.  We are also investing to enhance our  responsiveness  to the
production demands of our customers.

We purchase  electronic  components and other raw materials used in our products
from a large number of suppliers and all such  materials  are readily  available
from alternate sources.

We maintain minimal levels of finished products  inventory,  principally to meet
the needs of our medical products customers. We generally purchase raw materials
for specific contracts, and we purchase common components for stock based on our
firm fixed backlog.

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

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

                                       9
<PAGE>
Our 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 our manufacturing
facilities located in the following cities:

Lancaster, Pennsylvania
Woburn, Massachusetts
Whippany, New Jersey
Fort Walton Beach, Florida
McLean, Virginia
Jerusalem, Israel
Kibbutz Eyal, Israel
Farnborough, England

BACKLOG

Our funded  backlog of orders was  approximately  $157 million on August 3, 2008
which are orders covered by funded signed  contracts or purchase  orders.  There
was no  unfunded  backlog at August 3, 2008.  Of our total  backlog at August 3,
2008,  $114 million  (73%) is  attributable  to domestic  orders and $43 million
(27%) is attributable to foreign orders.

Our backlog of orders is subject to change  including  possible  cancellation of
orders,  change orders to the contract and other factors which may be beyond our
control.  Accordingly, our backlog is not necessarily indicative of the revenues
and  earnings  which may be  realized  when the  results of such  contracts  are
reported in the financial statements.  Management anticipates that approximately
78% of the  backlog  at August 3, 2008 will be shipped  during  the fiscal  year
ending August 2, 2009.

Approximately 92% of our backlog consists of firm fixed price contracts, some of
which require  delivery over time periods in excess of one year.  With this type
of  contract  we  agree  to  deliver  products  at a  fixed  price,  subject  to
adjustment,  for costs incurred because of change orders issued by the customer.
The remaining contracts are primarily cost reimbursement type contracts.

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  for  cause  or  convenience.  In the  event  of a
termination for convenience, 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 us under the contract to
the date of termination plus a fee based on the work completed.

PRODUCT DEVELOPMENT

We believe that our growth depends,  in part, on our ability to renew and expand
our  technology,  products,  and  design  and  manufacturing  processes  with an
emphasis  on cost  effectiveness.  We focus our primary  efforts on  engineering
design and product development  activities rather than pure research. Our 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, was
approximately  $28.8  million in fiscal 2008,  $33.4  million in fiscal 2007 and
$33.3  million in fiscal  2006.  The  portion of these costs not  reimbursed  by
customers  was  approximately  $19.1  million in fiscal 2008,  $13.1  million in
fiscal 2007 and $12.4  million in fiscal 2006.  These  increases in  development
spending were  undertaken to continue to provide future  business  opportunities
for  the  Company.   Future  product   development  costs  will  depend  on  the
availability of appropriate development  opportunities within the markets served
by the Company.

COMPETITION

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

Competition is generally based upon  technology,  design,  past  performance and
price. Our ability to compete  depends,  in part, on our ability to offer better
design and  performance  than our  competitors  and our readiness in facilities,
equipment and personnel to complete the programs.  Many of the programs in which
we participate  are long standing  programs in which we are the sole provider of
our product.

                                       10
<PAGE>
GOVERNMENT REGULATION

Because of our participation in the defense  industry,  we are subject to audits
by various government  agencies for our compliance with government  regulations.
We are 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  our  products.  We believe that we operate our
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 our  business,  financial  condition and results of
operations.

INTELLECTUAL PROPERTY

We rely primarily on a combination of trade  secrets,  employee and  third-party
non-disclosure  agreements  to protect  our  intellectual  property,  as well as
limiting  access  to the  distribution  of  proprietary  information.  We cannot
provide  assurance  that the steps  taken to protect our  intellectual  property
rights will be  adequate to prevent  misappropriation  of our  technology  or to
preclude competitors from independently developing such technology. Furthermore,
we cannot provide  assurance that, in the future,  third parties will not assert
infringement  claims  against us with  respect to our  products.  Asserting  our
rights or defending  against third party claims could involve  substantial costs
and  diversion  of  resources,  thus  materially  and  adversely  affecting  our
business,  financial  condition and results of operations.  In the event a third
party  were  successful  in a  claim  that  one of our  products  infringed  its
proprietary rights, we may have to pay substantial royalties or damages,  remove
that  product from the  marketplace  or expend  substantial  amounts in order to
modify the product so that it no longer  infringes on such  proprietary  rights,
any of which could have a material  adverse  effect on our  business,  financial
condition and results of operations.

EMPLOYEES

As of  August  3,  2008  we had  903  full-time  employees,  none  of  whom  are
represented by a labor union as follows:
<TABLE>
                         <S>                          <C>
                         Executive                     13
                         Administration                50
                         Manufacturing                605
                         Engineering                  192
                         Sales and Marketing           43
                                                      ---
                          Total                       903
                                                      ===
</TABLE>
We believe  that our future  success  will  depend,  in part,  on our  continued
ability to recruit and retain highly skilled technical, managerial and marketing
personnel,  including microwave engineers. To assist in recruiting and retaining
such personnel, we have established  competitive benefits programs,  including a
401(k) employee savings plan for our U.S. employees, and stock option plans.

Item 1A.  Risk Factors

You should carefully  consider the factors described below and other information
contained in this report.  The risks and  uncertainties  described below are not
the only ones we face. Additional risks and uncertainties not presently known to
us, which we currently  deem  immaterial  or which are similar to those faced by
other  companies  in our  industry or  business in general,  may also impair our
business  operations.  If  any of  the  following  risks  actually  occurs,  our
business,  financial  condition or results of operations could be materially and
adversely  affected.  In such case,  the trading price of our common stock could
decline,  and you may  lose all or part of your  investment.  This  report  also
contains forward-looking statements that involve risks and uncertainties. Please
refer to "Forward-Looking Statements" included elsewhere in this report.

                                       11
<PAGE>
                    Risks Related to Recent Legal Proceedings

Class-action complaints against us could result in costly litigation and payment
of damages.

In 2006,  we were served with  several  class-action  complaints  against us and
certain of our officers and  directors in the United States  District  Court for
the  Eastern  District  of  Pennsylvania.  The  claims  arise out of a  criminal
indictment  by  the  U.S.   Attorney's   Office  for  the  Eastern  District  of
Pennsylvania in connection with certain government  contracts and are made under
Section  10(b) and 20(a) of the  Securities  Exchange act of 1934 and Rule 10b-5
thereunder.  While we intend to vigorously  defend against these actions,  their
ultimate  outcome is presently not  determinable  as they are in the preliminary
phase.  Thus,  we cannot at this time  determine  the  likelihood  of an adverse
judgment or a likely range of damages in the event of an adverse judgment.  If a
class were ultimately certified, any settlement of or judgment arising from such
lawsuit could be material,  and we cannot give any assurance  that we would have
resources  available  to pay such  settlement  or  judgment.  Additionally,  any
litigation to which we are subject may be costly and could  require  significant
involvement of our senior management and may divert management's  attention from
our business and operations.

                          Risks Related to Our Business

A significant  percentage of our sales are under government  contracts which are
only  partially  funded  initially  and may lose funding or may be terminated in
future years.

Approximately  62% of our net sales in  fiscal  2008 and 64% of our net sales in
fiscal 2007 were made to United States government agencies and their contractors
and subcontractors for defense programs. Over its lifetime, a government program
may be  implemented  by the award of many  different  individual  contracts  and
subcontracts.  The funding of  government  programs is subject to  congressional
appropriations.  Although  multi-year  contracts may be authorized in connection
with major procurements,  Congress generally appropriates funds on a fiscal year
basis even  though a program  may  continue  for  several  years.  Consequently,
programs are often only  partially  funded  initially and  additional  funds are
committed  only as Congress  makes further  appropriations.  The  termination of
funding for a government  program would result in a loss of  anticipated  future
revenues  attributable to that program which could have a negative impact on our
operations.

Generally,  government  contracts contain  provisions  permitting the government
agency  to  terminate  the  contract  at its  convenience,  in whole or in part,
without prior notice,  and to provide for payment of compensation  only for work
done and commitments  made at the time of termination.  We cannot guarantee that
one or more of our  government  contracts  will not be  terminated  under  these
circumstances.  Also, we cannot  guarantee  that we would be able to procure new
government  contracts to offset the revenues lost as a result of  termination of
any contracts.  Because a substantial  part of our revenues are dependent on our
procurement, performance and payment under our contracts, our failure to replace
sales  attributable  to  a  significant  defense  program  or  contract  at  its
termination,  whether due to cancellation,  spending cuts, budgetary constraints
or otherwise, could have a material adverse effect upon our business,  financial
condition and results of operations.

Fixed-price contracts are common in all of our markets and may increase risks of
cost overruns and product non-performance.

Our customers set demanding specifications for product performance,  reliability
and cost.  Most of our  customer  contracts  are firm,  fixed  price  contracts,
providing  for a  predetermined  fixed  price  for the  products  that we  make,
regardless of the costs we incur. Thus, we must make pricing  commitments to our
customers  based on our  expectation  that we will achieve  more cost  effective
product  designs  and  automate  more  of  our  manufacturing  operations.   The
manufacture  of  our  products  requires  a  complex  integration  of  demanding
processes  involving unique technical skill sets. We face risks of cost overruns
or order  cancellations  if we fail to  achieve  forecasted  product  design and
manufacturing  efficiencies  or if products cost more to produce than  expected.
The expense of producing  products can rise due to increased  cost of materials,
components, labor, capital equipment or other factors. We may have cost overruns
or problems with the performance or reliability of our products in the future.

If we  fail  to  win  competitively  awarded  contracts  in the  future,  we may
experience  a  reduction  in  our  sales,  which  could  negatively  affect  our
profitability.

We obtain many of our U.S.  Government  contracts through a competitive  bidding
process.  We cannot provide assurance that we will continue to win competitively
awarded  contracts or that awarded  contracts will generate sales  sufficient to
result in our  profitability.  We are also subject to risks  associated with the
following:

     o    the frequent  need to bid on programs in advance of the  completion of
          their   design   (which   may  result  in   unforeseen   technological
          difficulties and cost overruns);

     o    the substantial time and effort, including the relatively unproductive
          design and development  required to prepare bids and proposals,  spent
                                       12
<PAGE>
          for competitively awarded contracts that may not be awarded to us;

     o    design complexity and rapid technological obsolescence; and

     o    the constant need for design improvement

Our government  contracts may be subject to protest or challenge by unsuccessful
bidders or to termination,  reduction or modification in the event of changes in
government  requirements,  reductions in federal  spending or other factors.  In
addition, failure to obtain a renewal or follow-on contract with U.S. Government
or foreign governments would result in a loss of revenues.  If revenues from the
award of new  contracts  fail to offset  this  loss,  it could  have a  material
adverse effect on our results of operations and financial position.

Our  international  sales are  subject  to risks  related to doing  business  in
foreign countries.

In  fiscal  2008  and  2007,   sales  to   international   customers   comprised
approximately  32% and 27%,  respectively,  of our net sales,  and we expect our
international  business to continue  to account  for a  significant  part of our
revenues. We currently maintain  manufacturing  facilities in the United Kingdom
and  Israel.  International  sales are  subject  to  numerous  risks,  including
political and economic  instability  in foreign  markets,  currency and economic
difficulties  in  the  Pacific  Rim,   restrictive  trade  policies  of  foreign
governments, inconsistent product regulation by foreign agencies or governments,
imposition  of product  tariffs and burdens and costs of  complying  with a wide
variety of international and U.S. export laws and regulatory  requirements.  The
governments  of Japan,  South  Korea,  Taiwan  and the  United  Kingdom  are all
significant customers.  Our international sales also are subject to us obtaining
export licenses for certain  products and systems.  We cannot provide  assurance
that we  will be able to  continue  to  compete  successfully  in  international
markets or that our international sales will be profitable. Substantially all of
our  revenues in fiscal 2008 at our  domestic  locations  and our  operation  in
Israel were denominated in U.S. dollars, and we intend to continue to enter only
into U.S.  dollar-denominated  contracts.  Revenues  reported at our EWST (U.K.)
facility  are  primarily   denominated   in  Pound  Sterling  and  accounts  for
approximately  2% to 4% of our  consolidated  net sales in U.S. dollars over the
last three fiscal years.  In addition,  fluctuations in currency could adversely
affect our  customers,  which may lead to delays in the timing and  execution of
orders.

We rely on a small number of significant customers.

A significant  part of our sales have  historically  come mainly from  contracts
with  agencies  of, and prime  contractors  to, the U.S.  government.  Net sales
directly to the U.S. government accounted for 19% of fiscal year 2008 net sales.
Additionally,  approximately  36% of our net sales were attributable to our next
five largest  customers  for fiscal year 2008.  Variations in the demand for our
products by any of these  direct and  indirect  customers  could have a serious,
adverse impact on our performance.  If we were to lose any of these or any other
major customers, or if orders by any major customer were otherwise to be delayed
or reduced,  including  reductions  due to market or  competitive  conditions in
commercial markets or further decreases in government defense spending, then our
business, financial condition and results of operations would be harmed.

We have limited intellectual property rights.

Our success is dependent upon our  proprietary  technology.  We do not currently
have any material  patents.  We rely  principally  on trade secret and copyright
laws,  certain employee and third-party  non-disclosure  agreements,  as well as
limited  access to and  distribution  of  proprietary  information,  in order to
protect our technology.  Trade secret laws afford us limited  protection because
they  cannot be used to prevent  third  parties  from  reverse  engineering  and
reproducing our products. Similarly, copyright laws afford us limited protection
because copyright  protection  extends only to how an idea is expressed and does
not protect the idea itself. Moreover, third parties could independently develop
technologies  that compete with our  technologies.  We cannot provide  assurance
that the  obligations  on the part of our  employees  and  business  partners to
maintain  the  confidentiality  of  our  proprietary   technology  will  prevent
disclosure of such information by our employees or third parties. Litigation may
be necessary  for us to defend  against  claims of  infringement  or protect our
proprietary  technology,  which  could  result  in  substantial  cost  to us and
diversion of our efforts.  We cannot provide  assurance that we would prevail in
any such litigation.  Our inability to protect our proprietary  technology could
have a material adverse effect on our business,  financial condition and results
of operations.  Although we believe that our products and proprietary  rights do
not infringe on the patents and proprietary  rights of third parties,  we cannot
provide  assurance that  infringement  claims,  regardless of merit, will not be
asserted  against  us.  In  addition,   effective  copyright  and  trade  secret
protection  of our  proprietary  technology  may be  unavailable  or  limited in
certain foreign countries.

We are subject to environmental  laws and regulations and our ongoing operations
may expose us to environmental liabilities.

Our operations are subject to federal,  state,  foreign and local  environmental
laws and  regulations.  As a  result,  we may be  involved  from time to time in
administrative or legal proceedings relating to environmental matters. We cannot

                                       13
<PAGE>
provide  assurance that the aggregate  amount of future clean-up costs and other
environmental   liabilities  will  not  be  material.  We  cannot  predict  what
environmental  legislation  or  regulations  will be enacted in the future,  how
existing or future laws or regulations  will be  administered  or interpreted or
what environmental conditions may be found to exist. Enactment of more stringent
laws  or  regulations  or more  strict  interpretations  of  existing  laws  and
regulations may require us to make additional expenditures,  some of which could
be material.

A failure to attract and retain  technical  personnel  could reduce our revenues
and our operational effectiveness.

There is a continuing demand for qualified technical personnel.  We believe that
our future growth and success will depend upon our ability to attract, train and
retain such  personnel.  Competition  for  personnel in the defense  industry is
intense and there are a limited number of persons,  especially  engineers,  with
knowledge of and experience in microwave technology.  Our design and development
efforts depend on hiring and retaining qualified technical  personnel.  Although
we  currently  experience  relatively  low rates of turnover  for our  technical
personnel,  the rate of turnover  may  increase in the future.  An  inability to
attract or maintain a  sufficient  number of  technical  personnel  could have a
material  adverse  effect  on our  contract  performance  or on our  ability  to
capitalize on market opportunities.

The markets in which we operate are competitive.

Our  historical  defense  markets  and our more  recent  commercial  markets are
characterized  by rapid  technological  change  as new  products  are  generally
developed  quickly and industry  standards are  constantly  evolving.  Thus, our
products  can become  obsolete  over a short period of time unless we succeed in
remaining technologically innovative and in anticipating new market demands.

The defense  industry in particular has  experienced  substantial  consolidation
due, among other things, to increasing  pressures for cost reductions.  This has
substantially  increased competitive pressures and introduced delays in contract
funding and awards into our historical markets in the defense industry.  Many of
our competitors are larger than us and have substantially  greater financial and
other  resources  than we have. As a supplier,  we also  experience  significant
competition  from the in-house  capabilities  of our  customers.  Our ability to
compete for defense contracts largely depends on the following factors:

     o    our ability to offer better performance than our competitors;
     o    the readiness of our facilities,  equipment and personnel to undertake
          the programs for which we compete; and
     o    the  effectiveness  and  innovations  of our research and  development
          programs.

We may encounter difficulties in effectively integrating acquired businesses.

As part of our business  strategy,  we have  augmented  our  technology  base by
acquiring companies with compatible or related products.  Historically,  we have
acquired a number of such  companies  and  products  and have  integrated  those
companies into our business.  These and any future  acquisitions we make will be
accompanied by the risks  commonly  encountered  in  acquisitions  of companies,
which include, among other things:

     o    potential exposure to unknown liabilities of acquired companies;
     o    higher than anticipated acquisition costs and expenses;
     o    difficulty and expense of assimilating the operations and personnel of
          the   companies,   especially   if   the   acquired   operations   are
          geographically distant;
     o    potential   disruption  of  our  ongoing  business  and  diversion  of
          management time and attention;
     o    failure to  maximize  our  financial  and  strategic  position  by the
          successful incorporation of acquired technology;
     o    difficulties in adopting and maintaining uniform standards,  controls,
          procedures and policies;
     o    loss  of key  employees  and  customers  as a  result  of  changes  in
          management; and
     o    possible dilution to our shareholders.

We may not be  successful  in  overcoming  these  risks  or any  other  problems
encountered in connection with any of our acquisitions.  We may make a strategic
acquisition  knowing that the  transaction  may adversely  affect our short-term
profitability,  perhaps  because the  acquisition  candidate may be experiencing
operating  losses.  We may believe that acquiring  such a company  outweighs the
operating  losses the candidate is experiencing and the losses that we expect to
experience before being able to make the acquisition candidate  profitable.  The
completion  of such an  acquisition  in the future would  negatively  affect our
profitability and may cause a decline in our stock price.

Our backlog is subject to reduction and cancellation.

Backlog  represents  products or services that our customers  have  committed by
contract  to  purchase  from  us.  Our  backlog  as  of  August  3,  2008,   was
approximately $157 million.  Approximately 78% of this backlog is expected to be
filled within twelve months.  Our backlog is subject to fluctuations  and is not
necessarily  indicative of future backlog or sales.  Moreover,  cancellations of

                                       14
<PAGE>
purchase orders or reductions of product  quantities in existing contracts could
substantially  and  materially  reduce our  backlog  and,  consequently,  future
revenues.  Our failure to replace  canceled or reduced  backlog  could result in
lower revenues.

                         Risks Related to Our Securities

Our stock price has fluctuated significantly and may continue to do so.

A number  of  factors  could  cause  the  market  price of our  common  stock to
fluctuate significantly, including:

     o    our quarterly operating results or those of other defense companies;
     o    the public's  reaction to our press  releases,  announcements  and our
          filings  with  the  Securities  and  Exchange  Commission,   including
          developments with respect to the recent indictment and suspension;
     o    changes in earnings estimates or recommendations by research analysts;
     o    changes in general  conditions in the U.S. economy,  financial markets
          or defense industry;
     o    natural disasters, terrorist attacks or acts of war; and
     o    other developments affecting us or our competitors.

In recent  years,  the stock  market has  experienced  extreme  price and volume
fluctuations.  This volatility has had a significant  effect on the market price
of securities  issued by many  companies for reasons  unrelated to the operating
performance of these companies.

Delaware  law and our charter  documents  may impede or  discourage  a takeover,
which could cause the market price of our shares to decline.

We are a Delaware  corporation and the anti-takeover  provisions of Delaware law
impose various impediments to the ability of a third party to acquire control of
us,  even  if  a  change  in  control   would  be  beneficial  to  our  existing
shareholders.  Our certificate of incorporation and by-laws provide, among other
things, for a classified board of directors serving staggered  three-year terms.
Our  incorporation  under  Delaware  law,  the  acceleration  of the  vesting of
outstanding  stock options  including options that we have granted upon a change
in control,  and certain  provisions of our  certificate  of  incorporation  and
by-laws could impede a merger,  takeover or other business combination involving
us or discourage a potential  acquirer from making a tender offer for our common
stock, which, under certain circumstances,  could reduce the market value of our
common stock.

Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties

Our facilities are as follows:
<TABLE>
<CAPTION>
                                                                                           Owned
                                                                                             Or
Location                                Purpose of Property                  Area          Leased
--------                                -------------------                 -------        ------
<S>                         <C>                                          <C>               <C>
Lancaster, PA               Corporate headquarters                        5,200 sq. ft.    Leased
Lancaster, PA               Production, engineering and administration   86,200 sq. ft.    Owned
Woburn, MA                  Production, engineering and administration   60,000 sq. ft.    Owned
Farmingdale, NY (1)         Production, engineering and administration   62,300 sq. ft.    Leased
Whippany, NJ                Production, engineering and administration   23,000 sq. ft.    Leased
Fort Walton Beach, FL       Production, engineering and administration   20,000 sq. ft.    Owned
Fort Walton Beach, FL (2)   Production, engineering and administration   31,500 sq. ft.    Leased
McLean, VA                  Production, engineering and administration   43,260 sq. ft.    Leased
Jerusalem, Israel           Production, engineering and administration   23,700 sq. ft.    Leased
Kibbutz Eyal, Israel (3)    Production, engineering and administration   40,000 sq. ft.    Leased
Farnborough, England        Production, engineering and administration    7,570 sq. ft.    Leased
Chicago, IL                 Engineering and administration                3,000 sq. ft.    Leased
Tustin, CA                  Engineering and administration                2,020 sq. ft.    Leased
Lancaster, PA               Land held for expansion                       37 Acres         Owned
--------------
<FN>
     (1) On August 24, 2005 we amended our lease  agreements  with a partnership
partially owned by the children of our Chairman.  The original two 10 year lease
agreements  provided for initial minimum annual rents of approximately  $312,000
and $92,000,  respectively,  in each case subject to escalation of approximately

                                       15
<PAGE>
4% annually throughout the 10 year term. The two individual leases were combined
into a single lease with the same rent  provisions and with the term extended to
August 31,  2010.  During the fourth  quarter of fiscal 2008 we decided to close
our  manufacturing  facility in  Farmingdale,  NY and transfer its contracts and
assets to our other facilities in Whippany, New Jersey;  Woburn,  Massachusetts;
Lancaster,  Pennsylvania; and Jerusalem, Israel. It is expected that the closure
of the facility will be substantially completed by the end of December 2008.
     (2) As of February 1, 2005,  we entered into an agreement to acquire all of
the issued and  outstanding  common stock of Micro  Systems,  Inc.  Prior to the
acquisition  of MSI,  MSI had leased  one of its two  buildings  in Fort  Walton
Beach,  Florida  from  MSI  Investments,  a  Florida  General  Partnership.  MSI
Investments is owned by four individuals, two of whom are currently employees of
MSI and one serves as a consultant. This lease has an original term of 15 years,
ending December 31, 2012. The lease costs currently are  approximately  $287,000
on an annual basis,  including the tenant's  obligation to pay for insurance and
property taxes. The base lease rate is adjusted every January for changes in the
consumer price index, using 1997 as the base year.
     (3) As of  August 1, 2008 we  entered  into an  agreement  to  acquire  the
business and certain assets subject to the assumption of certain  liabilities of
Eyal Microwave  Industries ("EMI") a privately held Israeli company.  EMI has an
existing  lease with a term  expiring  December  31,  2019 at an annual  cost of
approximately $324,000.
</FN>
</TABLE>
We believe that these  facilities  are  adequate  for our current and  presently
anticipated future needs.

Item 3.  Legal Proceedings

On June 6, 2006,  in connection  with an  investigation  by the U.S.  Attorney's
Office in Pennsylvania  which, inter alia, involved pricing under contracts with
the U.S.  Department  of Defense  relating to voltage  control  oscillators  and
powerheads,  an  indictment  was returned  against us and Lee Blatt,  our former
Chairman.  No  other  officer  or  director  of the  Company  was  named  in the
indictment. The contracts aggregate approximately $3.9 million in total revenue.
On May 5, 2008, we entered into an agreement  with the United States  Attorney's
Office for the Eastern  District of Pennsylvania in which (a) we agreed to plead
guilty to two counts of obstructing an audit relating  solely to the powerheads;
(b) we agreed to pay a fine of $3.5 million;  and (c) the  Government  agreed to
dismiss all other counts of the  indictment.  The agreement was presented to the
Court on May 5, 2008,  and the Court  accepted the agreement and sentenced us to
the agreed-upon fine.

With respect to Mr. Blatt, the Court, at the Government's request, dismissed all
of the  charges  against  him in the  indictment  and  the  Government  filed  a
Superseding  Information charging Mr. Blatt with a misdemeanor  violation of the
tax code in a single  count,  and Mr. Blatt entered a guilty plea for failing to
keep Company records of the allocation of an $18,000 corporate research expense.
Mr.  Blatt was fined  $25,000,  received a term of probation of one year and was
required to perform some community service which has been completed.

Under the terms of an  indemnification  agreement with Mr. Blatt, we have agreed
to provide  indemnification  with regard to certain legal proceedings so long as
he has acted in good faith and in a manner believed to be in, or not opposed to,
our best interest with respect to any criminal  proceeding and had no reasonable
cause to believe his conduct was unlawful.

Shortly before the indictment  mentioned above, Company counsel were notified by
representatives  of the United States Attorney's Office for the Eastern District
of  Pennsylvania,  Civil  Division,  that they  intended to file a civil lawsuit
against us pursuant to inter alia, the False Claims Act, 31 U.S.C.  Section 3729
et. seq. We entered into a Tolling  Agreement on June 21,  2006,  deferring  any
further  activity  related to this potential  claim until after the trial of the
criminal  matter  mentioned  above.  By agreement  dated May 5, 2008, the United
States Attorney's  Office for the Eastern District of Pennsylvania  entered into
an agreement  with us to resolve the potential  issues  arising from the lawsuit
threatened  against us pursuant to, among other things, the False Claims Act, 31
U.S.C.  Section  3729  et.  seq.  for the  matters  alleged  in the  Superseding
Indictment.  We agreed to pay $6 million in exchange for, among other things,  a
release.

In June and July 2006,  we were  served  with  several  class-action  complaints
against us and certain of our officers in the United States  District  Court for
the Eastern  District of  Pennsylvania.  The claims are made under Section 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  All
defendants in the  class-action  complaints filed motions to dismiss on April 6,
2007. On July 17, 2007,  the Court issued an order denying the Company's and Mr.
Blatt's motion to dismiss and granted,  in part, the other defendants' motion to
dismiss.  Specifically,  the Court dismissed the Section 10(b) claim against the
other  defendants  and  denied the motion to dismiss  the  Section  20(a)  claim
against them. On July 18, 2007,  the Court  granted  defendant's  motion to stay
these actions until after the trial of the criminal matter  referenced above. On
February  8, 2008,  the Court  issued an Order  allowing  for  certain  document
discovery to commence.  On May 9, 2008,  the Court lifted the stay. A Scheduling
Order has now been  entered  requiring  the  parties to  complete  discovery  by
January  2009. At this stage of the  proceedings,  it is not possible to predict
what, if any, liability we may have from the Securities Class Actions.

In July and August 2006,  we and certain of our current and former  officers and
directors were also served with two separate derivative complaints for breach of
fiduciary  duty  brought  pursuant  to Rule 23.1 of the  Federal  Rules of Civil
Procedure. The complaints relate to our indictment in the matter discussed above

                                       16
<PAGE>
and were  consolidated  into one action on March 9, 2006.  All defendants in the
derivative complaints filed motions to dismiss on February 26, 2007. On July 20,
2007, the Court issued an order denying defendants' motions in part and granting
them in part.  Specifically,  the  Court  dismissed  the  claim  that the  named
officers and  directors  failed to oversee Mr. Blatt and denied the motions with
respect to the other alleged claims.  The Court also granted  defendants' motion
to stay the action until after the trial of the criminal matter.  On February 8,
2008,  the Court  issued an Order  allowing  for certain  document  discovery to
commence.  On May 9, 2008, the Court lifted the stay. A Scheduling Order has now
been entered  requiring  the parties to complete  discovery by January  2009. At
this stage of the  proceedings,  it is not  possible  to predict  what,  if any,
liability we may have from the Derivative Actions.

We believe we are entitled to recovery of certain legal fees associated with the
above matters under our Directors and Officers ("D&O")  insurance  policy. As of
August 3, 2008, we have aggregate claims of  approximately  $7,151,000 (net of a
deductible  of $500,000)  and have received  partial  payments of  approximately
$2,236,000.  We have entered into an agreement  dated  January 11, 2007 with the
insurance  carrier  whereby  if  it  is  determined  by  final  decision  of  an
arbitration panel, or by final judgment of a court, or other final decision of a
tribunal  having  jurisdiction  thereof,  that any amount paid by the  insurance
carrier was not a loss, as that term is defined in the policy, we shall repay to
the  insurance  carrier  any such  uncovered  sums  previously  advanced  to us.
Subsequent to the end of fiscal 2008, the insurance carrier asserted in a letter
their  determination  that they are not  liable for  certain of the legal  costs
incurred  by us.  We have  responded  with a  letter,  supported  by court  case
citations,  that all the submitted costs represent valid claims under the policy
and that the  insurance  company  is  liable.  However,  based on the  insurance
company's  position and generally  accepted  accounting  principles,  we are not
permitted to record any potential claim for recovery under our insurance policy.
Accordingly,  the previously recorded receivable of $2,803,000 as of May 4, 2008
has been  eliminated  in the fourth  quarter of fiscal 2008.  While there are no
assurances,  we believe  such costs  represent a "loss" under our D&O policy and
such costs are recoverable.

The term "Loss" is defined in the policy as follows:

"Loss means the amount  that any Insured  becomes  legally  obligated  to pay on
account of any covered  Claim,  including but not limited to damages  (including
punitive or exemplary damages,  or the multiple portion of any multiplied damage
award,  if and to the extent  such  damages are  insurable  under the law of the
jurisdiction  most favorable to the  insurability of such damages  provided such
jurisdiction  has a substantial  relationship to the relevant  Insureds,  to the
Company,  or to the Claim giving rise to the damages),  judgments,  settlements,
pre-judgment and post-judgment interest,  Defense Costs and, solely with respect
to Insuring Clause 2, Settlement fees."

Further, the policy defines "Defense Costs" as follows:

"Defense Costs means that part of Loss consisting of reasonable costs,  charges,
fees  (including  but not  limited to  attorneys'  fees and  experts'  fees) and
expenses  (other than regular or overtime wages,  salaries,  fees or benefits of
the directors,  officers or employees of the Organization) incurred in defending
any Claim and the premium for appeal, attachment or similar bonds."

On June 27,  2007,  we were  notified  by the  Office  of the  General  Counsel,
Acquisition  Integrity Office,  Department of Navy (the "Navy"), that certain of
our operations  had been  suspended from receiving new contract  awards from the
U.S.  Government.  The affected  operations  included  facilities  in Lancaster,
Pennsylvania; Woburn, Massachusetts and Chicago, Illinois. The Chicago, Illinois
location is a two-person marketing office.

On August 15, 2007 the  suspension  was lifted  following  an  amendment  to the
Administrative  Agreement with the Navy (originally  signed on October 12, 2006)
extending  the  term  of the  agreement  for  one  additional  year.  While  the
suspension was in place,  these facilities could not be solicited for or awarded
new contracts or contract extensions without special  exceptions.  The suspended
facilities were permitted to receive  contract  awards or subcontracts  from the
Federal  Government if the head of the agency  stated in writing the  compelling
reason  to do so. A  significant  portion  of our  business  is  received  under
contracts where we are the only qualified supplier on critical defense programs.

Prior to May 5, 2008, our counsel met with  representatives of the Department of
Navy,  Suspension and Debarment Office,  Acquisition Integrity Office to discuss
(a) the possible  agreement  between the United States Attorney's Office for the
Eastern District of Pennsylvania and us, as such is set forth above, and (b) the
possible agreement with the Civil Division of the U.S. Attorney's Office and us,
as is  mentioned  above.  Representatives  from the Navy  advised that no action
would be taken to suspend or debar us based upon these agreements, and no action
was in fact taken or is expected to be taken.

On April 10, 2007, EADS Deutschland GmbH ("EADS"), a German corporation, filed a
lawsuit  against Herley  Industries,  Inc.,  General  Microwave  Corporation and
General  Microwave  Export  Corporation  d/b/a  Herley Power  Amplifier  Systems
(collectively  "we" or "us") in the United States District Court for the Eastern
District of New York.  EADS  claims  that we  breached a Transfer of  Technology
Agreement  entered into on May 30, 2001 under which we were granted the right to
use certain  technology owned by EADS in performing under an exclusive sales and
marketing  agreement  entered into on May 30,  2001.  EADS  asserted  claims for
breach  of  contract  and  conversion,  claiming  that  we  were  wrongfully  in
possession of the  intellectual  property that was  transferred to us. EADS also
sought  a  preliminary   injunction.   We  denied  any   wrongdoing   and  filed
counterclaims  against  EADS.  On August 2,  2007,  we and EADS  entered  into a

                                       17
<PAGE>
settlement of this motion, which was reduced to a written consent decree entered
by the Court on August 29,  2007.  EADS's  claims for breach of contract and for
conversion remained pending,  as did our counterclaims.  Pursuant to the consent
decree,  the parties  agreed to a  mediation/settlement  conference of all their
respective  claims with the Court,  and further  agreed to stay all  proceedings
pending the outcome of that mediation/settlement conference on October 17, 2007.
In November  2007, we reached a  comprehensive  settlement  agreement  with EADS
effective December 5, 2007, as discussed in Note A-1.

We are 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 will not
have a  material  adverse  effect  on  our  financial  position  or  results  of
operations.


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

     Not Applicable.

PART II

Item 5. Market for Registrant's Common Equity,  Related Shareholder Matters, and
     Issuer Purchases of Equity Securities.

(a)  Our Common  Stock is traded in The Nasdaq  Global  Market  under the symbol
     "HRLY". The following table sets forth the high and low closing sales price
     as  reported  by The Nasdaq  Global  Market  for our  Common  Stock for the
     periods indicated.
<TABLE>
<CAPTION>
                                                                          Common Stock
                                                                      High           Low
                                                                      ----           ---
     Fiscal Year 2007
     <S>                                                              <C>            <C>
         First Quarter.............................................   15.55          10.50
         Second Quarter ...........................................   16.99          14.60
         Third Quarter ............................................   16.66          14.85
         Fourth Quarter ...........................................   18.28          15.20
     Fiscal Year 2008
         First Quarter.............................................   15.90          12.86
         Second Quarter............................................   15.29          12.37
         Third Quarter ............................................   13.36           9.69
         Fourth Quarter ...........................................   16.17          12.93
</TABLE>
     The closing price on October 3, 2008 was $16.02.

     As of October 3, 2008, there were  approximately  163 holders of record and
     approximately 2,600 beneficial holders of our Common Stock.

     There  have been no cash  dividends  declared  or paid by us on our  Common
     Stock during the past two fiscal years.

     We did not  repurchase any equity  securities  during the fourth quarter of
     fiscal 2008.

                                       18
<PAGE>
     The following  table sets forth the indicated  information  as of August 3,
     2008 with respect to our equity compensation plans:
<TABLE>
<CAPTION>
                                                                                               (c)
                                                                                              number
                                              (a)                                          of securities
                                             Number                                      remaining available
                                          of securities                (b)               for future issuance
                                         to be issued upon       Weighted-average            under equity
                                           exercise of          exercise price of        compensation plans
                                       outstanding options,    outstanding options,      (excluding securities
Plan category                           warrants and rights     warrants and rights     reflected in column (a))
-------------                           -------------------     -------------------    ------------------------
<S>                                            <C>                     <C>                      <C>
Equity compensation
plans approved by
security holders                               2,263,418               $ 13.23                    32,250
Equity compensation
plans not approved
by security holders                            1,248,807               $ 17.64                   228,700
                                               ---------                                         -------
Total                                          3,512,225               $ 14.80                   260,950
                                               =========                                         =======
<FN>
(b) Not applicable.
</FN>
</TABLE>

Item 6. Selected Financial Data (in thousands except per share data):

Consolidated Statements of Operations Data:
------------------------------------------
<TABLE>
<CAPTION>
                                                  53 weeks
                                                    ended             52 weeks ended
                                                  August 3,   July 29,   July 30,   July 31,  August 1,
                                                     2008       2007       2006       2005       2004
                                                     ----       ----       ----       ----       ----
<S>                                             <C>            <C>        <C>        <C>        <C>
Net sales (1)                                   $   152,511    163,140    176,268    151,415    122,154
                                                    =======    =======    =======    =======    =======
Cost and expenses:
     Cost of products sold                      $   118,311    118,834    127,921    106,441     79,505
                                                    =======    =======    =======    =======    =======
     Selling and administrative expenses        $    33,735     32,516     32,736     27,599     21,123
                                                    =======    =======    =======    =======    =======
     Litigation costs                           $     5,550      1,674      2,230      2,706      1,924
                                                    =======    =======    =======    =======    =======
     Litigation settlements (3)                 $    15,542        -          -          -          -
                                                    =======    =======    =======    =======    =======
     Employment contract settlement costs (2)   $       -        8,914        -          -          -
                                                    =======    =======    =======    =======    =======

Operating (loss) income                         $   (20,627)     1,202     13,381     14,669     19,602
                                                    =======    =======    =======    =======    =======
Net (loss) income                               $   (10,346)     3,118     10,354     10,781     13,673
                                                    =======    =======    =======    =======    =======
(Loss) earnings per common share (4):
          Basic                                 $   (.76)       .22        .72        .75        .97
          Assuming Dilution                     $   (.76)       .22        .69        .72        .92

Consolidated Balance Sheet Data:
-------------------------------
Total Assets                                    $    259,418    262,593    251,450    242,023    220,971
Total Current Liabilities                       $     43,925     34,958     33,351     32,090     23,846
Long-Term Debt net of current portion           $      7,092      5,951      5,948      5,000      5,845
Long-Term Portion of Litigation Settlement (3)  $        892     -          -          -          -
   Agreement (2)                                $      3,074      4,117     -          -          -
Other Long-Term Liabilities                     $      1,652      1,311      1,265      1,042        932
<FN>
Notes to Selected Financial Data:
--------------------------------
(1)      See "Acquisitions" under Item 1. "Business".
(2)      See Note H of Notes to Consolidated Financial Statements.
(3)      See Note E of Notes to Consolidated Financial Statements.
(4)      No cash dividends have been distributed in any of the years presented.
</FN>
</TABLE>
                                       19
<PAGE>
Item 7. Management's  Discussion and Analysis of Financial Condition and Results
     of Operations

The following  discussion  should be read in conjunction  with the  Consolidated
Financial  Statements  and notes  thereto  included in Item 8 of Part II of this
Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

All   statements   other  than   statements  of  historical   fact  included  in
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  which  follows,  are  forward-looking  statements.  Forward-looking
statements involve various important assumptions, risks, uncertainties and other
factors  which could cause our actual  results to differ  materially  from those
expressed in such forward-looking statements. Forward-looking statements in this
discussion can be identified by words such as "anticipate,"  "believe," "could,"
"estimate," "expect," "plan," "intend," "may," "should" or the negative of these
terms  or  similar  expressions.  Although  we  believe  that  the  expectations
reflected in the forward-looking  statements are reasonable, we cannot guarantee
future  results,  performance  or  achievement.   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,  cancellation  or
deferral of customer orders, technological change or difficulties,  difficulties
in the  timely  development  of new  products,  difficulties  in  manufacturing,
commercialization and trade difficulties and general economic conditions as well
as the factors set forth in our public  filings with the Securities and Exchange
Commission.

You are cautioned not to place undue reliance on the forward-looking statements,
which  speak  only as of the  date  of this  Annual  Report  or the  date of any
document  incorporated  by  reference,  in this Annual  Report.  We are under no
obligation,  and  expressly  disclaim  any  obligation,  to  update or alter any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.

For  these  statements,   we  claim  the  protection  of  the  safe  harbor  for
forward-looking  statements  contained in Section 21E of the Securities Exchange
Act of 1934.

Business Summary

We are a leading  supplier  of  microwave  products  and  systems to defense and
aerospace entities worldwide.  Our primary customers include large defense prime
contractors (including Northrop Grumman,  Lockheed Martin, Raytheon and Boeing),
the U.S.  Government  (including the Department of Defense,  NASA and other U.S.
Government  agencies)  and  international  customers  (including  the  Egyptian,
German,  Japanese and South Korean  militaries  and  suppliers to  international
militaries).  We are a leading  provider of  microwave  technologies  for use in
command  and  control  systems,  flight  instrumentation,  weapons  sensors  and
electronic  warfare  systems.  We have served the defense industry since 1965 by
designing and manufacturing microwave devices for use in high technology defense
electronics  applications.  Our products and systems are currently deployed on a
wide range of high profile military  platforms,  including the F-16 Falcon,  the
F/A-18E/F  Super Hornet,  the E-2C/D Hawkeye,  EA-18G  Growler,  the AEGIS class
surface  combatants,  the EA-6B  Prowler,  the AMRAAM air to air missile,  CALCM
(Conventional  Air Launch Cruise Missile),  Multi-mission  Maritime Aircraft and
unmanned aerial vehicles,  or UAVs, as well as high priority  national  security
programs such as National Missile Defense and the Trident II D-5.

Significant Events

In connection with the legal matters  discussed in Note E "Litigation," to avoid
the delay, expense,  inconvenience and uncertainty of protracted litigation, the
Company  entered into an agreement with the Office of the United States Attorney
for the Eastern District of Pennsylvania to settle all existing criminal claims.
Under the terms of the agreement  dated May 5, 2008 the Company  agreed to pay a
fine of $3,500,000. In addition, the Company entered into an agreement to settle
all existing  civil  claims with the Civil  Division of the Office of the United
States  Attorney for the Eastern  District of  Pennsylvania  which  requires the
payment of $6,000,000. These payments were made on May 5, 2008.

The Company  anticipated  that the trial of the criminal  matter would have been
between  two to three  months and the trial of the  Justice  Department's  civil
action  would have been a similar  time  period.  The legal fees for both trials
have been estimated to be in excess of the settlement amounts.

The Company  advised the Department of the Navy,  Acquisition  Integrity  Office
about the terms and conditions of the criminal and civil  settlement  agreements
and the Company was  advised  that no action  would be taken to suspend or debar
the Company based on these settlements.

On June 27, 2007, the Company was notified by the Office of the General Counsel,
Acquisition  Integrity Office,  Department of Navy (the "Navy"), that certain of
its operations  had been  suspended from receiving new contract  awards from the

                                       20
<PAGE>
U.S.  Government.  The affected  operations  included  facilities  in Lancaster,
Pennsylvania; Woburn, Massachusetts and Chicago, Illinois. The Chicago, Illinois
location is a two-person marketing office. On August 15, 2007 the suspension was
lifted following an amendment to the Administrative Agreement (originally signed
on October 12, 2006) with the Navy as discussed below.  While the suspension was
in place,  these  facilities could not be solicited for or awarded new contracts
or contract extensions without special exceptions. The suspended facilities were
permitted to receive contract awards or subcontracts from the Federal Government
if the head of the agency  stated in writing the  compelling  reason to do so. A
significant portion of our business is received under contracts where we are the
only qualified supplier on critical defense programs.

On June 13,  2006,  in  connection  with the legal  matter  discussed  in Note E
"Litigation" to the consolidated financial statements,  the Company was notified
that certain of its  operations  had been  suspended from receiving new contract
awards from the U. S. Government. The affected operations included facilities in
Lancaster,  Pennsylvania;  Woburn,  Massachusetts;  Chicago,  Illinois  and  the
Company's subsidiary in Farmingdale, New York. The result of this suspension was
that these  facilities  were not  solicited  for or  awarded  new  contracts  or
contract extensions without special exceptions, pending the outcome of the legal
proceedings.  The suspended facilities were permitted to receive contract awards
or subcontracts from the Federal  Government if the contracting agency stated in
writing the compelling reason to do so.

The Company's facilities which were not included in the action and who were free
at all  times to  contract  with  the  U.S.  Government  are the  facilities  in
Whippany, New Jersey (Herley-CTI);  Jerusalem (Herley-Israel);  McLean, Virginia
(Innovative Concepts, Inc.); Fort Walton Beach, Florida (Micro Systems, Inc. and
Herley-RSS) and Farnborough, U.K. (EW Simulation Technology, Limited).

Effective October 12, 2006, the Company entered into an Administrative Agreement
with the  Department  of the Navy,  on behalf of the  Department of Defense that
requires the Company,  among other things, to implement a comprehensive  program
of compliance reviews, audits and reports for a period of four years (as amended
August  15,  2007) or until  settlement  or  adjudication  of the  legal  matter
referenced  above,  whichever is later,  unless shortened or extended by written
agreement  of the parties.  In  addition,  the Company was required to sever its
relationship with its former Chairman of the Board of Directors,  as an employee
or consultant to the Company.  In return,  the Navy, on behalf of the Department
of Defense  terminated the suspension of the Company from receiving new contract
awards from the U.S. Government.

Effective   October  12,  2006  and  as  a  condition   to  entering   into  the
Administrative  Agreement  with the  Department  of the Navy  noted  above,  the
Company entered into an agreement (the  "Agreement") with its former Chairman to
terminate the Employment  Agreement between him and the Company dated as of July
29, 2002 and  modified on December  9, 2003.  Aggregate  costs of  approximately
$8,914,000 under the Agreement, including a cash payment of $3,000,000, payments
due  under a  Promissory  Note of  approximately  $5,354,000,  medical  and life
insurance  benefits of  approximately  $364,000  (both  discounted at an imputed
interest rate of 6.75%) and the fair value of the  modification of stock options
of approximately $196,000 (using the Black-Scholes option valuation model), have
been recorded in the Company's condensed  consolidated  financial  statements in
the fifty-two weeks ended July 29, 2007.

In connection with a lawsuit filed on April 10, 2007, by EADS  Deutschland  GmbH
("EADS"),  a German  corporation,  against the Company (see Note E), the parties
have entered into an agreement effective December 5, 2007 providing for a mutual
release and dismissal,  with  prejudice and without costs or attorney's  fees to
either party, of all claims and  counterclaims  filed. To avoid further dilution
of  management's  time  and  energies,  as well as  legal  costs  on a long  and
protracted  legal  dispute,  the  Company  agreed  to pay  to  EADS  the  sum of
$6,000,000.  A payment of $2,500,000  was made on December 5, 2007; a payment of
$1,500,000  was made on March 31, 2008;  and payments of  $1,000,000  are due on
March 31, 2009 and March 31, 2010, respectively.  The agreement further provides
for the transfer to EADS of all drawings in the Company's possession, custody or
control for the equipment  supplied in conjunction  with a contract  between the
parties;  providing EADS with the use of such drawings for the exclusive purpose
of fulfilling its obligations  towards its own customers under the contract.  As
security  for the  payments  due in March of 2008,  2009 and 2010,  the  Company
issued an  irrevocable  stand-by  letter of credit in the  amount of  $3,500,000
under  its  existing  credit  facility.  The  letter of credit  was  reduced  to
$2,000,000  in  connection  with the  payment  made in March  2008.  The Company
recorded a charge to operations in the fifty-three weeks ended August 3, 2008 of
approximately  $6,042,000  consisting  of payments  due under the  agreement  of
approximately  $5,699,000,  net of imputed  interest of  approximately  $301,000
discounted  at an imputed  interest  rate of 7.25%,  plus costs and other direct
settlement expenses of approximately $343,000.

On May 5, 2008,  the  employees  of General  Microwave  Corp.  (GMC)  which does
business as Herley  Farmingdale,  were notified of the Company's intent to close
the Herley Farmingdale  facility.  Despite our efforts to update and improve the
Farmingdale operations, the facility has continued to report losses and has been
the single largest contributor to our poor operating  performance.  Accordingly,
management decided to close our manufacturing facility in Farmingdale,  New York
as  quickly as  possible  and  transfer  the bulk of its  workload  to our other
facilities  in  Whippany,   New  Jersey;   Woburn,   Massachusetts;   Lancaster,
Pennsylvania;  and Jerusalem,  Israel.  A transition plan is well underway which
transfers  contract  activity  and assets to other  Herley  businesses  and also
                                       21
<PAGE>
reduces the workforce as the activity at Farmingdale  decreases.  It is expected
that the closure of the facility will be  substantially  completed by the end of
December 2008. The lease  obligations at the facility extend to August 2010. The
major cost associated with the restructuring are one-time  termination  benefits
which are estimated at approximately  $1.1 million.  The costs are being accrued
evenly from May 2008 through  December  2008.  Costs  accrued  during the fourth
quarter  approximated  $377,000 and charges  against the  liability for one-time
termination  benefits paid approximated  $30,000. The liability for the one-time
termination benefits was approximately $347,000 as of August 3, 2008.

The Company entered into an Asset Purchase  Agreement ("Asset  Agreement") dated
as of August 1, 2008 to acquire the business and certain  assets  subject to the
assumption  of  certain  liabilities  of Eyal  Microwave  Industries  ("EMI")  a
privately  held  Israeli  company  for  cash of  $30,000,000.  EMI is a  leading
supplier of a broad range of  innovative,  high  reliability  RF,  microwave and
millimeter  wave  components  and  customized  subsystems for the global defense
industry.  Based in Kibbutz  Eyal,  Israel,  the company has  approximately  175
employees.  EMI includes Eyal  Microwave Ltd. and its  wholly-owned  subsidiary,
Eyal Mag Ltd.  Funding for the purchase was provided  through a $20 million loan
under the Company's existing credit facility through its current bank and a term
loan in the amount of $10 million for a period of 10 years through the Company's
bank in Israel. The new loan is payable in quarterly  installments over a period
of 10 years with interest at LIBOR plus 1.5%. The acquisition  will be accounted
for under the provisions of SFAS 141.

In September 2008,  management  executed an agreement (the  "Agreement")  with a
foreign  defense  company  to  divest  our ICI  subsidiary  located  in  McLean,
Virginia.  ICI is a communications  technology  development firm specializing in
research,  design,  development,   production,  and  support  of  wireless  data
communications  products and services.  The  Agreement  provides for an all cash
transaction  valued at  approximately  $15  million and  includes a  significant
contingency  requiring U.S. Government approval on or before November 5, 2008 or
the Agreement  will be void. We believe it is reasonably  possible that the U.S.
Government  approval will be granted and the transaction  will be completed.  In
the event the  transaction is completed,  ICI will be reported as a discontinued
operation and a non-cash charge to earnings of approximately  $1.0 million would
be  recorded to reflect the  difference  between the sale price  pursuant to the
Agreement  and the net  carrying  value of the assets  held for sale.  In fiscal
2008, ICI reported revenues of approximately $19 million and operating income of
approximately  $0.6  million.  The ICI balance  sheet  includes  total assets of
approximately $21.7 million,  including  approximately $4.1 million of allocated
goodwill,  and  liabilities  of  approximately  $5.7  million.  There  can be no
assurance that the U.S.  Government  will grant approval so that the transaction
will be completed.

Results of Operations

The  following  table sets forth for the  periods  indicated  certain  financial
information derived from our consolidated  statements of operations 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>
                                                         53 weeks           52 weeks ended
                                                          ended             --------------
                                                          August 3,     July 29,       July 30,
                                                           2008          2007           2006
                                                          ----           ----           ----
<S>                                                       <C>            <C>            <C>
Net sales                                                 100.0%         100.0%         100.0%
Cost of products sold                                      77.6%          72.8%          72.6%
                                                          -----          -----          -----
Gross profit                                               22.4%          27.2%          27.4%

Selling and administrative expenses                        22.1%          19.9%          18.6%
Litigation costs                                            3.6%           1.1%           1.2%
Litigation settlements                                     10.2%           0.0%           0.0%
Employment contract settlement costs                        0.0%           5.5%           0.0%
                                                          -----          -----          -----
Operating (loss) income                                   (13.5%)          0.7%           7.6%
                                                          -----          -----          -----
Other (expense) income, net:
     Investment income                                      0.7%           0.7%           0.5%
     Interest expense                                      (0.4%)         (0.4%)         (0.2%)
     Foreign exchange (loss) gain                          (0.1%)          0.3%           0.2%
                                                          -----          -----          -----
                                                            0.2%           0.6%           0.5%
                                                          -----          -----          -----
     (Loss) income before income taxes                    (13.3%)          1.3%           8.1%
     (Benefit) provision for income taxes                  (6.5%)         (0.6%)          2.3%
                                                          -----          -----          -----
     Net (loss) income                                     (6.8%)          1.9%           5.8%
                                                          ======         =====          =====
</TABLE>

                                       22
<PAGE>
Fiscal 2008 Compared to Fiscal 2007

Our  Company's  senior  management  regularly  reviews  the  performance  of our
operations including reviews of key performance metrics as well as the status of
operating initiatives. We review information on the financial performance of the
operations, new business opportunities,  customer relationships and initiatives,
IR&D activities, human resources,  manufacturing  effectiveness,  cost reduction
activities,  as well as other subjects.  We compare  performance against budget,
against  prior  comparable  periods,   and  against  our  most  recent  internal
forecasts.  The following  table  presents a financial  summary  comparison  (in
thousands) of key performance metrics.
<TABLE>
<CAPTION>
                                      Fourth Quarter                         Fiscal Year to Date
                            -------------------------------------     ----------------------------------------
                                 2008         2007        % Change        2008        2007            % Change
                            --------------------------------------    ----------------------------------------
Key performance metrics:
<S>                             <C>          <C>            <C>         <C>         <C>                <C>
Net sales                       $44,168      $40,626         9 %         $152,511    $163,140           (7)%
Gross profit                    $10,647      $11,320        (6)%          $34,200     $44,306          (23)%
Gross profit percentage            24.1%        27.9%                        22.4%       27.2%
Selling and administrative       $8,127       $8,427        (4)%          $33,835     $32,516            4 %
Litigation costs                 $3,289         $448       634 %           $5,550      $1,674          232 %
Litigation settlement costs        -            -           n/a           $15,442        -              n/a
Employment settlement costs        -            -           n/a              -         $8,914           n/a
Operating (loss) income           ($769)      $2,445        n/a          ($20,627)     $1,202           n/a
Bookings                        $40,068      $28,058        43 %         $171,200    $174,985           (2)%
Backlog                        $156,559     $136,717        15 %         $156,559    $136,717           15 %
</TABLE>
We believe the overall prospects for our financial  performance  continues to be
promising.  Our  backlog  remains at high  levels  while our  proposal  activity
continues to be very active.  The poor financial  performance in fiscal 2008 was
driven  largely by engineering  and  manufacturing  difficulties  on a number of
significant and important contracts, including development contracts, as well as
litigation settlement costs. We understand the various technical problems we are
facing and are progressing  with action plans to resolve them. In addition,  the
operational issues are being carefully, but aggressively addressed, as evidenced
in part by the closing of our Farmingdale manufacturing facility. Although there
can be no  assurance  that we will  succeed,  we believe the business is showing
improvement  and we are  confident  that we will continue to  successfully  work
through these challenges.

During fiscal 2008, a number of operational  improvement  initiatives  have been
undertaken  at our  operating  facilities  which have  demonstrated  operational
performance  improvement  which is expected to continue into future periods.  We
established  four  improvement  objectives  across all locations:  improve cycle
time, reduce defects, improve customer satisfaction,  and increase Herley pride.
We motivated  our employees to actively  engage in this program.  Across all our
locations,  we have more than 100 active teams addressing  specific  improvement
objectives aligned with these four corporate objectives. We are also emphasizing
a culture of honoring our  commitments  in  everything we do. We continue to see
this process  improvement  culture  taking root in our  operations.  Although we
believe  that  our  expectations  for  the  success  of  these  initiatives  are
reasonable,  there  are  no  guarantees  that  future  results,  performance  or
achievements may be realized.

Similarly, we formed five Councils which are: Technology,  Operations,  Business
Development, Finance, and Contracts. Each Council has a representative from each
of our locations and is chartered  with the  objective of  implementing  process
improvements in their  respective  discipline that crosses all locations as well
as sharing of best practices  across Herley.  Significant  accomplishments  were
achieved by the  Councils  during  fiscal 2008 and efforts are underway on their
initiatives for fiscal 2009.

In addition,  we continue to identify  and  implement  specific and  substantive
actions to control  costs and focus the  resources  of the  Company  directly on
operational   performance   issues  designed  to  bring  about   measurable  and
sustainable improvement.  Accordingly,  we believe we are taking appropriate and
aggressive  actions  to meet the  challenges  facing our  Company  and we remain
optimistic that the Company's  performance issues experienced during fiscal 2008
will be short-lived.

Fifty-three weeks ended August 3, 2008 and fifty-two weeks ended July 29, 2007
------------------------------------------------------------------------------

Net sales for the fifty-three weeks ended August 3, 2008 were approximately
$152.5 million compared to $163.1 million in fiscal 2007, a decrease of $10.6
million (7%). The decrease in net sales is primarily related to:

o    a decrease of approximately  $6.4 million at Innovative  Concepts primarily
     due to (a) delays in booking and a reduction in scope for certain cost plus
     fixed  fee  contracts  for  software  development  and  (b) a  decrease  in
     deliveries  due to the  completion  of a contract  for radio  communication
     equipment;
o    delays in key  microwave  development  and  production  programs  at Herley
     Farmingdale of approximately $6.3 million;

                                       23
<PAGE>
o    a decrease in revenue of  approximately  $2.4 million versus the prior year
     as certain  commercial  programs ended and the transition  towards military
     business progressed at Herley CTI;
o    a decrease at Herley  Medical  Products of  approximately  $2.1  million in
     sales to two key  commercial  customers  due to timing of their  customers'
     capital purchasing requirements; and
o    disruptions  across  several  production  programs due to supplier  quality
     issues.

Offsetting these decreases was:

o    an increase of $5.7 million of  simulation  systems and other product sales
     through Micro Systems, Inc.;
o    an  increase  of  approximately  $0.8  million at Herley New England due to
     volume of certain key second generation production programs; and
o    an increase in revenue on various  programs  and products  across  multiple
     sites.

Domestic and foreign sales were 68% and 32%  respectively of net sales in fiscal
2008 versus 73% and 27%  respectively  in the prior fiscal year.  Bookings  were
approximately  $171.2  million,  and were 77%  domestic  and 23%  foreign.  This
compares to bookings of  approximately  $175.0  million in the prior year period
which were 65% domestic and 35% foreign.

Gross profit in the  fifty-three  weeks ended  August 3, 2008 was $34.2  million
(22.4% of net sales)  compared to $44.3  million  (27.2% of net sales) in fiscal
2007, a decrease of $10.1 million. Contributing to the reduction in gross profit
during fiscal 2008 are the following items:

o    Higher  independent  research and development  costs of approximately  $3.3
     million on investments in certain strategic opportunities at several Herley
     operations;
o    Approximately $2.6 million in contract losses recognized on two development
     and production contracts at Herley Farmingdale;
o    Higher costs at our Israeli subsidiary due to the unfavorable exchange rate
     of the U.S.  Dollar versus the New Israeli  Shekel reduced gross margins by
     approximately $1.6 million;
o    Reduced volume of revenues across several Herley operations  affected gross
     margin by approximately $1.2 million;
o    Approximately $1.0 million at Herley Farmingdale due to cost overruns and a
     change  in  management's  estimate  of the  recoverability  of the costs on
     future contracts;
o    Disruptions  across  several  production  programs due to supplier  quality
     issues, increased costs of production; and
o    Product mix of contracts both domestically and internationally.

Selling and  administrative  expenses for the fifty-three  weeks ended August 3,
2008 were $33.8  million as compared to $32.5  million in fiscal 2007.  The $1.3
million   increase  in  selling  and   administrative   expenses  is   primarily
attributable to an increase in representative commissions related largely to our
international business.

We believe  we are  entitled  to  recovery  of certain  legal fees under our D&O
insurance policy associated with the matters discussed in Part 1, Item 3, "Legal
Proceedings".  As of August 3, 2008, we have aggregate  claims of  approximately
$7,151,000 (net of a deductible of $500,000) and have received  partial payments
of approximately $2,236,000. We have entered into an agreement dated January 11,
2007 with the insurance carrier whereby if it is determined by final decision of
an arbitration  panel,  or by final judgment of a court, or other final decision
of a tribunal having jurisdiction thereof, that any amount paid by the insurance
carrier was not a loss, as that term is defined in the policy, we shall repay to
the  insurance  carrier  any such  uncovered  sums  previously  advanced  to us.
Subsequent to the end of fiscal 2008, the insurance carrier asserted in a letter
their  determination  that they are not  liable for  certain of the legal  costs
incurred  by us.  We have  responded  with a  letter,  supported  by court  case
citations,  that all the submitted costs represent valid claims under the policy
and that the  insurance  company  is  liable.  However,  based on the  insurance
company's  position and  generally  accepted  accounting  principles  we are not
permitted to record any potential claim for recovery under our insurance policy.
Accordingly,  the previously recorded receivable of $2,803,000 as of May 4, 2008
has been  eliminated  in the fourth  quarter of fiscal 2008.  While there are no
assurances,  we believe  such costs  represent a "loss" under our D&O policy and
such costs are recoverable.

We had an  operating  loss  during  fiscal  2008 of $20.6  million  compared  to
operating  income of $1.2  million in fiscal  2007.  The  results of fiscal 2008
include both the $9.5 million settlement of the Department of Justice litigation
and the $6.0 million settlement of the EADS litigation as discussed in Note A to
the consolidated  financial statements as well as related legal expenses of $5.6
million. The decrease in operating income before the legal expenses,  litigation
settlements  and employment  contract  settlement  costs is  attributable to the
reduction in sales volume,  the decrease in gross margin as discussed above, and
the increase in selling and administrative.

Investment  income was $1.1  million,  a decrease of $0.1 million in fiscal 2008
because of lower average cash balances  through  portions of the year.  Interest
expense  was $0.7  million,  a decrease  of $0.1  million  versus the prior year
comparable period.
                                       24

<PAGE>
We  recognized a net foreign  exchange  loss of $0.1 million in fiscal year 2008
compared to a foreign exchange  transaction gain of $0.5 million in fiscal 2007.
The  foreign  exchange  losses and gains are  attributable  to  fluctuations  in
exchange  rates  between  the U.S.  dollar  and the local  currency  of our U.K.
subsidiary  primarily in connection with temporary advances we have made to them
in U.S. dollars.

The benefit for income taxes for fiscal 2008 was $10.0 million  representing  an
effective  income tax benefit rate of 49.2%, as compared to an effective  income
tax benefit rate of 48.5% in fiscal 2007.  The increase in the effective  income
tax rate for fiscal 2008 is primarily attributable to the net operating loss for
the company  for fiscal year 2008 as compared to overall  income for the company
for fiscal  year 2007.  The 49.2%  benefit  exceeds  the  statutory  rate of 35%
primarily  due to the  reversal  of FIN 48  liabilities  of  approximately  $2.7
million  that are no longer  needed  due to the  expiration  of the  statute  of
limitations  for an earlier tax year in which an uncertain tax position had been
taken.  Another major component to the benefit was the tax on the non-deductible
penalty paid as part of the litigation settlement,  which reduced the benefit by
6.0%.

Basic and diluted loss per common share for the  fifty-three  weeks ended August
3, 2008 were $(.76) each as  compared to basic and diluted  earnings  per common
share of $.22 each for the fifty-two weeks ended July 29, 2007.

Fiscal 2007 Compared to Fiscal 2006

The four-month suspension (June-October 2006) from receiving new contract awards
from the U.S.  Government  at some of our  operations  caused  disruption in our
business in several respects which cannot be easily measured,  but certainly had
an impact on the results of operations in fiscal 2007 both in terms of sales and
profitability. While the effects of the suspension were evident during the first
quarter,  they continued during the second quarter and to a lesser degree in the
third quarter due to delays in bookings.  The fourth quarter was affected by the
second  suspension  on June  26,  2007  but the  impact  on the  fourth  quarter
performance was not significant.

Net sales for the fifty-two weeks ended July 29, 2007 were approximately  $163.1
million  compared to $176.3 million for fiscal 2006, a decrease of $13.2 million
(7.5%).  The decrease in net sales is partly  related to the recording of a $2.2
million  claim  receivable  on a major  program  during the first quarter of the
prior year.  In addition,  there was a net decline of $11.7 million in microwave
systems  and  assemblies  in  our  domestic  operations  primarily  due  to  the
completion of certain  contracts and the timing of shipments,  some of which was
due to the delays in bookings during the suspension period.  Sales of simulation
systems at EWST declined $2.3 million due to the completion of certain contracts
and the cyclical nature of its business.  Commercial  sales of medical  products
were  slightly  higher,  while  commercial  sales at Herley-CTI  decreased  $1.8
million as certain commercial programs ended and the transition towards military
business  progressed.  Offsetting these decreases were $4.7 million of increased
sales at Herley-Israel of both microwave systems and microwave products.

Domestic and foreign sales were 73% and 27%  respectively of net sales in fiscal
2007, versus 76% and 24% respectively in fiscal 2006.

The gross  profit  margin in the  fifty-two  weeks ended July 29, 2007 was 27.2%
compared  to 27.4% in  fiscal  2006,  a  decline  of 0.2%.  Contributing  to the
reduction in the gross profit  percentage  during  fiscal 2007 are the following
items:

o    The booking of the $2.2 million claim receivable in fiscal 2006.

o    Disruptions caused by the four-month suspension from receiving new contract
     awards from the U. S. Government at some of our operations.

o    Startup production costs on certain programs.

o    Product mix of contracts domestically and internationally.

Offset by

o    Revisions in the accrual for contract losses on existing contracts based on
     current estimates.  The accrual for contract losses associated with the ICI
     acquisition  (more  fully  described  in Note B of Form 10-K for the fiscal
     year ended July 30, 2006) was reduced by $1,144,000 in the fifty-two  weeks
     ended July 29, 2007 (which is included as a reduction  of costs of products
     sold) as a result of changes in the estimated liability for expected losses
     under the contract.

Selling and administrative  expenses for the fifty-two weeks ended July 29, 2007
were 21% of net sales as compared to 19.8% in fiscal 2006. The increase in costs
as a percentage  of sales is due to the lower net sales in fiscal 2007.  Selling
and  administrative  costs  declined  year to year by  $776,000.  Increases  and
decreases are as follows:

                                       25
<PAGE>
o    Stock  compensation  costs  recorded in fiscal 2007 per SFAS 123(R) of $1.0
     million,  of which approximately $0.3 million was related to the employment
     contract  for the Chief  Operating  Officer.  This is an  increase  of $0.5
     million  versus  fiscal 2006 where the stock  compensation  costs were $0.5
     million.

Offset by

o    Legal costs, net of estimated  insurance  recoveries,  were $1.8 million in
     fiscal 2007, a decrease of $0.5 million versus fiscal 2006. The majority of
     the legal costs  relate to the defense of the Company  associated  with the
     recent indictment.
o    A net decrease of  approximately  $0.8 million in  commission  costs across
     several businesses due to the mix and timing of specific orders.

We believe we are entitled to recovery of certain legal fees associated with the
recent  indictment and class-action  complaints under our D&O insurance  policy.
Accordingly,  as of July 29, 2007, we have a receivable of $1,778,000  (net of a
deductible  of $500,000  and a payment  received of $684,000 on June 1, 2007) in
anticipation  of recoveries  and the amount is included in other  receivables in
the  accompanying  consolidated  balance  sheet at July 29, 2007.  The insurance
carrier may contest the claim in whole or in part. In addition,  we have entered
into an agreement  dated January 11, 2007 with the insurance  carrier whereby if
it is determined by final decision of an arbitration panel, or by final judgment
of a court, or other final decision of a tribunal having  jurisdiction  thereof,
that any amount paid by the  insurance  carrier was not a loss,  as that term is
defined  in the  policy,  we  shall  repay  to the  insurance  carrier  any such
uncovered sums previously advanced to us.

Employment  contract settlement costs of approximately $8.9 million relate to an
agreement  effective  October 12, 2006 with the Company's  co-founder and former
Chairman,  to  terminate  his  employment  agreement  with us  after 41 years of
service.  Settlement  costs include a cash payment of $3.0 million paid upon the
effective date of the settlement agreement, payments due under a Promissory Note
and  estimated  medical and life  insurance  benefits  discounted  at an imputed
interest  rate of  6.75%,  plus the fair  value of a  modification  to the stock
options held by him using the Black-Scholes option valuation model.

We had  operating  income for fiscal 2007 of $1.2 million  compared to operating
income of $13.4  million  in fiscal  2006.  Excluding  the  employment  contract
settlement  costs of $8.9 million  recorded in the first quarter of fiscal 2007,
operating  income for fiscal  2007 would have been $10.1  million or 6.2% of net
sales,  as compared to $13.4  million or 7.6% of net sales in fiscal  2006.  The
decrease  in  operating  income  as a  percentage  of  net  sales  is  primarily
attributable  to the  increase  in  selling  and  administrative  expenses  as a
percentage  of net sales due to the lower sales volume.  Our foreign  operations
contributed  approximately  $3.3 million in operating  income for fiscal 2007 as
compared to $2.7 million in fiscal 2006.

Investment  income was  $1,186,000,  an  increase  of $346,000 in fiscal 2007 as
compared to fiscal 2006 because of interest earned on higher cash balances.

Interest expense was $790,000,  an increase of $471,000 as compared to the prior
year  primarily due to the imputed  interest  expense  related to the employment
settlement  agreement,  as well as interest  expense  relating to financing  the
implementation of the ERP software package.

We recognized a net foreign  exchange gain of $501,000 in fiscal 2007,  versus a
gain of $431,000 in fiscal 2006.  These foreign  exchange gains are attributable
to fluctuations in exchange rates between the U.S. dollar and the local currency
of our U.K.  subsidiary  primarily in connection with temporary advances we have
made to them in U.S. dollars.

The  benefit  for income  taxes for fiscal 2007 was  $1,019,000  representing  a
negative  effective  tax rate of 48.5%,  as compared to an effective tax rate of
27.8% in fiscal 2006.  The decline in the  effective  income tax rate for fiscal
2007 is  primarily  attributable  to (a) the  extension of the R&D tax credit by
Congress in December 2006 retroactive to January 1, 2006, (b) an increase in the
proportion  of  overall  earnings   generated   through  the  Company's  foreign
operations  where earnings are taxed at lower rates than  domestically,  and (c)
the elimination of certain tax accruals that are no longer deemed necessary. The
extension of the R&D tax credit reduced the statutory  income tax rate of 35% by
an estimated 5% for fiscal 2007.  As a result of lower  domestic  earnings,  due
primarily  to the  employment  contract  settlement  costs  which  significantly
affects domestic  profitability,  foreign  earnings are a greater  percentage of
total earnings. The Company's foreign earnings are attributable primarily to our
Israeli  subsidiary  which is taxed at an estimated  rate of 11% for fiscal 2007
thereby  reducing  the  effective  income  tax rate by  approximately  49%.  The
elimination of certain tax reserves that are no longer deemed necessary  reduced
the effective tax rate by approximately  11%. Other benefits  included  research
and development credits (prior to December 31, 2005), tax benefits  attributable
to extra territorial  income (i.e. export sales),  the Section 199 manufacturing
deduction,  the benefit of stock  compensation  costs,  and tax exempt  interest
income.

Basic and diluted  earnings per common share for the fifty-two  weeks ended July
29,  2007 were $.22 per  common  share  each as  compared  to basic and  diluted
earnings per common share of $.72 and $.69, respectively, for fiscal 2006.

                                       26
<PAGE>
Liquidity and Capital Resources

We believe that presently  anticipated future cash requirements will be provided
by  internally  generated  funds,  our existing  unsecured  credit  facility and
existing cash  balances.  A  significant  portion of our revenue for fiscal 2009
will be generated from our existing backlog of sales orders.  The funded backlog
of  orders  at  August  3,  2008  was   approximately   $157  million  of  which
approximately  78% is expected to ship in fiscal  2009.  All orders  included in
this backlog are covered by signed contracts or purchase  orders.  Nevertheless,
contracts  involving  government programs may be terminated at the discretion of
the  government.  In the event of the  cancellation  of a significant  amount of
government  contracts included in our backlog,  we will be required to rely more
heavily  on  cash  balances  and  our  existing  credit  facility  to  fund  our
operations. We are not aware of any events which are reasonably likely to result
in any cancellation of our government  contracts.  We have  approximately  $24.1
million  available  under our bank credit  facility as of August 3, 2008, net of
outstanding  stand-by letters of credit of approximately $15.9 million, and cash
of  approximately  $14.3 million.  On September 12, 2008, in connection with the
acquisition  of Eyal  Microwave  Industries  ("Eyal")  (See  Note S of  Notes to
Consolidated  Financial  Statements) we borrowed $20.0 million under the line of
credit.  We also entered into a new term loan in the amount of $10 million for a
period  of 10 years  through  our bank in  Israel.  The new loan is  payable  in
quarterly  installments  over a period of 10 years with  interest  at LIBOR plus
1.5%. Proceeds of this loan were also used to fund the acquisition of Eyal.

As of August 3, 2008 and July 29, 2007,  working  capital was $94.4  million and
$103.5  million,  respectively,  and the  ratio of  current  assets  to  current
liabilities was 3.1 to 1 and 4.0 to 1, respectively.

As is customary  in the defense  industry,  inventory  is partially  financed by
progress  payments.  In  addition,  it is customary  for us to receive  advanced
payments  from  customers  on major  contracts at the time a contract is entered
into. The  un-liquidated  balance of progress  payments was  approximately  $0.7
million at August 3, 2008 and $1.9  million  at July 29,  2007.  The  balance of
advanced  payments  was  approximately  $8.1  million at August 3, 2008 and $7.2
million at July 29, 2007.

Net cash used in operations  during the  fifty-three  weeks ended August 3, 2008
was  approximately  $10.6 million as compared to net cash provided by operations
of $15.7  million in the prior  year,  a net  decrease  of  approximately  $26.3
million.  We had a net loss in the current  fiscal year of $10.3 million  versus
net income of $3.1 million in the prior year, a negative change in profitability
of approximately $13.5 million. Fiscal 2008 was impacted by the settlement costs
of various  litigation and related  expenses of approximately  $15.5,  including
cash  payments of $13.5  million  (as  discussed  in Note E to the  Consolidated
Financial  Statements) and fiscal 2007 included  employment  settlement costs of
approximately  $8.9  million,  including  a cash  payment  of $3.0  million  (as
discussed in Note H to the Consolidated Financial Statements).

Significant  decreases  in cash  provided  by  operating  activities  during the
fifty-three weeks ended August 3, 2008 include the following:

1.   An increase of approximately $5.0 million in the amount of cash invested in
     costs  incurred and income  recognized in excess of billings on uncompleted
     contracts and claims,

2.   an increase in inventory of  approximately  $11.3 million  partially due to
     delays in shipping certain contracts due to technical issues,

3.   payments of $4.0 million in connection with the EADS litigation settlement,

4.   payment of $3.5 million in fines and $6.0 million in settlement of
     litigation relating to contracts with the U. S. Department of Defense,

5.   payments  of $1.3  million in  connection  with the  employment  settlement
     agreement, and

6.   an increase in refundable income taxes of $1.2 million.

Offset primarily by:

     An increase of approximately  $6.9 million generated through amounts due to
vendors and accrued expenses.

Net cash  used in  investing  activities  relates  to  capital  expenditures  of
approximately $4.6 million.

                                       27
<PAGE>
Net cash used in financing activities includes:

1.   The purchase  and  retirement  of 493,938  shares of our common stock at an
     aggregate cost of approximately $7.1 million,  including transaction costs,
     pursuant to an  expansion  of a stock  buyback  program to make  additional
     purchases of up to 1,000,000  shares of our common stock in the open market
     or private transactions. As of August 3, 2008, approximately 608,000 shares
     are available for purchase under the buyback program, and

2.   payments of $1.4 million related to our long-term debt.

During the  fifty-three  weeks ended  August 3, 2008 we borrowed  $20.4  million
under our revolving  credit  facility for short-term  working  capital needs and
repaid $17.9 million.  On September 16, 2008 we borrowed $20.0 million under our
credit facility in connection with the acquisition of Eyal Microwave  Industries
(See Note S of Notes to the Consolidated Financial Statements).

Dividend Policy

We have not paid cash dividends in the Company's history. Our board of directors
evaluates our dividend policy based on our financial  condition,  profitability,
cash flow, capital  requirements,  and the outlook of our business. We currently
intend to retain any earnings for use in the business,  including for investment
in acquisitions, and consequently we do not anticipate paying any cash dividends
on our common stock in the foreseeable future.

Bank Line of Credit

On April 30,  2007,  we replaced  our existing  credit  facility  with a new $40
million  Revolving  Credit  Loan  Agreement  ("Agreement")  with two banks on an
unsecured  basis which may be used for  general  corporate  purposes,  including
business acquisitions and stand-by letters of credit. The Agreement requires the
payment of  interest  only on a monthly  basis and  payment  of the  outstanding
principal  balance on March 31, 2010. The Agreement was modified as of September
12,  2008.  Under the  terms of the  modification,  we may elect to borrow  with
interest  based on the bank's  prime rate of  interest  minus  0.50% or based on
LIBOR plus a margin of 2.0%  effective  September 12, 2008 (the margin was 1.65%
at August 3, 2008). In addition,  if in the event the sale of ICI (See Note S of
Notes to the Consolidated  Financial  Statements) is not consummated by November
30, 2008,  we will grant the bank a security  interest in our domestic  accounts
receivable,  inventory and all other non-real estate domestic assets. There is a
fee of 20 basis  points per annum on the unused  portion of the credit  facility
payable quarterly.  Stand-by letters of credit were outstanding in the amount of
approximately  $15.9  million at August 3, 2008 (See Note E to the  Consolidated
Financial  Statements).  If at any time our  backlog of orders  falls  below $50
million,   the  bank  may  obtain  a  security  interest  in  eligible  accounts
receivable, as defined, and if the outstanding advances are greater than 100% of
eligible receivables, a lien on all inventories.  Funded backlog as of August 3,
2008 was  approximately  $157  million.  A loan of $2.5 million was  outstanding
under the line at August 3,  2008.  There were no  borrowings  under the line at
July 29, 2007.

On September 16, 2008, in connection  with the  acquisition of Eyal as discussed
in Note S of Notes to Consolidated Financial Statements, we borrowed $20 million
under our bank line of credit and we entered  into a new term loan in the amount
of $10 million for a period of 10 years through our bank in Israel. The new loan
is payable in quarterly  installments over a period of 10 years with interest at
LIBOR plus 1.5%. Proceeds of this loan were also used to fund the acquisition of
Eyal.

Contractual   Financial   Obligations,   Commitments   and   Off-Balance   Sheet
Arrangements

Our  financial  obligations  and  commitments  to  make  future  payments  under
contracts  include purchase orders,  debt and lease  agreements,  and contingent
commitments such as stand-by letters of credit. These financial  obligations are
recorded in  accordance  with  accounting  rules  applicable  to the  underlying
transaction,  with the  result  that some are  recorded  as  liabilities  on the
Balance  Sheet,  while  others  are  required  to be  disclosed  in the Notes to
Consolidated Financial Statements and Management's Discussion and Analysis.

We have outstanding an aggregate of approximately $23.2 million in open purchase
orders as of August 3, 2008.  These open  purchase  orders  represent  executory
contracts  for the  purchase of goods and services  which will be  substantially
fulfilled in the next six months.

We utilized off-balance sheet arrangements to provide performance  guarantees to
certain  customers in case of our default in  performance  of certain  contracts
under which advance payments have been received.  These arrangements  consist of
standby letters of credit.  Off-balance sheet arrangements are not considered to
be a source of liquidity or capital  resources  and do not expose us to material
risks or material unfavorable financial impacts.

                                       28
<PAGE>
The following table summarizes the Company's  contractual  financial obligations
and other  contingent  commitments,  including  interest,  at August 3, 2008 (in
thousands):
<TABLE>
<CAPTION>
                                                  Within    2-3      4-5    After 5
             Obligations                 Total    1 Year   Years    Years    Years
             -----------                 -----    ------   -----    -----    -----
<S>                                   <C>             <C>      <C>      <C>    <C>
Mortgage Note                         $    2,908      280      560      560    1,508
Industrial Revenue Bonds                   2,928      221      440      443    1,824
Notes Payable - bank                       2,500    -        2,500    -        -
Notes Payable                              1,314    1,019      295    -        -
Litigation settlement                      2,000    1,000    1,000    -        -
Employment Settlement Agreement            4,718    1,357    2,426      935    -
Operating Lease Obligations               11,679    3,552    6,317    1,646      164
Purchase Obligations                      23,174   22,862      309        3     -
                                          ------   ------   ------    -----    -----
                                          51,221   30,291   13,847    3,587    3,496
Standby Letters of Credit                 18,268    8,355    9,851       62     -
                                          ------   ------   ------    -----    -----
Total Contractual Obligations         $   69,489   38,646   23,698    3,649    3,496
                                          ======   ======   ======    =====    =====
</TABLE>
Upon the adoption of FIN 48, we  reclassified  to long term our  liabilities for
unrecognized  tax  benefits  in the amount of  approximately  $3.1  million,  as
discussed in Note F to the Consolidated Financial Statements. Approximately $2.7
million of the unrecognized tax benefit was realized in the quarter ended May 4,
2008 due to the  expiration  of the statute of  limitations  in April 2008.  The
balance  of the  long-term  liability  at August 3, 2008 is  approximately  $0.5
million. We are unable to make reasonable estimates as to the period(s) in which
cash will be paid for the remaining liabilities.

Effective   October  12,  2006  and  as  a  condition   to  entering   into  the
Administrative  Agreement with the Department of the Navy discussed earlier,  we
entered into an agreement (the  "Agreement")  with Lee N. Blatt to terminate the
Employment  Agreement  between us and him dated as of July 29, 2002 and modified
on December 9, 2003.  Under the terms of the  Agreement  he will receive a total
payment  of  $9,461,528  payable  $3,000,000  upon  the  effective  date  of the
Agreement  and  sixty-four  (64)   consecutive   monthly  payments  of  $100,000
commencing  on January 1, 2007 and a final  payment of $61,528 on May 1, 2012 as
evidenced by a non-interest  bearing Promissory Note dated effective October 12,
2006.  In addition he received his bonus of $636,503  for fiscal year 2006,  and
shall be entitled to receive medical care reimbursement and insurance, including
life  insurance,  in  accordance  with  the  original  terms  of his  Employment
Agreement.  The  Agreement  also  provides  that all  outstanding  stock options
previously  issued to him  which are all  vested  and  fully  exercisable  shall
continue to be  exercisable  by him or,  following his death,  by his designated
beneficiaries,  on or before the expiration date of the specific option.  In the
event of a "change  of  control"  as  defined in the  Employment  Agreement  all
remaining  payments due under the  Promissory  Note become  immediately  due and
payable.

We have an employment  agreement with our Chairman/Chief  Executive Officer (the
"Executive")   which  expires  December  31,  2013,  subject  to  extension  for
additional one-year periods annually each January 1 with a final expiration date
of December 31, 2015 (as amended December 9, 2003).  The agreement  provides for
an annual salary as of August 3, 2008 of $739,300 and provides for a semi-annual
cost of living  adjustment based on the consumer price index. The agreement also
provides for incentive compensation at 3% in the aggregate of our pretax income.

The agreement also provides that, in the event there is a change in control, the
Executive  has the option to  terminate  the  agreement  and  receive a lump-sum
payment  equal  to the  sum of the  salary  payable  for  the  remainder  of the
employment  term,  plus the annual  bonuses  (based on the  average of the three
highest annual bonuses awarded during the ten preceding years) for the remainder
of the employment term. As of August 3, 2008, the amount payable in the event of
such termination would be approximately $8,357,000.

In addition,  the agreement provides for a consulting period of ten years at the
end of the employment period at an annual compensation equivalent to one-half of
the executive's  annual salary at the end of the employment  period,  subject to
annual cost of living adjustments.

We entered into an employment  agreement with our Chief Operating  Officer as of
June 4, 2007 which expires July 31, 2011,  subject to extension  for  additional
one-year periods  annually  beginning July 31, 2008 with a final expiration date
of July 31,  2012.  The  agreement  provides  for an  initial  annual  salary of
$365,800  (subject  to a  semi-annual  cost of  living  adjustment  based on the
consumer  price  index),  and an initial  award of 250,000  non-qualified  stock
options  at the  closing  stock  price on the date  prior  to  execution  of the
agreement of $15.77 per share.  The options vest 20% upon award and 20% annually
over the next four years. The agreement also provides for incentive compensation
to be paid at the  discretion  of the  Board of  Directors,  however,  incentive
compensation  for the  fiscal  year  ended  August 3,  2008 is at a  minimum  of
$300,000.  The agreement  also provides for a consulting  period of ten years at
the end of the employment period at an annual  compensation of $100,000.  In the
event there is a change in control of the Company, as defined, the executive has

                                       29
<PAGE>
the option to  terminate  the  agreement  at any time  after  July 31,  2010 and
receive a lump-sum  payment equal to the sum of: (1) his salary  payable for the
remainder of the  employment  term, (2) the annual bonuses (based on the average
of the annual bonuses  awarded during the term of the employment  agreement) for
the  remainder of the  employment  term,  and (3) a lump sum payment of $500,000
representing full consideration under the consulting period.

Certain other executive officers have employment agreements which expire June 6,
2009 providing for aggregate annual salaries as of August 3, 2008 of $395,500.

An employment  contract of a retired executive  provides for a consulting period
which became effective October 1, 1998, and terminates  December 31, 2010 at the
annual rate of compensation of $100,000.

Several  officers and key employees have severance  agreements  providing for an
aggregate lump-sum payment of approximately  $2,533,000 in the event of a change
of control as defined in the agreements.  The agreements  expire from one to two
years from the date of a change of control.

Recent Accounting Pronouncements

In April 2008, the Financial  Accounting  Standards  Board ("FASB") issued Staff
Position No. FAS 142-3, "Determination of the Useful Life of Intangible Assets",
which  amends the factors that should be  considered  in  developing  renewal or
extension  assumptions  used  to  determine  the  useful  life  of a  recognized
intangible  asset under FASB Statement No. 142,  "Goodwill and Other  Intangible
Assets."  The  intent of FAS 142-3 is to improve  the  consistency  between  the
useful life of a recognized  intangible asset under Statement 142 and the period
of  expected  cash flows used to measure  the fair value of the asset under FASB
Statement No. 141 (revised 2007), "Business  Combinations",  and other generally
accepted  accounting  principles.  FAS  142-3  is  effective  for  fiscal  years
beginning after December 15, 2008 and only applies  prospectively  to intangible
assets  acquired after the effective date.  Early adoption is not permitted.  We
are currently  evaluating  the impact,  if any, that this statement will have on
our consolidated financial position, cash flows and results of operations.

In March 2008, the FASB issued  Statement of Financial  Accounting  Standard No.
161  ("SFAS  161"),   Disclosures  about  Derivative   Instruments  and  Hedging
Activities--an  amendment of FASB  Statement  No.133,  Accounting for Derivative
Instruments  and Hedging  Activities  ("SFAS No.  133").  SFAS No. 161  requires
companies to provide enhanced disclosures  regarding derivative  instruments and
hedging  activities in order to better  convey the purpose of derivative  use in
terms of risk  management.  Disclosures  about  (i) how and why an  entity  uses
derivative instruments, (ii) how derivative instruments and related hedged items
are accounted for under SFAS No. 133 and its related interpretations,  and (iii)
how derivative instruments and related hedged items affect a company's financial
position,  financial performance,  and cash flows, are required.  This Statement
retains  the same scope as SFAS No. 133 and is  effective  for fiscal  years and
interim periods  beginning after November 15, 2008. We are currently  evaluating
the  impact,  if any,  that  the  adoption  of SFAS  No.  161  will  have on our
consolidated financial position, cash flows and results of operations.

In  September  2006,  the FASB issued SFAS No.  157,  "Fair Value  Measurements"
("SFAS 157"). SFAS No. 157 (i) establishes a single definition of fair value and
a framework for measuring fair value, (ii) sets out a fair value hierarchy to be
used to classify the source of information used in fair value measurements,  and
(iii) requires new disclosures of assets and liabilities  measured at fair value
based on their  level in the  hierarchy.  This  statement  applies  under  other
accounting  pronouncements  that require or permit fair value  measurements.  In
February 2008, the FASB issued Staff  Positions  (FSPs) No. 157-1 and No. 157-2,
which, respectively,  remove leasing transactions from the scope of SFAS No. 157
and defer its  effective  date for one year  relative  to  certain  nonfinancial
assets and liabilities.  As a result,  the application of the definition of fair
value and related  disclosures  of SFAS No. 157 (as  impacted by these two FSPs)
will be effective for our fiscal year  beginning  August,  2008 on a prospective
basis with respect to fair value  measurements  of (a)  nonfinancial  assets and
liabilities  that are  recognized  or disclosed  at fair value in our  financial
statements on a recurring basis (at least annually) and (b) all financial assets
and liabilities.  The remaining  aspects of SFAS No. 157 for which the effective
date was deferred  under FSP No. 157-2 are currently  being  evaluated by us and
will be effective for our fiscal year beginning August,  2009. Areas impacted by
the deferral relate to nonfinancial  assets and liabilities that are measured at
fair value,  but are  recognized  or disclosed  at fair value on a  nonrecurring
basis.  This  deferral  applies  to  such  items  as  nonfinancial   assets  and
liabilities  initially measured at fair value in a business combination (but not
measured at fair value in subsequent  periods) or nonfinancial  long-lived asset
groups measured at fair value for an impairment assessment.  The effects of SFAS
No. 157 and FSPs No. 157-1 and No. 157-2 are currently being evaluated by us but
are not  expected  to  have a  material  impact  on our  consolidated  financial
position, cash flows and results of operations.

In  December  2007,  the FASB  issued  SFAS No. 141  (revised  2007),  "Business
Combinations"  (SFAS 141(R)).  The objective of this Statement is to improve the
relevance,  representational  faithfulness, and comparability of the information
that a reporting  entity  provides  in its  financial  reports  about a business
combination.  Specifically,  it establishes principles and requirements over how
the acquirer (1) recognizes and measures the identifiable  assets acquired,  the
liabilities  assumed,  and any  noncontrolling  interest  in the  acquiree;  (2)
recognizes and measures goodwill acquired in the business  combination or a gain
from a bargain  purchase,  and; (3) determines  what  information to disclose to

                                       30
<PAGE>
enable users of the  financial  statements  to evaluate the nature and financial
effects   of   the   business    combination.    SFAS   141(R)   also   requires
acquisition-related  transaction expenses and restructuring costs be expensed as
incurred  rather than  capitalized  as a component of the business  combination.
This Statement is effective for fiscal years  beginning  after December 15, 2008
(our 2010 fiscal year).  SFAS 141(R) would have an impact on accounting  for any
businesses acquired after the effective date of this pronouncement.

In December 2007, the FASB issued Statement of Financial Accounting Standard No.
160, "Noncontrolling Interests in Consolidated Financial Statements an amendment
of ARB No. 51" (SFAS 160).  The  objective  of this  Statement is to improve the
relevance,  comparability,  and transparency of the financial information that a
reporting   entity  provides  in  its  consolidated   financial   statements  by
establishing  accounting and reporting standards for the noncontrolling interest
in  a  subsidiary   (minority  interests)  and  for  the  deconsolidation  of  a
subsidiary.  SFAS 160 also requires that a retained noncontrolling interest upon
the  deconsolidation  of a subsidiary  be initially  measured at its fair value.
Upon  adoption of SFAS 160,  we would be  required to report any  noncontrolling
interests as a separate  component  of  shareholders'  equity.  We would also be
required to present any net income allocable to noncontrolling interests and net
income   attributable  to  our  shareholders   separately  in  our  consolidated
statements of income.  This Statement is effective for fiscal years, and interim
periods within those fiscal years,  beginning  after December 15, 2008 (our 2010
fiscal year).  SFAS 160 requires  retroactive  adoption of the  presentation and
disclosure  requirements  for  existing  minority  interests,  and would have an
impact on the presentation and disclosure of the noncontrolling  interest of any
non wholly-owned businesses acquired in the future.

Critical Accounting Policies and Estimates

Our  established  policies  are outlined in the  footnotes  to the  Consolidated
Financial  Statements  entitled  "Summary of  Significant  Accounting  Policies"
(contained  in Part II,  Item 8 of this  Form  10-K).  As part of our  oversight
responsibilities,  we  continually  evaluate  the  propriety  of our  accounting
methods as new events  occur.  We believe  that our  policies  are  applied in a
manner  which is  intended  to provide the user of our  financial  statements  a
current,  accurate and complete  presentation  of information in accordance with
accounting  principles  generally  accepted  in the  United  States of  America.
Important accounting practices that require the use of assumptions and judgments
are outlined below.

We recognize  revenue when products are shipped and the customer takes ownership
and assumes risk of loss,  collection  of the relevant  receivable  is probable,
persuasive  evidence  of an  arrangement  exists and the sales price is fixed or
determinable.  Payments received from customers in advance of products delivered
are recorded as customer advance payments until earned. Approximately 92% of our
contracts are firm, fixed price contracts,  providing for a predetermined  fixed
price for the products sold, regardless of the costs incurred. Approximately 10%
to 11% of revenues over the last three fiscal years were derived from long-term,
fixed price  contracts for which  revenues and estimated  profits are recognized
using the  percentage  of  completion  method of  accounting on the cost to cost
method.  Under  this  method,  revenue  is  recorded  based  upon the ratio that
incurred costs to date bear to total estimated contract costs at completion with
related cost of sales recorded as costs are incurred. 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.  Risks and  uncertainties  inherent in the  estimation  process  could
affect the amounts  reported in our financial  statements.  The key  assumptions
used in the  estimate  of costs to complete  relate to labor costs and  indirect
costs required to complete the contract. The estimate of rates and hours as well
as the  application  of overhead  costs is reviewed on a regular  basis.  If our
business conditions were different,  or if we used different  assumptions in the
application of this and other accounting policies,  it is likely that materially
different amounts would be reported on our financial statements.

The effect of any change in the estimated gross margin percentage for a contract
is reflected in the period in which the change is known.  Prospective  losses on
long-term  contracts  are based  upon the  anticipated  excess of costs over the
selling  price of the  remaining  units to be delivered  and are recorded in the
period when first determinable.  Actual losses could differ from those estimated
due to changes in the final costs and contract terms.

Inventories  are stated at lower of cost  (principally  first-in,  first-out) or
market.  A  valuation  allowance  for  obsolete  and  slow-moving  inventory  is
established based upon an aging of raw material components. Current requirements
for raw materials are evaluated  based on current backlog of orders for products
in which the components are used and anticipated future orders.

Goodwill is tested for  impairment in accordance  with SFAS No. 142 using a fair
value approach  applied to our single  reporting  unit.  Impairment  charges are
recognized  for amounts where the  reporting  unit's  goodwill  exceeds its fair
value.  An annual  impairment  test is performed  in the fourth  quarter of each
fiscal year. Any future impairment of goodwill will be charged to operations. We
amortize  the cost of other  intangibles  over  their  estimated  useful  lives.
Amortizable  intangible  assets may also be tested for impairment if indications
of impairment exist.

An impairment test based on a single  reporting unit was performed in the fourth
quarter of fiscal  2008 using our  current  market  capitalization,  which in an
                                       31
<PAGE>
active  market for our common  stock,  we consider a  reasonable  indication  of
implied fair value.  Based on this initial step in the test for  impairment,  we
concluded that there was no impairment of goodwill as of August 3, 2008.

Effective  August 1,  2005,  the  Company  adopted  the fair  value  recognition
provisions of SFAS No. 123(R),  "Share-Based  Payment" ("SFAS 123(R)") using the
modified  prospective  application method. This standard requires the Company to
measure the cost of employee  services  received  in exchange  for equity  share
options granted based on the grant-date  fair value of the options.  The cost is
recognized as  compensation  expense over the requisite  service period for each
separately  vesting  portion  of the  options.  Under the  modified  prospective
application method,  compensation costs includes: (a) compensation cost of stock
options  granted  prior to but not yet  vested as of  August  1, 2005  (based on
grant-date  fair value  estimated in accordance with the provisions of SFAS 123)
and (b)  compensation  cost for all options granted  subsequent to July 31, 2005
(based on grant-date  fair value estimated in accordance with the new provisions
of SFAS 123(R)).  Determining the fair value of share-based  awards at the grant
date requires  judgment,  including  estimating  our stock price  volatility and
employee stock option exercise behaviors.  Our expected volatility is based upon
the historical  volatility of our stock. The expected life of share-based awards
is  based  on  observed  historical  exercise  patterns  for our  employees.  As
share-based  compensation  expense  recognized in the consolidated  statement of
income is based on awards ultimately expected to vest, the amount of expense has
been reduced for estimated  forfeitures.  SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary,  in subsequent periods
if actual forfeitures differ from those estimates.

Provisions for federal,  foreign, state and local income taxes are calculated on
reported  financial  statement  pretax  income based on current tax law and also
include  the  cumulative  effect of any  changes  in tax rates  from  those used
previously in determining  deferred tax assets and liabilities.  Such provisions
differ from the amounts  currently  payable  because certain items of income and
expense  are  recognized  in  different  time  periods for  financial  reporting
purposes than for income tax purposes.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk  associated  with  foreign  currency  exchange and
changes in interest  rates.  We have not entered into any market risk  sensitive
instruments for trading purposes.

Since the acquisitions of General Microwave Corporation and EWST, we are subject
to  movements in foreign  currency  rate changes  related to our  operations  in
Israel and in the U.K.  Prior to fiscal 2008,  the  movements in the New Israeli
Shekel  versus the U.S.  Dollar have not been  significant.  Movements in Pounds
Sterling (the functional currency at EWST) have been more significant.

For fiscal years 2008, 2007, and 2006,  Herley Israel accounts for approximately
8% to 13% of our consolidated  net sales. A significant  portion of the revenues
are derived from dollar  denominated  contracts,  however costs at Herley Israel
are largely  based in New Israeli  Shekels  which exposes us to market risk with
respect to  fluctuations  in the U.S.  dollar value of future New Israeli Shekel
denominated costs and earnings.  A 10% strengthening in the average value of New
Israeli  Shekels in fiscal 2008,  for  example,  would have  increased  costs by
approximately $1,736,000,  and would have increased our consolidated loss before
income taxes by  approximately  $1,736,000.  The  average,  high and low foreign
currency exchange rates during fiscal year 2008 were 0.2688,  0.3096, and 0.2304
respectively. A 10% strengthening in the average value of New Israeli Shekels in
fiscal  2007,  for  example,   would  have  increased  costs  by   approximately
$1,565,000,  and would have decreased our  consolidated  income from  operations
before  income taxes by  approximately  $1,565,000.  The  average,  high and low
foreign currency exchange rates during fiscal year 2007 were 0.2370, 0.2545, and
0.2268 respectively.

For fiscal years 2008, 2007 and 2006, EWST accounts for  approximately  2% to 4%
of our consolidated net sales based in part on the rate at which EWST's Sterling
denominated financial statements have been converted into U.S. dollars. Having a
portion of our future revenue and income  denominated in Sterling  exposes us to
market risk with  respect to  fluctuations  in the U.S.  dollar  value of future
Sterling denominated revenue and earnings. A 10% decline in the average value of
Sterling in fiscal 2008, for example,  would have reduced sales by approximately
$437,000,  and would have decreased our consolidated loss from operations before
income taxes by  approximately  $161,000 due to the reduction in the U.S. dollar
value of EWST's sales and  operating  loss.  The  average,  high and low foreign
currency  exchange  rates  during  fiscal  year  2008 were  2.00,  2.07 and 1.96
respectively. A 10% decline in the average value of Sterling in fiscal 2007, for
example,  would have reduced  sales by  approximately  $473,000,  and would have
increased our consolidated  operating income by approximately $63,000 due to the
reduction  in the U.S.  dollar  value of EWST's sales and  operating  loss.  The
average,  high and low foreign  currency  exchange rates during fiscal year 2007
were 1.95, 2.03 and 1.88 respectively.

We  have  made  inter-company  advances  to  EWST  in the  aggregate  amount  of
approximately  $8.6 million at August 3, 2008 and $7.6 million at July 29, 2007.
Since the advances are denominated in U.S. Dollars and EWST anticipates reducing
the amount of  advances  during  fiscal  year 2009,  the amount  outstanding  is
subject to foreign exchange rate fluctuations.

                                       32
<PAGE>
In October  2001,  we entered into an interest rate swap with a bank pursuant to
which it exchanged floating rate interest in connection with the Bonds discussed
in Note G of the financial  statements on a notional  amount of $3,000,000 for a
fixed rate of 4.07% for a ten-year  period ending  October 1, 2011. The notional
amount  reduces  each year in tandem  with the  annual  installments  due on the
Bonds.  The fixing of the interest rate for this period  offsets our exposure to
the  uncertainty of floating  interest rates on the Bonds,  and as such has been
designated as a cash flow hedge.  The hedge is deemed to be highly effective and
any  ineffectiveness  will be  recognized  in interest  expense in the reporting
period.   The  fair  value  of  the  interest  rate  swap  was  a  liability  of
approximately  $87,200  as of  August  3,  2008.  There  was no  material  hedge
ineffectiveness related to cash flow hedges during the fiscal years presented to
be recognized in earnings.

On April 30, 2007, the Company  replaced its existing credit facility with a new
$40 million Revolving Credit Loan Agreement  ("Agreement")  with two banks on an
unsecured  basis which may be used for  general  corporate  purposes,  including
business acquisitions and stand-by letters of credit. The Agreement requires the
payment of  interest  only on a monthly  basis and  payment  of the  outstanding
principal  balance on March 31, 2010. The Agreement was modified as of September
12, 2008. Under the terms of the  modification,  the Company may elect to borrow
with interest based on the bank's prime rate of interest minus 0.50% or based on
LIBOR plus a margin of 2.0%  effective  September 12, 2008 (the margin was 1.65%
at August 3, 2008). In addition,  if in the event the sale of ICI (See Note S of
Notes to the Consolidated  Financial  Statements) is not consummated by November
30, 2008,  we will grant the bank a security  interest in our domestic  accounts
receivable,  inventory and all other non-real estate domestic assets. There is a
fee of 20 basis  points per annum on the unused  portion of the credit  facility
payable quarterly.  Stand-by letters of credit were outstanding in the amount of
approximately  $15.9  million at August 3, 2008 (See Note E). If at any time the
Company's  backlog  of orders  falls  below $50  million,  the bank may obtain a
security  interest  in eligible  accounts  receivable,  as  defined,  and if the
outstanding  advances are greater than 100% of eligible  receivables,  a lien on
all  inventories.  Funded  backlog as of August 3, 2008 was  approximately  $157
million.  A loan of $2,500,000 was outstanding under the line at August 3, 2008.
There were no borrowings under the line at July 29, 2007.

The table below provides information about our debt that is sensitive to changes
in interest  rates.  Future  principal  payment  cash flows by maturity  date as
required under the industrial  revenue bonds, and corresponding fair value is as
follows (in thousands):
<TABLE>
<CAPTION>
        Fiscal year ending                           Bonds
        ------------------                           -----
             <S>                                   <C>
             2009                                  $    125
             2010                                       130
             2011                                       135
             2012                                       140
             2013                                       145
             2014 and later                           1,680
                                                      -----
                                                    $ 2,355
                                                      =====
        Fair value                                  $ 2,317
                                                      =====
</TABLE>
On September 16, 2008, the Company entered into a new term loan in the amount of
$10 million for a period of 10 years through the Company's  bank in Israel.  The
new loan is payable  in  quarterly  installments  over a period of 10 years with
interest at LIBOR plus 1.5%. We do not anticipate any other material  changes in
our primary market risk exposures in fiscal 2009.

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.

Item 9A.  Controls and Procedures


I.   Evaluation of Disclosure Controls and Procedures.

     Under  the  supervision  and  with  the  participation  of our  management,
     including  our principal  executive  officer  (Chairman of the  Board/Chief
     Executive  Officer) and principal  financial  officer  (Vice  President and
     Chief  Financial  Officer),  we have  evaluated  the  effectiveness  of our
     disclosure  controls  and  procedures  (as such  term is  defined  in Rules
     13a-15(e)  and  15d-15(e)  under the  Securities  Exchange Act of 1934,  as
     amended (the "Exchange Act")) as of August 3, 2008 (the "Evaluation Date").
     Based on such evaluation, the principal executive officer and the principal
     financial  officer have  concluded  that, as of the  Evaluation  Date,  our

                                       33
<PAGE>
     disclosure  controls  and  procedures  are  effective,  and are  reasonably
     designed  to  ensure  that  all   material   information   (including   our
     consolidated  subsidiaries) required to be included in our reports filed or
     submitted  under the Exchange Act is recorded,  processed,  summarized  and
     reported  within the time  periods  specified in the rules and forms of the
     Securities and Exchange Commission.

     Our review of our  internal  controls  was made  within the  context of the
     relevant  professional  auditing standards  defining  "internal  controls,"
     "significant  deficiencies" and "material  weaknesses." "Internal controls"
     are  processes   designed  to  provide   reasonable   assurance   that  our
     transactions are properly  authorized,  our assets are safeguarded  against
     unauthorized or improper use, and our  transactions  are properly  recorded
     and reported,  all to permit the preparation of our consolidated  financial
     statements in conformity with accounting  principles  generally accepted in
     the United States. "Significant deficiencies" are control issues that could
     have a  significant  adverse  effect on our ability to  properly  authorize
     transactions; safeguard our assets; or record, process, summarize or report
     financial  data  in the  consolidated  financial  statements.  A  "material
     weakness" is a particularly serious reportable condition where the internal
     control  does  not  reduce  to  a  relatively   low  level  the  risk  that
     misstatements  caused by error or fraud may occur in amounts  that would be
     material in relation to the  consolidated  financial  statements and not be
     detected  within a timely  period  by  employees  in the  normal  course of
     performing  their  assigned  functions.  As part of our  internal  controls
     procedures, we also address other, less significant control matters that we
     identify, and we determine what revision or improvement to make, if any, in
     accordance with our on-going procedures.

II.  Changes in Internal Control over Financial Reporting.

     During the quarter ended August 3, 2008,  there were certain  insignificant
     changes in our internal  control over  financial  reporting  which resulted
     from control  improvement and remediation  efforts.  These changes have not
     materially affected, and are not likely to materially affect, such internal
     control over financial reporting.

III. Management's Annual Report on Internal Control over Financial Reporting.

     We are responsible for  establishing  and maintaining an adequate  internal
     control structure and procedures over financial reporting. We have assessed
     the effectiveness of internal control over financial reporting as of August
     3, 2008. Our assessment was based on criteria set forth by the Committee of
     Sponsoring   Organizations  of  the  Treadway  Commission  (COSO)  Internal
     Control-Integrated Framework.

     Our internal  control  over  financial  reporting is a process  designed to
     provide  reasonable   assurance  regarding  the  reliability  of  financial
     reporting and the preparation of financial statements for external purposes
     in accordance with generally accepted accounting  principles.  Our internal
     control over  financial  reporting  includes  those policies and procedures
     that:

          (1)  pertain to the maintenance of records that, in reasonable detail,
               accurately and fairly reflect our  transactions  and dispositions
               of our assets;

          (2)  provide  reasonable  assurance that  transactions are recorded as
               necessary  to  permit  preparation  of  financial  statements  in
               accordance with generally accepted  accounting  principles in the
               United States,  and that our receipts and  expenditures are being
               made only in accordance with authorizations of our management and
               board of directors; and

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

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

     Based on the COSO criteria,  we believe our internal control over financial
     reporting as of August 3, 2008 was effective.

     Our internal control over financial reporting as of August 3, 2008 has been
     audited by Marcum & Kliegman LLP, independent  registered public accounting
     firm, as stated in their report which is included below.

     Important Considerations

     The  effectiveness  of our  disclosure  controls  and  procedures  and  our
     internal  control over financial  reporting is subject to various  inherent

                                       34
<PAGE>
     limitations, including cost limitations, judgments used in decision making,
     assumptions  about the  likelihood of future  events,  the soundness of our
     systems,  the  possibility of human error and the risk of fraud.  Moreover,
     projections  of any  evaluation  of  effectiveness  to future  periods  are
     subject to the risk that controls may become inadequate  because of changes
     in conditions  and the risk that the degree of compliance  with policies or
     procedures may deteriorate over time. Because of these  limitations,  there
     can be no assurance  that any system of disclosure  controls and procedures
     or  internal  control  over  financial  reporting  will  be  successful  in
     preventing all errors or fraud or in making all material  information known
     in a timely manner to the appropriate levels of management.

                                       35
<PAGE>
Report of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting

To the Audit Committee of the
Board of Directors and Shareholders of
Herley Industries, Inc.

We have audited  Herley  Industries,  Inc.  and  Subsidiaries'  (the  "Company")
internal  control  over  financial  reporting  as of  August 3,  2008,  based on
criteria  established  in Internal  Control-Integrated  Framework  issued by the
Committee of Sponsoring  Organizations of the Treadway  Commission  (COSO).  The
Company's  management is responsible for maintaining  effective internal control
over  financial  reporting,  and  for its  assessment  of the  effectiveness  of
internal  control  over  financial  reporting,   included  in  the  accompanying
"Management  Annual Report on Internal  Control over Financial  Reporting".  Our
responsibility  is to express an opinion on the Company's  internal control over
financial reporting based on our audit.

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

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

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

In our opinion,  Herley  Industries,  Inc. and Subsidiaries  maintained,  in all
material  aspects,  effective  internal  control over financial  reporting as of
August 3, 2008,  based on criteria  established in Internal Control - Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission (COSO).

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the consolidated balance sheets as
of August 3, 2008 and July 29, 2007 and the related  consolidated  statements of
operations,  shareholders'  equity,  and cash  flows and the  related  financial
statement  schedule for the fifty-three  (53) weeks ended August 3, 2008 and the
fifty-two  (52) weeks ended July 29, 2007 and July 30, 2006 of the Company,  and
our report  dated  October 21, 2008  expressed an  unqualified  opinion on those
financial statements and financial statement schedule.


/s/ Marcum & Kliegman LLP
-------------------------


Marcum & Kliegman LLP
Melville, New York
October 21, 2008

                                       36
<PAGE>
Item 9B.  Other Information

     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  2009,  to be  filed  with  the
Securities  and Exchange  Commission  within 120 days  following  the end of the
Company's fiscal year ended August 3, 2008.

PART IV

Item 15.  Exhibits and Financial Statement Schedules

(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 (Exhibit 3.2 of Annual Report on Form
      10-K for the fiscal year ended July 29, 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  2003 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated June 11,
      2003).
10.6  Employment  Agreement  between  Herley  Industries,  Inc. and Lee N. Blatt
      dated as of July 29, 2002. (Exhibit 10.5 of Annual Report on Form 10-K for
      the fiscal year ended July 28, 2002).
10.7  Employment Agreement between Herley Industries,  Inc. and Myron Levy dated
      as of July 29, 2002.  (Exhibit  10.6 of Annual Report on Form 10-K for the
      fiscal year ended July 28, 2002).
10.8  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).
10.9  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).
10.10 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).
10.11 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 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).
10.13 Asset Purchase Agreement dated as of March 29, 2004 between Registrant and
      Communication  Techniques,  Inc.  (Exhibit  10.15 of Annual Report on Form
      10-K for the fiscal year ended August 1, 2004).
10.14 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).
10.15 Common Stock  Purchase  Agreement  dated as of September  20, 2002 between
      Registrant and EW Simulation Technology, Limited. (Exhibit 10.17 of Annual
      Report on Form 10-K for the fiscal year ended July 28, 2002).
10.16 Trust Indenture dated as of October 19, 2001 between Registrant,  and East
      Hempfield Township Industrial  Development Authority and Allfirst Bank, as
      Trustee.  (Exhibit 10.18 of Annual Report on Form 10-K for the fiscal year
      ended July 28, 2002).
10.17 Asset Purchase  Agreement dated as of September 1, 2004 between Registrant
      and Reliable System Services Corp. (Exhibit 10.20 of Annual Report on Form
      10-K for the fiscal year ended August 1, 2004).
10.18 Amendment  dated December 9, 2003 to Employment  Agreement  between Herley
      Industries,  Inc. and Myron Levy dated as of July 29, 2002. (Exhibit 10.21
      of Annual Report on Form 10-K for the fiscal year ended August 1, 2004).
10.19 Amendment  dated December 9, 2003 to Employment  Agreement  between Herley
      Industries,  Inc.  and Lee N. Blatt  dated as of July 29,  2002.  (Exhibit
      10.22 of Annual  Report on Form 10-K for the fiscal  year ended  August 1,
      2004).
10.20 Common  Stock  Purchase  Agreement  dated as of February  1, 2005  between
      Registrant and Micro Systems, Inc. (Exhibit 2.1 of Form 8-K dated February
      7, 2005).
10.21 Common  Stock  Purchase  Agreement  dated as of  April  12,  2005  between
      Registrant and Innovative  Concepts,  Inc.  (Exhibit 2.1 of Form 8-K dated
      April 18, 2005).
10.22 2006 New Employee  Stock Option Plan.  (Exhibit  10.26 of Annual Report on
      Form 10-K for the fiscal year ended July 30, 2006).

                                       37
<PAGE>
10.23 Employment Agreement between Herley Industries, Inc. and John Kelley dated
      as of June 7, 2006.  (Exhibit  10.27 of Annual Report on Form 10-K for the
      fiscal year ended July 30, 2006).
10.24 Employment Agreement between Herley Industries,  Inc. and Kevin J. Purcell
      dated as of June 7, 2006. (Form 8-K dated June 8, 2006).
10.25 Administrative  Agreement between the Department of the Navy, on behalf of
      the Department of Defense,  and Herley  Industries,  Inc. (Exhibit 10.1 of
      Form 8-K dated October 12, 2006).
10.26 Agreement  between  Herley  Industries,  Inc.  and Lee N. Blatt  effective
      October 12, 2006. (Exhibit 10.2 of Form 8-K dated October 12, 2006).
10.27 Employment  Agreement dated as of May 30, 2007 between Herley  Industries,
      Inc. and Jeffrey L. Markel. (Exhibit 10.1 of Form 8-K dated May 30, 2007).
10.28 Revolving Credit Loan Agreement dated April 30, 2007 among the Registrant,
      Manufacturers and Traders Trust Company and Bank of Lancaster County, N.A.
      (Exhibit 10.1 of Form 8-K dated June 7, 2007).
10.29 Amendment  No. 1 to  Agreement  between  Herley  Industries,  Inc. and the
      Department of the Navy. (Exhibit 10 of Form 8-K dated August 15, 2007).
10.30 Asset Purchase Agreement dated as of August 1, 2008 by and between General
      Microwave Israel  Acquisition (2008) Ltd. and Eyal Microwave Ltd. and Eyal
      Mag Ltd. (Exhibit 10.1 of Form 8-K dated September 22, 2008).
10.31 Addendum to the Asset Purchase Agreement dated as of September 16, 2008 by
      and between Herley GMI Eyal Ltd. (formerly called General Microwave Israel
      Acquisition  (2008) Ltd.),  Eyal Microwave Ltd. and Eyal Mag Ltd. (Exhibit
      10.2 of Form 8-K dated September 22, 2008).
23.1  Consent of Marcum & Kliegman LLP.
31.1  Certifications  pursuant to Rules 13a-14(a) as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002.
32.1  Certifications  pursuant to 18 U.S.C.  Section 1350 as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.

(b)  Financial Statements

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

     (2)  Schedule II - Valuation and Qualifying  Accounts filed as part of this
          Form 10-K at page 40.

                                       38
<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 October 21, 2008.

                                        HERLEY INDUSTRIES, INC.

                                        By:    /S/ Myron Levy
                                        -------------------------------------
                                          Myron Levy, Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been  signed  below on  October  21,  2008 by the  following  persons in the
capacities indicated:


By:    /S/  Myron Levy
   ---------------------------------        Chairman of the Board,
      Myron Levy                            Chief Executive Officer and Director
                                            (Principal Executive Officer)


By:    /S/ Kevin J. Purcell                 Vice President and
   ---------------------------------        Chief Financial Officer
      Kevin J. Purcell                      (Principal Financial Officer


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


By:    /S/  Carlos C. Campbell              Director
   ---------------------------------
      Carlos C. Campbell

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


By:    /S/ Robert M. Moore                  Director
   ---------------------------------
      Robert M. Moore


By:    /S/ Edward A. Bogucz                 Director
   ---------------------------------
      Edward A. Bogucz


<PAGE>



Schedule II - Valuation and Qualifying Accounts (in thousands)
<TABLE>
<CAPTION>

              Column A                  Column B            Column C            Column D     Column E
              --------                  --------            --------            --------     --------
                                                           Additions             Amount
                                                      -------------------        written
                                       Balance at     Charged to                  off       Balance at
                                        beginning     costs and                  against      end of
             Description                of period     expenses      Other        reserve      period
             -----------               ----------     ----------    -----        -------    ----------
Valuation accounts deducted
    from assets to which they
    apply:

August 3, 2008:
<S>                                         <C>         <C>      <C>                 <C>         <C>
Inventories                                 $ 5,163     $ 1,678  $       -           $ 365       $ 6,476

July 29, 2007:
Inventories                                 $ 4,576     $ 1,277  $       -           $ 690       $ 5,163

July 30, 2006:
Inventories                                 $ 4,492     $ 1,475  $       -         $ 1,391       $ 4,576
</TABLE>
All other  Schedules  have been omitted since they are either not required,  not
applicable,  or the  information is otherwise  included in this Annual Report on
Form 10-K.

                                       40
<PAGE>

Item 8.  Financial Statements and Supplementary Data


                             HERLEY INDUSTRIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                             Page

<S>                                                                                           <C>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                       F-2

FINANCIAL STATEMENTS:

     Consolidated Balance Sheets as of August 3, 2008 and July 29, 2007                       F-3

     Consolidated Statements of Operations for the fifty-three weeks ended August 3, 2008
     and the fifty-two weeks ended July 29, 2007 and July 30, 2006                            F-4

     Consolidated Statements of Shareholders' Equity for the fifty-three weeks
     ended August 3, 2008 and the fifty-two weeks ended July 29, 2007 and July
     30, 2006                                                                                 F-5

     Consolidated Statements of Cash Flows for the fifty-three weeks ended August 3, 2008
     and the fifty-two weeks ended July 29, 2007 and July 30, 2006                            F-6

     Notes to Consolidated Financial Statements                                               F-7
</TABLE>
                                      F-1
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Audit Committee of the
Board of Directors and Shareholders of
Herley Industries, Inc.

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Herley
Industries,  Inc. and Subsidiaries (the "Company") as of August 3, 2008 and July
29, 2007, and the related consolidated  statements of operations,  shareholders'
equity and cash flows for the  fifty-three  (53) weeks ended  August 3, 2008 and
the fifty-two  (52) weeks ended July 29, 2007 and July 30, 2006. Our audits also
included the financial  statement  schedule as of and for the  fifty-three  (53)
weeks ended August 3, 2008 and the fifty-two  (52) weeks ended July 29, 2007 and
July 30,  2006  listed in the  index at Item 15.  These  consolidated  financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial statements and financial statement schedule based on our
audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit also includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
financial  statements,  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 August 3, 2008 and July 29, 2007, and
the  consolidated  results  of  its  operations  and  its  cash  flows  for  the
fifty-three  (53) weeks ended August 3, 2008 and the fifty-two  (52) weeks ended
July 29,  2007 and July 30, 2006 in  conformity  with  United  States  generally
accepted  accounting  principles.  Also, in our opinion,  the related  financial
statement  schedule,  when  considered  in  relation  to the basic  consolidated
financial  statements taken as a whole presents fairly, in all material aspects,
the information set forth therein.

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight  Board  (United  States),  Herley  Industries,   Inc.  and
Subsidiaries'  internal  control over financial  reporting as of August 3, 2008,
based on the  criteria  established  in  Internal  Control-Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
and our report dated,  October 21, 2008, expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.

/s/ Marcum & Kliegman LLP
-------------------------

Marcum & Kliegman LLP
Melville, New York
October 21, 2008

                                      F-2
<PAGE>
                      HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                             CONSOLIDATED BALANCE SHEETS
                          (In thousands, except share data)
<TABLE>
<CAPTION>
                                                            August 3,    July 29,
                                                              2008         2007
                                                            ---------    --------
                     ASSETS
Current Assets:
<S>                                                        <C>         <C>
      Cash and cash equivalents                            $  14,347   $  35,181
      Trade accounts receivable, net                          27,003      28,058
      Income Taxes Receivable                                  2,056         819
      Costs incurred and income recognized in excess
         of billings on uncompleted contracts and claims      19,490      14,448
      Other receivables                                        1,286       2,816
      Inventories, net                                        61,559      51,815
      Deferred income taxes                                   11,263       4,254
      Other current assets                                     1,276       1,069
                                                           ---------    --------
                  Total Current Assets                       138,280     138,460
Property, Plant and Equipment, net                            30,552      29,996
Goodwill                                                      73,900      74,044
Intangibles, net of accumulated amortization of $7,505
      in 2008 and $5,256 in 2007                              16,145      18,431
Other Assets                                                     541       1,662
                                                            --------    --------
                  Total Assets                             $ 259,418   $ 262,593
                                                            ========    ========
      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
      Current portion of long-term debt                    $   1,394   $   1,346
      Current portion of employment settlement
           agreement - (net of imputed interest of
           $238 in 2008 and $245 in 2007)(Note H)              1,119       1,113
      Current portion of litigation settlements -
          (net of imputed interest of $46)                       954        -
      Accounts payable and accrued expenses                   27,546      19,453
      Billings in excess of costs incurred and
          income recognized on uncompleted contracts             613          99
      Income taxes payable                                        43       3,518
      Accrual for contract losses                              2,994       1,160
      Accrual for warranty costs                               1,142       1,106
      Advance payments on contracts                            8,120       7,163
                                                            --------    --------
                  Total Current Liabilities                   43,925      34,958
Long-term Debt, net of current portion                         7,092       5,951
Long-term Portion of Employment Settlement Agreement -
  (net of imputed interest of $287 in 2008
   and $580 in 2007)(Note H)                                   3,074       4,117
Long-term Portion of litigation settlement -
  (net of imputed interest of $108)                              892        -
Other Long-term Liabilities                                    1,652       1,311
Deferred Income Taxes                                          8,839       6,615
Accrued Income Taxes Payable                                     509        -
                                                            --------    --------
                  Total Liabilities                           65,983      52,952
                                                            --------    --------
Commitments and Contingencies
Shareholders' Equity:
      Common stock, $.10 par value; authorized 20,000,000
        shares; issued and outstanding 13,521,902 in 2008,
        and 13,977,115 in 2007                                 1,352       1,398
      Additional paid-in capital                             101,403     107,094
      Retained earnings                                       89,058      99,404
      Accumulated other comprehensive income                   1,622       1,745
                                                            --------    --------
                  Total Shareholders' Equity                 193,435     209,641
                                                            --------    --------
                  Total Liabilities and Shareholders'
                   Equity                                  $ 259,418   $ 262,593
                                                            ========    ========
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                      F-3
<PAGE>
                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands except per share data)
<TABLE>
<CAPTION>
                                                                  Fifty-three     Fifty-two weeks ended
                                                                  weeks ended     ---------------------
                                                                   August 3,     July 29,       July 30,
                                                                    2008           2007           2006
                                                                 -----------    -----------    -----------

<S>                                                            <C>            <C>            <C>
Net sales                                                      $    152,511   $    163,140   $    176,268
                                                                 -----------    -----------    -----------
Cost and expenses:
       Cost of products sold                                        118,311        118,834        127,921
       Selling and administrative expenses                           33,835         32,516         32,736
       Litigation costs                                               5,550          1,674          2,230
       Litigation settlements (Notes A-1 and E)                      15,442         -              -
       Employment contract settlement costs (Note H)                 -               8,914         -
                                                                 -----------    -----------    -----------
                                                                    173,138        161,938        162,887
                                                                 -----------    -----------    -----------

       Operating (loss) income                                      (20,627)         1,202         13,381
                                                                -----------    -----------    -----------
Other income (expense):
       Investment income                                              1,061          1,186            840
       Interest expense                                                (661)          (790)          (319)
       Foreign exchange transaction (losses) gains                     (122)           501            431
                                                                 -----------    -----------    -----------
                                                                        278            897            952
                                                                 -----------    -----------    -----------

       (Loss) income before income taxes                            (20,349)         2,099         14,333
       (Benefit) provision for income taxes                         (10,003)        (1,019)         3,979
                                                                 -----------    -----------    -----------
       Net (loss) income                                       $    (10,346)  $      3,118   $     10,354
                                                                 ===========    ===========    ===========

(Loss) earnings per common share - Basic                       $     (.76)      $    .22       $    .72
                                                                 ===========    ===========    ===========

       Basic weighted average shares                                 13,652         13,927         14,463
                                                                 ===========    ===========    ===========

(Loss) earnings per common share - Diluted                     $     (.76)      $    .22       $    .69
                                                                 ===========    ===========    ===========

       Diluted weighted average shares                               13,652         14,395         15,097
                                                                 ===========    ===========    ===========
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                      F-4
<PAGE>
                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                   Fifty-three weeks ended August 3, 2008 and
             Fifty-two weeks ended July 29, 2007 and July 30, 2006
                        (In thousands except share data)
<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                   Additional                             Other
                                               Common Stock         Paid-in    Retained    Treasury    Comprehensive
                                            Shares      Amount      Capital    Earnings      Stock     Income (loss)     Total
                                          -----------   --------   ---------   ---------   ---------   ------------   -----------
<S>                                       <C>        <C>        <C>         <C>         <C>         <C>            <C>
Balance at July 31, 2005                  14,389,625 $    1,439 $   109,118 $    85,932 $     -     $        1,148 $     197,637
Exercise of stock options                    271,091         27       3,144                                                3,171
Stock option compensation                                               453                                                  453
Tax benefit upon exercise of stock options                              703                                                  703
Purchase of 798,567 shares of treasury
 stock                                                                                       (9,044)                      (9,044)
                                          -----------   --------   ---------   ---------   ---------   ------------   -----------
     Subtotal                             14,660,716      1,466     113,418      85,932      (9,044)         1,148       192,920
                                                                                                                      -----------
Net income                                                                       10,354                                   10,354
Other comprehensive income
   Unrealized gain on interest rate swap                                                                        33            33
   Foreign currency translation gain                                                                           163           163
                                                                                                                      -----------
Comprehensive income                                                                                                      10,550
                                          -----------   --------   ---------   ---------   ---------   ------------   -----------
Balance at July 30, 2006                  14,660,716 $    1,466 $   113,418 $    96,286 $    (9,044)$        1,344 $     203,470

Exercise of stock options                    116,630         12       1,207                                                1,219
Purchase of 1,664 shares of treasury stock                                                      (26)                         (26)
Stock option compensation                                             1,007                                                1,007
Stock option modification (Note H)                                      196                                                  196
Tax benefit upon exercise of stock options                              256                                                  256
Retirement of treasury shares               (800,231)       (80)     (8,990)                  9,070                       -
                                          -----------   --------   ---------   ---------   ---------   ------------   -----------
     Subtotal                             13,977,115      1,398     107,094      96,286        -             1,344       206,122

Net income                                                                        3,118                                    3,118
Other comprehensive (loss) income
   Unrealized loss on interest rate swap                                                                        (7)           (7)
   Foreign currency translation gain                                                                           408           408
                                                                                                                      -----------
Comprehensive income                                                                                                       3,519
                                          -----------   --------   ---------   ---------   ---------   ------------   -----------
Balance at July 29, 2007                  13,977,115 $    1,398 $   107,094 $    99,404 $     -     $        1,745 $     209,641

Exercise of stock options                     38,725          3         318                                                  321
Purchase of 493,938 shares of treasury
 stock                                                                                       (7,139)                      (7,139)
Stock option compensation                                               990                                                  990
Tax benefit upon exercise of stock options                               91                                                   91
Retirement of treasury shares               (493,938)       (49)     (7,090)                  7,139                       -
                                          -----------   --------   ---------   ---------   ---------   ------------   -----------
     Subtotal                             13,521,902      1,352     101,403      99,404        -             1,745       203,904

Net loss                                                                        (10,346)                                 (10,346)
Other comprehensive loss
   Unrealized loss on interest rate swap                                                                       (25)          (25)
   Foreign currency translation loss                                                                           (98)          (98)
                                                                                                                      -----------
Comprehensive loss                                                                                                       (10,469)
                                          -----------   --------   ---------   ---------   ---------   ------------   -----------
Balance at August 3, 2008                 13,521,902 $    1,352 $   101,403 $    89,058 $     -     $        1,622 $     193,435
                                          ===========   ========   =========   =========   =========   ============   ===========
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                      F-5
<PAGE>
                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                  Fifty-three    Fifty-two weeks ended
                                                                  weeks ended    ---------------------
                                                                    August 3      July 29,     July 30,
                                                                      2008         2007        2006
                                                                  ------------  -----------   --------
Cash flows from operating activities:
<S>                                                             <C>            <C>          <C>
      Net (loss) income                                         $    (10,346)  $     3,118  $      10,354
                                                                   ------------  -----------  ------------
      Adjustments to reconcile net (loss) income to
      net cash provided by operating activities:
           Depreciation and amortization                               7,266         7,177          7,096
           Stock-based compensation costs                                990         1,007            453
           Excess tax benefit from exercises of stock options            (91)         (256)          (703)
           Litigation settlements                                     15,442
           Employment contract settlement costs (includes $196
            of stock option modification costs)                         -            8,914           -
           Imputed interest on employment and litigation
            settlement liabilities                                       446           283           -
           Foreign exchange transaction losses (gains)                   122          (501)          (431)
           Inventory valuation reserve charges                         1,515         1,283          1,475
           Reduction in accrual for contract losses                     (826)       (1,144)
           Warranty reserve charges                                    1,260         1,304            726
           Deferred tax provision                                     (4,275)       (1,310)           218
           Changes in operating assets and liabilities:
                Trade accounts receivable                                961         2,542         (3,342)
                Income Taxes Receivable                               (1,237)         (819)
                Costs incurred and income recognized in excess
                 of billings on uncompleted contracts and claims      (5,042)         (522)         2,132
                Other receivables                                      1,530        (2,047)           645
                Inventories, net                                     (11,342)         (189)        (2,794)
                Other current assets                                    (207)          118            157
                Accounts payable and accrued expenses                  6,869        (3,246)        (2,357)
                Billings in excess of costs incurred and
                 income recognized on uncompleted contracts              514          (456)            17
                Income taxes payable                                  (3,384)          379            338
                Accrual for contract losses                            2,660          (251)          (175)
                Litigation settlements                               (13,500)        -               -
                Employment settlement agreement                       (1,336)       (3,771)          -
                Advance payments on contracts                            957         3,840          1,435
                Other, net                                               438           222             84
                                                                   ------------  -----------  ------------
                Total adjustments                                       (270)       12,557          4,974
                                                                   ------------  -----------  ------------
           Net cash (used in) provided by operating activities       (10,616)       15,675         15,328
                                                                   ------------  -----------  ------------
Cash flows from investing activities:
      Acquisition of technology license                                 -             (179)        (1,256)
      Other                                                                3           204            111
      Capital expenditures                                            (4,637)       (4,972)        (6,227)
                                                                   ------------  -----------  ------------
           Net cash used in investing activities                      (4,634)       (4,947)        (7,372)
                                                                   ------------  -----------  ------------
Cash flows from financing activities:
      Borrowings under bank line of credit                            20,400        17,900         16,500
      Borrowings - other                                                -            1,746           -
      Proceeds from exercise of stock options                            321         1,219          3,171
      Excess tax benefit from exercises of stock options                  91           256            703
      Payments of long-term debt                                      (1,357)       (1,038)          (805)
      Payments under bank line of credit                             (17,900)      (17,900)       (16,500)
      Purchase of treasury stock                                       (7,139)          (26)        (9,044)
                                                                   ------------  -----------  ------------
           Net cash (used in) provided by financing activities        (5,584)        2,157         (5,975)
                                                                   ------------  -----------  ------------
Effect of exchange rate changes on cash                                -                (7)            (9)
                                                                   ------------  -----------  ------------
           Net (decrease) increase in cash and cash
           equivalents                                               (20,834)       12,878          1,972
Cash and cash equivalents at beginning of period                      35,181        22,303         20,331
                                                                   ------------  -----------  ------------
Cash and cash equivalents at end of period                      $     14,347   $    35,181  $      22,303
                                                                   ============  ===========  ============
Supplemental cash flow information:
      Financing of computer software and maintenance                                        $       1,627
                                                                                              ============
      Retirement of 493,938 (800,231 in 2007) shares of
       treasury stock                                           $      7,139   $     9,070
                                                                   ===========   ==========
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                      F-6
<PAGE>
                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.   Nature of Operations and Recent Events
     --------------------------------------

     Herley  Industries,  Inc.  ("Herley"),  a  Delaware  corporation,  and  its
     wholly-owned  subsidiaries  (collectively the "Company") are engaged in the
     design,  development and manufacture of microwave  technology solutions for
     the defense,  aerospace and medical industries worldwide with four domestic
     and three foreign  manufacturing  facilities and two engineering offices in
     the US. Herley's corporate office is in Lancaster, Pennsylvania.

     During the fourth  quarter of fiscal 2008 the Company  decided to close its
     manufacturing  facility in  Farmingdale,  NY and transfer its contracts and
     assets  to  its  other   facilities  in  Whippany,   New  Jersey;   Woburn,
     Massachusetts;  Lancaster,  Pennsylvania; and Jerusalem, Israel. Management
     expects that the closure of the facility will be substantially completed by
     the end of December 2008. The major costs associated with the restructuring
     are one-time termination benefits which are estimated at approximately $1.1
     million.  The costs are being accrued evenly from May 2008 through December
     2008.  Costs accrued  during the fourth quarter  approximated  $377,000 and
     charges  against the  liability  for  one-time  termination  benefits  paid
     approximated  $30,000.  The liability for the one-time termination benefits
     was approximately $347,000 as of August 3, 2008.

     In connection with the legal matters  discussed in Note E "Litigation,"  to
     avoid the delay,  expense,  inconvenience  and  uncertainty  of  protracted
     litigation,  the Company  entered into an agreement  with the Office of the
     United States  Attorney for the Eastern  District of Pennsylvania to settle
     all existing criminal claims. Under the terms of the agreement dated May 5,
     2008 the  Company  agreed to pay a fine of  $3,500,000.  In  addition,  the
     Company  entered into an agreement to settle all existing civil claims with
     the Civil  Division  of the Office of the United  States  Attorney  for the
     Eastern District of Pennsylvania  which requires the payment of $6,000,000.
     These payments were made on May 5, 2008. The Company advised the Department
     of the Navy, Acquisition Integrity Office about the terms and conditions of
     the criminal and civil  settlement  agreements  and the Company was advised
     that no action  would be taken to  suspend  or debar the  Company  based on
     these settlements.

     On June 27,  2007,  the Company  was  notified by the Office of the General
     Counsel,  Acquisition  Integrity  Office,  Department of Navy (the "Navy"),
     that  certain of its  operations  had been  suspended  from  receiving  new
     contract awards from the U.S. Government.  The affected operations included
     facilities in Lancaster,  Pennsylvania;  Woburn, Massachusetts and Chicago,
     Illinois. The Chicago,  Illinois location is a two-person marketing office.
     On August 15, 2007 the suspension was lifted  following an amendment to the
     Administrative  Agreement  (originally signed on October 12, 2006) with the
     Navy  as  discussed  below.  While  the  suspension  was  in  place,  these
     facilities  could not be solicited for or awarded new contracts or contract
     extensions  without  special  exceptions.  The  suspended  facilities  were
     permitted  to receive  contract  awards or  subcontracts  from the  Federal
     Government  if the head of the  agency  stated in  writing  the  compelling
     reason to do so. A  significant  portion of our business is received  under
     contracts  where we are the only  qualified  supplier on  critical  defense
     programs.

     On June 13, 2006, in connection  with the legal matter  discussed in Note E
     "Litigation,"  the Company was notified that certain of its  operations had
     been  suspended  from  receiving  new  contract   awards  from  the  U.  S.
     Government.  The affected  operations  included  facilities  in  Lancaster,
     Pennsylvania;  Woburn,  Massachusetts;  Chicago, Illinois and the Company's
     subsidiary in Farmingdale, New York. The result of this suspension was that
     these  facilities  were not  solicited  for or  awarded  new  contracts  or
     contract extensions without special exceptions,  pending the outcome of the
     legal  proceedings.  The  suspended  facilities  were  permitted to receive
     contract  awards  or  subcontracts  from  the  Federal  Government  if  the
     contracting agency stated in writing the compelling reason to do so.

     The Company's facilities which were not included in the action and who were
     free at all times to contract with the U.S.  Government  are the facilities
     in Whippany, New Jersey (Herley-CTI);  Jerusalem  (Herley-Israel);  McLean,
     Virginia (Innovative  Concepts,  Inc.) ("ICI");  Fort Walton Beach, Florida
     (Micro Systems,  Inc. and Herley-RSS)  ("MSI");  and Farnborough,  U.K. (EW
     Simulation Technology, Limited).

     Effective  October 12, 2006,  the Company  entered  into an  Administrative
     Agreement  with the  Department of the Navy, on behalf of the Department of
     Defense  that  requires  the Company,  among other  things,  to implement a
     comprehensive  program of  compliance  reviews,  audits and  reports  for a
     period of four years (as amended  August 15, 2007) or until  settlement  or
     adjudication  of the legal  matter  referenced  above,  whichever is later,
     unless  shortened  or  extended by written  agreement  of the  parties.  In
     addition,  the Company  was  required  to sever its  relationship  with its
     former Chairman of the Board of Directors,  as an employee or consultant to

                                      F-7
<PAGE>
     the Company.  In return,  the Navy, on behalf of the  Department of Defense
     terminated the suspension of the Company from receiving new contract awards
     from the U.S. Government.

     Effective  October  12,  2006  and as a  condition  to  entering  into  the
     Administrative  Agreement with the Department of the Navy noted above,  the
     Company  entered  into an  agreement  (the  "Agreement")  with  its  former
     Chairman to terminate the Employment  Agreement between him and the Company
     dated as of July 29, 2002 and modified on December 9, 2003. Aggregate costs
     of approximately  $8,914,000 under the Agreement,  including a cash payment
     of  $3,000,000,  payments  due  under a  Promissory  Note of  approximately
     $5,354,000,  medical and life insurance benefits of approximately  $364,000
     (both  discounted at an imputed  interest rate of 6.75%) and the fair value
     of the modification of stock options of  approximately  $196,000 (using the
     Black-Scholes  option valuation model), have been recorded in the Company's
     consolidated  financial  statements in the  fifty-two  weeks ended July 29,
     2007.

     In connection  with a lawsuit filed on April 10, 2007, by EADS  Deutschland
     GmbH ("EADS"), a German corporation,  against the Company (see Note E), the
     parties have entered into an agreement effective December 5, 2007 providing
     for a mutual  release and  dismissal,  with  prejudice and without costs or
     attorney's fees to either party, of all claims and counterclaims  filed. To
     avoid further dilution of management's time and energies,  as well as legal
     costs on a long and protracted legal dispute,  the Company agreed to pay to
     EADS the sum of $6,000,000. A payment of $2,500,000 was made on December 5,
     2007; a payment of $1,500,000  was made on March 31, 2008;  and payments of
     $1,000,000 are due on March 31, 2009 and March 31, 2010, respectively.  The
     agreement  further provides for the transfer to EADS of all drawings in the
     Company's  possession,  custody or control  for the  equipment  supplied in
     conjunction  with a contract  between the parties;  providing EADS with the
     use  of  such  drawings  for  the  exclusive   purpose  of  fulfilling  its
     obligations  towards its own customers under the contract.  As security for
     the payments  due in March of 2008,  2009 and 2010,  the Company  issued an
     irrevocable stand-by letter of credit in the amount of $3,500,000 under its
     existing credit facility. The letter of credit was reduced to $2,000,000 in
     connection  with the  payment  made in March 2008.  The Company  recorded a
     charge to  operations  in the  fifty-three  weeks  ended  August 3, 2008 of
     approximately  $6,042,000 consisting of payments due under the agreement of
     approximately $5,699,000, net of imputed interest of approximately $301,000
     discounted  at an  imputed  interest  rate of 7.25%,  plus  costs and other
     direct settlement expenses of approximately $343,000.

2.   Fiscal Year
     -----------

     The Company's  fiscal year ends on the Sunday closest to July 31.  Normally
     each fiscal year consists of fifty-two  weeks,  but every five or six years
     the  fiscal  year will  consist  of  fifty-three  weeks.  Fiscal  year 2008
     consists of  fifty-three  weeks ended August 3, 2008 ("fiscal  2008");  and
     fiscal years 2007 and 2006  consist of fifty-two  weeks ended July 29, 2007
     ("fiscal 2007") and July 30, 2006 ("fiscal 2006"), respectively.

3.   Basis of Financial Statement Presentation and Accounting Estimates
     ------------------------------------------------------------------

     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 of America
     ("U.S. GAAP") requires management to make certain estimates and assumptions
     that affect the reported  amounts of assets,  liabilities and disclosure of
     contingent  assets  and  liabilities  as  of  the  date  of  the  financial
     statements  and  reported  amounts  of  revenues  and  expenses  during the
     reporting periods.

     These  judgments can be subjective  and complex,  and  consequently  actual
     results  could  differ  from  those  estimates  and  assumptions.  The most
     significant  estimates include:  valuation and recoverability of long-lived
     assets;  income  taxes;  recognition  of  revenue  and costs on  production
     contracts;  and the  valuation of inventory  and  stock-based  compensation
     costs valued in accordance  with FAS 123R. Each of these areas requires the
     Company to make use of reasoned estimates including  estimating the cost to
     complete a contract,  the net  realizable  value of its  inventory  and the
     market  value of its  products.  Changes in  estimates  can have a material
     impact on the Company's  financial position and results of operations.  The
     accrual for contract losses associated with the ICI acquisition (more fully
     described in Note B), was reduced by $1.1 million for the  fifty-two  weeks
     ended July 29, 2007 (which is included as a reduction  of costs of products
     sold) as a result  of  management  changing  its  estimated  liability  for
     expected  losses under the  contract.  The  remaining  accrual for contract
     losses of  approximately  $826,000  relating to the  remaining two contract
     options was eliminated in the fifty-three weeks ended August 3, 2008 (which
     is included as a  reduction  of costs of products  sold) as a result of the
     customer  not  exercising  the  remaining  two contract  options  under the
     contract.  Shipments  under the contract  were  completed  during the first
     quarter  of  fiscal  2008 and the  remaining  options  under  the  contract
     expired.

     In the  fifty-three  weeks ended August 3, 2008,  the Company  recognized a
     loss of  approximately  $1.0 million on a development  contract due to cost
     overruns and a change in management's estimate of the recoverability of the
     costs on future contracts;  and losses of approximately $2.6 million due to
     cost overruns on two other development contracts.

     Certain  prior  year  amounts  were  reclassified  to  conform  to the 2008
     presentation.  The  reclassifications  had no effect on previously reported
     net income.

                                      F-8
<PAGE>
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.  The Company has cash balances in excess of amounts insured
     by the FDIC as of  August  3,  2008 and July 29,  2007.  In  addition,  the
     Company has cash balances in foreign countries of approximately  $9,089,000
     and $6,364,000 as of August 3, 2008 and July 29, 2007, respectively.

5.   Concentration of Credit Risk/Trade Accounts Receivable and Related Accounts
     ---------------------------------------------------------------------------

     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  defense,
     aerospace and medical 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.  As of August 3, 2008 and July 29, 2007, a reserve
     for doubtful accounts of approximately $122,000 and $138,000,  respectively
     are reflected in the consolidated  balance sheets as a deduction from trade
     accounts receivable.  Historically, the write off of uncollectible accounts
     receivable has been immaterial.

     The asset "Costs  incurred and income  recognized  in excess of billings on
     uncompleted  contracts" represents revenues recognized in excess of amounts
     billed.  The  liability  "Billings  in excess of costs  incurred and income
     recognized on uncompleted contracts" represents amounts billed in excess of
     revenues  earned.  Included in these two  categories  are unbilled  amounts
     which are  recorded  under the  percentage  of  completion  method  and are
     recoverable from the customer upon shipment of the product, presentation of
     billings or completion of the contract. Unbilled amounts are expected to be
     collected inside of one year.

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.  Inventory  costs relating to long-term  contracts and
     programs  are  reduced  by any  amounts in excess of  estimated  realizable
     value.  As is  customary  in the defense  industry,  inventory is partially
     financed by progress  payments.  The un-liquidated  balance of the progress
     payments is shown as a reduction in the carrying  amount of  inventory.  An
     estimate for obsolete and excess  inventory is also provided as a reduction
     of the carrying value of inventory.

7.   Property, Plant and Equipment
     -----------------------------

     Property,   plant  and  equipment  are  stated  at  cost  less  accumulated
     depreciation and  amortization.  Depreciation and amortization are provided
     principally by the straight-line  method over the estimated useful lives of
     the related assets.  Leasehold  improvements are amortized over the shorter
     of their  economic lives or the lease term, as defined in paragraph 5(f) of
     Statement of Financial Accounting Standards ("SFAS") No.13, "Accounting for
     Leases." Rent holidays and scheduled rent increases under operating  leases
     are recognized on a straight-line basis over the lease term,  including the
     rent holiday period, in accordance with paragraph 2 of Financial Accounting
     Standards Board ("FASB")  Technical  Bulletin 85-3 (as amended).  Gains and
     losses  arising  from  the  sale or  disposition  of  property,  plant  and
     equipment are included in income from operations.

8.   Computer Software
     -----------------

     Internal  use  software,   which   consists   primarily  of  an  integrated
     manufacturing  and  financial  reporting  package  is  stated  at cost less
     accumulated  amortization and is amortized using the  straight-line  method
     over its estimated useful life, generally eight years.

9.   Goodwill and Intangible Assets
     ------------------------------

     The  Company  accounts  for its  goodwill  in  accordance  with  SFAS  141,
     "Business  Combinations",  and SFAS 142,  "Goodwill  and  Other  Intangible
     Assets".  These statements  established  accounting and reporting standards
     for  acquired  goodwill  and other  intangible  assets.  Specifically,  the
     standards  address how acquired  intangible  assets should be accounted for
     both at the time of acquisition  and after they have been recognized in the
     financial  statements.  In accordance with SFAS No. 142, purchased goodwill
     must be evaluated  for  impairment  on an annual  basis.  Those  intangible
     assets  that  are  classified  as  goodwill  or as other  intangibles  with
     indefinite lives are not amortized.

                                      F-9
<PAGE>
     Impairment  testing is performed in two steps:  (i) the Company  determines
     impairment  by  comparing  the fair  value  of a  reporting  unit  with its
     carrying value,  and (ii) if there is impairment,  the Company measures the
     amount of  impairment  loss by comparing the implied fair value of goodwill
     with the carrying  amount of that  goodwill.  The Company has performed its
     annual impairment  evaluation required by this standard and determined that
     the goodwill and other  intangibles with indefinite lives are not impaired.
     Any future  impairment  of  goodwill  will be charged  to  operations.  The
     Company amortizes the cost of other intangibles over their estimated useful
     lives.  Amortizable  intangible assets may also be tested for impairment if
     indications of impairment exist.

     The change in the  carrying  amount of goodwill for the  fifty-three  weeks
     ended August 3, 2008 is as follows (in thousands):
<TABLE>
        <S>                                         <C>
        Balance at July 30, 2006                    $       73,612
          Fluctuations in foreign currency (1)                 432
                                                     -------------
        Balance at July 29, 2007                    $       74,044
          Fluctuations in foreign currency (1)                (144)
                                                     -------------
        Balance at August 3, 2008                   $       73,900
                                                     =============
</TABLE>
The carrying amounts of intangible assets as of August 3, 2008 and July 29, 2007
are as follows (in thousands):
<TABLE>
<CAPTION>
                                            August 3,                       July 29,
                                              2008                            2007
                                     -----------------------  --------------------------------------
                                      Gross                       Gross
                                     carrying      Accumulated  carrying  Accumulated   Amortization
                                      amount      amortization   amount   amortization  period (years)
                                     --------     ------------   -------- ------------  --------------
Definite lived intangible assets:
--------------------------------
<S>                                  <C>                 <C>   <C>                <C>       <C>
Technology (1)                       $    12,592         4,103 $   12,629         3,324     10-15
Backlog                                    3,125         2,285      3,125         1,375      2-5
Drawings                                     800           231        800           178      15
Non-compete agreement                         31            31         31            31       5
Xytrans license                            3,734           467      3,734             -       8
Patents                                      568           388        568           348      14
                                      ----------         -----  ---------         -----
                                      $   20,850         7,505  $  20,887         5,256
                                      ----------         -----  ---------         -----
Indefinite lived intangible assets:
----------------------------------
Trademarks                            $    2,800                $   2,800
                                      ==========                =========
Total intangible assets               $   23,650         7,505  $  23,687         5,256
                                      ==========         =====  =========         =====
<FN>
---------
(1) Adjusted to reflect fluctuations in foreign currency related to EWST.
</FN>
</TABLE>
The Company entered into a license and development  agreement  ("agreement")  on
April 7, 2005 to license  millimeter wave  technology for military  applications
from Xytrans,  Inc.  ("Xytrans").  Xytrans  focuses on providing  high-frequency
transceiver and outdoor unit design for the wireless  broadband  network market.
The technology  acquired includes exclusive access to a portfolio of patents and
trade  secrets  that  improve  the  cost  and  performance  of  millimeter  wave
subsystems  that are used in  weapons  and radar  systems.  The  agreement  also
provides for the payment of royalties ranging from 1% to 4% of sales of products
including relevant millimeter wave technology,  starting at the earliest January
1, 2006,  and generally  ending 4 years later.  No royalties have been earned or
paid as of August 3, 2008.  The Company  began to amortize the costs  associated
with this agreement  starting July 30, 2007 over the estimated  economic life of
approximately eight years.

Amortization  expense  related to Intangibles  for the  fifty-three  weeks ended
August 3, 2008 and the fifty-two weeks ended July 29, 2007 and July 30, 2006 was
approximately $2,249,000, $1,788,000 and $1,788,000, respectively.

Estimated aggregate  amortization expense for each of the next five fiscal years
is as follows (in thousands):

                             2009       $2,208
                             2010       $1,928
                             2011       $1,648
                             2012       $1,648
                             2013       $1,648

                                      F-10
<PAGE>
10.  Long-Lived Assets
     -----------------

     The Company accounts for long-lived assets in accordance with SFAS No. 144,
     "Accounting  for the  Impairment  or Disposal of  Long-Lived  Assets." This
     statement applies to long-lived assets other than goodwill,  and prescribes
     a  probability  weighted  cash flow  estimation  approach to  evaluate  the
     recoverability  of the  carrying  amount  of  long-lived  assets  such as a
     component  of an entity.  The  Company  considers a business to be held for
     sale when  management  approves  and  commits to a formal  plan to actively
     market a business for sale. Upon designation as held for sale, the carrying
     value of the  assets of the  business  are  recorded  at the lower of their
     carrying value or their estimated fair value, less cost to sell. Results of
     operations  of a  business  classified  as held for sale  are  reported  as
     discontinued  operations  when (a) the  operations  and  cash  flows of the
     business will be eliminated from ongoing operations as a result of the sale
     and (b) the Company will not have any significant continuing involvement in
     the operations of the business after the sale.

11.  Advance Payments and Billings in Excess of Costs Incurred
     ---------------------------------------------------------

     The Company  receives  advances,  performance-based  payments  and progress
     payments  from  customers  which  may  exceed  costs  incurred  on  certain
     contracts.

12.  Revenue and Cost Recognition
     ----------------------------

     The Company  recognizes  revenue when products are shipped and the customer
     takes  ownership  and  assumes  risk of loss,  collection  of the  relevant
     receivable is probable,  persuasive  evidence of an arrangement  exists and
     the  sales  price is fixed or  determinable.  It is the  policy of the U.S.
     Government to ensure that (a) its contracts  include  inspection  and other
     quality requirements, including warranty clauses when appropriate, that are
     determined  necessary to protect the  Government's  interest;  (b) supplies
     tendered by  contractors  meet contract  requirements;  and (c)  Government
     contract  quality  assurance  is  conducted  before  acceptance  (except as
     otherwise provided in the Federal Acquisition Regulations), by or under the
     direction  of  Government  personnel.  The  Company,  as a U.S.  Government
     contractor,  is  required to control  the  quality of its  products  and to
     tender  to the  Government  only  those  products  that  meet the  contract
     requirements.  Accordingly,  the  Company's  Government  contracts  include
     provisions  that require its products to pass quality  inspection  prior to
     acceptance by the Government.  Revenue is not recognized until the products
     pass  quality  inspection  and accepted by the  customer.  In the event the
     Government's  acceptance  occurs at  destination,  revenue is recognized at
     shipment if it can be demonstrated that the delivered  products meet all of
     the specified criteria prior to customer acceptance. Payments received from
     customers in advance of products delivered are recorded as advance payments
     on contracts until earned.

     Most of our customer  contracts are firm, fixed price contracts,  providing
     for a  predetermined  fixed price for the products sold,  regardless of the
     costs  incurred.   A  certain  percentage  of  revenues  are  derived  from
     long-term, fixed price contracts. Revenues and estimated profits, including
     contract  claims  and  unpriced  change  orders,  are  recognized  on these
     contracts  using the percentage of completion  method of accounting and are
     based on estimated completion to date (the total contract amount multiplied
     by the percentage of performance, based on total costs incurred in relation
     to total estimated cost at  completion).  The amount of claims and unpriced
     change orders  relating to changes in scope issues on a contract,  which is
     included in "Costs incurred and income  recognized in excess of billings on
     uncompleted contracts and claims" as of August 3, 2008 and July 29, 2007 is
     approximately $4.3 million.

     Prospective  losses on long-term  contracts are based upon the  anticipated
     excess of manufacturing costs over the selling price of the remaining units
     to be  delivered  and are  recorded in the period when first  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.

13.  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,  was  approximately  $28.7,  $33.4 and $33.3 million in fiscal
     2008,  2007, and 2006,  respectively,  and are included in cost of products
     sold. Amounts paid by customers toward these product development activities
     were  approximately  $9.6, $20.3 and $20.9 million in fiscal 2008, 2007 and
     2006, respectively and are included in net sales.

     Expenditures for  Company-sponsored  research and development  projects and
     bid  and  proposal  costs  are  expensed  as  incurred.  Customer-sponsored
     research and development  projects  performed under contracts are accounted
     for as contract costs as the work is performed.

14.  Income Taxes
     ------------

     Income  taxes  are  accounted  for  by  the  asset/liability   approach  in
     accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred taxes

                                      F-11
<PAGE>
     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  (benefit)  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.

     Deferred  tax assets  pertaining  to windfall  tax  benefits on exercise of
     stock options and the  corresponding  credit to additional  paid-in capital
     are  recorded if the related  tax  deduction  reduces  taxes  payable.  The
     Company has elected the  "With-and-without  approach" regarding ordering of
     windfall  tax  benefits to  determine  whether the windfall tax benefit did
     reduce taxes payable in the current year. Under this approach, the windfall
     tax benefits would be recognized in additional  paid-in  capital only if an
     incremental  tax  benefit  is  realized  after  considering  all  other tax
     benefits presently available to the Company.

     On July 30, 2007, the Company adopted  Interpretation  No. 48,  "Accounting
     for  Uncertainty in Income Taxes (as amended) - an  interpretation  of FASB
     Statement  No.  109" ("FIN 48").  The  cumulative  effect of  applying  the
     provisions  of FIN 48 resulted in a  reclassification  of $3,139,000 of tax
     liabilities  (including interest and penalties of $734,000) from current to
     non-current  and did not require an  adjustment to retained  earnings.  The
     total amount of unrecognized tax benefits could increase or decrease within
     the next twelve months for a number of reasons including audit settlements,
     tax   examination   activities   and  the   recognition   and   measurement
     considerations under FIN 48. The Company has elected to retain its existing
     accounting  policy with respect to the  treatment of interest and penalties
     attributable  to income taxes in  accordance  with FIN 48, and continues to
     reflect interest and penalties  attributable to income taxes, to the extent
     they arise,  as a component of its income tax  provision or benefit as well
     as its outstanding income tax assets and liabilities.

     The Company has  identified its federal tax return and its state tax return
     in Pennsylvania as major tax jurisdictions.  The Company is also subject to
     multiple other state and foreign jurisdictions. The Company's evaluation of
     FIN 48 tax matters was performed for tax years ended 2005 through 2008, the
     only periods subject to examination.  The Company  believes that its income
     tax  positions  and  deductions  would be  sustained  on audit and does not
     anticipate any  adjustments,  other than those  identified above that would
     result in a material change to its financial position.

15.  Stock-Based Compensation
     ------------------------

     The Company has various  fixed stock  option  plans which are  described in
     Note N that  provide for the grant of stock  options to eligible  employees
     and directors.

     Effective  August 1, 2005, the Company  adopted the fair value  recognition
     provisions of SFAS No. 123(R),  "Share-Based Payment" ("SFAS 123(R)") using
     the modified  prospective  application  method.  This standard requires the
     Company to measure the cost of employee  services  received in exchange for
     equity share  options  granted  based on the  grant-date  fair value of the
     options.  The cost is recognized as compensation expense over the requisite
     service period for each separately  vesting  portion of the options.  Under
     the modified prospective application method, compensation costs included in
     operating  expenses in the  fifty-three  weeks ended August 3, 2008 and the
     fifty-two  weeks ended July 29,  2007 and July 30,  2006 was  approximately
     $990,000,   $1,007,000  and  $453,000,   respectively  and  includes:   (a)
     compensation  cost of stock options  granted prior to but not yet vested as
     of August 1, 2005 (based on grant-date  fair value  estimated in accordance
     with the provisions of SFAS 123) and (b) compensation  cost for all options
     granted  subsequent  to July 31,  2005  (based  on  grant-date  fair  value
     estimated in accordance with the new provisions of SFAS 123(R)). New option
     grants  made after July 31,  2005,  as well as option  grants  issued on or
     prior to that date, have been valued using a Black-Scholes option valuation
     model.

     Income tax benefits  relating to the exercise of stock  options  during the
     fifty-three  weeks ended August 3, 2008 and the fifty-two  weeks ended July
     29, 2007 and July 30, 2006 amounted to approximately $91,000,  $256,000 and
     $703,000,  respectively.  Commencing  in fiscal  2006  income tax  benefits
     relating to the  exercise of stock  options are  classified  as a financing
     cash inflow in the Company's Consolidated Statements of Cash Flows.

     As of August 3, 2008, there were 3,512,225 stock options  outstanding.  The
     aggregate  value of  unrecognized  compensation  costs  related to unvested
     options,  as determined  using a Black-Scholes  option  valuation model was
     approximately  $910,000 (net of estimated forfeitures) which is expected to
     be  recognized  over a  weighted-average  period of 1.77 years.  During the
     fifty-three   weeks  ended  August  3,  2008,  the  Company  granted  4,000
     non-qualified  stock options,  with a fair value of approximately  $23,000.
     Options  for 38,725  shares of common  stock were  exercised  at an average
     price of $8.30 per share,  and 93,500  options  were  forfeited  during the
     year.

     The total  intrinsic  value of options  exercised  during  the years  ended
     August 3, 2008, July 29, 2007 and July 30, 2006 was approximately $237,000,
     $685,000 and $2,085,000, respectively.

                                      F-12
<PAGE>
     The weighted  average fair value of stock options on the date of grant, and
     the  assumptions  used to estimate the fair value of stock  options  issued
     during the periods presented using the Black-Scholes option valuation model
     are as follows:
<TABLE>
<CAPTION>
                                                                  2008         2007         2006
                                                                  ----         ----         ----
              <S>                                                 <C>           <C>          <C>
              Weighted average fair value of options granted      $5.72         $5.72        $7.19
              Expected life (years)                                2.73          2.93         3.53
              Expected volatility                                   .47           .47          .44
              Risk-free interest rate                               5.1%          5.1%         4.3%
              Expected dividend yield                              zero          zero         zero
              Forfeiture rate                                      6.19          6.19         7.45
</TABLE>
     The expected life of options granted during the periods  presented above is
     based on the Company's  historical  share option exercise  experience using
     the historical expected term from vest date. The expected volatility of the
     options  granted  is  determined  using  historical  volatilities  based on
     historical  stock prices.  The risk-free  interest rate is determined using
     the yield available for zero-coupon U.S. Government issues with a remaining
     term equal to the expected life of the options.  The Company has never paid
     a dividend,  and as such the dividend yield is zero. The forfeiture rate is
     based on the Company's historical experience.


16.  Foreign Currency Translation
     ----------------------------

     Financial   statements  of  foreign  subsidiaries  are  prepared  in  their
     respective  functional currencies and translated into United States dollars
     using exchange  rates at the balance sheet date for assets and  liabilities
     and a  monthly  average  rate  during  the year  for  revenues,  costs  and
     expenses.  Net gains or losses  resulting  from the  translation of foreign
     financial  statements  are  charged or  credited  directly  to the  foreign
     currency translation  component of "Accumulated other comprehensive income"
     in  the  accompanying  consolidated  statements  of  shareholders'  equity.
     Transaction gains and losses resulting from transactions entered into under
     contracts in a currency other than the subsidiary's functional currency are
     accounted for on a transactional basis as a credit or charge to operations.

17.  Derivatives
     -----------

     The Company recognizes all derivatives on the consolidated balance sheet at
     fair value.  On the date the  derivative  instrument is entered  into,  the
     Company  generally  designates  the derivative as either (1) a hedge of the
     fair value of a recognized asset or liability,  or of an unrecognized  firm
     commitment ("fair value hedge") or (2) a hedge of a forecasted  transaction
     or of the  variability  of cash flows to be received  or paid  related to a
     recognized asset or liability ("cash flow hedge"). The Company entered into
     an interest rate swap in October 2001 with a bank, which it recognized as a
     cash  flow  hedge.  Changes  in the  fair  value  of a  derivative  that is
     designated  as, and meets all the required  criteria for, a cash flow hedge
     are  recorded  in  accumulated  other   comprehensive   income  (loss)  and
     reclassified into earnings as the underlying hedged item affects earnings.

18.  Comprehensive Income
     --------------------

     The Company reports comprehensive income in the Consolidated  Statements of
     Shareholders'  Equity which includes net income,  unrealized gain (loss) on
     an interest rate swap,  net of related income taxes;  and foreign  currency
     translation  gain (loss).  Substantially  all the amount  included in other
     comprehensive income relates to the effects of foreign exchange translation
     gains and  losses.  No  adjustment  has been made for  income  taxes  since
     substantially  all  translation  gains and losses  relate to the  permanent
     investment in the foreign subsidiary.

19.  Dividend Policy
     ---------------

     The Company  has not paid cash  dividends  in the  Company's  history.  The
     Company's  board of directors  evaluates  its dividend  policy based on its
     financial condition,  profitability,  cash flow, capital requirements,  and
     the outlook of its business.

20.  Advertising Costs
     -----------------

     The Company expenses  advertising  costs as incurred.  Advertising costs in
     fiscal  2008,   2007  and  2006  were  $233,000,   $315,000  and  $262,000,
     respectively.

21.  New Accounting Pronouncements
     -----------------------------

     In April  2008,  the FASB  issued  Staff  Position  ("SFP")  No. FAS 142-3,
     "Determination of the Useful Life of Intangible  Assets",  which amends the
     factors  that  should be  considered  in  developing  renewal or  extension
     assumptions  used to determine  the useful life of a recognized  intangible

                                      F-13
<PAGE>
     asset under SFAS No.  142,  "Goodwill  and Other  Intangible  Assets."  The
     intent of FAS 142-3 is to improve the  consistency  between the useful life
     of a  recognized  intangible  asset  under  SFAS No.  142 and the period of
     expected  cash flows used to measure the fair value of the asset under SFAS
     No. 141 (revised 2007), "Business  Combinations",  and other U.S. generally
     accepted  accounting  principles.  FAS 142-3 is effective  for fiscal years
     beginning  after  December  15,  2008 and  only  applies  prospectively  to
     intangible  assets acquired after the effective date. Early adoption is not
     permitted.  The Company is currently  evaluating  the impact this statement
     will have on its consolidated financial position, cash flows and results of
     operations.

     In March  2008,  the FASB issued  SFAS No. 161 ("SFAS  161"),  "Disclosures
     about Derivative Instruments and Hedging  Activities--an  amendment of FASB
     Statement  133,   Accounting  for   Derivative   Instruments   and  Hedging
     Activities"  ("SFAS 133"). SFAS 161 requires  companies to provide enhanced
     disclosures  regarding  derivative  instruments  and hedging  activities in
     order to better  convey  the  purpose  of  derivative  use in terms of risk
     management.  Disclosures  about (i) how and why an entity  uses  derivative
     instruments,  (ii) how derivative  instruments and related hedged items are
     accounted for under SFAS 133 and its related interpretations, and (iii) how
     derivative   instruments  and  related  hedged  items  affect  a  company's
     financial position,  financial  performance,  and cash flows, are required.
     This  statement  retains  the same scope as SFAS 133 and is  effective  for
     fiscal years and interim  periods  beginning  after  November 15, 2008. The
     Company is currently  evaluating  the impact,  if any, that the adoption of
     SFAS 161 will have on its consolidated  financial position,  cash flows and
     results of operations.

     In September 2006, the FASB issued SFAS No. 157, "Fair Value  Measurements"
     ("SFAS 157").  SFAS 157 (i)  establishes a single  definition of fair value
     and a  framework  for  measuring  fair  value,  (ii) sets out a fair  value
     hierarchy  to be used to classify  the source of  information  used in fair
     value  measurements,  and (iii)  requires  new  disclosures  of assets  and
     liabilities  measured at fair value based on their level in the  hierarchy.
     This statement applies under other accounting  pronouncements  that require
     or permit fair value  measurements.  In February  2008, the FASB issued FSP
     No. 157-1 and No. 157-2, which,  respectively,  remove leasing transactions
     from the  scope  of SFAS  157 and  defer  its  effective  date for one year
     relative to certain  nonfinancial assets and liabilities.  As a result, the
     application of the definition of fair value and related disclosures of SFAS
     157 (as  impacted by these two FSPs) will be  effective  for the  Company's
     fiscal year beginning  August,  2008 on a prospective basis with respect to
     fair value measurements of (a) nonfinancial assets and liabilities that are
     recognized or disclosed at fair value in the Company's financial statements
     on a recurring basis (at least  annually) and (b) all financial  assets and
     liabilities. The remaining aspects of SFAS 157 for which the effective date
     was  deferred  under FSP No.  157-2 are  currently  being  evaluated by the
     Company and will be  effective  for the  Company's  fiscal  year  beginning
     August,  2009. Areas impacted by the deferral relate to nonfinancial assets
     and  liabilities  that are measured at fair value,  but are  recognized  or
     disclosed at fair value on a nonrecurring  basis.  This deferral applies to
     such items as  nonfinancial  assets and liabilities  initially  measured at
     fair value in a business  combination  (but not  measured  at fair value in
     subsequent  periods) or  nonfinancial  long-lived  asset groups measured at
     fair value for an impairment  assessment.  The effects of SFAS 157 and FSPs
     No. 157-1 and No. 157-2 are  currently  being  evaluated by the Company but
     are not expected to have a material  impact on its  consolidated  financial
     position, cash flows and results of operations.

     In December  2007, the FASB issued SFAS No. 141 (revised  2007),  "Business
     Combinations"  ("SFAS  141(R)").  The  objective  of this  statement  is to
     improve the relevance,  representational faithfulness, and comparability of
     the information that a reporting  entity provides in its financial  reports
     about a business combination.  Specifically,  it establishes principles and
     requirements  over  how  the  acquirer  (1)  recognizes  and  measures  the
     identifiable   assets   acquired,   the   liabilities   assumed,   and  any
     noncontrolling  interest  in the  acquiree;  (2)  recognizes  and  measures
     goodwill  acquired  in the  business  combination  or a gain from a bargain
     purchase,  and; (3) determines what information to disclose to enable users
     of the financial statements to evaluate the nature and financial effects of
     the business  combination.  SFAS 141(R) also  requires  acquisition-related
     transaction expenses and restructuring costs be expensed as incurred rather
     than capitalized as a component of the business combination. This statement
     is  effective  for fiscal  years  beginning  after  December  15, 2008 (the
     Company's 2010 fiscal year). SFAS 141(R) would have an impact on accounting
     for any businesses acquired after the effective date of this pronouncement.

     In December 2007, the FASB issued SFAS No. 160,  "Noncontrolling  Interests
     in  Consolidated  Financial  Statements  an  amendment of ARB No. 51" (SFAS
     160).  The  objective  of  this  statement  is to  improve  the  relevance,
     comparability,  and  transparency  of  the  financial  information  that  a
     reporting  entity  provides in its  consolidated  financial  statements  by
     establishing  accounting  and reporting  standards  for the  noncontrolling
     interest in a subsidiary  (minority  interests) and for the deconsolidation
     of a  subsidiary.  SFAS 160 also  requires  that a retained  noncontrolling
     interest upon the  deconsolidation of a subsidiary be initially measured at
     its fair value. Upon adoption of SFAS 160, the Company would be required to
     report  any   noncontrolling   interests   as  a  separate   component   of
     shareholders' equity. The Company would also be required to present any net
     income allocable to noncontrolling interests and net income attributable to
     the shareholders of the Company  separately in its consolidated  statements
     of income.  This  statement  is  effective  for fiscal  years,  and interim
     periods within those fiscal years,  beginning  after December 15, 2008 (the
     Company's 2010 fiscal year). SFAS 160 requires  retroactive adoption of the
     presentation and disclosure  requirements for existing minority  interests,
     and  would  have  an  impact  on the  presentation  and  disclosure  of the
     noncontrolling  interest of any non wholly-owned businesses acquired in the
     future.

                                      F-14
<PAGE>
Note B - ACQUISITIONS

     The Company  adjusted its valuation of the assets  acquired and liabilities
     assumed in the acquisition of ICI in accordance with the provisions of SFAS
     No.  141  during  the  second  quarter  of fiscal  2006.  Accordingly,  the
     Company's  consolidated  financial  statements  reflect  an  adjustment  of
     $2,504,000  to the reserve for  contract  losses  relating to a contract in
     ICI's  backlog  at the date of  acquisition  that  consisted  of an initial
     production order and four additional  options  exercisable  unilaterally by
     the customer. Although the customer had not exercised any options as of the
     date of acquisition,  the Company had a contractual obligation to honor the
     terms and conditions of the contract  including the  discounted  pricing in
     the  contract  options,  with  a high  probability  of  the  options  being
     exercised, resulting in the estimated losses under the contract. Two of the
     four options were exercised. The accrual for contract losses was reduced by
     $1.1 million in the fifty-two  weeks ended July 29, 2007 (which is included
     as a  reduction  of costs of  products  sold)  as a  result  of  management
     changing its estimated  liability  for expected  losses under the contract.
     The balance of the accrual for contract  losses of  approximately  $826,000
     relating  to the  remaining  two  contract  options was  eliminated  in the
     fifty-three weeks ended August 3, 2008 (which is included as a reduction of
     costs of products  sold) as a result of the  customer  not  exercising  the
     remaining  two contract  options under the  contract.  Shipments  under the
     contract  were  completed  during the first  quarter of fiscal 2008 and the
     remaining options under the contract expired.

NOTE C - INVENTORIES

     The major components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                      August 3,    July 29,
                                                                        2008         2007
                                                                      ---------    --------
        <S>                                                       <C>            <C>
        Purchased parts and raw materials                         $       32,439 $    28,526
        Work in process                                                   33,663      27,797
        Finished products                                                  2,623       2,576
                                                                    -------------  ----------
                                                                          68,725      58,899
          Less:
                 Allowance for obsolete and slow moving inventory          6,476       5,163
                 Unliquidated progress payments                              690       1,921
                                                                    -------------  ----------
                                                                  $       61,559 $    51,815
                                                                    =============  ==========
</TABLE>
NOTE D - PROPERTY, PLANT AND EQUIPMENT

     Property,   plant  and   equipment  are  comprised  of  the  following  (in
thousands):
<TABLE>
<CAPTION>
                                                         August 3,      July 29,  Estimated
                                                          2008            2007    Useful Life
                                                          ----            ----    -----------
        <S>                                            <C>           <C>            <C>
        Land                                           $     4,006   $     4,006
        Building and building improvements                  13,894        12,229    10-40 years
        Machinery, equipment and software                   60,594        56,128     3- 8 years
        Furniture and fixtures                               2,888         3,285     5-10 years
        Leasehold improvements                               2,073         3,242     5-10 years
                                                        -----------   -----------   -----------
                                                            83,455        78,890
        Less accumulated depreciation and amortization      52,903        48,894
                                                        -----------   -----------
                                                       $    30,552   $    29,996
                                                        ===========   ===========
</TABLE>
Depreciation  and  amortization   charges  totaled   approximately   $5,017,000,
$5,389,000 and $5,208,000 in fiscal 2008, 2007 and 2006, respectively.

                                      F-15
<PAGE>
NOTE E - COMMITMENTS AND CONTINGENCIES

     Leases
     ------

     The  Company  leases  office,  production  and  warehouse  space as well as
     computer equipment and automobiles under  non-cancelable  operating leases.
     Rent  expense  for the  fifty-three  weeks  ended  August  3,  2008 and the
     fifty-two  weeks ended July 29, 2007 and July 30, 2006,  was  approximately
     $4,036,000, $3,812,000 and $3,960,000, respectively. Minimum annual rentals
     under non-cancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
                        Fiscal year ending          Amount
                        ------------------          ------
                           <S>                     <C>
                                2009               $ 3,552
                                2010                 3,460
                                2011                 2,857
                                2012                 1,472
                                2013                   174
                           Thereafter                  164
                                                    ------
                                                   $11,679
                                                    ======
</TABLE>
     Purchase Commitments
     --------------------
     The Company was committed to make future purchases  primarily for inventory
     related  items under  various  purchase  arrangements  with fixed  purchase
     provisions aggregating approximately $23 million at August 3, 2008.

     Employment and Severance Agreements

     The Company has an employment  agreement with the Chairman/Chief  Executive
     Officer  of the  Company  which  expires  December  31,  2013,  subject  to
     extension for additional  one-year  periods  annually each January 1 with a
     final  expiration date of December 31, 2015 (as amended  December 9, 2003).
     The  agreement  provides  for an  annual  salary  as of  August  3, 2008 of
     $739,300 as adjusted  under the agreement for a semi-annual  cost of living
     adjustment  based on the consumer price index.  The agreement also provides
     for  incentive  compensation  at 3% of  pretax  income of the  Company.  No
     incentive  compensation  has been  provided  under the agreement for fiscal
     2008. A discretionary  bonus of $381,000 was paid and charged to expense in
     fiscal 2008. Incentive compensation in the amount of approximately $369,000
     and  $477,000  was  charged  to  expense  in  fiscal  years  2007 and 2006,
     respectively.

     The agreement also provides that, in the event there is a change in control
     of the Company,  as defined,  the executive has the option to terminate the
     agreement  and  receive a lump-sum  payment  equal to the sum of his salary
     payable for the  remainder of the  employment  term,  plus the annual bonus
     (based on the average of the three highest  annual  bonuses  awarded during
     the ten preceding  years) for the remainder of the  employment  term. As of
     August 3, 2008, the amount payable in the event of such  termination  would
     be approximately  $8,357,000.  The agreement also provides for a consulting
     period  of ten  years  at the end of the  employment  period  at an  annual
     compensation equivalent to one-half of the executive's annual salary at the
     end of the employment period, subject to annual cost of living adjustments.

     Under  the  terms of an  employment  agreement  with the  Company's  former
     Chairman,  incentive  compensation in the amount of approximately  $637,000
     was charged to expense in fiscal 2006.

     The Company  entered into an employment  agreement with the Chief Operating
     Officer of the  Company as of May 30,  2007 which  expires  July 31,  2011,
     subject to extension for additional  one-year  periods  annually  beginning
     July 31, 2008 with a final  expiration date of July 31, 2012. The agreement
     provides for an annual salary of $365,800  (adjusted for a semi-annual cost
     of living  adjustment  based on the consumer  price index),  and an initial
     award of 250,000  non-qualified stock options at the closing stock price on
     the date prior to  execution  of the  agreement  of $15.77  per share.  The
     options vest 20% upon award and 20% annually over the next four years.  The
     agreement  also  provides  for  incentive  compensation  to be  paid at the
     discretion of the Board of Directors,  however,  incentive compensation for
     the fiscal  year ended  August 3, 2008 is a minimum of  $300,000  which has
     been  accrued  in the  financial  statements  as of  August  3,  2008.  The
     agreement also provides for a consulting  period of ten years at the end of
     the employment period at an annual  compensation of $100,000.  In the event
     there is a change in control of the Company, as defined,  the executive has
     the option to terminate  the  agreement at any time after July 31, 2010 and
     receive a lump-sum  payment equal to the sum of: (1) his salary payable for
     the remainder of the employment  term, (2) the annual bonuses (based on the
     average of the annual  bonuses  awarded  during the term of the  employment
     agreement)  for the remainder of the  employment  term,  and (3) a lump-sum
     payment of $500,000  representing full  consideration  under the consulting
     period.

     Certain other executive officers of the Company have employment  agreements
     which expire June 6, 2009  providing  for aggregate  annual  salaries as of
     August 3, 2008 of $396,500.

     An  employment  contract of a retired  executive  provides for a consulting
     period which became effective October 1, 1998, and terminates  December 31,
     2010 at the annual rate of compensation of $100,000.

                                      F-16
<PAGE>
     Several officers and key employees have severance  agreements providing for
     an aggregate lump-sum payment of approximately $2,533,000 in the event of a
     change of control as defined in the agreements.  The agreements expire from
     one to two years from the date of a change of control.

     Litigation
     ----------

     On June 6, 2006, in connection with an investigation by the U.S. Attorneys'
     Office in Pennsylvania  which, inter alia, involved pricing under contracts
     with the U.S. Department of Defense relating to voltage control oscillators
     and  powerheads,  an  indictment  was returned  against the Company and Lee
     Blatt, its former Chairman. No other officer or director of the Company was
     named in the indictment. The contracts aggregate approximately $3.9 million
     in total  revenue.  On May 5, 2008,  the Company  entered into an agreement
     with the United  States  Attorney's  Office  for the  Eastern  District  of
     Pennsylvania  in which (a) the Company agreed to plead guilty to two counts
     of obstructing an audit relating solely to the powerheads;  (b) the Company
     agreed  to pay a fine of $3.5  million;  and (c) the  Government  agreed to
     dismiss all other counts of the indictment.  The agreement was presented to
     the  Court  on May 5,  2008,  and the  Court  accepted  the  agreement  and
     sentenced the Company to the agreed-upon fine.

     With  respect  to  Mr.  Blatt,  the  Court,  at the  Government's  request,
     dismissed  all of  the  charges  against  him in  the  indictment  and  the
     Government  filed a  Superseding  Information  charging  Mr.  Blatt  with a
     misdemeanor  violation  of the tax code in a single  count,  and Mr.  Blatt
     entered a guilty plea for failing to keep Company records of the allocation
     of an $18,000  corporate  research  expense.  Mr. Blatt was fined  $25,000,
     received a term of  probation  of one year and was required to perform some
     community service which has been completed.

     Under the terms of an indemnification agreement with Mr. Blatt, the Company
     has  agreed  to  provide  indemnification  with  regard  to  certain  legal
     proceedings so long as he has acted in good faith and in a manner  believed
     to be in, or not opposed to, the  Company's  best  interest with respect to
     any criminal  proceeding and had no reasonable cause to believe his conduct
     was unlawful.

     Shortly  before  the  indictment  mentioned  above,  Company  counsel  were
     notified by  representatives of the United States Attorney's Office for the
     Eastern  District of  Pennsylvania,  Civil Division,  that they intended to
     file a civil lawsuit against the Company  pursuant to inter alia, the False
     Claims Act, 31 U.S.C.  Section  3729 et. seq.  The Company  entered  into a
     Tolling Agreement on June 21, 2006,  deferring any further activity related
     to this  potential  claim  until  after  the trial of the  criminal  matter
     mentioned  above.  By  agreement  dated  May 5,  2008,  the  United  States
     Attorney's  Office for the Eastern District of Pennsylvania and the Company
     entered into an agreement to resolve the potential  issues arising from the
     lawsuit threatened against the Company pursuant to, among other things, the
     False Claims Act, 31 U.S.C.  Section 3729 et. seq. for the matters  alleged
     in the  Superseding  Indictment.  The  Company  agreed to pay $6 million in
     exchange for, among other things, a release.

     In June and July 2006,  the Company was served  with  several  class-action
     complaints  against the  Company and certain of its  officers in the United
     States District Court for the Eastern District of Pennsylvania.  The claims
     are made under  Section 10(b) and 20(a) of the  Securities  Exchange Act of
     1934  and  Rule  10b-5  thereunder.  All  defendants  in  the  class-action
     complaints filed motions to dismiss on April 6, 2007. On July 17, 2007, the
     Court  issued an order  denying the  Company's  and Mr.  Blatt's  motion to
     dismiss and  granted,  in part,  the other  defendants'  motion to dismiss.
     Specifically, the Court dismissed the Section 10(b) claim against the other
     defendants and denied the motion to dismiss the Section 20(a) claim against
     them. On July 18, 2007, the Court granted  defendant's motion to stay these
     actions until after the trial of the criminal matter  referenced  above. On
     February 8, 2008, the Court issued an Order  allowing for certain  document
     discovery  to  commence.  On May 9,  2008,  the Court  lifted  the stay.  A
     Scheduling  Order has now been  entered  requiring  the parties to complete
     discovery  by January  2009.  At this stage of the  proceedings,  it is not
     possible to predict what,  if any,  liability the Company may have from the
     Securities Class Actions.

     In July and August 2006,  the Company and certain of its current and former
     officers  and  directors  were also  served  with two  separate  derivative
     complaints  for breach of fiduciary  duty brought  pursuant to Rule 23.1 of
     the  Federal  Rules  of  Civil  Procedure.  The  complaints  relate  to the
     Company's  indictment in the matter  discussed above and were  consolidated
     into  one  action  on March  9,  2006.  All  defendants  in the  derivative
     complaints filed motions to dismiss on February 26, 2007. On July 20, 2007,
     the Court issued an order denying  defendants' motions in part and granting
     them in part.  Specifically,  the Court  dismissed the claim that the named
     officers and  directors  failed to oversee Mr. Blatt and denied the motions
     with  respect  to  the  other  alleged  claims.   The  Court  also  granted
     defendants' motion to stay the action until after the trial of the criminal
     matter. On February 8, 2008, the Court issued an Order allowing for certain
     document discovery to commence.  On May 9, 2008, the Court lifted the stay.
     A Scheduling  Order has now been entered  requiring the parties to complete
     discovery  by January  2009.  At this stage of the  proceedings,  it is not
     possible to predict what,  if any,  liability the Company may have from the
     Derivative Actions.

     The Company  believes  it is  entitled  to  recovery of certain  legal fees
     associated with the above matters under our Directors and Officers  ("D&O")
     insurance policy. As of August 3, 2008, the Company has aggregate claims of
     approximately $7,151,000 (net of a deductible of $500,000) and has received

                                      F-17
<PAGE>
     partial payments of approximately $2,236,000.  The Company has entered into
     an agreement  dated January 11, 2007 with the insurance  carrier whereby if
     it is determined by final  decision of an  arbitration  panel,  or by final
     judgment  of  a  court,  or  other  final  decision  of a  tribunal  having
     jurisdiction thereof, that any amount paid by the insurance carrier was not
     a loss,  as that  term is  defined  in the  policy,  we shall  repay to the
     insurance carrier any such uncovered sums previously advanced to us.

     Subsequent to the end of fiscal 2008, the insurance  carrier  asserted in a
     letter  their  determination  that they are not liable  for  certain of the
     legal costs  incurred by the  Company.  The  Company has  responded  with a
     letter,  supported by court case  citations,  that all the submitted  costs
     represent  valid claims under the policy and that the insurance  company is
     liable.  The Company  believes such costs  represent a "loss" under its D&O
     policy.   However,  based  on  the  insurance  company's  position  and  in
     accordance   with  the  guidance  in  AICPA  Statement  of  Position  96-1,
     "Environmental   Remediation   Liabilities"  and  Securities  and  Exchange
     Commission  Staff  Accounting  Bulletin No. 92 "Accounting  and Disclosures
     Relating to Loss  Contingencies",  the Company is not permitted to record a
     potential claim for recovery under its insurance policy.  Accordingly,  the
     previously  recorded  receivable  of  $2,803,000 as of May 4, 2008 has been
     eliminated in the fourth quarter of fiscal 2008.

     The term "Loss" is defined in the policy as follows:

     "Loss means the amount that any Insured becomes legally obligated to pay on
     account  of any  covered  Claim,  including  but  not  limited  to  damages
     (including  punitive or exemplary  damages,  or the multiple portion of any
     multiplied  damage  award,  if and to the extent such damages are insurable
     under the law of the  jurisdiction  most favorable to the  insurability  of
     such damages provided such  jurisdiction has a substantial  relationship to
     the relevant Insureds,  to the Company,  or to the Claim giving rise to the
     damages), judgments, settlements,  pre-judgment and post-judgment interest,
     Defense  Costs and,  solely with respect to Insuring  Clause 2,  Settlement
     fees."

     Further, the policy defines "Defense Costs" as follows:

     "Defense  Costs means that part of Loss  consisting  of  reasonable  costs,
     charges,  fees  (including but not limited to attorneys'  fees and experts'
     fees) and expenses (other than regular or overtime wages, salaries, fees or
     benefits of the  directors,  officers  or  employees  of the  Organization)
     incurred in defending  any Claim and the premium for appeal,  attachment or
     similar bonds."

     On June 27,  2007,  the Company  was  notified by the Office of the General
     Counsel,  Acquisition  Integrity  Office,  Department of Navy (the "Navy"),
     that  certain of its  operations  had been  suspended  from  receiving  new
     contract awards from the U.S. Government.  The affected operations included
     facilities in Lancaster,  Pennsylvania;  Woburn, Massachusetts and Chicago,
     Illinois. The Chicago, Illinois location is a two-person marketing office.

     On August 15, 2007 the suspension was lifted  following an amendment to the
     Administrative  Agreement with the Navy  (originally  signed on October 12,
     2006)  extending the term of the agreement for one additional  year.  While
     the suspension was in place, these facilities could not be solicited for or
     awarded new contracts or contract  extensions  without special  exceptions.
     The  suspended  facilities  were  permitted to receive  contract  awards or
     subcontracts  from the Federal  Government if the head of the agency stated
     in writing the  compelling  reason to do so. A  significant  portion of the
     Company's  business  is  received  under  contracts  where  it is the  only
     qualified supplier on critical defense programs.

     Prior to May 5, 2008,  counsel for the Company met with  representatives of
     the  Department  of Navy,  Suspension  and  Debarment  Office,  Acquisition
     Integrity Office to discuss (a) the possible  agreement  between the United
     States  Attorney's  Office for the Eastern District of Pennsylvania and the
     Company,  as such is set forth above,  and (b) the possible  agreement with
     the Civil  Division of the U.S.  Attorney's  Office and the Company,  as is
     mentioned above. Representatives from the Navy advised that no action would
     be taken to suspend or debar the Company based upon these  agreements,  and
     no action was in fact taken or is expected to be taken.

     On April 10, 2007,  EADS filed a lawsuit  against the Company in the United
     States  District  Court for the Eastern  District of New York.  EADS claims
     that the Company breached a Transfer of Technology  Agreement  entered into
     on May 30,  2001  under  which the  Company  was  granted  the right to use
     certain technology owned by EADS in performing under an exclusive sales and
     marketing  agreement entered into on May 30, 2001. EADS asserted claims for
     breach of contract and conversion, claiming that the Company was wrongfully
     in possession of the  intellectual  property  that was  transferred  to the
     Company. EADS also sought a preliminary injunction.  The Company denied any
     wrongdoing  and filed  counterclaims  against EADS. On August 2, 2007,  the
     Company  and EADS  entered  into a  settlement  of this  motion,  which was
     reduced  to a written  consent  decree  entered  by the Court on August 29,
     2007.  EADS's  claims for breach of contract  and for  conversion  remained
     pending,  as did  the  Company's  counterclaims.  Pursuant  to the  consent
     decree,  the parties  agreed to a  mediation/settlement  conference  of all
     their  respective  claims with the Court,  and  further  agreed to stay all
     proceedings pending the outcome of that mediation/settlement  conference on
     October 17, 2007. In November  2007,  the Company  reached a  comprehensive
     settlement  agreement with EADS effective December 5, 2007, as discussed in
     Note A-1.

                                      F-18
<PAGE>
     In accordance with SFAS No. 5, "Accounting for  Contingencies," the Company
     determines  whether an  estimated  loss from a loss  contingency  should be
     accrued  by  assessing  whether  a  loss  is  deemed  probable  and  can be
     reasonably estimated. Litigation is inherently unpredictable and due to the
     uncertainty of the outcome of the matters  discussed above, the Company has
     concluded  that it is currently not probable that a loss has been incurred.
     Accordingly,  no accrual has been recorded in the accompanying consolidated
     financial  statements.  If an  unfavorable  ruling  were  to  occur  in any
     specific period,  there exists the possibility of a material adverse impact
     on the results of operations for that period.

     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  will  not  have a  material  adverse  effect  on the  Company's
     consolidated financial position, cash flows and results of operations.

     Stand-by Letters of Credit
     --------------------------

     The Company  maintains a letter of credit  facility in connection  with the
     revolving credit agreement with two banks 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
     March 31, 2010. At August 3, 2008,  stand-by letters of credit  aggregating
     approximately  $15,878,000 were  outstanding  under this facility (See Note
     G).

NOTE F - INCOME TAXES

     During the quarter  ended May 4, 2008 the Company  recognized a tax benefit
     of  $2,737,000,  including  interest and penalties of $806,000,  due to the
     expiration  of the statute of  limitations  in April 2008,  for a deduction
     taken for an impaired  investment on a prior year's income tax return.  The
     ultimate  timing  of the tax  consequences  of the other  tax  benefits  is
     uncertain.

     As of August 3, 2008,  the Company's  unrecognized  tax  benefits,  that if
     recognized would affect the Company's effective tax rate, were $509,000.  A
     reconciliation  of the  beginning  and ending  amount of  unrecognized  tax
     benefits is as follows:
<TABLE>
        <S>                                    <C>
        Balance at July 30, 2007 upon adoption $      3,139,000
        Lapse of statute of limitations              (2,737,000)
        Accrued interest                                107,000
                                                  --------------
                                               $        509,000
                                                  ==============
</TABLE>
     The  unrecognized  tax  benefits  are  included  as "Accrued  Income  Taxes
     Payable"  under  long-term  liabilities  in the  accompanying  Consolidated
     Balance Sheets.

     (Loss) income before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
                                    Fifty-three
                                    weeks ended     Fifty-two weeks ended
                                      August 3,     July 29,     July 30,
                                       2008          2007          2006
                                       ----          ----          ----
(Loss) income before income taxes:
<S>                               <C>            <C>         <C>
      Domestic (loss) income      $     (21,089) $   (2,124) $       11,514
      Foreign income                        740       4,223           2,819
                                    ------------   ---------   -------------
      Total (loss) income         $     (20,349) $    2,099  $       14,333
                                    ============   =========   =============
</TABLE>
                                      F-19
<PAGE>
     (Benefit)   provision   for  income  tax  consists  of  the  following  (in
     thousands):
<TABLE>
<CAPTION>
                                         Fifty-three
                                         Weeks ended       Fifty-two weeks ended
                                           August 3,       July 29,     July 30,
                                             2008           2007         2006
                                             ----           ----         ----
   Current:
   <S>                                 <C>             <C>           <C>
            Federal                    $        (4,968)$        283  $      3,036
            State                                 (531)        (448)          350
            Foreign                               (229)         456           375
                                         --------------  -----------   -----------
                                                (5,728)         291         3,761
                                         --------------  -----------   -----------
   Deferred:
            Federal                             (4,170)      (1,196)          225
            State                                  (22)        (114)           24
            Foreign                                (83)      -                (31)
                                         --------------  -----------   -----------
                                                (4,275)      (1,310)          218
                                         --------------  -----------   -----------
                                       $       (10,003)$     (1,019) $      3,979
                                         ==============  ===========   ===========
</TABLE>
     The  Company   (received   refunds)  paid  income  taxes  of  approximately
     ($1,217,000),  $225,000  and  $3,407,000  in  fiscal  2008,  2007 and 2006,
     respectively.

     The benefit for income taxes for fiscal 2008 was  $10,003,000  representing
     an effective  income tax benefit rate of 49.2%, as compared to an effective
     income  tax  benefit  rate of  (48.5)% in fiscal  2007.  The 49.2%  benefit
     exceeds the  statutory  rate of 35% primarily due to the reversal of FIN 48
     liabilities  that are no longer needed due to the expiration of the statute
     of  limitations  for an earlier tax year in which an uncertain tax position
     had been taken offset by the tax on the non-deductible penalty paid as part
     of the litigation settlement, which reduced the benefit by 6.0%.

     The following is a reconciliation of the U. S. Federal statutory income tax
     rate and the effective tax rate on pretax income:
<TABLE>
<CAPTION>
                                                 Fifty-three
                                                 weeks ended     Fifty-two weeks ended
                                                   August 3,      July 29,    July 30,
                                                    2008            2007         2006
                                                 -----------      --------    --------
   <S>                                                <C>          <C>           <C>
   Tax (benefit) provision at
     Federal statutory rate                           35.0 %       35.0  %       35.0 %
   State income taxes, net of
      Federal income tax benefit                       2.0         (1.8)          1.8
   Benefit of extra territorial income                   -         (7.7)         (1.4)
   Non-deductible expenses                            (0.5)         1.0           0.9
   Benefit of foreign and
      foreign-source income                            1.3        (48.6)         (4.5)
   Research and development credits                    0.6         (5.1)         (1.3)
   Tax exempt interest                                   -         (3.4)         (1.2)
   Adjustment of prior year accrual                    3.3         (8.3)            -
   Non-Deductible Fine                                (6.0)       -                 -
   Reversal of unrecognized tax benefits              13.4        (10.7)            -
   Other, net                                          0.1          1.1          (1.5)
                                             --------------    ---------   -----------
      Effective tax rate                              49.2 %      (48.5) %       27.8 %
                                             ==============    =========   ===========
</TABLE>
     In the  fifty-three  weeks  ended  August 3,  2008,  the  Company  recorded
     benefits from accrual adjustments from the previous year consisting of: (1)
     a benefit  relating to the research and development  credit  carryover from
     fiscal year 2007;  and (2) the final rate  adjustment for the Israel income
     tax provision of 5% as compared to an estimated rate of 11% for fiscal year
     2007. These items were included in the tax benefit recorded in fiscal 2008.

     In the fifty-two weeks ended July 30, 2006, the Company  recorded  $453,000
     of stock compensation costs related to various stock options outstanding in
     accordance  with  SFAS  123(R).  For  tax  purposes,  these  costs  are not
     deductible until the stock options are actually  exercised.  This temporary
     difference  should have  increased the balance of the deferred tax asset on
     the balance sheet as of July 30, 2006 by $173,000. The Company's tax return
     for fiscal year 2006  properly  accounted  for these  costs.  However,  the
     related  deferred tax asset was not properly  recorded on the balance sheet
     at July 30,  2006.  The  deferred  tax asset of $173,000  was  corrected in
     fiscal 2007 as an  adjustment  of the prior year's  accrual  resulting in a
     benefit  reflected in the above table as (8.3) %. The amount was deemed not

                                      F-20
<PAGE>
     to be material to the balance sheet under the "iron  curtain"  approach and
     not considered material to the statement of operations under the "rollover"
     approach in  accordance  with the  provisions  of  Securities  and Exchange
     Commission Staff Accounting Bulletin No. 108.

     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  non-remitted
     earnings of subsidiaries outside the United States permanently.

     The tax effects of significant  items comprising  deferred income taxes are
     as follows (in thousands):
<TABLE>
<CAPTION>

                                                      August 3, 2008                      July 29, 2007
                                          ----------------------------------   ---------------------------------
                                          Deferred Tax Assets      Long-term   Deferred Tax Assets    Long-term
                                                       Long      Deferred Tax             Long       Deferred Tax
                                          Current      Term       Liabilities   Current    Term      Liabilities
                                          -------      ----       -----------   -------    ----      -----------
<S>                                         <C>        <C>        <C>           <C>        <C>          <C>
Intangibles                                 $ -        $ -        $ 7,334       $ -        $ -          $ 5,598
Accrued vacation pay                            959      -            -            534       -            -
Accrued bonus                                   179      -            -            286       -            -
Accrued warranty and other costs                388      -            -            219       -            -
Inventory                                     2,538      -            -          1,719       -            -
Depreciation                                  -          -          3,420        -           -            3,006
Accrual for contract losses                     899      -            -             44       -            -
Net operating loss carry-forwards             5,488      -            -            912       -            -
Accrued employment settlement costs             458     959           -            458      1,432         -
Plant closing costs                             133      -            -          -           -            -
Stock compensation costs                      -         936           -          -            557         -
Other                                           221      20           -             82       -            -
                                           --------  ------      --------      ------      ------       -------
                                           $ 11,263  $1,915      $ 10,754      $ 4,254     $1,989       $ 8,604
                                           ========   =====      ========      =======     ======       =======
</TABLE>
     As of  August 3,  2008,  the  Company  has  available  net  operating  loss
     carry-forwards  for state income tax purposes of approximately  $10,113,000
     and  $8,657,000,  net of  carryback,  for Federal  income tax purposes with
     expiration dates through 2028.  Unused research and development  credits of
     approximately  $128,000,  which expire in 2028,  are  available for Federal
     income tax purposes. There is also an AMT credit of $163,000 available.

NOTE G- LONG-TERM DEBT

     Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                                   August 3,      July 29,
                                                  Rate               2008           2007
                                            --------------------     ----           ----
     <S>                                    <C>                 <C>            <C>
     Revolving loan facility (a)            4.11% and 4.50%     $       2,500  $         -
     Mortgage note (b)                      7.43%                       2,105        2,222
     Industrial Revenue Bonds (c)           4.07%                       2,355        2,475
     Note payable (d)                       6.75%                         633        1,175
     Note payable (e)                       5.35%                         681        1,144
     Other                                                                212          281
                                                                  ------------   ----------
                                                                        8,486        7,297
     Less current portion                                               1,394        1,346
                                                                  ------------   ----------
                                                                $       7,092  $     5,951
                                                                  ============   ==========
</TABLE>
(a)  On April 30, 2007, the Company replaced its existing credit facility with a
     new $40 million  Revolving  Credit Loan  Agreement  ("Agreement")  with two
     banks  on an  unsecured  basis  which  may be used  for  general  corporate
     purposes,  including business  acquisitions and stand-by letters of credit.
     The Agreement  requires the payment of interest only on a monthly basis and
     payment  of the  outstanding  principal  balance  on March  31,  2010.  The
     Agreement  was  modified as of September  12, 2008.  Under the terms of the
     modification,  the Company may elect to borrow with  interest  based on the
     bank's  prime rate of interest  minus 0.50% or based on LIBOR plus a margin
     of 2.0%  effective  September  12,  2008 (the margin was 1.65% at August 3,
     2008).  In  addition,  if in the  event the sale of ICI (see Note S) is not
     consummated  by  November  30,  2008,  the  Company  will  grant the bank a
     security  interest in its domestic accounts  receivable,  inventory and all
     other non-real  estate domestic  assets.  There is a fee of 20 basis points
     per annum on the unused portion of the credit facility  payable  quarterly.
     Stand-by  letters of credit were outstanding in the amount of approximately
     $15.9  million at August 3, 2008 (See Note E). If at any time the Company's
     backlog of orders falls below $50  million,  the bank may obtain a security

                                      F-21
<PAGE>
     interest  in  eligible  accounts   receivable,   as  defined,  and  if  the
     outstanding advances are greater than 100% of eligible receivables,  a lien
     on all inventories.  Funded backlog relating to continuing operations as of
     August 3, 2008 was  approximately  $157 million.  A loan of $2,500,000  was
     outstanding  under the line at August 3,  2008.  There  were no  borrowings
     under the line at July 29, 2007.

     The agreement contains various financial covenants,  including, among other
     matters,  minimum  tangible net worth,  total  liabilities  to tangible net
     worth,  debt service  coverage and  restrictions on other  borrowings.  The
     Company was in compliance  with all such  financial  covenants at August 3,
     2008. In connection with the  acquisition of Eyal Microwave Ltd.  discussed
     in Note T,  the  Company  received  a  waiver  of the  tangible  net  worth
     covenant.

(b)  The mortgage loan is for a term of ten years  commencing  February 16, 1999
     (with an extended maturity as modified to March 1, 2014) with fixed monthly
     principal  and interest  installments  of $23,359  based upon a twenty-year
     amortization  including  interest at a fixed rate of 7.43% through March 1,
     2009 and at LIBOR plus 1.75% thereafter.  The loan is secured by a mortgage
     on the Company's land and building in Lancaster,  Pennsylvania having a net
     book value of approximately $1,810,000 at August 3, 2008.

     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.  The Company is in compliance  with all
     such financial  covenants at August 3, 2008. 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
     and are being amortized over the term of the loan (10 years).

(c)  On October 19, 2001, the Company  received  $3,000,000 in proceeds from the
     East Hempfield  Township  Industrial  Development  Authority  Variable Rate
     Demand/Fixed Rate Revenue Bonds Series of 2001 (the "Bonds"). The Bonds are
     due in varying  annual  installments  through  October 1, 2021. The initial
     installment  of $95,000 was paid  October 1, 2002 and  increases  each year
     until the final payment of $225,000 in 2021. The interest rate on the Bonds
     is reset weekly at the prevailing  market rate of the BMA Municipal  Index.
     The initial rate of interest was 2.1%, which,  after giving effect to a ten
     year  interest  rate swap  agreement  (See Note P)  becomes a fixed rate of
     4.07%.  The interest rate at August 3, 2008 was 2.39%.  The bond  agreement
     requires a sinking fund payment on a monthly basis to fund the annual Bonds
     redemption  installment.   Proceeds  from  the  Bonds  were  used  for  the
     construction of a 15,000 square foot expansion of the Company's  facilities
     in Lancaster, Pennsylvania, and for manufacturing equipment.

     The Bonds are secured by a letter of credit in the amount of  approximately
     $2,390,000  expiring  October  18,  2011  and a  mortgage  on  the  related
     properties  pledged  as  collateral.  The net  book  value  of the land and
     building covered by the mortgage was approximately  $1,644,000 at August 3,
     2008.

(d)  In June 2006, the Company  entered into a loan agreement with DeLage Landen
     Financial  Services,  Inc. through  Microsoft  Capital  Corporation for the
     principal  sum of  $1,626,501.  The note is payable in  thirty-six  monthly
     payments of approximately  $45,181  including imputed interest at 6.75% per
     annum.  Proceeds  of the loan were used to  license  certain  software  and
     related maintenance fees from Microsoft Corporation.

(e)  In connection with the  implementation  of an integrated  manufacturing and
     financial  accounting and reporting  software package,  the Company entered
     into an  additional  financing  agreement in August 2006 with DeLage Landen
     Financial Services,  Inc. through Microsoft Capital  Corporation  providing
     for loans not to exceed an  aggregate  of $2.0  million.  Amounts  borrowed
     under the agreement are payable in  thirty-six  equal monthly  installments
     with  interest at 5.354% per annum.  The Company  borrowed an  aggregate of
     $1.4 million with monthly payments totaling approximately $42,750.

     The Company paid  interest in fiscal 2008,  2007 and 2006 of  approximately
     $406,000, $469,000 and $291,000, respectively.

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

                Fiscal year ending during:  Amount
                -------------------------   ------
                          2009            $  1,394
                          2010               3,061
                          2011                 281
                          2012                 297
                          2013                 320
                       Thereafter            3,133
                                            -------
                                          $  8,486
                                            =======

                                      F-22
<PAGE>
NOTE H - EMPLOYMENT SETTLEMENT AGREEMENT

     Effective  October  12,  2006  and as a  condition  to  entering  into  the
     Administrative  Agreement with the Department of the Navy discussed in Note
     A-1, the Company  entered into an agreement (the  "Agreement")  with Lee N.
     Blatt to terminate  the  Employment  Agreement  between the Company and him
     dated as of July 29, 2002 and modified on December 9, 2003. Under the terms
     of the  Agreement  he will receive  payments  totaling  $9,461,528  payable
     $3,000,000  upon the effective  date of the Agreement and  sixty-four  (64)
     consecutive  monthly payments of $100,000 commencing on January 1, 2007 and
     a final  payment of $61,528 on May 1, 2012 as evidenced  by a  non-interest
     bearing  Promissory Note dated effective  October 12, 2006 (the "Promissory
     Note").  In  addition,  he received  his bonus of $636,503  for fiscal year
     2006,  and shall be  entitled to receive  medical  care  reimbursement  and
     insurance,  including life insurance, in accordance with the original terms
     of  his  Employment  Agreement.   The  Agreement  also  provides  that  all
     outstanding stock options previously issued to him which are all vested and
     fully exercisable shall continue to be exercisable by him or, following his
     death, by his designated beneficiaries, on or before the expiration date of
     the specific option.  On September 26, 2006, as required under the terms of
     the  Administrative  Agreement  with the  Department of the Navy, Mr. Blatt
     entered  into a  voting  trust  agreement  wherein  sole  voting  power  to
     1,301,000  shares under stock options held by him and 28,799 shares held in
     his IRA was granted to the Company's Chairman,  Myron Levy. In the event of
     a "change of control" of the Company as defined in the Employment Agreement
     all remaining payments due under the Promissory Note become immediately due
     and payable.

     Aggregate costs of approximately $8,914,000 under the Agreement,  including
     an initial  cash  payment  of  $3,000,000,  payments  due under the Note of
     approximately   $5,354,000,   medical  and  life   insurance   benefits  of
     approximately  $364,000  (both  discounted  at an imputed  interest rate of
     6.75%)  and the fair  value of the  modification  of the stock  options  of
     approximately  $196,000 (using the  Black-Scholes  option valuation model),
     have  been  recorded  in the  consolidated  financial  statements  for  the
     fifty-two weeks ended July 29, 2007.

     The current portion of the settlement  agreement  payments,  net of imputed
     interest of $238,000, as of August 3, 2008 is approximately  $1,119,000 and
     the  long-term   portion,   net  of  imputed   interest  of  $287,000,   is
     approximately $3,074,000.

     The principal portion of the payments due under the promissory note in each
     fiscal  year  is  approximately  $961,700  in  2009,  $1,028,700  in  2010,
     $1,100,300 in 2011 and $875,200 in 2012.

NOTE I - ACCOUNTS PAYABLE, ACCRUED EXPENSES AND WARRANTY COSTS

     Accounts payable and accrued expenses include the following (in thousands):
<TABLE>
<CAPTION>
                                                       August 3,     July 29,
                                                        2008           2007
                                                        ----           ----

        <S>                                             <C>            <C>
        Accounts payable                                $ 15,502       $  8,407
        Accrued payroll, bonuses and related costs         6,761          5,812
        Accrued commissions                                1,254          1,088
        Accrued legal and accounting fees                  1,302          1,117
        Accrued rent expense                               1,123          1,332
        Accrued contract penalties                           733            404
        Other accrued expenses                               871          1,293
                                                          ------         ------
                                                        $ 27,546       $ 19,453
                                                          ======         ======
</TABLE>
     The  Company  warrants  its  products  generally  for a period of one year.
     Product  warranty  costs are accrued  based on historical  claims  expense.
     Accrued  warranty costs are reduced as warranty  repair costs are incurred.
     The following table presents the change in the accrual for product warranty
     costs for the fifty-three and fifty-two weeks ended August 3, 2008 and July
     29, 2007, respectively (in thousands):
<TABLE>
<CAPTION>

                                                     Fifty-three     Fifty-two
                                                     weeks ended    weeks ended
                                                      August 3,      July 29,
                                                        2008            2007
                                                        ----            ----
     <S>                                             <C>            <C>
     Balance at beginning of period                  $ 1,106        $    986
     Provision for warranty obligations                1,260           1,338
     Warranty costs charged to the reserve            (1,224)         (1,218)
                                                       -----           -----
     Balance at end of period                        $ 1,142        $  1,106
                                                       =====           =====
</TABLE>
                                      F-23
<PAGE>
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  ("Code").  Effective  August 1, 2006,  the Plan was
     amended to allow  employees  to elect  salary  deferrals  up to the maximum
     dollar  amounts  permissible  under Code  Section  402(g) not to exceed the
     limits of Code Section  401(k),  404 and 415.  For the Plan year  beginning
     August 1, 2005, the Plan was amended to be considered a "Safe Harbor" plan,
     where a  contribution  will be made to eligible  participants  in an amount
     equal to 100% of the amount of each  participant's  elective  deferral that
     does not exceed 3% of compensation,  plus 50% of the amount of the elective
     deferral that exceeds 3% of compensation up to a maximum contribution of 5%
     of compensation.  Under the Safe Harbor  provision,  all  contributions are
     100%  vested  when  made.  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.  ICI also has a
     "Safe  Harbor"  plan,  where  a  contribution  will  be  made  to  eligible
     participants in an amount equal to 100% of the amount of each participant's
     elective  deferral that does not exceed 6% of compensation,  subject to the
     Code limitations  discussed  above. The Company has recognized  expenses of
     approximately $1,765,000, $1,766,000 and $1,773,000 under the plans for the
     fifty-three  weeks ended August 3, 2008 and the fifty-two  weeks ended July
     29, 2007 and July 30, 2006, respectively. The Company also contributed to a
     similar plan through EWST  whereby the Company  matches  employee  elective
     contributions  up to a maximum of 5% of compensation.  Expenses  recognized
     for 2008, 2007 and 2006 were  approximately  $86,000,  $75,200 and $55,900,
     respectively.

     The  Company's   Israeli   subsidiary   provides  for  employee   severance
     liabilities pursuant to the Israeli severance pay law and labor agreements.
     The Company's liability is fully provided for by monthly payments deposited
     with  insurers  and by a reserve  established  by the  Company to cover the
     portion  of this  liability  not  covered  by the  Company's  deposits.  In
     addition  to  recognizing  an  expense  for the  funding  to the  insurance
     programs for this severance obligation, the Company also records as expense
     the net increase in its unfunded  severance  liability.  The  liability for
     this  unfunded   severance   obligation  is  carried  in  Other   Long-Term
     Liabilities  on  the  accompanying  Consolidated  Balance  Sheets  and  was
     $1,652,000   and   $1,311,000   at  August  3,  2008  and  July  29,  2007,
     respectively.  The total expense recognized for employee severance programs
     in Israel  (both the  funded  and  unfunded  portion  of the  program)  was
     approximately  $458,000,  $228,000 and $223,000 for fiscal years 2008, 2007
     and 2006, respectively.

NOTE K - RELATED PARTY TRANSACTIONS

     Prior to the acquisition of MSI, MSI had leased one of its two buildings in
     Fort  Walton  Beach,  Florida  from  MSI  Investments,  a  Florida  General
     Partnership.  MSI Investments is owned by four individuals, two of whom are
     currently employees of MSI and one serves as a consultant. Lease costs paid
     in fiscal years 2008,  2007 and 2006 were $281,000,  $273,000 and $265,000,
     respectively.

     The  Company  entered  into a 10 year lease  agreement  with a  partnership
     partially  owned by the  children  of the  Company's  Chairman.  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.  On August
     24,  2005,  the  Company  amended  the  agreement  to  incorporate  the two
     individual leases into a single lease and extended the term of the lease to
     August 31,  2010.  The  Company  incurred  rent  expense  of  approximately
     $478,000,   $487,000  and   $485,000  in  fiscal   2008,   2007  and  2006,
     respectively.  During the fourth quarter of fiscal 2008 the Company decided
     to close its  manufacturing  facility in  Farmingdale,  NY and transfer its
     contracts  and assets to its other  facilities  in  Whippany,  New  Jersey;
     Woburn, Massachusetts;  Lancaster, Pennsylvania; and Jerusalem, Israel. The
     major costs  associated  with the  restructuring  are one-time  termination
     benefits which are estimated at approximately  $1.1 million.  The costs are
     being accrued  evenly from May 2008 through  December  2008.  Costs accrued
     during the fourth  quarter  approximated  $377,000,  of which  $313,000  is
     included  in cost of  products  sold and $64,000 is included in selling and
     administrative  expenses.  Charges  against the  liability for amounts paid
     during the fourth  quarter  approximated  $30,000  leaving a  liability  at
     August 3, 2008 of $347,000.

NOTE L - COMPUTATION OF PER SHARE EARNINGS

     The Company  follows the  provisions  of SFAS No. 128,  Earnings Per Share.
     Basic  earnings  per common  share (Basic EPS) are computed by dividing net
     income by the weighted average number of common shares outstanding. Diluted
     earnings per common share (Diluted EPS) are computed by dividing net income
     by the weighted  average number of common shares and dilutive  common share
     equivalents  and  convertible  securities  then  outstanding.  SFAS No. 128
     requires the  presentation of both Basic EPS and Diluted EPS on the face of
     the consolidated statements of operations.

     The following  provides a reconciliation  of the shares used in calculating
     the per share  amounts for the fiscal years ended August 3, 2008,  July 29,
     2007 and July 30, 2006 (in thousands):

                                      F-24
<PAGE>
<TABLE>
<CAPTION>
                                                        Fifty-three   Fifty-two weeks ended
                                                        weeks ended   ---------------------
                                                         August 3,     July 29,   July 30,
                                                           2008          2007       2006
                                                       --------------  ---------  ----------
             Numerator:
        <S>                                                <C>          <C>        <C>
        Net (Loss) Income                                  ($ 10,346)   $ 3,118    $ 10,354
                                                       ==============  =========  ==========

             Denominator:
        Basic weighted-average shares                         13,652     13,927      14,463
        Effect of dilutive securities:
             Employee stock options                          -              468         634
                                                       --------------  ---------  ----------
        Diluted weighted-average shares                       13,652     14,395      15,097
                                                       ==============  =========  ==========

        Stock options not included in computation              3,512      1,757       1,722
                                                       ==============  =========  ==========
</TABLE>
     Employee  stock  options for  3,512,225  shares were not  considered in the
     computation of diluted loss per share calculations for fiscal 2008 as their
     effect is  anti-dilutive.  The number of stock  options not included in the
     computation  of diluted EPS for the fiscal  years 2007 and 2006  relates to
     stock  options  having  exercise  prices which are greater than the average
     market price of the common shares  during the period,  and  therefore,  are
     anti-dilutive.  The options,  which were  outstanding as of August 3, 2008,
     expire at various dates through June 8, 2017 (See Note N).

NOTE M - COMPREHENSIVE INCOME

     The foreign currency  translation gain relates to the Company's  investment
     in its U.K. subsidiary and fluctuations in exchange rates between its local
     currency and the U.S. dollar.

     As of the  fiscal  years  ended  August  3,  2008 and July  29,  2007,  the
     components  of  accumulated  other  comprehensive  income is as follows (in
     thousands):
                                                             August 3,  July 29,
                                                               2008      2007
                                                               ----      ----
        Unrealized loss on interest rate swap, net of taxes   $   (54)     (29)
        Foreign currency translation gain                       1,676    1,774
                                                                -----    -----
                                                              $ 1,622    1,745
                                                                =====    =====
NOTE N - SHAREHOLDERS' EQUITY

     On  June  15,  2006,  the  Company  announced  a  resumption  of the  stock
     repurchase  program initially  announced in October 2002 covering 1,000,000
     shares of common stock of the Company and subsequently  expanded on May 30,
     2003 to cover up to 2,000,000 shares of common stock and again increased on
     October 12, 2007 to purchase up to 3,000,000 shares in the open market.  As
     of August 3, 2008 the Company has acquired an  aggregate  of  approximately
     2,392,000  shares of common stock under this  program of which  493,938 and
     798,567  shares  were  acquired  during  fiscal  years  2008 and 2006 at an
     aggregate cost of approximately $7,139,000 and $9,044,000, respectively.

     Summary of Stock Option Plans:

     In August 2006,  the Board of Directors  ratified and approved the 2006 New
     Employee  Stock Option Plan which covers 500,000 shares (as amended June 8,
     2007) 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  are
     determined at the time of grant by the Compensation  Committee or the Board
     of Directors.  The options  expire no later than ten years from the date of
     grant,  subject  to certain  restrictions.  Options  for 4,000 and  250,000
     shares were granted  under the plan during the fiscal years ended August 3,
     2008 and July 29, 2007, respectively.  Options for 213,000 shares of common
     stock are available for grant under the plan as of August 3, 2008.

     In March 2003,  the Board of Directors  approved the 2003 Stock Option Plan
     which  covers  1,000,000  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  are  determined  at the time of  grant by the  Compensation
     Committee or the Board of Directors.  The options  expire no later than ten
     years from the date of grant, subject to certain  restrictions.  No options
     were granted  under the plan the fiscal year ended August 3, 2008.  Options

                                      F-25
<PAGE>
     for 97,000  shares were granted under the plan during the fiscal year ended
     July 29, 2007.  Options for 12,000 shares were cancelled in fiscal 2008 and
     options for 15,700 shares of common stock are available for grant under the
     plan as of August 3, 2008.

     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  are  determined  at the time of  grant by the  Compensation
     Committee or the Board of Directors.  The options  expire no later than ten
     years from the date of grant, subject to certain  restrictions.  No options
     were granted  under the plan the fiscal year ended August 3, 2008.  Options
     for 26,000  shares were granted under the plan during the fiscal year ended
     July 29, 2007.  Options for 30,500 shares were cancelled in fiscal 2008 and
     options for 32,250 shares of common stock are available for grant under the
     plan as of August 3, 2008.

     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. The plan has
     expired with respect to the  granting of new  options.  Options  which have
     been 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.  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 are  determined  at the time of grant by
     the Compensation Committee or the Board of Directors. The options expire no
     later  than  ten  years  from  the  date  of  grant,   subject  to  certain
     restrictions.  No options were granted under the plan the fiscal year ended
     August 3, 2008.  Non-qualified stock options for 33,500 shares were granted
     under this plan  during the fiscal  year ended July 29,  2007.  Options for
     51,000 shares were cancelled in fiscal 2008. There are no options available
     for grant under the plan.

     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. The plan has
     expired with respect to the  granting of new  options.  Options  which have
     been 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.  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 are  determined  at the time of grant by
     the Compensation Committee or the Board of Directors. The options expire no
     later  than  ten  years  from  the  date  of  grant,   subject  to  certain
     restrictions. There are no options available for grant under the plan.

     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. The plan has
     expired with respect to the  granting of new  options.  Options  which have
     been granted  under the plan are  non-qualified  stock  options.  Under the
     terms of the plan,  the exercise  prices of the options  granted  under the
     plan were at the fair market value at the date of grant. The options expire
     not later  than ten  years  from the date of  grant.  At  August  3,  2008,
     non-qualified  options  to  purchase  7,007  shares  of common  stock  were
     outstanding under this plan.

     A summary  of stock  option  activity  under all plans for the  fifty-three
     weeks ended August 3, 2008 and the fifty-two  weeks ended July 29, 2007 and
     July 30, 2006 is as follows:
<TABLE>
<CAPTION>
Non-Qualified Stock Options                                                          Weighted       Aggregate
---------------------------                                                           Average       Intrinsic
                                                 Number          Price Range         Exercise       Value (1)
                                                of shares         per share            Price      (in thousands)
                                               ---------         -----------         --------      ------------
<S>                                              <C>         <C>          <C>          <C>            <C>
Outstanding July 31, 2005                        3,735,530   $   4.06  -  19.52        $ 12.33
Granted                                             79,000      16.61  -  21.18          19.11
Exercised                                         (272,429)      4.31  -  19.83          11.73
Cancelled                                          (52,021)     17.98  -  20.45          19.64
                                                 ---------      ------------------------------
Outstanding July 30, 2006                        3,490,080   $   4.06  -  20.45        $ 14.41
Granted                                            406,500      15.77  -  17.82          16.56
Exercised                                         (116,630)      4.06  -  13.10          10.45
Cancelled                                         (139,500)     13.10  -  20.09          18.86
                                                 ---------      ------------------------------
Outstanding July 29, 2007                        3,640,450   $   7.25  -  21.18        $ 14.84
Granted                                              4,000      12.58  -  15.16          13.87
Exercised                                          (38,725)      7.25  -  13.10           8.30
Cancelled                                          (93,500)     14.50  -  20.09          18.95
                                                 ---------      ------------------------------
Outstanding August 3, 2008                       3,512,225   $   7.63  -  21.18        $ 14.80        $ 8,566
                                                 =========
Exercisable August 3, 2008                       3,201,825                             $ 14.59        $ 8,520

Vested and expected to vest August 3, 2008       3,479,433                             $ 14.78        $ 8,561
<FN>
(1)  There are 1,494,600  vested  options with exercise  prices greater than the
     closing stock price of $16.02 as of August 3, 2008.
</FN>
</TABLE>
                                      F-26
<PAGE>

     Options  outstanding  and  exercisable by price range as of August 3, 2008,
     with expiration dates ranging from November 22, 2008 to June 8, 2017 are as
     follows:
<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>
            $ 7.63 - 10.46      1,053,025        1.78                 $  9.45        1,053,025         $  9.45
             10.97 - 15.77        798,200        5.04                   13.96          644,200           13.53
             15.78 - 17.82        183,500        5.66                   17.63          118,100           17.60
             17.98 - 17.98        796,000        4.27                   17.98          735,600           17.98
             18.57 - 21.18        681,500        3.46                   19.57          650,900           19.57
                                ---------        ----                   -----        ---------           -----
            $ 7.62 - 21.18      3,512,225        3.61                 $ 14.80        3,201,825         $ 14.59
                                =========                                            =========
</TABLE>


NOTE O - SIGNIFICANT  SEGMENTS,  MAJOR  CUSTOMERS,  EXPORT SALES AND  GEOGRAPHIC
     INFORMATION

     The Company's  chief  operating  decision  makers are  considered to be the
     Chairman/Chief  Executive  Officer and the Chief Operating  Officer ("Chief
     Executive Officers").  The Company's Chief Executive Officers evaluate both
     consolidated  and  disaggregated  financial  information,  primarily  gross
     revenues, in deciding how to allocate resources and assess performance. The
     Chief  Executive   Officers  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  operates  as  a  single
     integrated  business and as such has one operating segment as a provider of
     complex  microwave  technology  solutions  for the defense,  aerospace  and
     medical  industries  worldwide.  All of the Company's  revenues result from
     sales of its products.

     Revenues  for fiscal  years 2008,  2007 and 2006 were as  follows:  defense
     electronics, $142,296,000, $148,314,000 and $159,717,000, respectively; and
     commercial   technologies,   $10,215,000,   $14,826,000  and   $16,551,000,
     respectively.

     Approximately  62%, 64% and 67% of our net sales for fiscal 2008,  2007 and
     2006 were made to United States  government  agencies and their contractors
     and  subcontractors  for defense  programs.  Net sales directly to the U.S.
     Government in fiscal 2008, 2007 and 2006 accounted for  approximately  19%,
     20% and 22% of net sales,  respectively.  Lockheed  Martin  Corporation and
     Northrop Grumman  Corporation  accounted for  approximately 12% each of net
     sales in  fiscal  2008.  No  other  customer  accounted  for 10% or more of
     consolidated  net sales  during  the  periods  presented.  Sales to foreign
     customers amounted to approximately  $48,490,000  (32%),  $44,857,000 (27%)
     and $41,817,000 (24%) in fiscal 2008, 2007 and 2006, respectively.

     Geographic net sales based on place of contract performance were as follows
     (in thousands):
<TABLE>
<CAPTION>
                                  2008         2007         2006
                                 -----         ----         ----
<S>                          <C>          <C>          <C>
United States                $   129,546  $   139,349  $   155,057
Israel                            19,166       19,207       14,048
England                            3,799        4,584        7,163
                               ----------   ----------   ----------
                             $   152,511  $   163,140  $   176,268
                               ==========   ==========   ==========
</TABLE>

     Net property,  plant and  equipment by geographic  area were as follows (in
     thousands):
<TABLE>
<CAPTION>
                                  2008         2007
                                 -----         ----
<S>                          <C>          <C>
United States                $   25,864    $   24,904
Israel                            4,495         4,844
England                             193           248
                               ----------   ----------
                             $   30,552        29,996
                               ==========   ==========
</TABLE>
     Total assets of foreign  subsidiaries  accounted for  approximately 12% and
     11% of total consolidated assets in fiscal 2008 and 2007, respectively; and
     total  foreign   liabilities   accounted  for  approximately  8%  of  total
     consolidated liabilities in each of fiscal 2008 and 2007.

                                      F-27
<PAGE>
NOTE P - DERIVATIVE FINANCIAL INSTRUMENTS

     In October 2001, the Company entered into an interest rate swap with a bank
     pursuant to which it exchanged  floating rate  interest in connection  with
     the Bonds  discussed  in Note H on a notional  amount of  $3,000,000  for a
     fixed  rate of 4.07% for a 10 year  period  ending  October  1,  2011.  The
     notional  amount  reduces each year in tandem with the annual  installments
     due on the Bonds.  The fixing of the interest  rate for the ten year period
     offsets the  Company's  exposure to the  uncertainty  of floating  interest
     rates on the Bonds,  and as such has been  designated as a cash flow hedge.
     The hedge is deemed to be highly effective and any ineffectiveness  will be
     recognized in interest expense in the reporting  period.  The fair value of
     the interest  rate swap was a liability of $87,200 and $42,300 as of August
     3,  2008 and July 29,  2007,  respectively.  There  was no  material  hedge
     ineffectiveness  related  to cash  flow  hedges  during  the  period  to be
     recognized  in  earnings.  There  was no  gain or  loss  reclassified  from
     accumulated other comprehensive income into earnings during the fiscal year
     ended August 3, 2008 as a result of the discontinuance of a cash flow hedge
     due  to  the  probability  of  the  original  forecasted   transaction  not
     occurring.

NOTE Q - 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  approximates fair value because of the
     short-term maturity of those instruments.

     Accounts receivable and accounts payable:  The carrying amounts reported in
     the balance sheet for accounts receivable and accounts payable approximates
     fair value because of the short-term maturity of those instruments.

     Long-term debt: The fair value of the mortgage note and industrial  revenue
     bonds  (including  the  related  interest  rate swap) was  estimated  using
     discounted cash flow analyses,  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):
<TABLE>
<CAPTION>
                                                    August 3, 2008
                                       ---------------------------------------
                                         Carrying Amount         Fair Value
                                       --------------------    ---------------

        <S>                            <C>                     <C>
        Cash and cash equivalents      $           14,347      $      14,347
        Long-term debt                              7,092              7,414
</TABLE>

                                      F-28
<PAGE>
NOTE R - QUARTERLY RESULTS (UNAUDITED)

     The following is a summary of the unaudited quarterly results of operations
     for the fifty-three weeks and fifty-two weeks ended August 3, 2008 and July
     29, 2007,  respectively  (in  thousands,  except for per share  data).  The
     quarter ended February 3, 2008 consisted of fourteen weeks.
<TABLE>
<CAPTION>
                    2008                           October 28,      February 3,       May 4,       August 3,
                    ----                              2007            2008             2008          2008
                                                      ----            ----             ----          ----
<S>                                          <C>                       <C>              <C>           <C>
Net sales                                    $        35,133           34,661           38,549        44,168
Gross profit                                 $         9,993            4,993            8,567        10,648

Net loss                                     $        (2,591)          (3,840)          (3,592)         (323)
                                                      =======          =======          =======       =======
Loss per common share:
          Basic                              $         (0.19)           (0.28)           (0.27)        (0.02)
                                                      =======          =======          =======       =======
          Diluted                            $         (0.19)           (0.28)           (0.27)        (0.02)
                                                      =======          =======          =======       =======

Basic weighted average shares                         13,965           13,617           13,507        13,518
                                                      =======          =======          =======       =======
Diluted weighted average shares                       13,965           13,617           13,507        13,518
                                                      =======          =======          =======       =======

                    2007                            October 29,      January 28,      April 29,     July 29,
                    ----                               2006            2007             2007          2007
                                                       ----            ----             ----          ----
Net sales                                    $        40,116           37,997           44,401        40,626
Gross profit                                 $        10,285            9,987           12,714        11,320

Net (loss) income                            $        (6,011)           1,673            3,878         3,578
                                                      =======          =======          =======       =======
(Loss) earnings per common share:
          Basic                              $         (0.43)            0.12             0.28          0.26
                                                      =======          =======          =======       =======
          Diluted                            $         (0.43)            0.12             0.27          0.25
                                                      =======          =======          =======       =======

Basic weighted average shares                         13,862           13,902           13,969        13,977
                                                      =======          =======          =======       =======
Diluted weighted average shares                       13,862           14,405           14,449        14,480
                                                      =======          =======          =======       =======
</TABLE>
     In the first quarter  ended October 28, 2007 the Company  recorded a charge
     of $6.0 million in connection with a litigation settlement.

     In the third quarter ended May 4, 2008 the Company  recorded a $9.5 million
     charge in connection with a litigation  settlement.  The income tax benefit
     in the third  quarter  included  the  recognition  of a tax benefit of $2.7
     million due to the expiration of the statute of  limitations  relating to a
     deduction taken for an impaired investment on a prior year tax return.

     In the fourth  quarter  ended  August 3, 2008 gross  margin was  negatively
     affected by approximately  $2.1 million of contract loss provisions for two
     development  contracts  at Herley  Farmingdale.  The  fourth  quarter  also
     includes an adjustment of $2.8 million for legal fees receivable at the end
     of  the  third  quarter  which,  in  accordance  with  generally   accepted
     accounting  standards,  has been eliminated in the fourth quarter of fiscal
     2008.

     During the quarter  ended July 29,  2007,  the cost of sales was reduced by
     approximately  $475,000  due to revisions in the  estimated  liability  for
     expected  losses under the last two options of a contract  associated  with
     the ICI acquisition.

NOTE S - SUBSEQUENT EVENTS

     The Company entered into an Asset Purchase  Agreement  ("Asset  Agreement")
     dated as of August 1, 2008 to  acquire  the  business  and  certain  assets
     subject  to  the  assumption  of  certain  liabilities  of  Eyal  Microwave
     Industries   ("EMI")  a  privately   held  Israeli   company  for  cash  of
     $30,000,000. The transaction closed on September 16, 2008. EMI is a leading
     supplier of a broad range of innovative, high reliability RF, microwave and
     millimeter wave components and customized subsystems for the global defense
     industry.  Based in Kibbutz Eyal, Israel, the company has approximately 175
     employees.   EMI  includes  Eyal  Microwave   Ltd.  and  its   wholly-owned
     subsidiary,  Eyal Mag Ltd.  Funding for the purchase was provided through a
     $20 million loan under the Company's  existing credit facility  through its
     current  bank and a new term loan in the amount of $10 million for a period
     of 10 years through the Company's  bank in Israel.  The new loan is payable
     in quarterly  installments over a period of 10 years with interest at LIBOR
     plus 1.5%.  The  acquisition  will be accounted for under the provisions of
     SFAS 141.

     On September 18, 2008, the Company executed an agreement (the  "Agreement")
     with a foreign  defense  company  to divest its ICI  subsidiary  located in
     McLean,  Virginia.  ICI is a  communications  technology  development  firm

                                      F-29
<PAGE>
     specializing in research, design,  development,  production, and support of
     wireless data communications  products and services. The Agreement provides
     for an all  cash  transaction  valued  at  approximately  $15  million  and
     includes a significant contingency requiring U.S. Government approval on or
     before November 5, 2008 or the Agreement will be void. The Company believes
     it is reasonably possible that the U.S. Government approval will be granted
     and the  transaction  will be completed.  In the event the  transaction  is
     completed,  ICI will be reported as a discontinued operation and a non-cash
     charge to  earnings  of  approximately  $1.0  million  would be recorded to
     reflect the difference between the sale price pursuant to the Agreement and
     the net carrying  value of the assets held for sale.  In fiscal  2008,  ICI
     reported  revenues of  approximately  $19 million and  operating  income of
     approximately $0.6 million.  The ICI balance sheet includes total assets of
     approximately  $21.7  million,  including  approximately  $4.1  million  of
     allocated  goodwill,  and liabilities of approximately $5.7 million.  There
     can be no assurance  that the U.S.  Government  will grant approval so that
     the transaction will be completed.

     As of September  12, 2008 the Company  entered into a  modification  of its
     existing credit facility. Under the terms of the modification,  the Company
     may  elect to  borrow  with  interest  based on the  bank's  prime  rate of
     interest  minus  0.50% or based on LIBOR  plus a margin  of 2.0%  effective
     September  12, 2008 (the margin was 1.65% at August 3, 2008).  In addition,
     if in the event the sale of ICI (see Note S) is not consummated by November
     30,  2008,  the  Company  will  grant the bank a security  interest  in its
     domestic  accounts  receivable,  inventory  and all other  non-real  estate
     domestic assets.

                                   **********