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


                                  FORM 10-K/A
                                Amendment No. 1


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

                     For the fiscal year ended July 29, 2007

                                       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 $16.14 as reported on The Nasdaq  Global Market as of January 28, 2007,
the last business day of the Registrant's most recently  completed second fiscal
quarter, was approximately $214,274,000.

The number of shares  outstanding of Registrant's  Common Stock, $ .10 par value
on October 8, 2007 was 13,977,115.

Documents incorporated by reference: None

Note:  Amends footnote R in the Notes to the Consolidated  Financial  Statements
with respect to Unaudited Results for the fourth quarter of fiscal 2007.


<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.                                                        16

Item 2.        Properties.                                                                       16

Item 3.        Legal Proceedings.                                                                16

Item 4.        Submission of Matters to a Vote of Security Holders.                              17

PART II

Item 5.        Market for Registrant's Common Equity, Related Stockholder
                   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.                       30

Item 8.        Financial Statements and Supplementary Data.                                      31

Item 9.        Changes in and Disagreements with Accountants on
                   Accounting and Financial Disclosure.                                          31

Item 9A.       Controls and Procedures.                                                          31

Item 9B.       Other Information.                                                                34

PART III

Item 10.       Directors, Executive Officers and Corporate Governance.                           34

Item 11.       Executive Compensation.                                                           36

Item 12.       Security Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters.                                    45

Item 13.       Certain Relationships and Related Transactions, and Director
                 Independence.                                                                   46

Item 14.       Principal Accounting Fees and Services.                                           47

PART IV

Item 15.       Exhibits.                                                                         48

SIGNATURES                                                                                       50

Financial Statement Schedules.                                                                   51

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                      F-1
</TABLE>
<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,  the effects of the indictment of the Company 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, EA18G Growler, the AEGIS
class  surface  combatants,  the EA-6B  Prowler,  the AMRAAM air to air missile,

                                       3
<PAGE>
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.

-    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.

-    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.

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:

                                       4
<PAGE>

-    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.

-    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;
     Farmingdale,  New York; 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  20% of our fiscal
     2007 revenues.  No other customer accounted for 10% or more of our revenues

                                       5
<PAGE>
     in fiscal 2007.  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  27%  of  our
     revenues in fiscal 2007.

-    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  2007,  we spent
     approximately  $33.4  million  on new  product  development,  of which  our
     customers funded  approximately $20.3 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,
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,

                                       6
<PAGE>
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.

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


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<PAGE>
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 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:

                                       8
<PAGE>
-    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.

-    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

                                       9
<PAGE>
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 July 29, 2007 and July 30, 2006, approximately 20%
and 22% of our net sales  respectively,  were  attributable  to  contracts  with
offices  and  agencies  of the  U.S.  Government.  No  customers  accounted  for
shipments of 10% or more of net sales in fiscal 2007 or 2006.

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

During fiscal 2007, sales to foreign  customers  accounted for approximately 27%
of our net  sales.  Sales  to  foreign  customers  from our  domestic  locations
accounted for 13% of net sales with the remaining  sales  generated from England
(3%) and Israel (11%). 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.

                                       10
<PAGE>
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.

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
Farmingdale, New York
Woburn, Massachusetts
Whippany, New Jersey
Fort Walton Beach, Florida
McLean, Virginia
Jerusalem, Israel
Farnborough, England

BACKLOG

Our funded  backlog of orders was  approximately  $132  million on July 29, 2007
which are orders covered by funded signed contracts or purchase orders. Unfunded
backlog at July 29, 2007 was  approximately $5 million.  Of our total backlog at
July 29, 2007,  $83 million  (61%) is  attributable  to domestic  orders and $54
million (39%) 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
74% of the  backlog  at July 29,  2007 will be shipped  during  the fiscal  year
ending August 3, 2008.

                                       11
<PAGE>
Approximately 97% 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  $33.4  million in fiscal 2007,  $33.3  million in fiscal 2006 (of
which $14.2  million is  attributable  to the  acquisitions  of MSI and ICI) and
$10.3  million in fiscal  2005.  The  portion of these costs not  reimbursed  by
customers  was  approximately  $13.1  million in fiscal 2007,  $12.4  million in
fiscal 2006 and $5.0 million in fiscal  2005.  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.

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.


                                       12
<PAGE>
INTELLECTUAL PROPERTY

We rely primarily on a combination of trade secrets and 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 July 29, 2007 we had 926 full-time employees, none of whom are represented
by a labor  union.  Employment  by  functional  area as of July  29,  2007 is as
follows:

                      Executive                     12
                      Administration                58
                      Manufacturing                621
                      Engineering                  194
                      Sales and Marketing           41
                                                   ---
                      Total                        926
                                                   ===

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.

                                       13
<PAGE>
                    Risks Related to Recent Legal Proceedings

A finding of criminal  liability against us in connection with the indictment by
the U.S.  Attorney's office could have a material adverse effect on our business
and operating results.

On June 6, 2006 an indictment was returned against Herley  Industries,  Inc. and
Lee Blatt,  our former  Chairman by the U.S.  Attorney's  Office for the Eastern
District of Pennsylvania in connection with three government contracts completed
in October 2002  aggregating  revenue of  approximately  $3.9 million.  No other
officer,  director  or  employee  of  ours  was  named  in the  indictment.  The
indictment  is on  multiple  charges in  connection  with  purported  activities
resulting in alleged  excessive  profits by us on three  contracts with the U.S.
Government. We and Mr. Blatt could be fined up to approximately $13 million each
and we could be required to forfeit monies paid under the  contracts.  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.  We  believe we have
substantial  defenses to the  charges  alleged in the  indictment  and intend to
vigorously defend against these allegations;  however, there can be no assurance
that we will be successful.

A further suspension of certain of our facilities from receiving new contract
awards could have a material adverse effect on our business.

On June 27, 2007,  we were  notified by the OGC  Acquisition  Integrity  Office,
Department  of Navy  (the  "Navy")  that  certain  of our  operations  had  been
suspended,  as described below, 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  (signed on October 12, 2006) with the Navy. 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.

The  suspension  arose  out  of  certain  discrepancies  in the  automated  test
equipment (ATE) test data for certain microwave  components  manufactured by our
Lancaster  facility for a U. S. defense  prime  contractor  (the  "contractor").
After notification from the contractor on May 31, 2007, of these  discrepancies,
we  conducted  an initial  investigation  which  resulted in the  recalling  and
retesting of certain microwave components.  On June 11, 2007, we engaged a third
party  independent  forensic data analysis  consultant to conduct an analysis of
the test data recorded on the ATE for these microwave components provided to the
contractor  and directed  outside  counsel to investigate  this matter.  Outside
counsel  commenced the conduct of  interviews  of our employees  working on this
program on June 12, 2007. During the course of these interviews, two technicians
stated that they had manually modified certain test results with the approval of
a test supervisor.  On June 20, 2007, we notified the Navy that we had reason to
believe that certain  non-management  employees  at our  Lancaster  facility had
misrepresented test results on the microwave  components.  In July 2007, outside
counsel conducted additional interviews of our employees working on this program
and other  programs  with the  independent  forensic  data  analysis  consultant
present.  These  interviews  confirmed  that  only  these two  technicians  were
involved in  misrepresenting  test results for the contractor and all other work
at this facility had no test data modifications.  Appropriate corrective actions
were taken to the satisfaction of the Navy and the contractor by July 23, 2007.

                                       14
<PAGE>
On June 13, 2006,  we were notified  that as a  consequence  of the  indictment,
certain of our operations had been suspended from receiving new contract  awards
from  the U. S.  Government.  The  affected  operations  include  facilities  in
Lancaster,  Pennsylvania,  Woburn,  Massachusetts,  Chicago,  Illinois  and  our
subsidiary  in  Farmingdale,  New York.  The  Chicago,  Illinois  location  is a
two-person  marketing  office.  The  result of this  suspension  was that  these
facilities  could not be  solicited  for or awarded  new  contracts  or contract
extensions  without  special  exceptions,  pending the  outcome of the  criminal
proceeding.   The  suspended   facilities   could  receive  contract  awards  or
subcontracts  from the Federal  Government  if the head of the agency  states in
writing the compelling reason to do so.

Effective October 12, 2006, we entered into an Administrative Agreement with the
Department of the Navy, on behalf of the Department of the Defense that required
us, 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, we were required to sever our relationship with our former
Chairman of the Board of Directors,  as our employee or  consultant.  In return,
the Navy, on behalf of the  Department of Defense has  terminated the suspension
and debarment of our operations from receiving new contract awards from the U.S.
Government.  Our  failure  to  comply  with  this  Administrative  Order  or  an
unfavorable outcome of the recent indictment could lead to a further suspension.

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

Since June 6, 2006,  we have been 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
the  criminal  indictment  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  64% of our net sales in  fiscal  2007 and 67% of our net sales in
fiscal 2006 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

                                       15
<PAGE>

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
          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 2007 and 2006,  international  sales comprised  approximately  27% and
24%, 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 significant  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

                                       16
<PAGE>


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  2007  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 3% to 5%
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 20% of fiscal year 2007 net sales.
Additionally,  approximately  32% of our net sales were attributable to our next
five largest  customers  for fiscal year 2007.  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
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.

                                       17
<PAGE>
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

                                       18
<PAGE>
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 July 29, 2007, was approximately
$137  million,  of which $132  million  was  funded.  Approximately  74% 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 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.
                                       19
<PAGE>
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 (3)              Production, engineering and administration          43,260 sq. ft.     Leased
Jerusalem, Israel           Production, engineering and administration          23,700 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 September 23, 1999 we closed on the sale of its prior owned  facility in
     Amityville,  NY  and  relocated  the  plant  to  this  leased  facility  in
     Farmingdale, NY. The Company entered into two 10 year lease agreements with
     a  partnership  partially  owned by the  children of Mr.  Levy.  The leases
     provide  for initial  minimum  annual rent of  approximately  $312,000  and
     $92,000,  respectively, in each case subject to escalation of approximately
     4% annually throughout the 10 year term. On August 24, 2005, we amended the
     agreement to incorporate the two individual  leases into a single lease and
     extended the term of the lease to August 31, 2010.
(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. as discussed in
     Note B of the financial  statements.  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 April 1, 2005,  we entered  into an  agreement  to acquire all of the
     issued and outstanding common stock of Innovative Concepts, Inc., including
     its wholly owned subsidiary Stapor in Chantilly,  VA as discussed in Note B
     of the financial statements.
</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 a  continuing  investigation  by the U.S.
Attorneys'  Office in Pennsylvania  which,  inter alia,  involves  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.  The  indictment  as  superseded  on January 30, 2007 alleges 27
counts of  violations  of the wire fraud  statute (18 U.S.C.  Section  1343);  2
counts of  violations of the  obstruction  of a federal audit statute (18 U.S.C.
Section  1516);  1 count of violating  the major fraud against the United States
statute (18 U.S.C.  Section 1031); 3 counts of violating the false statements to
the government statute (18 U.S.C.  Section 1001); aiding and abetting (18 U.S.C.
Section 2); and a notice of  forfeiture.  The Company  believes that no criminal
conduct has occurred and will vigorously contest the charges. If convicted,  Mr.
Blatt and the Company  could be fined up to  approximately  $13 million each and
the Company could be required to forfeit  approximately  $2.9 million paid under
the contracts.  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.

                                       20
<PAGE>
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.

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.

In addition,  in June 2006, the Company was 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,  and does not
anticipate any further  activity related to this potential claim until after the
trial of the criminal matter  mentioned  above which is currently  scheduled for
May 2008.

The Company  believes it has substantial  defenses to the charges alleged in the
indictment and intends to vigorously defend against these allegations.

The Company believes it is entitled to recovery of certain legal fees associated
with the above matters under its D&O insurance policy.  The Company has recorded
a receivable of $2,462,000  (net of a deductible of $500,000) in anticipation of
recoveries and received a partial payment of  approximately  $684,000 on June 1,
2007.  As of  July  29,  2007  approximately  $1,778,000  of the  receivable  is
outstanding   and  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,  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,  the  Company  shall  repay to the  insurance  carrier  any such
uncovered sums previously advanced to the Company.

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 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 has
asserted claims for breach of contract and conversion, claiming that the Company
is wrongfully in possession of the intellectual property that was transferred to
the Company.  EADS also seeks a preliminary  injunction.  The Company has 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  remain  pending,  as do the Company's
counterclaims.  Pursuant to the  consent  decree,  the parties  have agreed to a
mediation/settlement  conference of all their respective  claims with the Court,
and have  further  agreed to stay all  proceedings  pending  the outcome of that
mediation/settlement conference currently scheduled for October 17, 2007.

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 other
litigation  will not have a material  adverse effect on the Company's  financial
position or results of operations.

                                       21
<PAGE>
Item 4.  Submission of Matters to a Vote of Security Holders

     Not Applicable.

PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder 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
                                                                       ----          ---
<S>                                                                   <C>            <C>
     Fiscal Year 2005
         First Quarter ............................................   19.77          17.32
         Second Quarter............................................   20.60          18.04
         Third Quarter.............................................   20.27          16.40
         Fourth Quarter............................................   19.82          17.38
     Fiscal Year 2006
         First Quarter.............................................   21.54          16.45
         Second Quarter ...........................................   17.80          15.74
         Third Quarter ............................................   21.38          16.98
         Fourth Quarter ...........................................   20.77           9.21
     Fiscal Year 2007
         First Quarter.............................................   15.55          10.50
         Second Quarter ...........................................   16.99          14.60
         Third Quarter ............................................   16.66          14.85
         Fourth Quarter ...........................................   18.28          15.20
</TABLE>

     The  closing price on October 8, 2007 was $15.35.

     As of October 8, 2007, there were  approximately  170 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 2007.

     The  following  table sets forth the indicated  information  as of July 29,
2007 with respect to our equity compensation plans:
<TABLE>
<CAPTION>
                                                                                                 (c)
                                                                                         Number of securities
                                                (a)                                      remaining available
                                        Number 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                               2,383,643               $ 13.35                         1,779

Equity compensation
plans not approved
by security holders                            1,256,807               $ 17.65                       220,700
                                               ---------                                             -------

Total                                          3,640,450               $ 14.84                       222,479
                                               ---------                                             -------
</TABLE>

                                       22
<PAGE>

(b) Not applicable.

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

Consolidated Statements of Income Data:
--------------------------------------
<TABLE>
<CAPTION>
                                                                                             53 weeks
                                                               52 weeks ended                   ended
                                                   ---------------------------------------   ---------
                                                   July 29,   July 30,  July 31,  August 1,  August 3,
                                                     2007       2006      2005       2004      2003
                                                   --------   --------  --------  --------   --------
<S>                                             <C>            <C>       <C>        <C>       <C>
Net sales (1)                                   $   163,140    176,268   151,415    122,154   110,223
                                                    =======    =======   =======    =======   ========
Cost and expenses:
     Cost of products sold                      $   118,834    127,921   106,441     79,505    73,222
                                                    =======    =======   =======    =======   ========
     Selling and administrative expenses        $    34,190     34,966    30,305     23,047    17,334
                                                    =======    =======   =======    =======   ========
     Employment contract settlement costs (2)   $     8,914      -          -         -          -
                                                    =======    =======   =======    =======   ========
Operating income                                $     1,202     13,381    14,669     19,602    19,667
                                                    =======    =======   =======    =======   ========
Net income                                      $     3,118     10,354    10,781     13,673    13,937
                                                    =======    =======   =======    =======   ========
Earnings per common share (3)
     Basic                                      $       0.22       0.72      0.75       0.97      0.97
     Assuming Dilution                          $       0.22       0.69      0.72       0.92      0.93

Consolidated Balance Sheet Data:
-------------------------------
Total Assets                                    $    262,593    251,450   242,023    220,971   197,564
Total Current Liabilities                       $     34,958     33,351    32,090     23,846    18,125
Long-Term Portion of Employment Settlement
   Agreement (2)                                $      4,117     -          -         -          -
Long-Term Debt net of current portion           $      5,951      5,948     5,000      5,845     6,403
Other Long-Term Liabilities                     $      1,311      1,265     1,042        932       849
<FN>
Notes to Selected Financial Data:
--------------------------------
(1)  See "Acquisitions" under Item 1. "Business".
(2)  See Note H of Notes to Consolidated Financial Statements.
(3)  No cash dividends have been distributed in any of the years presented.
</FN>
</TABLE>
                                       23

<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,  the effects of the indictment of the
Company 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

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

                                       24
<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  (signed on October 12, 2006) with the Navy. 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.

The  suspension  arose  out  of  certain  discrepancies  in the  automated  test
equipment (ATE) test data for certain microwave  components  manufactured by our
Lancaster  facility for a U. S. defense  prime  contractor  (the  "contractor").
After notification from the contractor on May 31, 2007, of these  discrepancies,
we  conducted  an initial  investigation  which  resulted in the  recalling  and
retesting of certain microwave components.  On June 11, 2007, we engaged a third
party  independent  forensic data analysis  consultant to conduct an analysis of
the test data recorded on the ATE for these microwave components provided to the
contractor  and directed  outside  counsel to investigate  this matter.  Outside
counsel  commenced the conduct of  interviews  of our employees  working on this
program on June 12, 2007. During the course of these interviews, two technicians
stated that they had manually modified certain test results with the approval of
a test supervisor.  On June 20, 2007, we notified the Navy that we had reason to
believe that certain  non-management  employees  at our  Lancaster  facility had
misrepresented test results on the microwave  components.  In July 2007, outside
counsel conducted additional interviews of our employees working on this program
and other  programs  with the  independent  forensic  data  analysis  consultant
present.  These  interviews  confirmed  that  only  these two  technicians  were
involved in  misrepresenting  test results for the contractor and all other work
at this facility had no test data modifications.  Appropriate corrective actions
were taken to the satisfaction of the Navy and the contractor by July 23, 2007.

On June 13, 2006, in connection with the legal matter  discussed in Part I, Item
3. "Legal  Proceedings," 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 Chicago,  Illinois location is a two-person  marketing office. 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 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 the Company
is the only qualified supplier on critical defense programs.

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 our  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 the 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 is 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 has  terminated  the  suspension  and  debarment  of the Company from
receiving new contract awards from the U.S. Government.

                                       25
<PAGE>

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  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,  he 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 cash
payments 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 our condensed  consolidated  financial
statements for the fifty-two weeks ended July 29, 2007.

Results of Operations

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

                                                          52 weeks ended
                                              -------------------------------------
                                              July 29,       July 30,       July 31,
                                                2007           2006           2005
                                                ----           ----           ----
<S>                                            <C>            <C>            <C>
Net sales                                      100.0%         100.0%         100.0%
Cost of products sold                           72.8%          72.6%          70.3%
                                               ------         ------         ------

Gross profit                                    27.2%          27.4%          29.7%

Selling and administrative expenses             21.0%          19.8%          20.0%
Employment contract settlement costs             5.5%           0.0%           0.0%
                                               ------         ------         ------
Operating Income                                 0.7%           7.6%           9.7%
                                               ------         ------         ------
Other income (expense), net:
     Investment income                           0.7%           0.5%           0.6%
     Interest expense                           (0.4%)         (0.2%)         (0.2%)
     Foreign exchange gain (loss)                0.3%           0.2%          (0.2%)
                                               ------         ------         ------
                                                 0.6%           0.5%           0.2%
                                               ------         ------         ------
Income before income taxes                       1.3%           8.1%           9.9%
(Benefit) provision for income taxes            (0.6%)          2.3%           2.8%
                                               ------         ------         ------
Net income                                       1.9%           5.8%           7.1%
                                               ======         ======         ======
</TABLE>

                                       26
<PAGE>
     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.

Our  level of  inter-company  sales,  which  are  eliminated  in  consolidation,
increased to $13.2  million in fiscal 2007 from  approximately  $10.0 million in
fiscal 2006.

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:

     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
          recent 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.

                                       27
<PAGE>
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%

                                       28
<PAGE>
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.
Excluding the impact of the  employment  contract  settlement  costs,  basic and
diluted  earnings per common share would have been $.65 and $.63,  respectively,
for fiscal 2007 as compared to basic and diluted  earnings  per common  share of
$.72 and $.69,  respectively,  for fiscal 2006. A reconciliation of the Non-GAAP
earnings per common share  calculation is as follows (in thousands  except share
data):
<TABLE>
<CAPTION>
                                                         Fifty-two weeks ended
                                                         ---------------------
                                                Non-GAAP
                                                Measure          As Reported Under GAAP
                                                July 29,        July 29,        July 30,
                                                2007 (*)          2007            2006
                                                --------        -------         --------

<S>                                              <C>           <C>              <C>
Income before income taxes                       $ 2,099       $  2,099         $ 14,333
Employment contract settlement costs               8,914           -                -
                                                  ------         ------           ------
Income before income taxes                        11,013          2,099           14,333
Provision (benefit) for income taxes               1,900         (1,019)           3,979
                                                  ------         ------           ------
Net income                                       $ 9,113       $  3,118         $ 10,354
                                                  ======         ======           ======
Earnings per common share - Basic                 $ 0.65       $   0.22         $   0.72
                                                    ====           ====             ====
       Basic weighted average shares              13,927         13,927           14,463
                                                  ======         ======           ======
Earnings per common share - Diluted               $ 0.63       $   0.22         $   0.69
                                                    ====           ====             ====
       Diluted weighted average shares            14,395         14,395           15,097
                                                  ======         ======           ======
_____

*    The non-GAAP  disclosure  of net income and basic and diluted  earnings per
     common share is not  preferable  to GAAP net income and earnings per common
     share but is shown as a supplement to such disclosure for  comparability to
     the prior year's  results.  Management  believes that this  information  is
     important  to  investors  for  a  meaningful   analysis  of  our  financial
     performance.
</TABLE>

     Fiscal 2006 Compared to Fiscal 2005

Net sales for the fifty-two weeks ended July 30, 2006 were approximately  $176.3
million compared to $151.4 million for fiscal 2005, an increase of approximately
$24.9 million (16%).  Net sales  attributable to the acquisitions of MSI and ICI
which were  completed  in the third  quarter  of fiscal  2005  accounted  for an
increase of approximately  $21.3 million (14%) in net sales. We also experienced
an approximate $3.6 million (2%) net increase in sales at our other  operations,
most significantly as follows:

o    An increase in sales at our  Lancaster  operation  of $1.9  million,  which
     includes $2.2 million in revenue in connection with a claim due to customer
     delays and changes in specifications and designs under a major program,  as
     well  as an  increase  of  $3.0  million  in the  sales  of  Herley-Medical
     products.  These  increases  were  offset  by  reduced  sales  caused  by a
     reduction  in  scheduled  requirements  of  F18,  IFF,  AMRAAM  and  Meteor
     programs.

o    A net increase in sales at our  Herley-Israel  operation  of  approximately
     $1.7 million, primarily driven by an increase in development and production
     of  sophisticated  microwave  integrated  assemblies  for  military  use to
     various international customers.

                                       29
<PAGE>
Our  level of  inter-company  sales,  which  are  eliminated  in  consolidation,
increased  to $10.0  million in fiscal 2006 from  approximately  $7.3 million in
fiscal 2005.

The gross profit margin for the fifty-two weeks ended July 30, 2006 was 27.4% as
compared to the margin of 29.7% in fiscal 2005, a decline of 2.3%.  The decrease
in gross profit margins is primarily attributable to the following:

     o    Development  costs on  certain  contracts  in  excess of  billings  to
          customers.

     o    Engineering costs related to penetration into new military markets.

     o    The transition of several new programs from engineering development to
          the early stage of  production,  with startup  costs not yet offset by
          production revenues.

     o    The  cumulative  effects of  changes in  contract  cost  estimates  on
          certain programs accounted for under the percentage  completion method
          of accounting.

Offset by

     o    Higher gross  margins  contributed  by our foreign  operations  and at
          recently acquired businesses (MSI and ICI) from improved pricing, cost
          efficiencies, and product mix.

Selling and administrative  expenses for the fifty-two weeks ended July 30, 2006
were 19.8% of net sales as compared to 20.0% in fiscal  2005,  or an increase of
$4.7 million. Significant increases during the period included:

     o    An increase of approximately $4.1 million  attributable to selling and
          administrative  expenses related to the two acquisitions  completed in
          the third quarter of fiscal 2005 (MSI and ICI).

     o    Stock  compensation  costs  of $0.5  million  in  connection  with the
          adoption of SFAS 123R as of August 1, 2005.

Legal expenses in fiscal 2006 were $2.3 million and were primarily  attributable
to legal costs associated with the  investigation  and subsequent  indictment by
the U.S.  Attorneys'  office in  Pennsylvania.  During fiscal 2005,  legal costs
incurred  were $2.7 million of which $1.8 million  relates to the  investigation
and the  balance  relates  primarily  to the  litigation  and  settlement  costs
involving  Robinson  Laboratories,  Inc. and Ben  Robinson  which was settled in
fiscal 2005.

We spent approximately  $17,000 in out-of-pocket  consulting fees in fiscal 2006
versus  $658,000 in  out-of-pocket  consulting fees in fiscal 2005 in connection
with our Sarbanes-Oxley Section 404 compliance program. The reduction in fees is
attributable to our establishment of an internal audit department and the use of
internal resources for compliance testing activities.

As a result of the above trends,  our operating  income for fiscal year 2006 was
$13,381,100  or 7.6% of net sales,  as  compared to  $14,669,000  or 9.7% of net
sales in fiscal 2005. Our foreign operations contributed $2,748,000 in operating
income for the year as compared to $872,000 in fiscal  2005.  Revenues  from our
foreign  operations  increased by  $1,550,000  as compared to fiscal  2005.  The
increase in revenue and  operating  income  within our  foreign  operations  was
primarily driven by improved performance at Herley-Israel.

Investment  income decreased by $95,000 in fiscal 2006 as a result of a decrease
on average  of  approximately  $27  million in excess  cash  reserves  invested,
attributable to cash used to fund the  acquisitions in fiscal 2005 (see Note B);
offset by an increase of 65% in the rate of interest earned on the investment of
excess cash  reserves and  increased  operating  cash  balances  during the 2006
fiscal year as compared to fiscal 2005.

                                       30
<PAGE>
The  effective  income  tax  rate  for both  fiscal  2006 and 2005 was 28%.  The
effective tax rate is lower than the statutory  income tax rate of 35% primarily
due to net  favorable  tax  benefits.  The largest  benefit in 2006 was due to a
lower  effective  tax  rate on  foreign  source  income,  and in 2005 due to the
recognition of multi-year  research and development tax credits realized.  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 and tax exempt interest income.

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  reserves.  A  significant  portion of our revenue for fiscal 2008
will be generated from our existing backlog of sales orders.  The funded backlog
of orders at July 29, 2007 was approximately $132 million of which approximately
74% is expected to ship in fiscal 2008. 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  reserves  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  $28.5
million  available under our bank credit facility,  net of outstanding  stand-by
letters of credit of approximately $11.5 million,  and cash reserves at July 29,
2007 of approximately $35.2 million.

As of July 29, 2007 and July 30,  2006,  working  capital was  $103,502,000  and
$92,088,000 respectively, and the ratio of current assets to current liabilities
was 4.0 and 3.8 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 the progress  payments  was  approximately
$1,921,000 at July 29, 2007,  and  $2,573,000  at July 30, 2006.  The balance of
advanced payments was approximately  $7,163,000 at July 29, 2007, and $3,323,000
at July 30, 2006.

Net cash provided by operating  activities  was  approximately  $16.4 million in
fiscal 2007, an increase of approximately $1.1 million compared to $15.3 million
in fiscal  2006.  Net income was $3.1  million in fiscal 2007  compared to $10.4
million in fiscal 2006, a decrease of  approximately  $7.2  million.  Employment
contract  settlement  costs of  approximately  $8.9  million  (including  a cash
payment of $3.0 million) accounted for a significant portion of the reduction in
net income.

Other  significant  increases in cash  provided by operating  activities  during
fiscal 2007 versus fiscal 2006 include the following:

     o    A  reduction  of  approximately  $2.6  million  in the  amount of cash
          invested in inventories,

     o    An increase  of  approximately  $5.9  million in cash  generated  from
          collection  of accounts  receivable  during  fiscal 2007 versus fiscal
          2006, and

     o    An increase of  approximately  $2.4 million in cash generated  through
          advance  payments  from  customers on  contracts  during the course of
          fiscal 2007.

Offset  primarily  by the  following  decreases  in cash  provided by  operating
activities:

     o    An  increase  of  approximately  $2.7  million  in the  amount of cash
          invested  in  "Costs  incurred  and  income  recognized  in  excess of
          billings on uncompleted contracts,"

     o    An increase in cash invested in other receivables of $2.7 million,

                                       31
<PAGE>
     o    A decrease of  approximately  $1.1 million in the accrual for contract
          losses, and

     o    A $1.5  million net decrease due to changes in deferred tax assets and
          liabilities.

Net cash used in investing activities includes:

     o    A final  milestone  payment  of $0.2  million in  connection  with the
          Xytrans  license  of  certain  technology  to be used in  missile  and
          millimeter wave products. (See Note A-9.)

     o    Capital expenditures of $4.9 million.

     o    Proceeds  from  the  sale of  demonstration  equipment  in the  United
          Kingdom of $0.2 million.

Net cash provided by financing activities of $1.4 million results from the
following:

     o    Borrowings of $1.7 million in connection with the implementation of an
          ERP software package.

     o    Proceeds from the exercise of stock options for $1.2 million.

Offset by

     o    Aggregate  payments of $1.8 million  related to our long-term debt and
          the employment settlement liability.

During  fiscal 2007,  we borrowed and repaid $17.9  million  under our revolving
credit facility for short-term working capital needs.

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, the Company  replaced its existing credit facility with a new
$40 million Revolving Credit Loan 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  revolving  credit  facility
requires  the  payment of  interest  only on a monthly  basis and payment of the
outstanding principal balance on March 31, 2009. 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 1.35% to 1.65%.  The  applicable  incremental  margin is
based on the ratio of total  liabilities  to tangible net worth,  as those terms
are defined in the agreement. 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 $11.5 million at July 29,
2007.  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  inventory.  Funded  backlog as of July 29, 2007 was
approximately $132 million.  There were no borrowings under the line at July 29,
2007 and July 30, 2006.

                                       32
<PAGE>
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  $20,025,000 in open purchase
orders as of July 29,  2007.  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.

The following table summarizes the Company's  contractual  financial obligations
and other  contingent  commitments,  including  interest,  at July 29,  2007 (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                     $    2,494   $      280   $    2,214     $    -        $   -
     Industrial Revenue Bonds               3,370          221          442          440        2,267
     Employment Settlement Agreement        6,055        1,113        2,516        2,426          -
     Operating Lease Obligations           15,448        3,551        6,366        4,300        1,231
     Purchase Obligations                  20,025       18,661        1,123          241          -
                                           ------       ------      -------       ------        -----
                                           47,392       23,826       12,661        7,407        3,498
     Standby Letters of Credit             11,535        3,114        4,283        4,076           62
                                           ------       ------       ------       ------        -----
     Total Contractual Obligations     $   58,927   $   26,940   $   16,944     $ 11,483      $ 3,560
                                           ======       ======       ======       ======        =====

</TABLE>

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,  2012,  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 July 29, 2007 of $707,319 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.

                                       33
<PAGE>
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 July 29, 2007, the amount payable in the event of
such termination would be approximately $7,709,000.

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, 2010,  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
$350,000  (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  ending  August 3,  2008  shall be paid 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 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 July 29, 2007 of $620,000.

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  $3,440,000  through  September 30,
2008 in the event of a change of control as defined in the  agreements.  Several
other  employees  have  severance  agreements,  in the event of  termination  of
employment except for cause,  expiring at various dates from August 2007 through
April  2009,  providing  for  an  aggregate  payment  as of  July  29,  2007  of
$1,990,000.

Recent Accounting Pronouncements

In February  2007, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 159, "The Fair Value
Option for Financial Assets and Financial  Liabilities"  ("SFAS 159").  SFAS 159
provides  companies  with an option  to report  selected  financial  assets  and
financial  liabilities at fair value.  Unrealized  gains and losses on items for
which the fair value  option has been  elected are  reported in earnings at each
subsequent  reporting  date.  SFAS 159 is effective  for fiscal years  beginning
after  November 15, 2007 (our 2009 fiscal year).  We will evaluate the impact of
adopting  SFAS 159 but do not expect that it will have a material  impact on our
consolidated financial position, results of operations or cash flows.

In  September  2006,  the FASB issued SFAS No.  157,  "Fair Value  Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles,  and expands disclosures
about  fair  value  measurements.  It  codifies  the  definitions  of fair value
included  in other  authoritative  literature;  clarifies  and,  in some  cases,

                                       34
<PAGE>
expands on the guidance for implementing fair value measurements;  and increases
the level of disclosure required for fair value measurements.  Although SFAS 157
applies to (and amends) the provisions of existing authoritative  literature, it
does not,  of  itself,  require  any new fair  value  measurements,  nor does it
establish valuation  standards.  SFAS 157 is effective for financial  statements
issued for fiscal years  beginning  after November 15, 2007, and interim periods
within those fiscal years.  This statement will be effective for our fiscal year
beginning  August 4, 2008.  We will evaluate the impact of adopting SFAS 157 but
do not expect that it will have a material impact on our consolidated  financial
position, results of operations or cash flows.

In September  2006, the staff of the Securities and Exchange  Commission  issued
Staff  Accounting  Bulletin  No.  108 ("SAB  108")  which was issued in order to
eliminate the diversity of practice  surrounding how public  companies  quantify
financial statement misstatements.  SAB 108 requires registrants to quantify the
impact of correcting all misstatements  using both the "rollover" method,  which
focuses primarily on the impact of a misstatement on the income  statement,  and
the "iron curtain" method,  which focuses  primarily on the effect of correcting
the period-end balance sheet. The use of both of these methods is referred to as
the "dual  approach" and should be combined with the  evaluation of  qualitative
elements surrounding the errors in accordance with SAB No. 99, Materiality.  The
provisions  of SAB 108 are  effective  for our fiscal years  beginning  July 31,
2006. The adoption of SAB 108 did not have a material impact on our consolidated
financial position, results of operations or cash flows.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income  Taxes (as amended) - an  interpretation  of FASB  Statement  No. 109"
("FIN 48").  FIN 48 clarifies the  accounting  for  uncertainty  in income taxes
recognized in an enterprise's  financial  statements in accordance with SFAS No.
109,  "Accounting for Income Taxes", and prescribes a recognition  threshold and
measurement attribute for the financial statement recognition and measurement of
a tax  position  taken or  expected  to be taken  in a tax  return.  FIN 48 also
provides  guidance on  derecognition,  classification,  interest and  penalties,
accounting in interim  periods,  disclosure and transition.  FIN 48 is effective
for fiscal years beginning after December 15, 2006. We will adopt the provisions
of FIN 48 in the first  quarter  of fiscal  2008.  We are still  evaluating  the
potential impact, if any, upon adoption.

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 generally  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
88%  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 15% 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,

                                       35
<PAGE>
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  2007 using our  current  market  capitalization,  which in an
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 there was no impairment of goodwill at July 29, 2007.

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.

                                       36
<PAGE>
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.  The  movements  in the  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 the fiscal years 2007, 2006 and 2005, EWST accounts for  approximately 3% to
5% 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 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.  A
10% decline in the average value of Sterling in fiscal 2006, for example,  would
have reduced  sales by  approximately  $680,000,  and would have  increased  our
consolidated  operating income by approximately $146,000 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 2006 were 1.79, 1.87 and
1.73 respectively.

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

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  $42,000  as of  July  29,  2007.  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,  we replaced  our existing  credit  facility  with a new $40
million  Revolving  Credit Loan 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  revolving  credit  facility
requires  the  payment of  interest  only on a monthly  basis and payment of the
outstanding  principal  balance on March 31,  2009.  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 1.35% to 1.65%.  The  applicable  incremental  margin is
based on the ratio of total  liabilities  to tangible net worth,  as those terms
are defined in the agreement. 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 $11.5 million at July 29,
2007. 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  inventory.  Funded  backlog as of July 29, 2007 was  approximately  $132
million out of a total  backlog of  approximately  $137  million.  There were no
borrowings outstanding under our revolving credit facility as of July 29, 2007.

                                       37
<PAGE>
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>
                2008                                   $   120
                2009                                       125
                2010                                       130
                2011                                       135
                2012                                       140
                2013 and later                           1,825
                                                         -----
                                                       $ 2,475
                                                         =====

                Fair value                             $ 2,517
                                                         =====
</TABLE>
We do not  anticipate  any other  material  changes in our  primary  market risk
exposures in fiscal 2008.

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 July 29, 2007 (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
     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

                                       38
<PAGE>
     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 July 29, 2007,  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 July
     29, 2007.  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 July 29, 2007 was  effective.

     Our internal control over financial  reporting as of July 29, 2007 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

                                       39
<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.

                                       40

<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 July 29, 2007, 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
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 July
29,  2007,  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 July 29, 2007 and July 30, 2006 and the related  consolidated  statements  of
income, shareholders' equity, and cash flows and the related financial statement
schedule for the  fifty-two  (52) weeks ended July 29,  2007,  July 30, 2006 and
July 31, 2005 of the Company and our report dated October 11, 2007  expressed an
unqualified  opinion  on those  financial  statements  and  financial  statement
schedule.


/s/ Marcum & Kliegman LLP


Marcum & Kliegman LLP
Melville, New York
October 11, 2007

                                       41
<PAGE>
Item 9B.  Other Information

       Not applicable

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

Directors of the Registrant
<TABLE>
<CAPTION>
                                                                                                       Director
      Name of Director                          Age      Principal Occupation                            Since
      ----------------                          ---      --------------------                          --------

<S>                                              <C>      <C>                                             <C>
  Myron Levy                                     66       Chairman of the Board
                                                             and Chief Executive Officer                  1992
  Rear Admiral Edward K. Walker, Jr. (Ret.)      74       Vice Chairman of the Board                      1997
  (1)                                                        (2) (3)
  Dr. Edward A. Bogucz (1) (3)                   51       Executive Director of the New York Center       2003
                                                             of Excellence in Environmental Systems
  Rear Admiral Robert M. Moore (Ret.) (1) (2)    68       Business and Financial Management Consultant    2003
  John A Thonet                                  57       President of Thonet Associates                  1991
  Carlos C. Campbell (2) (3)                     70       Business and Financial Management Consultant    2005
--------------------
(1)  Member of Compensation and Audit Committees
(2)  Member of Corporate Governance Committee
(3)  Member of Nominating Committee
</TABLE>

Mr. Myron Levy was appointed Chairman of the Board in June 2006 after serving as
Vice Chairman of the Board since August 2003,  and has been our Chief  Executive
Officer since August 2001.  Prior  thereto,  Mr. Levy served as President  since
June 1993, as Executive Vice President and Treasurer since May 1991, and as Vice
President for Business  Operations  and Treasurer  since October 1988.  For more
than ten years prior to joining  the  Company,  Mr.  Levy,  a  certified  public
accountant,   was   employed   in  various   executive   capacities,   including
Vice-President, by Griffon Corporation.

Rear Admiral  Edward K. Walker,  Jr. (Ret.) was  appointed  Vice Chairman of the
Board in June 2006.  Rear  Admiral  Walker  served as the  Director of Corporate
Strategy for Resource Consultants, Inc., a privately held corporation supporting
the Department of Defense and other  government  agencies,  after his retirement
from the United States Navy in 1988 until 2000. Prior to his retirement from the
United  States Navy,  Rear Admiral  Walker  served for 34 years in various naval
officer positions,  including Commander of the Naval Supply Systems Command, and
Chief of Supply Corps. He holds a Bachelor's Degree from the United States Naval
Academy  and  Master's  Degree  in  Business   Administration  from  The  George
Washington University.

Dr. Edward A. Bogucz is currently  Executive  Director of the New York Center of
Excellence in  Environmental  Systems,  a  university-industry  consortium  that
includes 12  universities  and research  institutions.  Previously,  Dr.  Bogucz
served as Dean of Engineering and Computer  Science at Syracuse  University from
1995 through 2003.  Dean Bogucz earned his  bachelor's  and doctoral  degrees in
mechanical  engineering  from  Lehigh  University  and a  Master's  Degree  from
Imperial  College,  University  of London.  His teaching and research  expertise
includes  fluid   dynamics,   energy   systems,   computational   methods,   and
multidisciplinary  analysis and design. As Dean, he led the strengthening of the
College of Engineering and Computer Science in selected areas,  including RF and
microwave devices,  information  fusion,  systems  assurance,  and environmental
technologies.

Rear Admiral  Robert M. Moore (Ret.) is a consultant  in business and  financial
management.  He is a retired Rear Admiral,  U.S. Navy. His 35-year career in the
Navy culminated in his last assignment in charge of the Navy's  worldwide supply
system. He holds a Bachelor's Degree from the University of Texas and a Master's
Degree in Business Administration from Harvard University.

Mr. John A. Thonet has been  Secretary  since January 2003,  and is President of
Thonet  Associates,  an  environmental  consulting  firm  specializing  in  land
planning and zoning matters, for the past ten years.

Carlos C. Campbell operates a consulting business in Reston, Virginia and serves
on the Board of Directors for Resource  America,  Inc. and Pico Holdings,  Inc.,
both publicly traded companies.  He is a veteran of nine years as a Naval Flight
Officer and served in the  Administration  of President  Reagan as the Assistant
Secretary for Economic Development, U.S. Department of Commerce.

                                       42
<PAGE>
Executive Officers of the Registrant

         Name                Age      Position
         ----                ---      --------

  Myron Levy                 66     Chairman of the Board,
                                    Chief Executive Officer,
                                    and Director
  John M. Kelley             54     President
  Jeffrey L. Markel          59     Chief Operating Officer
  Kevin J. Purcell           49     Vice President and Chief Financial Officer
----------

John M. Kelley was appointed  President in August 2003,  and served as Executive
Vice President since July 2002. Prior thereto,  Mr. Kelley served as Senior Vice
President  since  July  2000  and  as  Vice   President/Director   of  Corporate
Communications  since  March 2000.  Mr.  Kelley  joined us in  December  1998 as
Director of Investor Relations.  Prior to joining Herley, Mr. Kelley had fifteen
years of banking  experience,  most recently  serving as Vice President at First
Capital  Bank.  Mr.  Kelley  earned his  Bachelor of Science  Degree in Business
Administration  from the  University of Arizona,  Tucson,  Arizona with Graduate
Degree Studies at UCLA.

Jeffrey L. Markel was appointed Chief Operating  Officer in June 2007.  Prior to
joining  Herley,  Mr. Markel was employed at BAE Systems serving as President of
the Network  Enabled  Systems Line of Business since 1997.  From 1994 to 1997 he
was Vice President of Program  Management for GEC Marconi.  His prior employment
was at Hazeltine Corporation, with his last position there being Vice President,
Communication Systems. Mr. Markel has over 38 years of experience in the defense
industry  encompassing  electronic  systems,  sub-systems,  and components.  His
educational  background includes a Bachelor of Science in Mechanical Engineering
and a Bachelor of Arts in Applied Science from Lehigh  University,  as well as a
Masters in Business Administration from Long Island University.

Kevin J. Purcell was appointed  Vice  President and Chief  Financial  Officer in
June  2006.  Prior to  joining  Herley,  Mr.  Purcell  served as Vice  President
Finance,  Contracts and Compliance for Smiths Aerospace LLC,  Customer  Services
Americas.  Previously,  Mr. Purcell served other  companies in senior  financial
positions  including  Vice  President  and  CFO,  Controller  and  Director.  In
addition,  he worked for a number of years in the Government Contractor Advisory
Services  group of KPMG.  Mr.  Purcell  received his B.B.A.  degree in financial
accounting from Iona College and his M.B.A.  degree from Pepperdine  University.
He is a Certified Public Accountant and a Certified Management Accountant.

Committees of the Board of Directors

     Audit Committee and Audit Committee Financial Expert

The Board has a standing Audit Committee. The Board has affirmatively determined
that each director who serves on the Audit Committee is independent, as the term
is defined by applicable Nasdaq and Securities and Exchange  Commission  ("SEC")
rules.  During fiscal 2007, the Audit Committee of the Board of Directors of the
Company consisted of Edward K. Walker (Chairman), Robert M. Moore, and Edward A.
Bogucz.  The  members of the audit  committee  have  substantial  experience  in
assessing the performance of companies, gained as members of the Company's board
of directors and audit committee, as well as by serving in various capacities in
other  companies  or  governmental  agencies.  As a  result,  they  each have an
understanding of financial statements. However, none of them keep current on all
aspects of generally accepted accounting principles.  Accordingly,  the board of
directors does not consider any of them to be a financial expert as that term is
defined in applicable regulations. Nevertheless, the board of directors believes
that they competently  perform the functions  required of them as members of the
audit  committee  and,  given  their  backgrounds,  it would  not be in the best
interest of the Company to replace any of them with another  person to qualify a
member of the audit committee as a financial expert.

The Audit  Committee  regularly  meets with our  independent  registered  public
accounting firm outside the presence of management.

     Compensation Committee

Our Compensation Committee annually establishes,  subject to the approval of the
Board of Directors and any applicable employment agreements,  the salaries which
will be paid to our executive  officers  during the coming year, and administers
our stock-based benefit plans. The Compensation  Committee currently consists of
Edward A. Bogucz, Chairman, Edward K. Walker and Robert M. Moore. Each member of
the Compensation Committee is a director who is not employed by us or any of our
affiliates, and are independent directors under NASDAQ listing standards.

                                       43
<PAGE>
     Nominating Committee

Our Nominating Committee currently  consisting of Carlos C. Campbell,  Chairman,
Edward K. Walker, and Edward A. Bogucz, each of whom is an independent director,
identifies  individuals  qualified to become Board  members,  recommends  to the
Board  nominees to fill  vacancies in membership of the Board as they occur and,
prior to each Annual Meeting of Shareholders, recommends a slate of nominees for
election as Directors at such meeting.

     Governance and Ethics Committee

Our Governance and Ethics  Committee,  currently  consisting of Robert M. Moore,
Chairman,  Edward  K.  Walker  and  Carlos  C.  Campbell,  each  of  whom  is an
independent  director,  monitors developments in corporate governance principles
and other corporate governance matters and makes recommendations to the Board of
Directors regarding the adoption of additional corporate governance principles.

Stockholder Recommendations for Board Nominees

The   Governance   and   Nominating    Committee   will   consider   stockholder
recommendations  for  candidates  for the  Board.  The  name of any  recommended
candidate for director,  together with a brief  biographical  sketch, a document
indicating the candidate's willingness to serve, if elected, and evidence of the
nominating  stockholder's  ownership  of  Company  stock,  should be sent to the
attention of the Secretary of the Company.

Compliance  with  Section  16(a)  of  The  Securities  Exchange  Act  of  1934 -
Beneficial Ownership Reporting Compliance

Section  16(a)  of the  Securities  Exchange  Act of  1934  requires  directors,
executive  officers and persons who beneficially own more than 10% of our common
stock  (collectively,  "Reporting Persons") to file initial reports of ownership
and reports of changes in ownership of our common stock with the  Securities and
Exchange  Commission.  Reporting  Persons  are  required by SEC  regulations  to
furnish us with copies of all Section 16(a) reports they file. To our knowledge,
based  solely on our review of the copies of such  reports  received  or written
representations  from  certain  Reporting  Persons  that no other  reports  were
required,  we believe that during  fiscal 2007,  all  Reporting  Persons  timely
complied with all applicable filing requirements.

Corporate Governance - Code of Ethics

We have adopted a Corporate Code of Business Ethics (the "Code") that applies to
all employees,  including our principal  executive officer,  principal financial
officer,  and  directors  of the  Company.  The Code is  broad  in scope  and is
intended to foster  honest and ethical  conduct,  including  accurate  financial
reporting,  compliance with laws and the like. If any substantive amendments are
made to the Code or if there is any  grant of  waiver,  including  any  implicit
waiver,  from a provision  of the Code to our Chief  Executive  Officer or Chief
Financial Officer,  we will disclose the nature of such amendment or waiver in a
report on Form 8-K.

Item 11.  Executive Compensation

Compensation Discussion and Analysis

This section  discusses the  principles  underlying  our executive  compensation
policies and decisions and the most important factors relevant to an analysis of
these policies and decisions.  It provides qualitative information regarding the
manner and context in which  compensation  is awarded to and earned by our Named
Executive Officers ("NEOs") (as defined in the Summary Compensation Table below)
and places in  perspective  the data  presented in the tables and narrative that
follow.

       Compensation Philosophy and Overview

We believe that the most effective  compensation program is one that is designed
to reward the achievement of our financial and strategic goals, and which aligns
executives' interests with those of our stockholders.

The compensation plans for our executive officers have three principal elements:
a base salary,  discretionary  cash  incentive  bonuses linked to achievement of
financial  and  strategic  goals and  equity-based  incentive  compensation.  In
addition,  we provide our executive  officers a variety of benefits that in most
cases are  available  generally  to all of our salaried  employees.  We view the
components of  compensation as related but distinct.  Although the  Compensation
Committee  of our  Board  of  Directors  (the  "Committee")  reviews  the  total
compensation  of our  executive  officers,  we do not believe  that  significant
compensation  derived from one  component  of  compensation  should  necessarily
negate or reduce  compensation  from other  components.  We do believe  that the
executive  compensation  package should be fair and  reasonable  when taken as a
whole.

                                       44
<PAGE>
We  have  not  adopted  any  formal   policies  or  guidelines   for  allocating
compensation  between  long-term and currently paid out  compensation or between
cash  and  non-cash  compensation.  However,  our  philosophy  is to  keep  cash
compensation  at a  competitive  level while  providing  the  opportunity  to be
significantly rewarded through equity if our company and our stock price perform
well over time.

We also believe that  executive  officers  should have a greater  percentage  of
their equity  compensation  in the form of stock options rather than  restricted
stock or  restricted  stock unit  awards,  as stock  options  have  greater risk
associated  with them than  these  other  equity  grants.  We  believe  that our
executive officers should have a larger portion of their equity incentive awards
at risk as compared with our other employees.

     Role of Executive Officers in Compensation Decisions

Mr. Myron Levy, our Chief Executive Officer, annually reviews the performance of
each of our other executive  officers.  The conclusions  reached by Mr. Levy and
his  recommendations  based on these  reviews,  including with respect to salary
adjustments,  incentive  awards and equity award  amounts,  are presented by Mr.
Levy to the  Committee.  The Committee can exercise its  discretion in modifying
any  recommended  adjustments or awards to executives.  The Committee  makes all
final compensation decisions for each of our executive officers.

Committee  meetings  typically  have  included,  for  all or a  portion  of each
meeting,  not only the Committee  members but also our Chief Executive Officer .

     Role of the Compensation Committee

The Compensation  Committee  currently  consists of Edward A. Bogucz,  Chairman,
Edward K. Walker and Robert M. Moore. Each member of the Compensation  Committee
is a  director  who is not  employed  by us or any of our  affiliates,  and  are
independent directors under NASDAQ listing standards.

The Committee  ensures that our executive  compensation  and benefits program is
consistent  with  our  compensation  philosophy  and  our  corporate  governance
guidelines and is empowered to make decisions regarding executive officers total
compensation,  and  subject to the  approval of the Board,  our Chief  Executive
Officer's total compensation.

The Committee  reviews our overall  compensation  strategy at least  annually to
ensure  that it promotes  stockholder  interests,  supports  our  strategic  and
tactical  objectives and provides for appropriate rewards and incentives for our
executive  officers.  The Committee's  most recent overall  compensation  review
occurred in October 2007.

     Accounting and Tax Implications of Our Compensation Policies

In designing our compensation  programs,  the Committee  considers the financial
accounting and tax  consequences to the Company as well as the tax  consequences
to our employees. We account for equity compensation paid to our employees under
SFAS  123(R),  which  requires  us to estimate  and record and expense  over the
service  period of the  award.  The SFAS  123(R)  cost of out  equity  awards is
considered  by  management  as part of our equity grant  recommendations  to the
Committee.  Our equity grant practices have been impacted by SFAS 123(R),  which
we adopted in the first quarter of our 2006 fiscal year.

Section  162(m) of the Internal  Revenue Code places a limit of $1million on the
amount of  compensation  that we may deduct for income tax  purposes  in any one
year with respect to our five most highly compensated executive officers. The $1
million limit does not apply to  compensation  that is  considered  "performance
based" under  applicable tax rules.  Our executive stock options are intended to
qualify  as  "performance-based,"  so that  compensation  attributable  to those
options is fully tax deductible.

We also  consider  the tax impact to employees  in  designing  our  compensation
programs,  particularly our equity compensation programs. For example, employees
generally  control the timing of taxation  with respect to the exercise of stock
options.

Components of our Executive Compensation Program

     Base Salary

We establish base salaries that are sufficient,  in the Committee's judgment, to
retain and motivate our NEOs while taking into account the unique  circumstances
of our Company.  In determining  appropriate  salaries,  the Committee considers
each NEO's scope of  responsibility  and  accountability  within our Company and
reviews the NEO's compensation,  individually and relative to other officers, as
well as similarly situated companies. We have entered into employment agreements
with our NEOs which provide for adjustments as set forth more fully below in the
section titled "Employment  Agreements." In fiscal 2007, there were no increases
in any NEO's  salary  beyond  what is called  for in the  individual  employment
agreements, such as cost-of-living increases.

                                       45
<PAGE>

     Discretionary Cash Incentive Bonuses

     The Committee  believes that discretionary cash bonus compensation for NEOs
     should be directly linked to our overall corporate  financial  performance,
     individual performance and our success in achieving both our short-term and
     long-term  strategic goals. In assessing the performance of our Company and
     our NEOs during fiscal 2007, the Committee  considered  our  performance in
     the following areas:

     o    Increase levels of component integration and value added content;

     o    Enhancement of our manufacturing capabilities;

     o    Pursuit of selective commercial opportunities;

     o    Maintaining leadership in microwave technology;

     o    Strengthening and expanding customer relationships;  and

     o    Maintaining our reputation for integrity.

In fiscal  2007,  the  Committee  awarded  Mr. Levy an  incentive  cash bonus of
$369,000 based on his employment agreement and on a number of factors, including
his strong  performance  as Chairman  of the Board and CEO,  his  assumption  of
responsibilities  of our former Chairman and the comparison of his salary to our
other NEOs, as well as our peer group. Mr. Kelley received a discretionary  cash
bonus of $50,000 and Mr. Purcell received $10,000.  Mr. Markel did not receive a
discretionary bonus in fiscal 2007 as his employment with us did not begin until
June 2007. The bonuses  awarded by the Committee for fiscal 2007 are detailed in
the Summary Compensation Table on page 39.

Our bonuses are structured to be deductible under Section 162(m) of the Internal
Revenue  Code  which  denies  publicly-held  corporations  a federal  income tax
deduction for  compensation in excess of $1 million paid to the CEO and the four
other  most  highly  compensated  officers  during  a  fiscal  year  unless  the
compensation  is  "performance-based."  We believe  that our process of awarding
cash bonuses satisfies this requirement; however, there can be no assurance that
any amounts paid as discretionary cash bonuses will be deductible.

In view of the scope of the  employment  agreements we have with our NEOs, we do
not expect changes in the manner in which discretionary cash bonuses are awarded
to our NEOs.

     Equity-Based Long Term Incentive Compensation

We believe that our equity incentive compensation  arrangements are an important
factor in developing an overall  compensation  program that is competitive  with
our peer group of companies and that aligns the interests of our NEOs with those
of our stockholders.

We believe  that stock  options  effectively  align the  long-term  interests of
management with our stockholders. Additionally, we believe that our NEO's should
have a greater  percentage  of their equity  awards at risk as compared with our
other  employees.  Since NEOs do not benefit from stock options unless the price
of our stock  increases  after the grant date as compared  with the grant price,
they clearly provide NEOs with an added incentive to build shareholder value. We
have not in the past,  repriced the exercise  price for stock  options that have
been granted when the future stock price has decreased  below the exercise price
of such stock options. The date of our awards of stock options is established by
the  Committee  at a meeting held  approximately  four to six weeks prior to the
date of grant. Our stock options grants for fiscal 2007 granted stock options to
our NEOs as set forth in the table on page 38. Grants of stock options vest over
a period of years in order to serve as an  inducement  for the NEOs to remain in
the employ of our Company.  It is  contemplated  that we will  continue to offer
stock options as the principal component of our equity compensation  arrangement
for our NEOs.

The number of shares of stock options  awarded to our NEOs is established by the
Committee in consultation with our CEO, taking into account a number of factors,
including the position,  job performance and overall responsibility of each NEO.
Since the value of the stock options granted to our NEOs is based upon the price
of our shares,  the  Committee  believes that the granting of stock options is a
significant  incentive to our NEOs to continue to build  shareholder  value. The
Committee  also  believes  that the  multi-year  vesting  periods  for the stock
options will be helpful in linking equity compensation to long-term performance.

     Executive Benefits and Perquisites

All of our executives are eligible to participate in our employee benefit plans,
including  medical,  dental,  life  insurance and 401(k) plans.  These plans are
available  to all  salaried  employees  and  do not  discriminate  in  favor  of
executive  officers.  It is  generally  our  policy  not to  extend  significant
perquisites to our executives that are not available to our employees generally.
We have no current  plans to make changes to levels of benefits and  perquisites
provided to executives.

                                       46
<PAGE>
Executive Compensation Tables

     Summary Compensation Table

The following table sets forth the annual and long-term compensation with
respect to our Chairman, Chief Executive Officer ("Principle Executive
Officer"), our Chief Financial Officer ("Principle Financial Officer") and our
other most highly compensated executive officers other than the Chief Executive
Officer who were serving as executive officers at the end of the last completed
fiscal year as required under SEC rules (collectively, the "Named Executive
Officers") for services rendered for the fiscal years ended July 29, 2007.
<TABLE>
<CAPTION>
                                                                               Non-Equity
  Name and Principal                                             Option      Incentive Plan      All Other
       Position          Year       Salary       Bonus (2)     Awards (3)     Compensation    Compensation (5)      Total
       --------          ----       ------       ---------     ----------     ------------    ----------------      -----
<S>                     <C>     <C>              <C>          <C>             <C>               <C>             <C>
 Myron Levy, Chairman   2007    $ 713,126 (1)         -                -      $ 369,069 (4)      $ 18,677       $ 1,100,872
   of the Board and
   Chief Executive
   Officer
 John M. Kelley,        2007    $ 250,000       $ 50,000      $    7,356            -            $ 12,031       $   319,387
   President
 Jeffrey L. Markel,     2007    $  47,116             -       $  299,346            -               -           $   346,462
   Chief Operating
   Officer (6)
 Kevin J. Purcell       2007    $ 220,000       $ 10,000      $   75,871             -           $ 14,660       $   320,531
   Chief Financial
   Officer
--------
<FN>
(1)  Includes  a cost of living  adjustment  of $27,371  for Mr.  Levy under his
     employment contract.
(2)  Executive bonuses are paid at the discretion of the board of directors.
(3)  Amounts represent the aggregate expense recognized for financial  statement
     reporting  purposes  with  respect to fiscal 2007 in  accordance  with SFAS
     123(R) for stock  options  granted to the Named  Executive  Officers in the
     current  fiscal year or in prior  fiscal years  (disregarding  estimates of
     forfeitures for service-based  vesting).  SFAS 123(R) expense for the stock
     options  is  based on the fair  value of the  options  on the date of grant
     using the  Black-Scholes  option-valuation  model.  The assumptions used in
     determining  the fair  value of the  options  are set forth in Note A-13 of
     Notes To Consolidated Financial Statements contained elsewhere in this Form
     10-K  for  the  year  ended  July  29,  2007.
(4)  Represents incentive compensation under Mr. Levy's employment agreement.
(5)  The  following   table   describes   each   component  of  the  "All  Other
     Compensation" column in the "Summary Compensation Table" above.
</FN>
</TABLE>
<TABLE>
<CAPTION>

                                                                Other
                   Matching                                     Personal
                   Contribution                                 Including
                   to Employee                    Medical       Personal
                   Savings       Supplelmental    Insurance     Use of
                   Plan          Life Insurance   Benefits      Auto        Total
                   -----------   --------------   ---------     ----------  -----
<S>                 <C>             <C>            <C>          <C>       <C>
Myron Levy          $ 8,800         $ 4,572        $ 1,552      $ 1,260   $ 18,677
John M. Kelley        8,800             828           -           2,403     12,031
Kevin J. Purcell      8,800             225           -           5,635     14,660
</TABLE>

(6)  Mr.  Markel was  appointed  Chief  Operating  Officer on June 4, 2007 at an
     annual rate of compensation of $350,000.

                                       47
<PAGE>

     Grants of Plan-Based Awards in Fiscal 2007

The following  table sets forth  certain  information  concerning  stock options
granted to the Named Executive Officers during fiscal 2007.
<TABLE>
<CAPTION>
                                                     All Other     Exercise
                                                  Option Awards:   or Base
                                                    Number of      Price of    Grant Date
                                                    Securities      Option     Fair Value
                                                    Underlying      Awards      of Option
                Name             Grant Date        Options (#)(1)  ($/Sh)        Awards
                ----             ----------        --------------  --------   ----------
          <S>                     <C>                <C>           <C>        <C>
          John M. Kelley          6/8/2007            17,500       $ 17.82    $   128,590
          Jeffrey L. Markel       5/9/2007           250,000       $ 15.77    $ 1,426,275
--------
<FN>
(1)  Options  issued in fiscal  2007  were at 100% of the  closing  price of our
     common  stock on the date of issue and vest as  follows:  Mr.  Kelley - one
     fifth of the  options  vest one year from date of grant and one fifth  each
     year thereafter;  Mr. Markel - one fifth on June 1, 2007 and one fifth each
     year thereafter.

(2)  The  amounts  under the  column  labeled  "Grant  Date Fair Value of Option
     Awards" is the fair value of the stock  options  under SFAS 123 (R) granted
     to the named  executives in 2007, which is the amount that the Company will
     expense in its financial  statements  over the option's  vesting  schedule.
     These  amounts  reflect  the  Company's  accounting  expense  and  may  not
     correspond  to the  actual  value  that  will be  recognized  by the  named
     executives.
</FN>
</TABLE>

     Outstanding Equity Awards at Fiscal 2007 Year End

The following table provides information with respect to each unexercised stock
option held by the Named Executive Officers as of July 29, 2007.
<TABLE>
<CAPTION>

                                                  Option Awards
                                                  -------------
                           Number of         Number of
                           securities        securities
                           underlying        underlying
                          unexercised       unexercised        Option       Option
                          options (#)         options         Exercise    Expiration
         Name             Exercisable    (#) Unexercisable   Price ($)       Date
         ----             -----------    -----------------   ---------     ----------
<S>                         <C>              <C>              <C>          <C>
       Myron Levy           225,000              -            $ 10.45      5/18/2010
                            150,000              -            $  8.38      3/12/2011
                            250,000              -            $ 13.10      12/3/2011
                            250,000              -            $ 19.52      5/21/2012
                            200,000              -            $ 17.98       5/2/2015
       John M. Kelley         7,500              -            $  7.25     11/30/2008
                             17,500              -            $ 19.52      8/21/2007
                             10,000              -            $ 19.83     12/23/2009
                             40,000              -            $ 17.98       5/2/2010
                              -               17,500          $ 17.82       9/8/2012
       Jeffrey L. Markel     50,000          200,000          $ 15.77       5/9/2017
       Kevin J. Purcell       5,000           20,000          $ 19.38       9/2/2011
</TABLE>

                                       48
<PAGE>
     Option Exercises in Fiscal 2007

The following table sets forth stock options exercised during fiscal 2007 by the
Named Executive Officer.
<TABLE>
<CAPTION>

                           Number of
                             Shares            Value
                            Acquired          Realized
                               on                on
         Name             Exercise (#)    Exercise ($)(1)
         ----             ------------    ---------------
<S>                           <C>              <C>
John M. Kelley                12,000           $ 41,901
-------
<FN>
(1)  Value is  calculated  by  subtracting  the exercise  price from the trading
     price of the common stock as of the exercise date.
</FN>
</TABLE>

Employment Agreements

Myron Levy entered into an  employment  agreement  with us, dated as of July 29,
2002 which  expires  December 31,  2012,  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 July 29, 2007 at the rate of $707,319  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. Incentive compensation earned for fiscal year ended July 29, 2007
was $369,000.  At the end of the employment period, the agreement provides for a
ten-year consulting period at an annual compensation rate equivalent to one-half
of Mr.  Levy's  annual  salary in effect  at the end of the  employment  period,
subject to annual cost of living adjustments.

The employment  agreement with Mr. Levy provides for certain payments  following
death or  disability,  and also provides that, in the event there is a change in
control,  as defined, he 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  incentive  (based on the average of the three
highest  annual  incentive  awarded  during  the ten  preceding  years)  for the
remainder of the employment term. As of July 29, 2007, the amount payable in the
event of such termination would be approximately $7,709,000.

John M. Kelley entered into an employment agreement with us, dated as of June 7,
2006 which expires June 6, 2009. The agreement  provides for an annual salary as
of July 29,  2007 at the rate of  $250,000,  subject  to  review by the Board of
Directors,  plus an annual bonus at the discretion of the Board of Directors. In
addition,  Mr.  Kelley has  entered  into a  severance  agreement  with us which
provides  that in the event of a change in our  control,  as  defined,  prior to
September 30, 2008, he is entitled to two years' base salary.

Mr.  Jeffrey  Markel  entered into an employment  agreement with us, dated as of
June 4, 2007 which expires July 31, 2010,  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
$350,000  (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  ending  August 3,  2008  shall be paid 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 of a change in our  control,  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.

Kevin J. Purcell entered into an employment  agreement with us, dated as of June
7, 2006 which expires June 6, 2009. The agreement  provides for an annual salary
as of July 29, 2007 at the rate of  $220,000,  subject to review by the Board of
Directors,  plus an annual bonus at the discretion of the Board of Directors. In
addition,  Mr.  Purcell has entered  into a  severance  agreement  with us which
provides that in the event of a change in our control, as defined, prior to June
10, 2008, he is entitled to two years' base salary.

Several other officers and key employees have severance agreements providing for
an aggregate lump sum payment of approximately  $3,440,000 through September 30,
2008 in the event of a change of control as defined in the agreements.

                                       49
<PAGE>
Estimate of Potential Payments upon Termination or Change in Control

The following table provides an estimate of the potential  payments and benefits
that each of the Named  Executive  Officers  would be entitled  to receive  upon
termination  of  employment  under  various  circumstances  and upon a change of
control.  In each case,  the table assumes the  executive's  termination  or the
change of control occurred on July 29, 2007. The table does not include payments
the  executive  would be  entitled  to  receive  in the  absence of one of these
specified events such as from the exercise of  previously-vested  stock options,
which amount can be calculated from the Outstanding Equity Awards at Fiscal 2007
Year End table.  The table also does not include benefits that are provided on a
non-discriminatory  basis to salaried  employees  generally,  including  amounts
payable under the Company's 401(k) plan.
<TABLE>
<CAPTION>
                                                                                        Termination
                                                                                     without Cause or
                                                Termination                           a Constructive
                                               without Cause                            Termination
                                              prior to Change        Change in        after a Change
            Name              Benefit            in Control         Control(1)        in Control(4)
            -----             --------       ----------------      -----------      ---------------
<S>                       <C>                   <C>                 <C>                <C>
     Myron Levy           Severance (5)         $ 7,709,000         $ 7,709,000        $ 7,709,000

     John M. Kelley       Severance                    -            $   500,000               -

     Jeffrey L. Markel    Severance (5)         $ 2,450,000 (2)                 (3)    $ 2,450,000(2)

     Kevin J. Purcell     Severance                    -            $   440,000               -
-------
<FN>
(1)  Change  in  control  is  defined  as such  term  is  presently  defined  in
     Regulation  240.12b-2 under the Securities  Exchange Act of 1934; or if any
     "person"  (as such term is used in Section  13(d) and 14(d) of the Exchange
     Act other than the Company or any  "person" who is a director or officer of
     the  Company,  becomes the  "beneficial  owner" (as defined in Rule 13(d)-3
     under the Exchange  Act),  directly or  indirectly,  of  securities  of the
     Company  representing  twenty-five  percent (25%),  (20% in the case of Mr.
     Levy and  50.1%  in the case of Mr.  Markel),  of the  voting  power of the
     Company's then outstanding securities; or if individuals who constitute the
     Board of Directors  cease for any reason to  constitute at least a majority
     thereof.
(2)  In the event of termination without cause or a "constructive  termination",
     Mr. Markel would be entitled to receive a lump-sum payment of approximately
     $1,950,000  representing  three times his salary and  estimated  incentive,
     plus $500,000 in settlement of his consulting  agreement.
(3)  In the event of a change in control as defined in (1) above, Mr. Markel has
     the option to terminate his employment agreement at any time after July 31,
     2012 and receive a lump-sum payment of approximately $1,900,000.
(4)  A  "constructive  termination"  event is (1) a  material  reduction  of the
     annual  base and  incentive  compensation  opportunities  specified  in the
     officer's  employment agreement to which he does not consent, (2) a failure
     of  Herley's  successor  after a change of control to assume the  officer's
     employment agreement, (3) a substantial change in the officer's position or
     responsibility  or (4) the  officer's  position  relocates  to more than 35
     additional  commute  miles  (one  way).
(5)  If any  payments or benefits  received by Messrs.  Levy or Markel  would be
     subject to the  "golden  parachute"  excise tax under  Section  4999 of the
     Internal  Revenue  Code,  we would be required  to pay him such  additional
     amounts as may be necessary to place him in the same after-tax  position as
     if the payments had not been subject to the excise tax.
</FN>
</TABLE>
                                       50
<PAGE>
Equity Compensation Plan Information

         The following table sets forth the indicated information as of July 29,
2007 with respect to our equity compensation plans:
<TABLE>
<CAPTION>
                                                                                                 (c)
                                                                                       Number of securities
                                                (a)                                    remaining available
                                        Number 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 by plans
approved by security holders                   2,383,643               $ 13.35                         1,779
Equity compensation plans not
approved by security holders                   1,256,807               $ 17.65                       220,700
                                               ---------                                             -------
Total                                          3,640,450               $ 14.84                       222,479
                                               =========                                             =======
</TABLE>
     The following information is provided about our stock option plans:

     2006 New Employee  Stock Option  Plan.  The 2006 New Employee  Stock Option
Plan covers  500,000  shares of common stock (as amended June 8, 2007).  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 250,000 shares were granted
under this plan during the fiscal year ended July 29, 2007.  Options for 217,000
shares of common stock are available for grant and 283,000 were  outstanding  at
July 29, 2007.

     2003 Stock Option Plan. The 2003 Stock Option Plan covers  1,000,000 shares
of common stock. Options granted under the plan are non-qualified stock options.
Under the terms of the plan,  the exercise  price of 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. If not specified,  100% of the
shares can be exercised one year after the date of grant. The options expire not
later  than ten years from the date of grant,  subject to certain  restrictions.
Options for 97,000  shares were  granted  under this plan during the fiscal year
ended July 29, 2007.  Options for 3,700 shares of common stock are available for
grant and 966,800 were outstanding at July 29, 2007.

     2000 Stock Option Plan. The 2000 Stock Option Plan covers  1,500,000 shares
of common stock. Options granted under the plan are non-qualified stock options.
Under the terms of the plan,  the exercise  price of 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. If not specified,  100% of the
shares can be exercised one year after the date of grant. The options expire not
later  than ten years from the date of grant,  subject to certain  restrictions.
Options for 26,000  shares were  granted  under this plan during the fiscal year
ended July 29, 2007.  Options for 1,750 shares of common stock are available for
grant and 1,225,300 were outstanding at July 29, 2007.

     1998 Stock Option Plan. The 1998 Stock Option Plan covers  2,250,000 shares
of common stock.  Options  granted under the plan may be incentive stock options
qualified under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options.  Under the terms of the plan, the exercise price of
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 our stock are at least  110% of 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. If not specified,
100% of the  shares  can be  exercised  one year  after the date of  grant.  The
options  expire  not later  than ten years  from the date of grant,  subject  to
certain restrictions. Non-qualified stock options for 33,500 shares were granted
under this plan  during the fiscal  year  ended July 29,  2007.  Options  for 29
shares of common stock are available for grant and 1,053,792 were outstanding at
July 29, 2007.

     1997 Stock Option Plan. The 1997 Stock Option Plan covers  2,500,000 shares
of common stock.  Options  granted under the plan may be incentive stock options
qualified under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options.  Under the terms of the plan, the exercise price of
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 our stock are at least  110% of 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. If not specified,
100% of the  shares  can be  exercised  one year  after the date of  grant.  The
options  expire  not later  than ten years  from the date of grant,  subject  to

                                       51
<PAGE>
certain restrictions.  No options were granted under this plan during the fiscal
year ended July 29, 2007 and there are no options  available for grants. At July
29, 2007,  options to purchase  104,551 shares of common stock were  outstanding
under this plan.

     1996 Stock Option Plan.  The 1996 Stock Option Plan,  which has now expired
with respect to the granting of new options,  covers  1,000,000 shares of common
stock.  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 July 29,  2007,
non-qualified  options to purchase 7,007 shares of common stock were outstanding
under this plan.

Employee Savings Plan

We maintain an Employee  Savings Plan ("Plan") which  qualified as a thrift plan
under Section 401(k) of the Internal Revenue Code (the "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 by us,  depending on profits.  The aggregate
benefit  payable  to an  employee  is  dependent  upon  the  employee's  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. We recognized
expenses of approximately $1,766,000,  $1,773,000 and $1,038,000 under the plans
for the  fifty-two  weeks ended July 29, 2007,  July 30, 2006 and July 31, 2005,
respectively.  We also  contributed  to a similar  plan  through EWST whereby we
match employee  elective  contributions  up to a maximum of 5% of  compensation.
Expenses recognized for 2007, 2006 and 2005 were approximately $75,200,  $55,900
and  $60,600,  respectively.  For the year  ended  July  29,  2007,  $8,800  was
contributed by us to this plan for each of Messrs.  Levy, Kelley, and Purcell. A
total of $66,437 was contributed for all officers and directors as a group.

     Directors' Compensation

Directors who are also employees of the Company are not  separately  compensated
for their services as directors.

Cash Compensation to Board Members.  Directors who are not our employees receive
an annual fee of $15,000 and a fee of $1,500 for each interim board of directors
meeting attended. The Corporate Governance Committee Chairman receives an annual
fee of $15,000,  and other members of the Corporate Governance Committee receive
$5,000 annually. The Audit Committee Chairman receives an annual fee of $25,000,
and  other  members  of  the  Audit  Committee  receive  $10,000  annually.  The
Compensation  Committee  Chairman  receives  an annual fee of $7,500,  and other
members of the Compensation  Committee  receive $5,000 annually.  The Nominating
Committee  Chairman  receives an annual fee of $7,500,  and other members of the
Nominating Committee receive $5,000 annually.

Equity  Compensation  to Board  Members.  The Company grants options to purchase
shares of the  Company's  Common  Stock to its outside  directors  on a periodic
basis. During fiscal 2007, the Company granted options to purchase 60,000 shares
of common  stock at a price of  $17.82  per share to its  outside  directors  as
follows:

<TABLE>
<CAPTION>
             <S>                                                  <C>
             Rear Admiral Edward K. Walker, Jr. (Ret.)            15,000
             Dr. Edward A. Bogucz                                 12,500
             Rear Admiral Robert M. Moore (Ret.)                  12,500
             John A. Thonet                                       10,000
             Carlos C. Campbell                                   10,000
</TABLE>
These shares fully vested on the grant date.

Other.  Board  members are  reimbursed  for  reasonable  expenses  in  attending
meetings of the Board of Directors and for expenses  incurred in connection with
their  complying  with our  corporate  governance  policies.  The  Company  also
provides directors' and officers'  liability insurance and indemnity  agreements
for our directors. No other compensation is provided to our directors.

                                       52
<PAGE>
     Non-management Directors' Compensation for Fiscal 2007

The  following  table  provides  information  with  respect to all  compensation
awarded to,  earned by or paid to each  person who served as a director  (except
for  Mr.  Levy,  our  Chief  Executive  Officer,   who  receives  no  additional
compensation for his service on our Board) for all of fiscal 2007. Other than as
set forth in the table and the  narrative  that  follows it, to date we have not
paid any  fees to or  reimbursed  any  expenses  of our  directors,  except  for
expenses  incurred in connection  with attendance at board meetings which in the
aggregate  are less than $10,000 each,  made any equity or non-equity  awards to
directors, or paid any other compensation to directors.
<TABLE>
<CAPTION>
                                           Fees Earned
                                           or Paid in    Option Awards
 Name                                       Cash ($)       ($)(1)(2)     Total ($)
 -----                                      --------       ---------     ---------
<S>                                         <C>            <C>            <C>
Rear  Admiral  Edward  K.  Walker,  Jr.     $57,500        $56,687        $114,187
 (Ret.)
Dr. Edward A. Bogucz                        $45,000        $47,239        $ 92,239
Rear Admiral Robert M. Moore (Ret.)         $55,000        $47,239        $102,239
John A. Thonet                              $22,500        $37,791        $ 60,291
Carlos C. Campbell                          $35,000        $37,791        $ 72,791
----------
<FN>
(1) These amounts reflect the dollar amount of expense recognized for financial
statement reporting purposes for fiscal 2007 in accordance with SFAS 123(R).
Assumptions used in the calculation of this amount for purposes of our financial
statements are included in Note A-15 of the Notes to Consolidated Financial
Statements included in this Annual Report.

(2) The aggregate number of options outstanding to purchase shares of our common
stock as of July 29, 2007, as set forth following their respective names, is as
follows: Mr. Walker 72,000 shares, Dr. Bogucz 37,500 shares, Mr. Moore 37,500
shares, Mr. Thonet 87,500 shares and Mr. Campbell 35,000 shares.
</FN>
</TABLE>

     Compensation Committee Interlocks and Insider Participation

In fiscal 2007, our  Compensation  Committee  consisted of Dr. Edward A. Bogucz,
and Messrs.  Edward K. Walker,  Jr., and Robert M. Moore.  None of these persons
were our  officers or  employees  during  fiscal  2007 nor had any  relationship
requiring disclosures in this Annual Report.

Indemnification Agreements

We have entered into separate  indemnification  agreements with our officers and
directors.  We have  agreed to provide  indemnification  with  regard to certain
legal  proceedings so long as the  indemnified  officer or director has acted in
good  faith  and in a manner  he or she  reasonably  believed  to be in,  or not
opposed to, our best interests and with respect to any criminal proceeding,  had
no reasonable cause to believe his or her conduct was unlawful.  We only provide
indemnification  for expenses,  judgments,  fines and amounts paid in settlement
actually incurred by the relevant officer or director,  or on his or her behalf,
arising out of proceedings brought against such officer or director by reason of
his or her corporate status.

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

The following table presents certain information regarding the beneficial
ownership of our common stock as of September 28, 2007 by (a) each beneficial
owner of 5% or more of our outstanding stock known to us, based solely on
filings with the Securities and Exchange Commission, (b) each of our directors,
(c) each of our Named Executive Officers and (d) all of our directors and
executive officers as a group.

The percentage of beneficial ownership for the table is based on 13,977,115
shares of our common stock outstanding as of September 28, 2007. To our
knowledge, except under community property laws or as otherwise noted, the
persons and entities named in the table have sole voting and sole investment
power over their shares of our common stock. Unless otherwise indicated, each
beneficial owner listed below maintains a mailing address of c/o Herley
Industries, Inc., 101 North Pointe Boulevard, Lancaster, PA 17601.

                                       53
<PAGE>
The number of shares  beneficially owned by each stockholder is determined under
SEC rules and is not  necessarily  indicative  of  beneficial  ownership for any
other purpose. Under these rules,  beneficial ownership includes those shares of
common stock over which the  stockholder has sole or shared voting or investment
power and those  shares of common  stock that the  stockholder  has the right to
acquire  within 60 days after  September  28, 2007  through the  exercise of any
stock option. The "Percentage of Shares" column treats as outstanding all shares
underlying  such  options  held by the  stockholder,  but not shares  underlying
options held by other stockholders.
<TABLE>
<CAPTION>
                                                           Common Stock                      % of Outstanding
Name of Beneficial Owner                            Beneficially Owned (1) (2)                   Shares
------------------------                            --------------------------            -----------------------
<S>                                                            <C>                                <C>
Myron Levy                                                     1,531,615                          10.2%
John M. Kelley                                                    74,923                            *
Jeffrey L. Markel (3)                                             50,000                            *
Kevin J. Purcell (4)                                                5000                            *
Carlos C. Campbell                                                35,000                            *
John A. Thonet (5)                                               108,649                            *
Adm. Edward K. Walker, Jr. (Ret.)                                 73,500                            *
Dr. Edward A. Bogucz                                              37,575                            *
Adm. Robert M. Moore (Ret.)                                       37,500                            *
Third Avenue Management, Inc. (6)                              2,743,511                          19.6%
GAMCO Investors (7)                                            1,477,147                          10.6%
Dimensional Fund Advisors, Inc. (8)                            1,177,249                           8.4%
Lee N. Blatt (9)                                               1,544,399                          10.1%
Directors and executive
  officers  as a group
  (9 persons)                                                  1,953,792                          12.7%
-------
 * Indicates ownership of less than one percent.
<FN>
(1)  No officer or director owns more than one percent of the outstanding shares
     of common stock  unless  otherwise  indicated.  Ownership  represents  sole
     voting and investment power.
(2)  Includes beneficial ownership of the following number of shares that may be
     acquired  within 60 days of September  28, 2007  pursuant to stock  options
     awarded under our stock option plans:

              Myron Levy                    1,075,000         John A. Thonet                       87,500
              John M. Kelley                   87,000         Adm. Edward K. Walker, Jr.           72,000
              Jeffrey L. Markel                50,000         Dr. Edward A. Bogucz                 37,500
              Kevin J. Purcell                  5,000         Adm. Robert M. Moore                 37,500
              Carlos C. Campbell               35,000         Directors and executive
                                                               officers as a group              1,457,000

(3)  Mr. Markel was appointed Chief Operating Officer in June 2007.
(4)  Mr.  Purcell was appointed Vice  President and Chief  Financial  Officer in
     June 2006.
(5)  Does not include 155,998 shares, owned by Mr. Thonet's children, Hannah and
     Rebecca  Thonet,  and 30,669 shares owned by his wife,  Kathi  Thonet.  Mr.
     Thonet disclaims  beneficial  ownership of these shares.
(6)  Address is 622 Third Avenue, New York, NY 10017.
(7)  Address is One Corporate Center, Rye, NY 10580.
(8)  Address is 1299 Ocean Avenue, Santa Monica, CA 90401.
(9)  Includes  beneficial  ownership  of  1,301,000  shares that may be acquired
     within 60 days of September 28, 2007 pursuant to stock  options.  Mr. Blatt
     entered  into a  voting  trust  agreement  wherein  sole  voting  power  to
     1,301,000  shares under stock options held by him and 21,099 shares held in
     his IRA was granted to the  Company's  Chairman,  Myron Levy.  Mr.  Blatt's
     address is 471 N. Arrowhead Trail, Vero Beach, FL 32963
</FN>
</TABLE>
Item 13.  Certain Relationships and Related Transactions, and Director
          Independence.

Effective   October  12,  2006  and  as  a  condition   to  entering   into  the
Administrative  Agreement  with the  Department of the Navy (see 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 a lump sum  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 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

                                       54
<PAGE>
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" of the Company as defined in the Employment  Agreement all remaining
payments due under the Promissory Note become immediately due and payable.

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.

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

Item 14.  Principal Accountant Fees and Services.

Marcum & Kliegman LLP is our independent  registered  public accounting firm and
performed the audit of our  consolidated  financial  statements for fiscal years
2007,  2006,  and 2005.  The following  table sets forth  estimated fees for the
audits of the fiscal  years ended July 29, 2007 and July 30, 2006  performed  by
Marcum & Kliegman LLP:
<TABLE>
<CAPTION>
                                                    2007             2006
                                                    ----             ----
<S>                                            <C>               <C>
          Audit fees (1)                       $ 568,000         $ 475,000
          Audit relatred fees (2)               $ 60,000              -
------------
<FN>
(1)  Audit Fees includes fees for professional  services  provided in connection
     with the audits of our  financial  statements,  the review of our quarterly
     financial statements,  Sarbanes-Oxley 404 related services,  consents,  and
     audit services  provided in connection  with other  statutory or regulatory
     filings. All such services were pre-approved by the Audit Committee.

(2)  Audit related fees includes the audit of our 401k plan.
</FN>
</TABLE>


The Audit Committee has sole authority to appoint, determine funding for, retain
and oversee our  independent  auditors and to pre-approve all audit services and
permissible non-audit services. The Audit Committee has delegated to Adm. Walker
the authority to pre-approve audit-related and non-audit services not prohibited
by law to be performed by our independent  registered public accounting firm and
associated  fees,  provided that he reports any pre-approval of audit-related or
non-audit  related  services  and fees to the full Audit  Committee  at its next
regular meeting.

Marcum & Kliegman LLP did not render any other non-audit related services during
fiscal years 2007 and 2006.


                                       55
<PAGE>
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).

                                       57
<PAGE>
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).
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 8K 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).
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 59.

                                       57
<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 12, 2007.


                                         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  12,  2007 by the  following  persons in the
capacities indicated:


By:    /S/  Myron Levy                   Chairman of the Board,
   ------------------------------        Chief Executive Officer and Director
       Myron Levy                        (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:                                      Director
   -------------------------------
      Edward K. Walker, Jr.

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

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


                                       58
<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:
<S>                                      <C>            <C>         <C>              <C>           <C>
July 29, 2007:
Inventories                              $ 4,576        $ 1,277     $      -         $   690       $ 5,163

July 30, 2006:
Inventories                              $ 4,492        $ 1,475     $      -         $ 1,391       $ 4,576

July 31, 2005:
Inventories                              $ 3,938        $   804     $      -         $   250       $ 4,492

</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.

                                       59

<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 July 29, 2007 and July 30, 2006                                 F-3

     Consolidated Statements of Income for the fifty-two weeks ended July 29, 2007,
     July 30, 2006 and July 31, 2005                                                                   F-4

     Consolidated Statements of Shareholders' Equity for the fifty-two weeks ended
     July 29, 2007, July 30, 2006 and July 31, 2005                                                    F-5

     Consolidated Statements of Cash Flows for the fifty-two weeks ended July
     29, 2007, July 30, 2006 and July 31, 2005                                                         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 July 29, 2007 and July
30,  2006,  and the related  consolidated  statements  of income,  shareholders'
equity and cash flows for the fifty-two (52) weeks ended July 29, 2007, July 30,
2006 and July 31,  2005.  Our  audits  also  included  the  financial  statement
schedule as of and for the  fifty-two  (52) weeks ended July 29, 2007,  July 30,
2006  and July 31,  2005  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
consolidated  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 July 29, 2007 and July 30, 2006, and the
consolidated results of its operations and its cash flows for the fifty-two (52)
weeks ended July 29, 2007,  July 30, 2006 and July 31, 2005 in  conformity  with
accounting principles generally accepted in the United States of America.  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 July 29, 2007,
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 11, 2007, 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 11, 2007

                                      F-2

<PAGE>


                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)
<TABLE>
<CAPTION>


                                                                                         July 29,         July 30,
                                                                                           2007             2006
                                                                                       ------------     ------------
                            ASSETS
<S>                                                                                  <C>              <C>
Current Assets:
          Cash and cash equivalents                                                  $      35,181    $      22,303
          Trade accounts receivable                                                         28,058           30,600
          Income Taxes Receivable, net                                                         819                -
          Costs incurred and income recognized in excess
             of billings on uncompleted contracts and claims                                14,448           13,926
          Other receivables                                                                  2,816              769
          Inventories, net                                                                  51,815           52,909
          Deferred income taxes                                                              4,254            3,745
          Other current assets                                                               1,069            1,187
                                                                                       ------------     ------------
                                   Total Current Assets                                    138,460          125,439
Property, Plant and Equipment, net                                                          29,996           30,478
Goodwill                                                                                    74,044           73,612
Intangibles, net of accumulated amortization of $5,256
          in 2007 and $3,468 in 2006                                                        18,431           19,989
Other Assets                                                                                 1,662            1,932
                                                                                       ------------     ------------
                                   Total Assets                                      $     262,593    $     251,450
                                                                                       ============     ============
          LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
          Current portion of long-term debt                                          $       1,346    $         630
          Current portion of employment settlement agreement -
              (net of imputed interest) (Note H)                                             1,113           -
          Accounts payable and accrued expenses                                             19,049           21,503
          Billings in excess of costs incurred and
              income recognized on uncompleted contracts                                        99              555
          Income taxes payable                                                               3,518            3,395
          Accrual for contract losses                                                        1,564            2,959
          Accrual for warranty costs                                                         1,106              986
          Advance payments on contracts                                                      7,163            3,323
                                                                                       ------------     ------------
                                   Total Current Liabilities                                34,958           33,351
Long-term Debt                                                                               5,951            5,948
Long-term Portion of Employment Settlement Agreement -
  (net of imputed interest of $580) (Note H)                                                 4,117           -
Other Long-term Liabilities                                                                  1,311            1,265
Deferred Income Taxes                                                                        6,615            7,416
                                                                                       ------------     ------------
                                   Total Liabilities                                        52,952           47,980
                                                                                       ------------     ------------
Commitments and Contingencies
Shareholders' Equity:
          Common stock, $.10 par value; authorized 20,000,000 shares;
            issued and outstanding 13,977,115 in 2007, and
            issued 14,660,716 and outstanding 13,862,149 in 2006                             1,398            1,466
          Additional paid-in capital                                                       107,094          113,418
          Retained earnings                                                                 99,404           96,286
          Treasury stock, 798,567 common shares, at cost                                    -                (9,044)
          Accumulated other comprehensive income                                             1,745            1,344
                                                                                       ------------     ------------
                                   Total Shareholders' Equity                              209,641          203,470
                                                                                       ------------     ------------
                                   Total Liabilities and Shareholders' Equity        $     262,593    $     251,450
                                                                                       ============     ============
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                      F-3
<PAGE>


      HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF INCOME
        (In thousands except per share data)
<TABLE>
<CAPTION>
                                                                Fifty-two weeks ended
                                                         ----------------------------------------
                                                          July 29,       July 30,      July 31,
                                                            2007           2006          2005
                                                         -----------    -----------    ----------
<S>                                                    <C>            <C>            <C>
Net sales                                              $    163,140   $    176,268   $   151,415
                                                         -----------    -----------    ----------
Cost and expenses:
       Cost of products sold                                118,834        127,921       106,441
       Selling and administrative expenses                   34,190         34,966        30,305
       Employment contract settlement costs (Note H)          8,914         -              -
                                                         -----------    -----------    ----------

                                                            161,938        162,887       136,746
                                                         -----------    -----------    ----------

       Operating Income                                       1,202         13,381        14,669
                                                         -----------    -----------    ----------

Other income (expense), net:
       Investment income                                      1,186            840           934
       Interest expense                                        (790)          (319)         (286)
       Foreign exchange transaction gains (losses)              501            431          (291)
                                                         -----------    -----------    ----------
                                                                897            952           357
                                                         -----------    -----------    ----------

       Income before income taxes                             2,099         14,333        15,026
       (Benefit) provision for income taxes                  (1,019)         3,979         4,245
                                                         -----------    -----------    ----------

       Net income                                      $      3,118   $     10,354   $    10,781
                                                         ===========    ===========    ==========

Earnings per common share - Basic                      $      .22       $    .72       $   .75
                                                         ===========    ===========    ==========

       Basic weighted average shares                         13,927         14,463        14,310
                                                         ===========    ===========    ==========

Earnings per common share - Diluted                    $     .22       $    .69       $    .72
                                                         ===========    ===========    ==========

       Diluted weighted average shares                       14,395         15,097        14,969
                                                         ===========    ===========    ==========
</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-two weeks ended July 29, 2007 and July 30, 2006, and July 31, 2005
                        (In thousands except share data)
<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                               Common Stock       Additional                              Other
                                               ------------        Paid-in     Retained    Treasury    Comprehensive
                                           Shares       Amount     Capital     Earnings     Stock      Income (loss)    Total
                                         ------------   -------   ----------   ---------   ---------   ------------   ----------
<S>                                       <C>        <C>            <C>          <C>          <C>            <C>   <C>
Balance at August 1, 2004                 14,220,508 $   1,422      107,671      75,151           -          1,256 $    185,500
Exercise of stock options                    329,349        33        3,501                                               3,534
Tax benefit upon exercise of stock options                              658                                                 658
Purchase of 160,232 shares of treasury stock                                                 (2,728)                     (2,728)
Retirement of treasury shares               (160,232)      (16)      (2,712)                  2,728                       -
                                         ------------   -------   ----------   ---------   ---------   ------------   ----------
     Subtotal                             14,389,625     1,439      109,118      75,151           -          1,256      186,964
                                                                                                                      ----------

Net income                                                                       10,781                                  10,781
Other comprehensive income (loss)
    Unrealized (loss) on
        available-for-sale securities                                                                           (1)          (1)
   Unrealized gain on interest rate swap                                                                        18           18
   Foreign currency translation (loss)                                                                        (125)        (125)
                                                                                                                      ----------
Comprehensive income                                                                                                     10,673
                                         ------------   -------   ----------   ---------   ---------   ------------   ----------
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
                                         ============   =======   ==========   =========   =========   ============   ==========
</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-two weeks ended
                                                                 ---------------------
                                                             July 29,    July 30,    July 31,
                                                               2007        2006        2005
                                                             ---------   ----------  ----------
<S>                                                       <C>         <C>          <C>
Cash flows from operating activities:
      Net Income                                          $     3,118 $     10,354 $    10,781
                                                            ---------   ----------  ----------
      Adjustments to reconcile net income to
         net cash provided by operating activities:
           Depreciation and amortization                        7,177        7,096       5,683
           Stock-based compensation costs                       1,007          453       -
           Excess tax benefit from exercises of stock options    (256)        (703)      -
           Employment contract settlement costs
           (includes $196 of stock option modification costs)   8,914        -           -
           Imputed interest related to employment
             settlement liability                                 283        -           -
           Foreign exchange transaction (gains) losses          (501)        (431)         291
           Inventory valuation reserve charges                  1,283        1,475         804
           Reduction in accrual for contract losses           (1,144)        -           -
           Warranty reserve charges                             1,304          726         965
           Gain on sale of fixed assets                         (105)        -             (8)
           Equity in income of limited partnership              -             (52)        (54)
           Deferred tax provision                             (1,310)          218       1,099
           Changes in operating assets and liabilities:
               Trade accounts receivable                        2,542      (3,342)       2,590
               Income Taxes Receivable                          (819)        -           -
               Costs incurred and income recognized in excess
                 of billings on uncompleted contracts
                 and claims                                     (522)        2,132     (1,626)
               Other receivables                              (2,047)          645       (576)
               Inventories, net                                 (189)      (2,794)     (2,515)
               Other current assets                               118          157       (430)
               Accounts payable and accrued expenses          (3,246)      (2,357)        350
               Billings in excess of costs incurred and
                 income recognized on uncompleted contracts     (456)           17     (1,596)
               Income taxes payable                               379          338       2,306
               Accrual for contract losses                      (251)        (175)       (500)
               Employment settlement agreement                (3,771)        -           -
               Advance payments on contracts                    3,840        1,435     (4,827)
               Other, net                                         327          136        221
                                                             ---------   ----------  ----------
                    Total adjustments                          12,557        4,974       2,177
                                                             ---------   ----------  ----------
           Net cash provided by operating activities           15,675       15,328      12,958
                                                             ---------   ----------  ----------
Cash flows from investing activities:
      Acquisition of businesses, net of cash acquired
        of $1,463                                               -            -        (51,407)
      Acquisition of technology license                         (179)      (1,256)     (2,300)
      Proceeds from sale of securities                          -            -             165
      Proceeds from sale of fixed assets                          204        -              17
      Partial distribution from limited partnership             -              111         109
      Capital expenditures                                     (4,972)      (6,227)     (5,404)
                                                             ---------   ----------  ----------
           Net cash used in investing activities              (4,947)      (7,372)    (58,820)
                                                             ---------   ----------  ----------
Cash flows from financing activities:
      Borrowings under bank line of credit                     17,900       16,500       -
      Borrowings - Other                                        1,746        -           -
      Proceeds from exercise of stock options                   1,219        3,171       3,534
      Excess tax benefit from exercises of stock options          256          703       -
      Payments of long-term debt                              (1,038)        (805)       (804)
      Payments under bank line of credit                     (17,900)     (16,500)       -
      Purchase of treasury stock                                 (26)      (9,044)     (2,728)
                                                             ---------   ----------  ----------
           Net cash provided by (used in) financing             2,157      (5,975)           2
           activities
                                                             ---------   ----------  ----------
Effect of exchange rate changes on cash                           (7)          (9)          10
                                                             ---------   ----------  ----------
           Net increase (decrease) in cash and cash            12,878        1,972    (45,850)
           equivalents
Cash and cash equivalents at beginning of period               22,303       20,331      66,181
                                                             ---------   ----------  ----------
Cash and cash equivalents at end of period                $    35,181 $     22,303 $    20,331
                                                             =========   ==========  ==========
Supplemental cash flow information:
      Financing of computer software and maintenance                  $      1,627
                                                                         ==========
      Retirement of 800,231 shares of treasury stock      $     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
     --------------------------------------
     The Company, a Delaware corporation,  is engaged in the design, development
     and  manufacture  of  microwave   technology  solutions  for  the  defense,
     aerospace and medical industries worldwide.

     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 (discussed below) was lifted following an
     amendment to the Administrative Agreement (originally signed on October 12,
     2006) with the Navy.  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.

     The June 27,  2007  suspension  arose out of certain  discrepancies  in the
     automated test equipment (ATE) test data for certain  microwave  components
     manufactured by the Company's  Lancaster facility for a U. S. defense prime
     contractor (the  "contractor").  After  notification from the contractor on
     May 31,  2007,  of these  discrepancies,  the Company  conducted an initial
     investigation  which  resulted in the  recalling  and  retesting of certain
     microwave components.  On June 11, 2007, a third party independent forensic
     data  analysis  consultant  was  engaged to conduct an analysis of the test
     data  recorded on the ATE for these  microwave  components  provided to the
     contractor and directed outside counsel to investigate this matter. Outside
     counsel  commenced the conduct of  interviews  of all employees  working on
     this program on June 12, 2007. During the course of these  interviews,  two
     technicians  stated that they had  manually  modified  certain test results
     with the  approval  of a test  supervisor.  On June 20,  2007,  the Company
     notified the Navy that it had reason to believe that certain non-management
     employees at its Lancaster facility had misrepresented  test results on the
     microwave  components.  In July 2007, outside counsel conducted  additional
     interviews of all employees working on this program and other programs with
     the independent forensic data analysis consultant present. These interviews
     confirmed that only these two technicians were involved in  misrepresenting
     test results for the  contractor and all other work at this facility had no
     test data modifications.  Appropriate  corrective actions were taken to the
     satisfaction of the Navy and the contractor by July 23, 2007.

     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 Chicago,  Illinois  location is a
     two-person  marketing office.  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 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 the
     Company is the only qualified supplier on critical defense programs.

     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 were 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
     the 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
     has  terminated  the suspension and debarment 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 Lee N. Blatt, the
                                      F-7
<PAGE>
     Company's former Chairman,  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,  of which  $3,000,000  was paid 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 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, he 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 were 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
     cash payments 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
     Company's  consolidated  financial statements for the fifty-two weeks ended
     July 29, 2007.

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.

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  accrual  for  contract  losses
     includes an estimate of  approximately  $826,000  relating to the remaining
     two  contract  options not yet  exercised by the  customer.  It is at least
     reasonably  possible  that a change in the estimate  will occur in the near
     term.

     Certain  prior  year  amounts  were  reclassified  to  conform  to the 2007
     presentation.  The  reclassifications  had no effect on previously reported
     net income.

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 July 29, 2007 and July 30, 2006.

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,
                                      F-8
<PAGE>
     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 July 29, 2007 and July 30, 2006, a reserve
     for doubtful accounts of $138,000 and $283,000,  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.

     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 an 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 years ended July 29,
     2007 and July 30, 2006, is principally  based upon the fair value of assets
     acquired and  liabilities  assumed  related to the  acquisition  of ICI (as
     defined in Note B) in fiscal 2005, as follows (in thousands):
<TABLE>
                   <S>                                                  <C>
                   Balance at July 31, 2005                             $ 70,831
                      Change in fair value of liabilities assumed
                         in connection with the ICI acquisition (Note B)   2,504
                      Foreign currency translation adjustment (1)            277
                                                                        --------
                   Balance at July 30, 2006                             $ 73,612
                      Foreign currency translation adjustment (1)            432
                                                                        --------
                   Balance at July 29, 2007                              $74,044
                                                                        ========
<FN>
    ---------
     (1) Related to the acquisition of EWST in fiscal 2003.
</FN>
</TABLE>
                                      F-9
<PAGE>
     The  carrying  amounts  of  intangible  assets  as of July 29,  2007 are as
     follows (in thousands):

<TABLE>
<CAPTION>

                                            July 29, 2007              July 30, 2006
                                     -------------------------   ------------------------
                                       Gross                      Gross
                                     carrying      Accumulated   carrying     Accumulated    Amortization
                                      amount      amortization    amount     amortization   period (years)
                                     --------     ------------   --------    ------------   --------------
<S>                                    <C>           <C>          <C>           <C>            <C>
Definite lived intangible assets:
--------------------------------
Technology                             $ 12,629      3,324        $ 12,577      2,087          10-15
Backlog                                   3,125      1,375           3,125        925           2-5
Drawings                                    800        178             800        124           15
Non-compete agreement                        31         31              31         24            5
Xytran license                            3,734        -             3,556         -             8
Patents                                     568        348             568        308           14
                                         ------      -----          ------      -----
                                       $ 20,887      5,256        $ 20,657      3,468
                                         ------      -----          ------      -----
Indefinite lived intangible assets:
----------------------------------
Trademarks                                2,800                      2,800
                                         ------                     ------
Total intangible assets                $ 23,687      5,256        $ 23,457      3,468
                                         ======      =====          ======      =====
</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.

     In January  2005,  the Company had made a deposit  payment of $1,000,000 in
     connection with this transaction. The deposit payment was secured by a note
     receivable,  which was  cancelled  upon  execution  of the  agreement.  The
     agreement  provided for an additional  payment on execution of  $1,000,000,
     and for certain additional contingent payments, of up to $4,500,000.  These
     contingent  payments  were  subject  to  the  achievement  of a  series  of
     development  milestones  on a U.S.  Government  missile  program,  and / or
     receipt by the Company of a single  contract  award using  millimeter  wave
     technology valued at a minimum of $6,000,000,  amongst other  requirements.
     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 July 29, 2007.

     Xytrans  achieved  several of the  development  milestones  on the  missile
     program discussed above and the Company made additional contingent payments
     totaling  $1,500,000.  Additional  development costs as a result of a scope
     change were paid in the net amount of $56,000. A final milestone payment of
     $178,700 was made in August 2006.  No further  contingent  payments are due
     under  the  agreement.  The  Company  will  begin  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-two weeks ended
     July  29,  2007,  July  30,  2006  and  July  31,  2005  was  approximately
     $1,788,000, $1,788,000 and $928,000, respectively.

     Estimated aggregate  amortization  expense for each of the next five fiscal
     years is as follows (in thousands):
<TABLE>
                           <S>       <C>
                           2008      $ 2,209
                           2009        2,208
                           2010        1,928
                           2011        1,648
                           2012        1,648
</TABLE>

10.  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.
                                      F-10
<PAGE>
11.  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.  Except for contracts that are accounted for
     using the  percentage of completion  method of  accounting,  revenue is not
     recognized  until the products  pass quality  inspection  and generally not
     until customer acceptance.  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 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).
     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.

12.  Product Development
     -------------------
     The Company's primary efforts are focused on engineering design and product
     development  activities  rather  than  pure  research.  The  cost of  these
     development   activities,   including   employees'   time   and   prototype
     development,  net of amounts paid by customers,  was  approximately  $13.1,
     $12.4 and $5.0 million in fiscal 2007,  2006, and 2005,  respectively,  and
     are included in cost of products  sold.  The amounts paid by customers  are
     included in net sales and was approximately  $20.3,  $20.9 and $5.3 million
     in fiscal 2007, 2006 and 2005, respectively.

     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.


13.  Income Taxes
     ------------
     Income  taxes  are  accounted  for  by  the  asset/liability   approach  in
     accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred taxes
     represent the expected future tax consequences when the reported amounts of
     assets and  liabilities  are recovered or paid.  They arise from  temporary
     differences  between the  financial  reporting  and tax bases of assets and
     liabilities  and are  adjusted  for  changes in tax laws and tax rates when
     those  changes  are  enacted.  The  (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
     share awards and the corresponding credit to additional paid-in capital are
     recorded if the related tax deduction reduces tax 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.


14.  Stock-Based Compensation
     ------------------------
     The Company has various  fixed stock  option  plans which are  described in
     Note M 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-two weeks ended July 29, 2007 and July 30,
     2006 is approximately  $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)). Such
     costs   reduced  net  income  for  the  fiscal   years  2007  and  2006  by
     approximately  $622,000 and $322,000 or  approximately  $0.04 and $0.02 per
     basic and diluted share, respectively.

     Income tax benefits  relating to the exercise of stock  options  during the
     fifty-two  weeks  ended  July 29,  2007,  July 30,  2006 and July 31,  2005
                                      F-11
<PAGE>
     amounted to approximately  $256,000,  $703,000 and $658,000,  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.  Prior  to the  adoption  of SFAS
     123(R),   the  Company   presented  all  income  tax  benefits  related  to
     stock-based compensation as an operating cash inflow.

     As of July 29, 2007,  there were 3,640,450 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  $1,876,000 (net of estimated  forfeitures) which is expected
     to be recognized over a weighted-average  period of 2.27 years.  During the
     fifty-two   weeks  ended  July  29,  2007,  the  Company   granted  406,500
     non-qualified stock options, with a fair value of approximately $2,326,000.
     Options for 116,630  shares of common  stock were  exercised  at an average
     price of $10.78 per share,  and 139,500  options were forfeited  during the
     year.  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.

     The total intrinsic value of options  exercised during the years ended July
     29,  2007,  July 30,  2006 and July 31, 2005 was  appproximately  $685,000,
     $2,085,000 and $2,574,000, respectively.

     In April 2005, the Company's Board of Directors, upon recommendation of the
     Board's  Compensation  Committee,  approved the accelerated  vesting of all
     unvested and  "out-of-the-money"  stock  options  outstanding  as of May 2,
     2005. As a result of this action, options to purchase approximately 307,000
     shares of the Company's  common stock that would  otherwise  have vested at
     various times within the next four years became fully vested.  The decision
     to  accelerate  the vesting,  which the Company  believes to be in the best
     interest of the Company and its  shareholders,  was made in lieu of certain
     discretionary cash bonuses,  and to reduce compensation  expense that would
     be recorded in future  periods  following  the  Company's  adoption of SFAS
     123(R).  The Board of Directors  further  believes that the acceleration is
     consistent with the Company's  overall equity  compensation  approach which
     includes a reduced use of stock options. The SFAS 123 pro forma stock-based
     compensation costs of approximately  $2,770,000 (net of taxes) for the year
     ended July 31, 2005 in the table below  includes a charge of  approximately
     $540,000 (net of taxes) as a result of the acceleration.

     Prior to adopting SFAS 123(R) on August 1, 2005, the Company's equity based
     employee  compensation  expense  under the various  stock  option plans was
     accounted  for under the  recognition  and  measurement  principles  of APB
     Opinion No. 25,  "Accounting  for Stock Issued to  Employees",  and related
     interpretations. Under the modified prospective application method, results
     for  prior  periods  have not been  restated  to  reflect  the  effects  of
     implementing SFAS 123(R).  Therefore,  for fiscal year 2005 no option based
     employee  compensation  cost is  reflected  in net  income,  as all options
     granted  under those plans had an  exercise  price equal to the  underlying
     common  stock  price on the date of grant.  The  following  table  which is
     presented for comparative  purposes,  provides the pro forma information as
     required    by    SFAS    No.    148,     "Accounting    for    Stock-Based
     Compensation-Transition  and Disclosure, an amendment of FASB Statement No.
     123," and  illustrates  the effect on net income  and  earnings  per common
     share for the  periods  presented  as if the  Company  had applied the fair
     value  recognition  provisions  of SFAS  No.  123 to stock  based  employee
     compensation prior to August 1, 2005:
<TABLE>
<CAPTION>
                                                 Fifty-two
                                                weeks ended
                                               July 31, 2005
                                               -------------
<S>                                               <C>
Net income  -  as reported                        $10,781
Deduct: total stock-based employee
 compensation expense determined
 under fair value based method for all
 awards, net of related tax effects                (2,770)
                                                    -----
Net income  -  pro forma                          $ 8,011
                                                    =====
Earnings per common share  -  as reported
     Basic                                         $ 0.75
     Diluted                                         0.72
Earnings per common share  - pro forma
     Basic                                         $ 0.56
     Diluted                                         0.54
</TABLE>
     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>
                                                                   2007         2006         2005
                                                                   ----         ----         ----
              <S>                                                 <C>           <C>          <C>
              Weighted average fair value of options granted      $ 5.72        $ 7.19       $ 4.00
              Expected life (years)                                 2.93          3.53         3.69
              Expected volatility                                    .47           .44          .44
              Risk-free interest rate                                5.1%          4.3%         3.8%
              Expected dividend yield                               zero          zero         zero
              Forfeiture rate                                       6.19          7.45         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
                                      F-12
<PAGE>
     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.

15.  Foreign Currency Translation
     ----------------------------
     Financial   statements  of  foreign  subsidiaries  are  prepared  in  their
     respective  functional currencies and translated into United States dollars
     at the  current  exchange  rates 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.

16.  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.

17.  Comprehensive Income
     --------------------
     The Company reports comprehensive income in the Consolidated  Statements of
     Shareholders'  Equity which includes net income,  unrealized gain (loss) on
     available-for-sale  securities  and  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.

18.  Dividend Policy
     ---------------
     The Company has 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.

19.  Advertising Costs
     -----------------
     The Company expenses  advertising  costs as incurred.  Advertising costs in
     fiscal  2007,   2006  and  2005  was   $315,000,   $262,000  and  $243,000,
     respectively.

20.  New Accounting Pronouncements
     -----------------------------
     In February 2007, the Financial  Accounting Standards Board ("FASB") issued
     Statement of Financial  Accounting  Standards  ("SFAS") No. 159,  "The Fair
     Value Option for Financial Assets and Financial  Liabilities" ("SFAS 159").
     SFAS 159 provides  companies  with an option to report  selected  financial
     assets and financial liabilities at fair value. Unrealized gains and losses
     on items for which the fair value  option has been  elected are reported in
     earnings at each  subsequent  reporting  date.  SFAS 159 is  effective  for
     fiscal years  beginning  after November 15, 2007 (the Company's 2009 fiscal
     year).  The Company will  evaluate the impact of adopting SFAS 159 but does
     not  expect  that  it  will  have  a  material   impact  on  the  Company's
     consolidated financial position, results of operations or cash flows.

     In September 2006, the FASB issued SFAS No. 157, "Fair Value  Measurements"
     ("SFAS  157").  SFAS 157 defines fair value,  establishes  a framework  for
     measuring  fair value in  generally  accepted  accounting  principles,  and
     expands  disclosures  about  fair  value  measurements.   It  codifies  the
     definitions  of fair  value  included  in other  authoritative  literature;
     clarifies and, in some cases, expands on the guidance for implementing fair
     value measurements; and increases the level of disclosure required for fair
     value  measurements.   Although  SFAS  157  applies  to  (and  amends)  the
     provisions of existing  authoritative  literature,  it does not, of itself,
     require any new fair value  measurements,  nor does it establish  valuation
     standards. SFAS 157 is effective for financial statements issued for fiscal
     years  beginning  after November 15, 2007, and interim periods within those
     fiscal years.  This  statement  will be effective for the Company's  fiscal
     year  beginning  August 4, 2008.  The Company  will  evaluate the impact of
     adopting  SFAS 157 but does not expect that it will have a material  impact
     on the Company's consolidated financial position,  results of operations or
     cash flows.

     In September  2006,  the staff of the  Securities  and Exchange  Commission
     issued  Staff  Accounting  Bulletin No. 108 ("SAB 108") which was issued in
     order to  eliminate  the  diversity  of  practice  surrounding  how  public
     companies  quantify  financial  statement  misstatements.  SAB 108 requires
                                      F-13
<PAGE>
     registrants  to quantify the impact of correcting all  misstatements  using
     both the  "rollover"  method,  which  focuses  primarily on the impact of a
     misstatement on the income statement,  and the "iron curtain" method, which
     focuses primarily on the effect of correcting the period-end balance sheet.
     The use of both of these methods is referred to as the "dual  approach" and
     should be combined with the evaluation of qualitative  elements surrounding
     the errors in accordance  with SAB No. 99,  Materiality.  The provisions of
     SAB 108 are  effective for the Company's  fiscal years  beginning  July 31,
     2006.  The  adoption  of SAB 108  did not  have a  material  impact  on the
     Company's  consolidated  financial position,  results of operations or cash
     flows.

     In June  2006,  the FASB  issued  Interpretation  No. 48,  "Accounting  for
     Uncertainty  in  Income  Taxes (as  amended)  - an  interpretation  of FASB
     Statement  No.  109"  ("FIN  48").  FIN 48  clarifies  the  accounting  for
     uncertainty  in  income  taxes  recognized  in  an  enterprise's  financial
     statements in accordance with SFAS No. 109,  "Accounting for Income Taxes",
     and prescribes a recognition  threshold and  measurement  attribute for the
     financial statement  recognition and measurement of a tax position taken or
     expected  to be taken in a tax  return.  FIN 48 also  provides  guidance on
     derecognition,   classification,  interest  and  penalties,  accounting  in
     interim periods,  disclosure and transition. FIN 48 is effective for fiscal
     years  beginning  after  December  15,  2006.  The  Company  will adopt the
     provisions of FIN 48 in the first quarter of fiscal 2008 and the Company is
     still evaluating the potential impact, if any, upon adoption.

NOTE B - ACQUISITIONS

     The Company entered into an agreement as of February 1, 2005 to acquire all
     of the capital stock of Micro  Systems,  Inc.  ("MSI"),  Fort Walton Beach,
     Florida for payments of $21,473,328 in cash, plus acquisition costs accrued
     of approximately  $16,000, and the assumption of certain  liabilities.  The
     results of  operation  of MSI are  included in the  consolidated  financial
     statements  from February 1, 2005. MSI was acquired by the Company in order
     to capitalize on its synergies  with the Company's  legacy  product  lines,
     consolidate   operations,   add  additional   engineers  and  increase  its
     capabilities  in the area of control  avionics and target control  systems.
     MSI is a market  leader in the design  and  manufacturing  of  command  and
     control  systems for  operation  of unmanned  aerial,  seaborne  and ground
     targets and missiles.

     The Company entered into an agreement as of April 1, 2005 to acquire all of
     the capital stock of Innovative Concepts,  Inc. ("ICI"),  McLean,  Virginia
     for cash payments of  $24,378,330,  the assumption of certain  liabilities,
     and a cash advance of $3,250,000  for the  repayment of debt  assumed.  The
     results of  operations  of ICI are included in the  consolidated  financial
     statements  from April 1, 2005. ICI was acquired by the Company in order to
     capitalize  on its tactical  data link  technology  for exchange of digital
     information.  ICI 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.

     The  acquisitions  are accounted for in accordance  with the  provisions of
     SFAS No. 141,  "Business  Combinations,"  which  requires that all business
     combinations be accounted for using the purchase method.

     The  allocation  of the aggregate  purchase  price (net of cash acquired of
     approximately  $1,463,000),  based  on a review  of the  fair  value of the
     assets acquired and liabilities assumed, is as follows (in thousands):
<TABLE>
<CAPTION>
          Company acquired:                               MSI            ICI       RSS
          Effective Date:                             February 1,     April 1,  September 1,
          --------------                                 2005           2005       2004
                                                         ----           ----       ----
          <S>                                          <C>            <C>          <C>
          Current assets                               $  1,534       $  8,759     $483
          Property, plant and equipment                   2,038            681       72
          Other assets                                        1              -        -
          Intangible assets                               4,400         10,200        -
          Goodwill                                       15,148         19,693    3,456
          Current liabilities                            (2,436)       (12,364)    (258)
                                                         ------         ------    -----
          Aggregate purchase price                     $ 20,685       $ 26,969   $3,753
                                                         ======         ======   ======
</TABLE>
     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
     options have been exercised to date.

     Identifiable  intangible  assets above  consist of  technology  and backlog
     valued at $3,200  and $8,600  for MSI and ICI,  respectively.  Identifiable
     intangible  assets also include  trademarks valued at $1,200 and $1,600 for
     MSI and  ICI,  respectively.  These  intangible  assets  have  amortization
     periods  ranging from 5 years to 10 years for technology  and backlog,  and
     indefinite for trademarks.

     Goodwill  resulting from these  acquisitions  is based on the excess of the
     amounts paid over the estimated fair value of the net assets acquired,  and
     is tax deductible.
                                      F-14
<PAGE>
     Unaudited pro forma financial information for the acquisitions completed by
     the Company in fiscal 2005 as if the acquisitions had occurred on August 2,
     2004 is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
                                                                          2005
                                                                          ----
              <S>                                                      <C>
              Net sales                                                $ 173,223
              Net income                                                  10,374
              Net income per common share:
                  Basic                                                   $ 0.72
                  Diluted                                                 $ 0.69
              Weighted shares outstanding
                  Basic                                                   14,310
                  Diluted                                                 14,969
</TABLE>

NOTE C - INVENTORIES

     The major components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                     July 29,         July 30,
                                                                       2007             2006
                                                                       ----             ----
         <S>                                                         <C>               <C>
         Purchased parts and raw materials                           $ 28,526          $ 27,191
         Work in process                                               27,797            29,597
         Finished products                                              2,576             3,270
                                                                      -------           -------
                                                                       58,899            60,058
           Less:
              Allowance for obsolete and slow moving inventory          5,163             4,576
              Unliquidated progress payments                            1,921             2,573
                                                                      -------           -------
                                                                     $ 51,815          $ 52,909
                                                                       ======            ======
</TABLE>
NOTE D - PROPERTY, PLANT AND EQUIPMENT

     Property,   plant  and   equipment  are  comprised  of  the  following  (in
thousands):
<TABLE>
<CAPTION>
                                                July 29,     July 30,    Estimated
                                                  2007         2006      Useful Life
                                                  ----         ----      -----------
<S>                                              <C>          <C>        <C>
Land                                             $ 4,006      $ 4,006
Building and building improvements                12,229       12,221    10-40 years
Machinery, equipment and software                 56,128       51,845     3- 8 years
Furniture and fixtures                             3,285        3,199     5-10 years
Leasehold improvements                             3,242        2,988     5-10 years
                                                  ------       ------
                                                  78,890       74,259
Less accumulated depreciation and amortization    48,894       43,781
                                                  ------       ------
                                                $ 29,996     $ 30,478
                                                  ======       ======
</TABLE>
     Depreciation and  amortization  charges totaled  approximately  $5,114,000,
     $5,208,000 and $4,655,000 in fiscal 2007, 2006 and 2005, respectively.

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-two weeks ended July 29, 2007, July 30, 2006 and
     July 31, 2005, was  approximately  $3,812,000,  $3,960,000 and  $2,834,000,
     respectively.  Minimum annual rentals under non-cancelable operating leases
     are as follows (in thousands):
<TABLE>
<CAPTION>
                        Fiscal year ending          Amount
                        ------------------          ------
                             <S>                <C>
                             2008               $ 3,484
                             2009                 3,426
                             2010                 2,806
                             2011                 2,763
                             2012                   919
                       Thereafter                   746
                                                 ------
                                                $14,144
                                                 ======
</TABLE>
                                      F-15
<PAGE>
     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 $20 million at July 29, 2007.

     Employment and Severance Agreements
     -----------------------------------
     The Company has an employment  agreement with the Chairman/Chief  Executive
     Officer  of the  Company  which  expires  December  31,  2012,  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 July 29, 2007 of $707,319
     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% of pretax income of the Company.  Incentive compensation
     in the amount of approximately $369,000,  $477,000 and $488,000 was charged
     to expense in fiscal years 2007, 2006 and 2005, 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
     July 29, 2007, the amount payable in the event of such termination would be
     approximately  $7,709,000.  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
     and  $650,000  was  charged  to  expense  in  fiscal  years  2006 and 2005,
     respectively.  Effective  October 12,  2006 and as a condition  to entering
     into the  Administrative  Agreement  with the  Department of the Navy,  the
     Company  entered into an agreement with its former Chairman of the Board of
     Directors,  to  terminate  the  Employment  Agreement  between  him and the
     Company  dated as of July 29,  2002 and  modified  on December 9, 2003 (see
     Note A.1).

     The Company  entered into an employment  agreement with the Chief Operating
     Officer of the  Company as of May 30,  2007 which  expires  July 31,  2010,
     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  $350,000  (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  ending  August  3, 2008  shall be paid 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 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.

     In  addition,   certain  other  executive  officers  of  the  Company  have
     employment  agreements  which expire June 6, 2009  providing  for aggregate
     annual salaries as of July 29, 2007 of $620,000.

     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  other  officers and key  employees  of the Company have  severance
     agreements  providing for an aggregate  lump-sum  payment of  approximately
     $3,440,000  through  September 30, 2008 in the event of a change in control
     of the Company as defined in the  agreements.  Several other employees have
     severance agreements,  in the event of termination of employment except for
     cause,  expiring  at various  dates from August  2007  through  April 2009,
     providing for an aggregate payment as of July 29, 2007 of $1,990,000.

     Litigation
     ----------
     On June 6, 2006, in connection with a continuing  investigation by the U.S.
     Attorneys' Office in Pennsylvania which, inter alia, involves 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.  The indictment as superseded on January 30,
                                      F-16
<PAGE>
     2007 alleges 27 counts of  violations  of the wire fraud statute (18 U.S.C.
     Section 1343); 2 counts of violations of the obstruction of a federal audit
     statute (18 U.S.C.  Section  1516);  1 count of  violating  the major fraud
     against the United States  statute (18 U.S.C.  Section  1031);  3 counts of
     violating the false statements to the government statute (18 U.S.C. Section
     1001);  aiding  and  abetting  (18  U.S.C.  Section  2);  and a  notice  of
     forfeiture.  The Company believes that no criminal conduct has occurred and
     will  vigorously  contest the  charges.  If  convicted,  Mr.  Blatt and the
     Company could be fined up to approximately $13 million each and the Company
     could be  required to forfeit  approximately  $2.9  million  paid under the
     contracts.  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.

     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. 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, 2007. 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.  In addition,  in June 2006,  the Company was 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, and does not  anticipate  any further  activity
     related  to this  potential  claim  until  after the trial of the  criminal
     matter mentioned above which is currently scheduled for May 2008.

     The Company believes it has substantial  defenses to the charges alleged in
     the indictment and intends to vigorously defend against these allegations.

     The Company  believes  it is  entitled  to  recovery of certain  legal fees
     associated  with the above  matters  under its D&O  insurance  policy.  The
     Company has recorded a receivable  of  $2,462,000  (net of a deductible  of
     $500,000) in  anticipation  of recoveries and received a partial payment of
     approximately  $684,000 on June 1, 2007. As of July 29, 2007  approximately
     $1,778,000  of the  receivable  is  outstanding  and 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,  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, the Company shall repay to the insurance carrier any such uncovered
     sums previously advanced to the Company.

     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  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 has asserted claims
     for  breach of  contract  and  conversion,  claiming  that the  Company  is
     wrongfully in possession of the intellectual  property that was transferred
     to the Company. EADS also seeks a preliminary  injunction.  The Company has
     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  remain
     pending, as do the Company's counterclaims. Pursuant to the consent decree,
     the parties have agreed to a  mediation/settlement  conference of all their
     respective  claims  with the  Court,  and have  further  agreed to stay all
     proceedings  pending  the outcome of that  mediation/settlement  conference
     currently scheduled for October 17, 2007.
                                      F-17
<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.

     In  connection  with the Robinson  Laboratories,  Inc.  ("RLI")  litigation
     settled in 2005, by Order Dated  February 17, 2005, the Company was awarded
     $2.1 million for attorneys' fees. The judgment has not been paid by RLI and
     the  receivable  for this  award  has not been  recorded  in the  Company's
     consolidated financial statements because RLI has no assets.

     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
     financial position or 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, 2009. At July 29, 2007,  stand-by  letters of credit  aggregating
     approximately  $11,535,000 were  outstanding  under this facility (See Note
     G).

NOTE F - INCOME TAXES

     Income before income tax (benefit)  provision consists of the following (in
     thousands):
<TABLE>
<CAPTION>
                                          52 weeks ended
                                 --------------------------------
                                 July 29,    July 30,   July 31,
                                   2007        2006       2005
                                   ----        ----       ----
<S>                            <C>         <C>        <C>
Income before income taxes:
      Domestic (loss) income   $   (2,124) $   11,514 $   14,458
      Foreign income                4,223       2,819        568
                                 ---------   ---------  ---------
                               $    2,099  $   14,333 $   15,026
                                 =========   =========  =========
</TABLE>
     Income tax (benefit) provision consists of the following (in thousands):
<TABLE>
<CAPTION>
                                      52 weeks ended
                          --------------------------------------
                           July 29,      July 30,     July 31,
                             2007          2006         2005
                             ----          ----         ----
<S>                     <C>           <C>          <C>
Current
            Federal     $        283  $      3,036 $      2,772
            State               (448)          350          344
            Foreign              456           375           30
                          -----------   -----------  -----------
                                 291         3,761        3,146
                          -----------   -----------  -----------
Deferred
            Federal           (1,196)          225          992
            State               (114)           24           94
            Foreign           -                (31)          13
                          -----------   -----------  -----------
                              (1,310)          218        1,099
                          -----------   -----------  -----------
                        $     (1,019) $      3,979 $      4,245
                          ===========   ===========  ===========
</TABLE>
     The Company paid income taxes of approximately  $225,000,  $3,407,000,  and
     $546,000 in fiscal 2007, 2006 and 2005, respectively.


     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 research
     and  development  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
     provisions  that are no  longer  deemed  necessary.  The  extension  of the
     research and development  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
                                      F-18
<PAGE>
     significantly  affected 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 contingencies
     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.

     The following is a reconciliation of the U. S. Federal statutory income tax
     rate and the effective tax rate on pretax income:
<TABLE>
<CAPTION>
                                                 52 weeks ended
                                       ----------------------------------
                                         July 29,     July 30,    July 31,
                                          2007         2006        2005
                                          ----         ----        ----
<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               (1.8)        1.8         1.9
Benefit of extra territorial income         (7.7)       (1.4)       (1.1)
Non-deductible expenses                      1.0         0.9         0.7
Benefit of foreign and
   foreign-source income                   (48.6)       (4.5)       (1.0)
Research and development credits            (5.1)       (1.3)       (5.7)
Tax exempt interest                         (3.4)       (1.2)       (1.3)
Adjustment of prior year accrual            (8.3)          -           -
Reversal of tax reserves                   (10.7)          -           -
Other, net                                   1.1        (1.5)       (0.2)
                                       ----------   ---------   ---------
   Effective tax rate                      (48.5) %     27.8  %     28.3  %
                                       ==========   =========   =========

</TABLE>
     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 U.S. research and development  credit taken in fiscal 2006 was based on
     qualified research  expenditures through December 31, 2005 since the credit
     had  expired as of that date.  Congress  subsequently  extended  the credit
     retroactive  to January 1, 2006 and  therefore,  the credit taken in fiscal
     2007 includes the benefit  based on qualified  research  expenditures  from
     January 1, 2006 through July 29, 2007.

     The tax effects of significant  items comprising  deferred income taxes are
     as follows (in thousands):
<TABLE>
<CAPTION>
                                                     July 29, 2007                      July 30, 2006
                                                     -------------                      -------------
                                         Deferred Tax Assets       Long-term        Current       Long-term
                                                       Long        Deferred Tax   Deferred Tax   Deferred Tax
                                         Current       Term       Liabilities        Assets      Liabilities
                                         -------       ----       -----------      ------------  -----------
<S>                                       <C>         <C>         <C>                <C>          <C>
Intangibles                               $ -         $ -         $ 5,598            $ -         $ 4,393
Accrued vacation pay                        534         -             -                562           -
Accrued bonus                               286         -             -                201           -
Accrued warranty and other costs            219         -             -                476           -
Inventory                                 1,719         -             -              1,668           -
Depreciation                                -           -           3,006              -           3,023
Accrual for contract losses                  44         -             -                 95           -
Net operating loss carry-forwards           912         -             -                628           -
Accrued employment settlement costs         458     1,432             -                 -            -
Stock compensation costs                    -         557             -                 -            -
Other                                        82       -               -                115           -
                                        -------   -------       -------            -------      -------
                                        $ 4,254   $ 1,989       $ 8,604            $ 3,745      $ 7,416
                                        =======   =======       =======            =======      =======
</TABLE>
     As of July 29, 2007, the Company has available net operating loss
     carry-forwards for state income tax purposes of approximately $5,700,000,
     and $918,000 for Federal income tax purposes with expiration dates through
     2027. Unused research and development credits of approximately $580,000,
     which expire in 2027, are available for Federal income tax purposes.

                                      F-19
<PAGE>
NOTE G - LONG-TERM DEBT

     Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                             July 29,       July 30,
                                             Rate             2007           2006
                                       ---------------        ----           ----
<S>                                    <C>                   <C>             <C>
Revolving loan facility (a)            6.67% and 7.75%       $ -             $ -
Mortgage note (b)                      7.43%                  2,222           2,330
Industrial Revenue Bonds (c)           4.07%                  2,475           2,590
Note payable (d)                       6.75%                  1,175           1,626
Note payable (e)                       5.35%                  1,144            -
Other                                                           281              32
                                                          ----------   -------------
                                                              7,297           6,578
Less current portion                                          1,346             630
                                                          ----------   -------------
                                                             $5,951          $5,948
                                                          ==========   =============
</TABLE>
(a)  On April 30, 2007, the Company replaced its existing credit facility with a
     new $40  million  Revolving  Credit  Loan  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 revolving credit
     facility  requires  the  payment of  interest  only on a monthly  basis and
     payment of the outstanding principal balance on March 31, 2009. 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 1.35% to 1.65%,
     which is the "applicable  incremental  margin." The applicable  incremental
     margin is based on the ratio of total liabilities to tangible net worth, as
     those terms are defined in the agreement. 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
     $11.5  million at July 29, 2007 (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 July 29, 2007 was  approximately
     $132 million.  There were no borrowings under the line at July 29, 2007 and
     July 30, 2006.

     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 July 29,
     2007.

(b)  The mortgage loan is for a term of ten years  commencing  February 16, 1999
     with fixed monthly principal and interest installments of $23,359 including
     interest  at a  fixed  rate  of  7.43%,  and is  based  upon a  twenty-year
     amortization.  The loan is secured by a mortgage on the Company's  land and
     building   in   Lancaster,   Pennsylvania   having  a  net  book  value  of
     approximately $1,631,000 at July 29, 2007.

     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 July 29, 2007. 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 O)  becomes a fixed rate of
     4.07%.  The interest  rate at July 29, 2007 was 3.76%.  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
     $2,512,000  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  $1,670,000 at July 29,
     2007.

(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.
                                      F-20
<PAGE>
(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  as  of  July  29,  2007  with  monthly   payments   totaling
     approximately  $42,750.  No additional  amounts will be borrowed under this
     agreement.

The  Company  paid  interest  in  fiscal  2007,  2006 and 2005 of  approximately
$469,000, $291,000 and $304,000, respectively.

Future payments required on long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
               Fiscal year ending during:        Amount
               -------------------------         -----
                     <S>                        <C>
                     2008                       $ 1,346
                     2009                         3,373
                     2010                           436
                     2011                           135
                     2012                           140
                     Thereafter                   1,867
                                                -------
                                                $ 7,297
                                                =======
</TABLE>
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 him and the Company
     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 $245,000,  as of July 29, 2007 is approximately  $1,113,000 and
     the  long-term   portion,   net  of  imputed   interest  of  $580,000,   is
     approximately $4,117,000.

     The principal portion of the payments due under the promissory note in each
     fiscal year is  approximately  $899,100 in fiscal  2008,  $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>
                                              July 29,    July 30,
                                                2007        2006
                                                ----        ----
<S>                                         <C>         <C>
Accounts payable                            $    8,407  $   10,039
Accrued payroll, bonuses and related costs       5,812       5,563
Accrued commissions                              1,088       1,525
Accrued legal and accounting fees                1,117         639
Accrued rent expense                             1,332       1,448
Other accrued expenses                           1,293       2,289
                                              ---------   ---------
                                            $   19,049  $   21,503
                                              =========   =========
</TABLE>
                                      F-21
<PAGE>
     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-two  weeks  ended July 29,  2007 and July 30, 2006 (in
     thousands):
<TABLE>
<CAPTION>
                                                      Fifty-two weeks ended
                                                      ---------------------
                                                       July 29,      July 30,
                                                         2007          2006
                                                         ----          ----
     <S>                                            <C>           <C>
     Balance at beginning of period                 $        986  $       799
     Provision for warranty obligations                    1,338          725
     Warranty costs charged to the reserve                (1,218)        (538)
                                                    ------------  ------------
     Balance at end of period                       $      1,106  $       986
                                                    ============  ============
</TABLE>
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 $1,766,000, $1,773,000 and $1,038,000 under the plans for the
     fifty-two  weeks  ended July 29,  2007,  July 30,  2006 and July 31,  2005,
     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 2007,  2006 and 2005 were
     approximately $75,200, $55,900 and $60,600, 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
     $1,311,000 and $1,265,000 at July 29, 2007 and July 30, 2006, respectively.
     The total  expense  recognized  for employee  severance  programs in Israel
     (both the funded and unfunded  portion of the  program)  was  approximately
     $228,000,  $223,000  and  $110,000  for fiscal  years 2007,  2006 and 2005,
     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 2007,  2006 and 2005 were $273,000,  $265,000 and $130,000,
     respectively.

     In  connection  with  the  move of the  Amityville  facilities  of  General
     Microwave  Corporation in fiscal 1999,  the Company  entered into a 10 year
     lease  agreement with a partnership  partially  owned by the children of an
     officer of the Company.  The lease provides for initial minimum annual rent
     of $312,000 subject to escalation of  approximately 4% annually  throughout
     the 10 year term.  Additionally,  in March 2000,  the Company  entered into
     another 10 year lease with the same  partnership for additional  space. The
     initial  minimum  annual  rent of  $92,000  is  subject  to  escalation  of
     approximately  4%  annually.  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  $487,000,  $485,000 and $473,000 in fiscal
     2007, 2006 and 2005, respectively.

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) is computed by dividing net
     income by the weighted average number of common shares outstanding. Diluted
     earnings per common share  (Diluted EPS) is 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 income.
                                      F-22
<PAGE>

     The following  provides a reconciliation of information used in calculating
     the per share  amounts for the fiscal years ended July 29,  2007,  July 30,
     2006 and July 31, 2005 (in thousands, except per share data):
<TABLE>
<CAPTION>
                                                      Fifty-two weeks ended
                                             -------------------------------------
                                             July 29,     July 30,      July 31,
                                               2007         2006          2005
                                             ----------  ------------  -----------
<S>                                            <C>          <C>          <C>
     Numerator:
Net Income                                     $ 3,118      $ 10,354     $ 10,781
                                             ==========  ============  ===========

     Denominator:
Basic weighted-average shares                   13,927        14,463       14,310
Effect of dilutive securities:
     Employee stock options                        468           634          659
                                             ----------  ------------  -----------
Diluted weighted-average shares                 14,395        15,097       14,969
                                             ==========  ============  ===========
Stock options not included in computation        1,757         1,722          807
                                             ==========  ============  ===========
</TABLE>
     The number of stock options not included in the  computation of diluted EPS
     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 July 29, 2007,
     expire at various dates through June 8, 2017 (See Note M).

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.

     In the fiscal year ended July 29, 2007, the components of accumulated other
     comprehensive income of $1,745,000 are (a) unrealized loss on interest rate
     swap of ($29,000) and (b) foreign currency  translation gain of $1,774,000.
     In the fiscal year ended July 30, 2006, the components of accumulated other
     comprehensive income of $1,344,000 are (a) unrealized loss on interest rate
     swap of ($22,000) and (b) foreign currency translation gain of $1,366,000.


NOTE N - SHAREHOLDERS' EQUITY

     The authorized shares of Common Stock of the Company are 20,000,000 shares.

     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  2,000,000  shares of common  stock.  As of July 30, 2006 the
     Company has  acquired an  aggregate of  approximately  1,898,000  shares of
     common  stock under this program of which  798,567 and 160,232  shares were
     acquired during fiscal 2006 and 2005 at an aggregate cost of  approximately
     $9,044,000 and $2,728,000, 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  250,000 and 33,000
     shares were  granted  under the plan during the fiscal years ended July 29,
     2007 and July 30, 2006, respectively.  Options for 217,000 shares of common
     stock are available for grant under the plan as of July 29, 2007.

     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.  Options for
     97,000,  16,300 and 993,500  shares were granted  under the plan during the
     fiscal  years  ended  July  29,  2007,  July 30,  2006  and July 31,  2005,
     respectively.  Options for 99,000 shares were  cancelled in fiscal 2007 and
     options for 3,700 shares of common stock are  available for grant under the
     plan as of July 29, 2007.

     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.  Options for
     26,000,  18,000 and 53,000  shares were  granted  under the plan during the
     fiscal  years  ended  July  29,  2007,  July 30,  2006  and July 31,  2005,
     respectively.  Options for 23,500 shares were  cancelled in fiscal 2007 and
     options for 1,750 shares of common stock are  available for grant under the
     plan as of July 29, 2007.

     In April 1998,  the Board of Directors  approved the 1998 Stock Option Plan
     which  covers  2,250,000  shares of the  Company's  common  stock.  Options
                                      F-23
<PAGE>
     granted  under the plan may be  incentive  stock  options  qualified  under
     Section 422 of the  Internal  Revenue Code of 1986 or  non-qualified  stock
     options.  Under the  terms of the  plan,  the  exercise  price for  options
     granted  under the plan will be the fair market value at the date of grant.
     Prices for incentive stock options granted to employees who own 10% or more
     of the Company's  stock are at least 110% of market value at date of grant.
     The nature and terms of the  options to be granted  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.  Non-qualified  stock options for 33,500,  9,000 and
     29,500  shares were  granted  under this plan during the fiscal years ended
     July 29, 2007, July 30, 2006 and July 31, 2005,  respectively.  Options for
     12,000  shares were  cancelled  in fiscal 2007 and options for 29 shares of
     common stock are available for grant under the plan as of July 29, 2007.

     In May 1997,  the Board of  Directors  approved  the 1997 Stock Option Plan
     which  covers  2,500,000  shares of the  Company's  common  stock.  Options
     granted  under the plan may be  incentive  stock  options  qualified  under
     Section 422 of the  Internal  Revenue Code of 1986 or  non-qualified  stock
     options.  Under the  terms of the  plan,  the  exercise  price for  options
     granted  under the plan will be the fair market value at the date of grant.
     Prices for incentive stock options granted to employees who own 10% or more
     of the Company's  stock are at least 110% of market value at date of grant.
     The nature and terms of the  options to be granted  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.  Non-qualified  stock  options  for  2,700 and 5,000
     shares were granted  under this plan during the fiscal years ended July 30,
     2006 and July 31, 2005,  respectively.  There are no options  available for
     grant under the plan.

     In October 1995, the Board of Directors  approvedthe 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 arenon-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 July 29,  2007,  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-two weeks
     ended July 29, 2007, July 30, 2006 and July 31, 2005 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>
Outstanding August 1, 2004                       3,020,929   $   4.06  -  19.52        $ 12.33
Granted                                          1,081,000      17.98  -  19.94        $ 18.29
Exercised                                         (329,349)     16.54  -  20.60        $ 18.55
Cancelled                                          (37,050)      8.38  -  19.83        $ 17.08
                                             --------------    ----------------  --------------
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         $ 7,847
                                             ==============                      --------------       -------

Exercisable July 29, 2007                        3,201,750                            $ 14.53         $ 7,847
                                             -------------                       --------------       -------
Vested and expected to vest July 29, 2007        3,565,750                            $ 14.79         $ 7,847
                                             -------------                       --------------       -------
<FN>
(1)  There are 1,560,800  vested  options with exercise  prices greater than the
     closing stock price of $15.44 as of July 29, 2007.
</FN>
</TABLE>
     Options  outstanding  and  exercisable  by price range as of July 29, 2007,
     with  expiration  dates ranging from August 21, 2007 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>
         $  7.25 - 10.46        1,090,950        2.73                  $ 9.41        1,090,950             $ 9.41
           10.97 - 15.77          800,000        6.03                 $ 13.96          600,000            $ 13.35
           15.78 - 17.82          183,500        6.82                 $ 17.63           83,400            $ 17.54
           17.98 - 17.98          808,000        5.22                 $ 17.98          710,200            $ 17.98
           18.57 - 21.18          758,000        4.04                 $ 19.55          717,200            $ 19.55
                           ---------------                      --------------   --------------   ----------------
         $  7.25 - 21.18        3,640,450        4.48                 $ 14.84        3,201,750            $ 14.53
                           ===============                                       ==============
</TABLE>
                                      F-24
<PAGE>
     In April 2005, the Company's Board of Directors, upon recommendation of the
     Board's  Compensation  Committee,  approved the accelerated  vesting of all
     unvested and  "out-of-the-money"  stock  options  outstanding  as of May 2,
     2005. See Note A-13 of Notes to Consolidated Financial Statements.

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  President.   The  Company's
     Chairman/Chief  Executive Officer and President  evaluate both consolidated
     and  disaggregated  financial  information,  primarily gross  revenues,  in
     deciding   how  to  allocate   resources   and  assess   performance.   The
     Chairman/Chief   Executive   Officer   and   President   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 2007,  2006 and 2005 were as  follows:  defense
     electronics, $148,314,000, $159,717,000 and $138,071,000, respectively; and
     commercial  technologies,   $14,826,000,   $16,551,000,   and  $13,344,000,
     respectively.

     Approximately  64%, 67% and 65% of our net sales for fiscal 2007,  2006 and
     2005 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 2007, 2006 and 2005 accounted for  approximately  20%,
     22% and 25% of net sales,  respectively.  Northrop  Grumman  accounted  for
     approximately 11% of net sales in fiscal 2005. No other customer  accounted
     for 10% or more of  consolidated  net sales  during the periods  presented.
     Foreign sales  amounted to  approximately  $44,857,000  (27%),  $41,817,000
     (24%) and $40,460,000 (27%) in fiscal 2007, 2006 and 2005, respectively.

     Geographic net sales based on place of contract performance were as follows
     (in thousands):
<TABLE>
<CAPTION>
                                                 2007             2006              2005
                                                 ----             ----              ----
                <S>                         <C>               <C>              <C>
                United States               $ 139,349         $ 155,057        $ 131,326
                Israel                         19,207            14,048           12,738
                England                         4,584             7,163            7,351
                                            ---------         ---------        ---------
                                            $ 163,140         $ 176,268        $ 151,415
                                              =======           =======          =======
</TABLE>
     Net property,  plant and  equipment by geographic  area were as follows (in
     thousands):
<TABLE>
<CAPTION>
                                                 2007             2006
                                                 ----             ----
                <S>                           <C>              <C>
                United States                $ 24,904          $ 25,243
                Israel                          4,844             4,654
                England                           248               581
                                             --------          --------
                                             $ 29,996          $ 30,478
                                               ======            ======
</TABLE>

     Total assets of foreign  subsidiaries  accounted for  approximately 11% and
     10% of total  consolidated  assets in fiscal  2007 and 2006,  respectively;
     and total foreign  liabilities  accounted for  approximately 27% and 32% of
     total consolidated liabilities in fiscal 2007 and 2006, respectively.

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 G 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 $42,300 as of July 29,  2007.
     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  July  29,   2007  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.
                                      F-25
<PAGE>
     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>
                                        July 29, 2007
                           ---------------------------------------
                              Carrying Amount         Fair Value
                           --------------------    ---------------
<S>                          <C>                     <C>
Cash and cash equivalents    $    35,181   $         35,181
Long-term debt                     5,951              6,030
</TABLE>
NOTE R - QUARTERLY RESULTS (UNAUDITED)

     The following is a summary of the unaudited quarterly results of operations
     for the  fifty-two  weeks  ended  July  29,  2007  and  July  30,  2006 (in
     thousands, except for per share data).

<TABLE>
<CAPTION>

2007                                             October 29,   January 28,    April 29,    July 29,
----                                                2006           2007        2007         2007
                                                    ----           ----        ----         ----
<S>                                              <C>              <C>          <C>         <C>
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
                                                      ====          ====         ====        ====
Basic weighted average shares                       13,862        13,902       13,969      13,977
                                                    ======        ======       ======      ======
(Loss) earnings per common share - Diluted          $ 0.43)         0.12         0.27        0.25
                                                      ====          ====         ====        ====
Diluted weighted average shares                     13,862        14,405       14,449      14,480
                                                    ======        ======       ======      ======
2006
----                                             October 30,   January 29,    April 30,    July 30,
                                                    2005           2006         2006         2006
                                                    ----           ----         ----         ----
Net sales                                        $  41,938        45,839       45,689      42,802
Gross profit                                     $  14,125        13,488       10,953       9,781

Net income                                       $   3,975         3,964        1,702         713
                                                     =====         =====        =====         ===
Earnings per common share - Basic                $    0.28          0.27         0.12        0.05
                                                      ====          ====         ====        ====
Basic weighted average shares                       14,446        14,474       14,569      14,363
                                                    ======        ======       ======      ======
Earnings per common share - Diluted              $    0.26          0.26         0.11        0.05
                                                      ====          ====         ====        ====
Diluted weighted average shares                     15,240        15,091       15,398      14,828
                                                    ======        ======       ======      ======

</TABLE>
     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.  Net  income  for the  fourth  quarter  of 2007  was
     $3,844,000,  or 9.5% of net  sales.  Contributing  to the net income was an
     income tax  benefit  of  $989,000.  As of the end of the fourth  quarter of
     fiscal  2007,  the  effective  income  tax rate for the full  year  2007 is
     estimated  as a tax  benefit  of  48.5%,  versus  the tax  expense  rate of

                                      F-26
<PAGE>

     approximately 6% that was estimated through the first nine months of fiscal
     2007.  The decline in the  estimated  effective  income tax rate for fiscal
     2007 is  primarily  attributable  to (a) an increase in the  proportion  of
     overall  earnings  expected to be generated  through the Company's  foreign
     operations  where earnings are taxed at lower rates than  domestically  and
     (b) the reversal of tax accruals that were determined not to be necessary.


                                   **********
                                     F-27