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

                                    FORM 10-K
(Mark One)
                   [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended August 3, 2003

                                       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:

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

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

                          Common Stock, $ .10 par value
                          -----------------------------
                                (Title of Class)

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

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

Based on the closing  sale price of $18.29 as of October 17, 2003 the  aggregate
market value of the voting stock held by  non-affiliates  of the  registrant was
$233,720,429.

The number of shares  outstanding of registrant's  common stock, $ .10 par value
as of October 17, 2003 was 14,013,101.

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


<PAGE>



                             HERLEY INDUSTRIES, INC.

                                TABLE OF CONTENTS


                                                                            Page
                                                                            ----
PART I
   Item 1.    Business.                                                      1
   Item 2.    Properties.                                                   11
   Item 3.    Legal Proceedings.                                            11
   Item 4.    Submission of Matters to a Vote of Security Holders.          12
PART II
   Item 5.    Market for Registrant's Common Equity and Related
                 Stockholder Matters.                                       12
   Item 6.    Selected Financial Data.                                      13
   Item 7.    Management's Discussion and Analysis of Financial
                 Condition and Results of Operations.                       14
   Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.   23
   Item 8.    Financial Statements and Supplementary Data.                  24
   Item 9.    Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure.                       24
   Item 9A.   Controls and Procedures.                                      24
PART III
   Item 10.   Directors and Executive Officers of the Registrant.           25
   Item 11.   Executive Compensation.                                       25
   Item 12.   Security Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters.                 25
   Item 13.   Certain Relationships and Related Transactions.               25
   Item 14.   Principal Accountant Fees and Services                        25
PART IV
   Item 15.   Exhibits, Financial Statement Schedules, and Reports
              on Form 8K.                                                   26
SIGNATURES                                                                  28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                 F-1


<PAGE>



PART I

Forward-Looking Statements

All statements  other than statements of historical fact included in this Annual
Report, including without limitation statements under,  "Management's Discussion
and Analysis of Financial  Condition and Results of Operations"  and "Business,"
regarding 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,"  "estimate,"  "expect,"  "plan,"  "intend"  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,  technological change or difficulties,  product development risks,
commercialization and trade difficulties and general economic conditions.

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.

Item 1.  Business

BACKGROUND

Herley is a leading  supplier of  microwave  products and systems to defense and
aerospace entities worldwide.  Our primary customers include large defense prime
contractors (including Raytheon,  Northrop Grumman, Lockheed Martin 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 RC-135 Rivet Joint,  the E-2C  Hawkeye,  the AEGIS
class surface combatants,  the EA-6B Prowler, the AMRAAM air to air missile, 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  over the past ten
years 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.

- In September 1992, we acquired Micro-Dynamics,  Inc. of Woburn, Massachusetts,
a microwave subsystem designer and manufacturer.

- In June  1993,  we  acquired  Vega  Precision  Laboratories,  Inc.  of Vienna,
Virginia, a manufacturer of flight instrumentation products.

                                        1

<PAGE>



- 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
British company of Aldershot, UK. EWST designs, develops and produces electronic
warfare simulator systems for prime defense contractors and countries worldwide.

BUSINESS STRATEGY

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

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

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

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

- 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.


                                        2

<PAGE>



- 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 our 38 year focus on research and development and
our  state-of-the-art  design  and  production  capabilities.  We have  recently
completed   construction  of   state-of-the-art   manufacturing   facilities  in
Lancaster,  Pennsylvania,  where we have a full range of capabilities  including
long and short run production,  hardware assembly and full-service  engineering.
In addition, we have highly capable manufacturing  facilities located in Woburn,
Massachusetts; Farmingdale, New York; Aldershot, England; and Jerusalem, Israel.
We  continue  to develop  and  reward our  engineers  in order to  maintain  our
expertise in-house.

- 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, with only the U.S.  government,  at approximately  25%,  representing more
than 10% of our fiscal 2003 revenues. 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 36% of our revenues in
fiscal 2003.

-  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  38  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 2003, we spent over $6.3
million on new product development,  of which our customers funded approximately
$3.2 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 23 years
of experience in the defense electronics industry.


                                        3

<PAGE>



PRODUCTS AND SERVICES

We operate in two markets: defense electronics and commercial technologies.

DEFENSE ELECTRONICS

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 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 systems have been used to
fly remotely a large variety of unmanned  aerial  vehicles,  or UAVs,  typically
aircraft  used as target  drones or  Remotely  Piloted  Vehicles,  or RPVs.  Our
command and control 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 command and control  systems are currently in service
throughout the world.  Command and control  systems permit a ground  operator to
fly a target or a UAV  through a  pre-planned  mission.  The  mission may be for
reconnaissance,  where the vehicle is equipped  with high  definition TV sensors
and the necessary data links to send information back to its command and control
systems ground station.  The UAV may also be used as a decoy, since the operator
can direct the flight  operations  that will make the small drone appear to be a
larger combat aircraft.

Our  MAGIC2  system  affords  over-the-horizon  command  and  control  using GPS
guidance  and control of multiple  targets  from a single  ground  station.  The
ability  to  control  multiple  targets  at  increased  distances  represents  a
significant  product  improvement.  The  MAGIC2 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 MAGIC2 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.


                                        4

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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
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 KDX
destroyer program.

High Power  Amplifier.  We design and manufacture  high power amplifier  systems
with  frequencies  ranging  from  1.5  MHz  to  12GHz  with  power  levels  from
multi-kilowatts up to 15W, depending on the frequency.  Our high power amplifier
applications  include but are not limited to defense  communication,  electronic
warfare,  radar and avionics. We have an exclusive sales and marketing agreement
with EADS ewation, Grintek ewation, Sysdel Close Corporation and Indra regarding
high power amplifiers for monitoring, reconnaissance and countermeasures.

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.  We
also  manufacture  magnetrons,  which  are  the  power  source  utilized  in the
production of our transponders.


                                        5

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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.  For our engineering  efforts
in designing  solid-state  receiver  protectors  for the F- 16, we received cash
awards  from the  United  States  Air  Force as part of the  government's  value
engineering program.

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

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

CHAMELEON is a real time electronic  countermeasures  ("ECM") jamming simulator.
It uses a variety of ECM techniques  and radar target  modeling for training and
testing of both radar and EW  operators  and systems.  CHAMELEON  offers a fully
programmable ECM capability using Digital RF Memories ("DRFM")  technology.  The
system offers fully coherent  jamming in both range and velocity through the use
of 8-bit DRFM technology  together with GUI software.  Target modeling  includes
Swerling  fluctuations,  cross-section  synthesis  and clutter  generation.  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.

COMMERCIAL TECHNOLOGIES

Our  commercial  technologies  are comprised of scientific  products and medical
products.

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 OEM, system manufacturers
and research centers.

                                        6

<PAGE>



Medical  Products.  Our medical products vary in complexity from single modules,
to rack mounted amplifiers, to complete systems. The rack-mounted amplifiers and
complete systems  typically  include  detection/protection  circuitry,  built-in
power  supplies,  front panel  metering  and  digital  and/or  analog  interface
controls.  Both  forced air and/or  water  cooling  are used,  depending  on the
customer's  requirements.  Our medical  products are used in Magnetic  Resonance
Imaging,  or MRI,  systems.  All amplifiers have dual mode capability and can be
operated in either a pulsed or  continuous  wave mode,  and cover the  frequency
ranges of 10 MHz to 200 MHz with  power  levels as high as 12.0KW  peak power at
10% duty cycle.  Medical customers  include both original  equipment and systems
manufacturers, 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 year ended August 3, 2003,  approximately 25% of our net sales
were attributable to contracts with offices and agencies of the U.S. government.
No other customers accounted for shipments in excess of 10% of net sales.

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:

      Boeing                    BAE Systems                Harris
      Lockheed Martin           Northrop Grumman           Raytheon

During fiscal 2003, sales to foreign  customers  accounted for approximately 36%
of our net sales.  Domestic sales to foreign customers  accounted for 16% of net
sales.  Sales from  England  and Israel each  accounted  for 10% of net sales to
foreign customers.  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 also are subject to us 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 OEMs,  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.


                                        7

<PAGE>



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

MANUFACTURING

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

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

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

We maintain minimal levels of finished  products  inventory 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
Jerusalem, Israel
Aldershot, England



                                        8

<PAGE>



BACKLOG

Our total backlog of orders was approximately $89.9 million on August 3, 2003 as
compared to $82.7  million on July 28, 2002.  Of our total  backlog at August 3,
2003,  $51.3 million (57%) is  attributable to domestic orders and $38.6 million
(43%)  is   attributable  to  foreign  orders.   Management   anticipates   that
approximately  $76.9  million of its backlog  will be shipped  during the fiscal
year ending August 1, 2004.

All of the  orders  included  in backlog  are  covered  by signed  contracts  or
purchase   orders.   Backlog  is  not  directly   indicative  of  future  sales.
Accordingly,  we do not believe  that our backlog as of any  particular  date is
representative of actual sales for any succeeding period.

Substantially  all of our  contracts  are 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  except  for  costs
incurred because of change orders issued by the customer.

In accordance with  Department of Defense  procedures,  all contracts  involving
government programs may be terminated by the government, in whole or in part, at
the  government's  discretion  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.  Our primary efforts are focused 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  $6.3 million in fiscal 2003, $5.6 million in fiscal 2002 and $4.6
million in fiscal 2001,  of which we paid  approximately  $3.1 million in fiscal
2003,  $2.3  million in fiscal 2002 and $2.6 million in 2001.  The  remainder of
these costs were paid by some of our customers.

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.


                                        9

<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 assure
you 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  assure  you  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 October 5, 2003,  we employed 707 persons full time.  Of these  employees,
115 comprise the engineering staff, 504 constitute  manufacturing  personnel, 29
occupy sales and marketing positions, and 59 are in executive,  management,  and
support  functions.  None of our employees are covered by collective  bargaining
agreements and we consider our employee relations to be satisfactory. 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 and stock option plans.

OFFICERS OF THE REGISTRANT
                                 Served as
Name                    Age    Officer Since          Position(s) and Offices
----                    ---    -------------          -----------------------

Lee N. Blatt            75        1965                 Chairman of the Board
Myron Levy              62        1988                 Vice Chairman
                                                        Chief Executive Officer
                                                        and Director
John M. Kelley          50        1998                 President
William Wilson          54        2002                 Vice President
                                                        Chief Operating Officer
Rozalie Schachter       56        2000                 Vice President
                                                        Business Development
Anello C. Garefino      56        1993                 Vice President-Finance,
                                                        Treasurer and Chief
                                                        Financial Officer
John A. Carroll         52        2003                 Vice President
                                                        Human Resources
Howard M. Eckstein      52        1998                 Vice President
Mitchell Tuckman        53        1999                 Vice President
Richard Poirier         38        2003                 Vice President
David H. Lieberman      58        1985                 Secretary and Director



                                       10

<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                              3,300 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          46,000 sq. ft.   Leased
                                                                                14,000 sq. ft.   Leased
Jerusalem, Israel           Production, engineering and administration          20,000 sq. ft.   Owned
Aldershot, England (2)      Production, engineering and administration            6,300 sq. ft.  Leased
Chicago, IL                 Engineering and administration                        3,000 sq. ft.  Leased
Lancaster, PA               Land held for expansion                                20.4 Acres    Owned
--------------
<FN>
     (1) On September 23, 1999 the Company closed on the sale of its prior owned
facility in  Amityville,  NY and relocated the plant to this leased  facility in
Farmingdale,  NY. The Company  entered into two 10 year lease  agreements with a
partnership  owned by the children of Messrs Blatt and 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.
     (2) As of  September  1, 2002,  the Company  entered  into an  agreement to
acquire  all of  the  issued  and  outstanding  common  stock  of EW  Simulation
Technology, Limited as discussed in Note B of the financial statements.
</FN>
</TABLE>

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

We believe  that its  facilities  are  adequate  for its current  and  presently
anticipated future needs.

Item 3.  Legal Proceedings

On August  14,  2001,  Robinson  Laboratories,  Inc.  ("RLI")  and Ben  Robinson
("Robinson")  filed  an  Amended  Complaint  against  Herley  Industries,   Inc.
("Herley").  Although the Amended Complaint sets forth fifteen counts,  the core
allegations are (i) that Herley failed to issue 97,841 shares of common stock in
connection  with certain earn out  requirements  contained in an Asset  Purchase
Agreement  dated  February  1, 2000;  (ii) that Herley  breached  an  Employment
Agreement  with Robinson by  terminating  his  employment on August 5, 2001; and
(iii) that Herley breached a Stock Option Agreement dated January 31, 2000, with
Robinson.  RLI and  Robinson  asserted  (i)  violations  of  state  and  federal
securities laws; (ii) fraud claims;  (iii) breach of contract  claims;  and (iv)
other equitable claims arising from the above core factual allegations.

On  September  17,  2001,  Herley  filed an  Answer,  Affirmative  Defenses  and
Counterclaims  in this matter.  In the Answer and Affirmative  Defenses,  Herley
denied the  material  allegations  of the Amended  Complaint.  Herley also filed
Counterclaims  against both RLI and Robinson.  In these counterclaims,  Herley's
core allegations concern Robinson's misconduct (i) in connection with the manner
he attempted to satisfy  RLI's earn out  requirements;  (ii)  misrepresentations
made in connection  with the Asset  Purchase  Agreement;  (iii)  wrongdoing as a
Herley  employee  leading to his  termination  and (iv)  post-Herley  employment
wrongdoing  in  connection  with a new  company  known  as RH  Laboratories.  In
addition to seeking a Declaratory  Judgment  pursuant to 28 U.S.C.  ss. 2201 et.
seq.,  Herley also asserted  claims for,  among other things,  fraud,  breach of
contract, breach of fiduciary duty, unfair competition and tortious interference
with actual and prospective contractual relationships.

On August 5, 2002, a jury trial commenced. A jury verdict was rendered on August
21, 2002 in which the jury determined,  among other things,  that (i) Herley was
not required to pay any additional stock; (ii) Herley breached

                                       11

<PAGE>



the  Employment  Agreement  with  Robinson and awarded  Robinson $1.5 million in
damages;  (iii) Herley  breached the Lease  Agreement  with Robinson and awarded
Robinson  approximately $552,000 in compensatory damages; (iv) Robinson breached
fiduciary duties to Herley and awarded Herley $400,000 in compensatory  damages;
(v) Robinson and RLI breached indemnity  obligations and awarded Herley $100,000
in damages; (vi) RLI breached representations and warranties given to Herley and
awarded Herley $320,000 in damages.

On October 18, 2002,  the Court  entered a final  judgment  consistent  with the
above,  and  both  parties  filed  post-  trial  motions.  Additionally,  as the
prevailing  party in connection  with the claims asserted by RLI relating to the
earn-out stock, as well as claims advanced  relating to the various  breaches of
the Asset Purchase Agreement, Herley filed a petition for fees and costs against
both RLI and Robinson on November 27, 2002 for approximately $2,000,000. RLI and
Robinson  also  filed  petitions  to  recover  attorneys  fees of  approximately
$240,000 for certain  claims in which they contend that they were the prevailing
party. On February 5, 2003, the Court denied the post-trial motions filed by the
parties, thus leaving the jury verdict undisturbed.

At a proceeding  on April 28, 2003,  the Court decided to delay ruling on all of
the petitions for fees and costs until after appeals are exhausted. Accordingly,
by Order  dated May 6,  2003,  the Court  denied  without  prejudice  all of the
parties'  petitions.  On May 12,  2003,  Herley  filed its  appeal to the United
States Court of Appeals for the Second  Circuit.  On May 28,  2003,  RLI filed a
notice of  cross-appeal.  Robinson has not  appealed.  Herley filed its brief in
support of its appeal before the Second  Circuit on August 22, 2003.  RLI timely
filed  its  brief  in  response  to  Herley's  appeal  and in  support  of RLI's
cross-appeal.  Herley is now  required  to file a  response  to RLI's  brief and
thereafter RLI will file a response to Herley's brief. Oral argument has not yet
been scheduled.

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.

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

     Not Applicable.

PART II

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

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

                                                             Common Stock
                                                             ------------
                                                           High        Low
                                                           ----        ---
     Fiscal Year 2002
         First Quarter................................. $ 18.50     $ 11.17
         Second Quarter................................   17.13       13.10
         Third Quarter.................................   24.49       14.96
         Fourth Quarter................................   22.33       17.55

     Fiscal Year 2003
         First Quarter.................................   21.30       14.50
         Second Quarter................................   18.54       14.00
         Third Quarter.................................   17.43       13.06
         Fourth Quarter................................   18.56       14.50
     Fiscal Year 2004
         First Quarter (through October 17, 2003)......   20.55       17.50


                                       12

<PAGE>

     The closing price on October 17, 2003 was $18.29.

     (b)   As of October  17,  2003,  there were  approximately  222  holders of
           record of the Company's Common Stock.
     (c)   There have been no cash dividends  declared or paid by the Company on
           its Common Stock during the past two fiscal years.

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

                                                   53 weeks                       52 weeks ended
                                                     ended       -----------------------------------------------
                                                   August 3,     July 28,     July 29,     July 30,    August 1,
                                                     2003          2002         2001         2000        1999
                                                     ----          ----         ----         ----        ----

<S>                                             <C>               <C>         <C>           <C>        <C>
Net sales (4)                                   $   110,223       92,881      76,494        70,537     61,036

Income from continuing operations               $    13,937       10,730       7,573         7,639      7,862

Loss from discontinued operations               $     -             (921)       (168)        -           -

Loss on extinguishment of debt                  $     -            -           -             -           (127)

Cumulative effect of adopting SFAS 142          $     -           (4,637)      -             -           -

Net income                                      $    13,937        5,172       7,405         7,639      7,735

Per share data from continuing operations (1),
  (2), (3)
     Basic                                      $       .97          .89          .75         1.05       1.00
     Assuming Dilution                          $       .93          .83          .69          .96        .92

Total Assets                                    $   197,564      190,202      114,597       86,656     74,056
Total Current Liabilities                       $    18,974       15,263       18,732       12,783     10,513
Long-Term Debt net of current portion           $     6,403        5,684        2,740        2,931     15,437
<FN>

     (1) As adjusted to give effect to a 3-for-2 stock split effective September
     10, 2001.
     (2)  Earnings  per share  from  continuing  operations  are  presented  and
     calculated before  extraordinary  item in fiscal 1999, before  discontinued
     operations  in 2002 and 2001,  and before  cumulative  effect of accounting
     change in 2002.
     (3) No cash dividends have been  distributed in any of the years presented.
     (4) See "Acquisitions" under Item 1. "Business".
</FN>
</TABLE>


                                       13

<PAGE>



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

Results of Operations

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

                                                                 53 weeks           52 weeks ended
                                                                   ended        -----------------------
                                                                 August 3,      July 28,       July 29,
                                                                   2003           2002           2001
                                                                   ----           ----           ----

<S>                                                               <C>            <C>            <C>
Net sales                                                         100.0%         100.0%         100.0%
Cost of products sold                                              66.4%          66.7%          66.3%
                                                                  ------          -----        -------

Gross profit                                                       33.6%          33.3%          33.7%

Selling and administrative expenses                                14.7%          14.3%          19.0%
Litigation costs                                                    1.1%           2.2%           0.3%
Plant closing costs                                                -               0.4%           -
                                                                  ------         ------        -------

Income from operations                                             17.8%          16.4%          14.4%
                                                                   -----          -----          -----

Other income (expense), net:
     Investment income                                              1.0%           0.8%           0.9%
     Interest expense                                              (0.3)%         (0.4)%         (0.3)%
                                                                   ------         ------         ------
                                                                    0.7%           0.4%           0.6%
                                                                   -----          -----          -----
Income from continuing operations before
     income taxes                                                   18.5%         16.8%          15.0%
Provision for income taxes                                           5.9%          5.2 %          5.1%
                                                                   ------         ------         -----
Income from continuing operations                                   12.6%         11.6%           9.9%
Loss from discontinued operations                                     -            1.0%           0.2%
                                                                   ------         -----          -----
Income before cumulative effect of change
     In accounting principle                                        12.6%         10.6%           9.7%
Cumulative effect of adopting SFAS 142                                -           (5.0)%           -
                                                                   ------        ------          -----
Net income                                                          12.6%          5.6%           9.7%
                                                                   ======        ======          =====
</TABLE>


                                       14

<PAGE>



     Fiscal 2003 Compared to Fiscal 2002
     -----------------------------------

Net sales from continuing  operations for the 53 weeks ended August 3, 2003 were
approximately  $110,223,000  compared to  $92,881,000  for fiscal 2002.  The net
sales increase of $17,342,000  (18.7%) is attributable  to increased  revenue in
defense   electronics  of  $23,131,000   (including   $11,212,000   through  the
acquisition  of  EWST);  offset  by  a  decrease  of  $5,789,000  in  commercial
technologies.

Gross profit of 33.6% for the 53 weeks ended  August 3, 2003 is slightly  better
than the prior year of 33.3%. The Company  benefitted from increased  absorption
of fixed  overhead costs and production  efficiencies,  including  automation of
certain  processes.  Offsetting  these benefits was the increased  investment in
product  development up from  approximately  $2.3 million in fiscal 2002 to $3.1
million in fiscal 2003.  In  addition,  the margins on the EWST sales were lower
than the Company's historical margins.

Selling and  administrative  expenses for the 53 weeks ended August 3, 2003 were
14.7% of net sales as compared to 14.3% in fiscal 2002. There was a net increase
in expenses of $2,958,000  which  includes  expenses of EWST of  $1,096,000,  an
increase in incentive  compensation  under  employment  contracts of $1,072,000,
amortization  of acquired  intangibles  of $217,000  related to EWST,  increased
audit and tax fees of $134,000,  payroll costs of $322,000,  and travel expenses
of $121,000;  offset by a decrease in commissions and fees of $174,000.  Various
other line item expenses  increased  during the 53 weeks ended August 3, 2003 by
$170,000 on a net basis.

Litigation  costs in  fiscal  2003  decreased  $932,000  from the  level of fees
incurred  in fiscal  2002.  The  litigation  costs are  directly  related to the
Robinson Labs litigation which is currently in the appeals process. (See Item 3.
"Legal Proceedings").

Plant closing costs in connection with the facilities in Nashua, NH and Anaheim,
CA were accrued in October 2001 in the amount of $406,000 of which  $389,000 was
paid as of August 3, 2003.

Other income increased on a net basis approximately $383,000 from the prior year
primarily due to interest  earned on the  investment of cash reserves  including
the proceeds of approximately $64,812,000 received from the sale of common stock
to the public at the end of April 2002.

The effective  income tax rate for fiscal 2003 was 31.8% as compared to 31.2% in
fiscal 2002. The overall  effective tax rate is lower than the statutory  income
tax  rate  of 34%  due to  various  favorable  tax  benefits  including  a lower
effective tax rate on foreign-source  income and the tax benefit attributable to
extra territorial income.

     Fiscal 2002 Compared to Fiscal 2001
     -----------------------------------

Net sales from  continuing  operations for the 52 weeks ended July 28, 2002 were
approximately $92,881,000 compared to $76,494,000 for fiscal 2001. The net sales
increase of $16,387,000  (21.4%) is attributable to increased revenue in defense
electronics  of  $18,638,000;  offset by a decrease of  $2,251,000 in commercial
technologies.

Gross  profit of 33.3%  for the 52 weeks  ended  July 28,  2002 is less than the
prior year of 33.7%.  The decline in margin is due primarily to lower margins on
certain Robinson Labs contracts that were transferred to other  facilities,  and
the investment in new product  development  related to commercial  applications.
The  significant  increase  in net sales in defense  electronics  cushioned  the
decline in gross profit.

Selling and  administrative  expenses  for the 52 weeks ended July 28, 2002 were
$13,229,000  compared  to  $14,545,000  for  fiscal  2001,  a  net  decrease  of
$1,316,000. In connection with the adoption of SFAS 142 as of July 30, 2001, the
Company  ceased   amortization   of  goodwill  (See  Note  A.8.).   Selling  and
administrative  expenses  in  fiscal  2001  included  goodwill  amortization  of
$916,000.  Cost  savings  associated  with the  relocation  of the AMT  facility
amounted to approximately $605,000. Other significant changes include an

                                       15

<PAGE>



increase in  incentive  compensation  of $363,000 and a reduction in payroll and
related costs of $198,000.

Legal costs in fiscal 2002  increased  $1,814,000  over  fiscal  2001,  directly
related to the Robinson Labs litigation. (See Item 3. "Legal Proceedings").

Plant closing costs in connection with the facilities in Nashua, NH and Anaheim,
CA were accrued in October 2001 in the amount of $406,000 of which  $348,000 was
paid as of July 28, 2002.

Other income increased  approximately $39,000 from the prior year primarily from
the investment of proceeds of approximately  $64,812,000 from the sale of common
stock to the public on April 30, 2002, partially offset by lower interest rates.
Interest  expense  increased  $100,000  as  compared  to fiscal  2001 due to the
$3,000,000  financing  of  the  expansion  of  the  Lancaster  facility  through
industrial  revenue  bonds and interest on temporary  borrowings  of  $4,300,000
under the bank line of credit.

The  effective  income tax rate  decreased to 31.2% in fiscal 2002 from 33.8% in
2001 due to various favorable tax benefits  including a lower effective tax rate
on  foreign-source  income  and  recognition  in the  fourth  quarter of the tax
benefit attributable to extra territorial income.

Discontinued operations

The Company  entered  into an  agreement  effective  as of the close of business
September 30, 2000, to acquire all of the issued and outstanding common stock of
Terrasat, Inc. ("Terrasat"),  a California corporation for cash in the amount of
$6,000,000,  $3,000,000  of which was paid in December  2000 and  $3,000,000  of
which was paid in  December  2001.  In  addition,  the  agreement  provided  for
additional cash payments in the future up to $2,000,000, based on gross revenues
through  December 31, 2001. The targeted gross revenues under the agreement were
not achieved, therefore no additional cash payments were required.

In August 2001,  the FASB issued SFAS No 144  "Accounting  for the Impairment or
Disposal  of  Long-Lived  Assets"  which  addresses  financial   accounting  and
reporting for the impairment of long-lived  assets and for long- lived assets to
be  disposed  of.  SFAS No 144  supersedes  SFAS No.  121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of,"
retains the  fundamental  provisions  of Statement 121 for (a)  recognition  and
measurement of the  impairment of long-lived  assets to be held and used and (b)
measurement  of  long-lived  assets  to be  disposed  of by sale.  SFAS 144 also
supersedes  the  accounting  and  reporting  provisions  of APB  Opinion No. 30,
"Reporting  the Results of  Operations -- Reporting the Effects of Disposal of a
Segment of a Business,  and  Extraordinary,  Unusual and Infrequently  Occurring
Events and  Transactions,"  for  segments of a business  to be disposed  of, but
retains  the  requirement  of  Opinion  30  to  report  discontinued  operations
separately from continuing  operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment,  or in a
distribution  to owners) or is  classified as held for sale.  The  provisions of
this statement were adopted by the Company effective on July 30, 2001.

In January 2002 the Board of Directors of the Company decided to discontinue the
operations  of  Terrasat  and to seek a  buyer  for the  business.  The  Company
believed  that  Terrasat  would not be able to  generate  sufficient  returns to
justify continued investment due to the overcapacity in the telecom industry and
deteriorating  economic conditions in Terrasat's primary markets.  Consequently,
the  accompanying   consolidated   financial   statements  reflect  Terrasat  as
discontinued  operations  in  accordance  with  SFAS No.  144.  The  assets  and
liabilities  of  Terrasat  at  July  29,  2001  have  been   classified  in  the
accompanying  balance sheet as "Assets held for sale," and "Liabilities held for
sale." Results of operations and cash flows of Terrasat have been  classified as
"Loss  from  discontinued  operations,"  and "Net  cash  provided  by (used  in)
discontinued operations," respectively.

The sale of certain  assets and  liabilities,  and the  business of Terrasat was
consummated on March 1, 2002,  effective the close of business January 27, 2002,
to certain current employees of Terrasat for cash and a note which  approximates
the  carrying  value of the net assets  held for sale as of January  27, 2002 of
$878,000.


                                       16

<PAGE>



Change in accounting principle

In June 2001, the Financial  Accounting  Standards  Board (FASB) issued SFAS No.
142  "Goodwill  and  Other  Intangible  Assets"  which  requires  the  use  of a
non-amortization   approach  to  account  for  purchased  goodwill  and  certain
intangibles.  Under a non-amortization approach,  goodwill will not be amortized
into results of operations,  but instead will be reviewed for impairments  which
will be charged to results of  operations  in the periods in which the  recorded
value of goodwill is more than its fair value.  The provisions of this statement
were  adopted by the  Company on July 30,  2001.  The  adoption  of SFAS  No.142
resulted in the Company's  discontinuation of amortization of its goodwill as of
July 30, 2001.

In connection  with the adoption of SFAS 142, the Company was required to assess
goodwill  for  impairment  within  six months of  adoption,  and  completed  its
assessment in the second quarter of fiscal 2002.

The  Company  operates  as a  single  integrated  business  and as such  has one
operating  segment which is also the reportable  segment as defined in SFAS 131.
Within the  operating  segment,  the Company has  identified  two  components as
reporting  units as defined under SFAS 142,  defense  electronics and commercial
technologies.  The Company has  determined  the carrying value of each reporting
unit by assigning  assets and liabilities,  including the existing  goodwill and
intangible assets, to those reporting units as of July 30, 2001. The Company has
determined  that an impairment of goodwill in the commercial  technologies  unit
has occurred.  Accordingly,  a transition adjustment in the amount of $4,637,000
has been  recorded  as of July 30,  2001 as a  cumulative  effect of a change in
accounting  principle.  There is no tax benefit  associated  with the adjustment
since the impaired goodwill is not deductible for income tax purposes.

An impairment  test was performed in the fourth  quarter of fiscal 2003 based on
the current  market  capitalization  of the Company.  There was no impairment of
goodwill at August 3, 2003. An annual  impairment  test will be performed in the
fourth quarter of each fiscal year and any future impairment of goodwill will be
charged to operations.

Amortization  of goodwill  charged to continuing  operations for the fiscal year
ended July 29,  2001 was  approximately  $1,296,000.  Amortization  of  goodwill
charged to  discontinued  operations for the fiscal year ended July 29, 2001 was
approximately $208,000.


                                       17

<PAGE>



Quarterly Results

The  following is a summary of the  unaudited  quarterly  operations  for the 53
weeks  ended  August  3,  2003 and for the 52  weeks  ended  July  28,  2002 (in
thousands, except for per share data).
<TABLE>
<CAPTION>

                                                  November 3,     February 2,      May 4,        August 3,
                                                     2002            2003           2003           2003
                                                     ----            ----           ----           ----
<S>                                               <C>               <C>            <C>              <C>
Net sales                                         $  27,290         25,015         26,897           31,021
Gross profit                                          9,191          8,673          8,851           10,286
Income from continuing operations                     3,352          3,287          3,359            3,939
                                                     ------         ------         ------           -----
     Net income                                   $   3,352          3,287          3,359            3,939
                                                     ======         ======         ======           =====

Earnings per common share - Basic
     Income from continuing operations            $    .23            .23            .24             .28
                                                       ---            ---            ---             ---
       Net income                                 $    .23            .23            .24             .28
                                                       ===            ===            ===             ===

Basic weighted average shares                         14,668         14,464         14,218          13,921
                                                      ======         ======         ======          ======

Earnings per common share - Diluted
     Income from continuing operations            $    .22            .22            .23             .27
                                                       ---            ---            ---             ---
       Net income                                 $    .22            .22            .23             .27
                                                       ===            ===            ===             ===

Diluted weighted average shares                       15,506         15,124         14,848          14,600
                                                      ======         ======         ======          ======

                                                  October 28,     January 27,     April 28,      July 28,
                                                     2001            2002           2002           2002
                                                     ----            ----           ----           ----
Net sales                                         $  22,213         21,840         23,499           25,329
Gross profit                                          7,639          7,036          8,323            7,936
Income from continuing operations                     2,439          2,393          2,692            3,206
Loss from discontinued operations                      (144)          (777)         -                -
Cumulative effect of adopting SFAS 142               (4,637)         -              -                -
                                                     -------        -------        -------          ------
     Net income (loss)                            $  (2,342)         1,616          2,692            3,206
                                                     =======        =======        =======          ======

Earnings (loss) per common share - Basic
     Income from continuing operations            $     .23            .21             .23             .22
     Loss from discontinued operations            $    (.01)          (.07)            -               -
     Cumulative effect of adopting SFAS 142       $    (.43)           -               -               -
                                                      ------         ------           ----            ----
       Net income (loss)                          $    (.22)           .14             .23             .22
                                                      ======         ======           ====            ====

Basic weighted average shares                         10,695         11,238         11,559          14,671
                                                      ======         ======         ======          ======

Earnings (loss) per common share - Diluted
     Income from continuing operations            $     .21            .20             .22             .21
     Loss from discontinued operations            $    (.01)          (.06)            -               -
     Cumulative effect of adopting SFAS 142       $    (.40)           -               -               -
                                                      ------           ----           ----             ---
       Net income (loss)                          $    (.20)            .13            .22             .21
                                                      ======           ====           ====             ===

Diluted weighted average shares                       11,695         11,986         12,495          15,580
                                                      ======         ======         ======          ======
</TABLE>

The gross  profit  margin  from  quarter to quarter is affected by the change in
product mix. Income from  continuing  operations in the fourth quarter of fiscal
2002 was favorably  affected by the lower  effective  income tax rate due to the
recognition of the tax benefit  attributable to extra territorial income,  which
was offset by litigation costs (See Item. 3 "Legal Proceedings").


                                       18

<PAGE>



Liquidity and Capital Resources

As of August 3, 2003 and July 28, 2002,  working  capital was  $128,323,000  and
$129,012,000,   respectively,  and  the  ratio  of  current  assets  to  current
liabilities was 7.8 to 1 and 9.5 to 1, respectively.

As is customary  in the defense  industry,  inventory  is partially  financed by
progress  payments.  In  addition,  it is  customary  for the Company to receive
advanced  payments from  customers on major  contracts at the time a contract is
entered  into.  The  unliquidated   balance  of  these  advanced   payments  was
approximately $856,000 at August 3, 2003, and $1,371,000 at July 28, 2002.

Net cash provided by continuing  operations  was  approximately  $14,567,000  in
fiscal 2003 as compared to $13,139,000 in 2002.  Significant items  contributing
to the sources of funds include income from operations of $18,239,000  (adjusted
for  depreciation  and  amortization),  a net  increase  in  deferred  taxes  of
$816,000,  and an  increase  in income  taxes of  $3,627,000.  Offsetting  these
sources of funds are  increases  in accounts  receivable  of  $2,039,000,  costs
incurred and income recognized in excess of billings on uncompleted contracts of
$1,258,000, and an increase in inventory of $3,846,000.

Net cash  used in  investing  activities  consists  of  $3,876,000  for  capital
expenditures, and $2,542,000 for the acquisition of EWST. The Company has a note
payable of  $1,500,000,  including  interest  at 1.8%,  in  connection  with the
acquisition of EWST payable in annual installments of $500,000 beginning October
1, 2003.

During the fiscal year ended August 3, 2003, the Company received  approximately
$1,994,000 from the exercise of common stock options by employees.

On May 30, 2003 the  Company  announced  an  expansion  of the stock  repurchase
program  initially  announced in October 2002 from  1,000,000 to an aggregate of
2,000,000  shares.  As of August 3, 2003,  the  Company  acquired  approximately
940,000  shares of common  stock  under  this  program at an  aggregate  cost of
approximately $14,668,000.

In June 2002, the Company entered into a new $50,000,000  Revolving  Credit Loan
Syndication agreement with two banks on an unsecured basis which may be used for
general  corporate  purposes,  including  business  acquisitions.  The revolving
credit  facility  requires the payment of interest  only on a monthly  basis and
payment of the  outstanding  principal  balance on January 31, 2005. The Company
may elect to borrow up to a maximum of  $5,000,000  with  interest  based on the
FOMC  Federal  Funds  Target  Rate plus a margin  of 1.50% to 1.80%,  or up to a
maximum of  $45,000,000  with interest  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,
ranging  from less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal
Funds  Target  Rate and the LIBOR  rate was 1.00% and  1.10%,  respectively,  at
August  3,  2003.  There is a fee of 15 basis  points  per  annum on the  unused
portion of the $45,000,000  LIBOR based portion of the credit  facility  payable
quarterly.  There were no borrowings  outstanding  as of August 3, 2003 and July
28, 2002.  During the fiscal year ended July 28, 2002, the Company  borrowed and
repaid  $4,300,000  under the credit facility for working  capital needs.  There
were no  borrowings  during  fiscal year 2003.  Stand-by  letters of credit were
outstanding in the amount of $12,454,000  under the credit facility at August 3,
2003.

The Company believes that presently anticipated future cash requirements will be
provided by internally  generated funds, its existing unsecured credit facility,
and the approximately $64,812,000 net proceeds from the sale of 3,000,000 shares
of common  stock to the  public on April 30,  2002 (See Note M of the  financial
statements). A significant portion of the Company's revenue for fiscal 2004 will
be generated from its existing backlog of sales orders. The backlog of orders at
August 3, 2003 was approximately $89,949,000. All orders included in 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 the  Company's  backlog,  the Company will be
required to rely more heavily on cash reserves and its existing  credit facility
to fund its  operations.  The  Company  is not  aware of any  events  which  are
reasonably likely to result in any cancellation of its government

                                       19

<PAGE>



contracts. The Company has $37,546,000 available under its bank credit facility,
net of outstanding stand-by letters of credit of $12,454,000,  and cash reserves
at August 3, 2003 of approximately $81,811,000.

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


      During                          Industrial
      fiscal               Mortgage     revenue       EWST
       year       Total      note        bonds        note   Other
       ----       -----      ----        -----        ----   -----
       2004     $  686    $    86     $   100      $   500   $ -
       2005        698         93         105          500     -
       2006        711        101         110          500     -
       2007        223        108         115           -      -
       2008        236        116         120           -      -
      Future     4,535      2,106       2,355           -      74
                 -----      -----       -----        -----     --
               $ 7,089    $ 2,610     $ 2,905      $ 1,500   $ 74
                 =====      =====       =====        =====     ==


Stand-by letters of credit expire as follows:

               During
               fiscal
                year             Amount
                ----             ------
                2004           $  7,365
                2005                211
                2006              1,930
                2007              2,948
                                 ------
                               $ 12,454
                                 ======

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

               During
               fiscal
                year             Amount
                ----             ------
                2004            $ 1,121
                2005              1,033
                2006                978
                2007                957
                2008                932
               Future             1,143

Critical Accounting Policies and Estimates

The  Company's  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 its
oversight  responsibilities,  management  continually evaluates the propriety of
its  accounting  methods  as new  events  occur.  Management  believes  that its
policies  are  applied in a manner  which is intended to provide the user of the
Company's financial statements a current,  accurate and complete presentation of
information in accordance with Generally Accepted  Accounting  Principles in the
United States of America. Important accounting practices that require the use of
assumptions and judgments are outlined below.

Revenue under certain  long-term,  fixed price contracts is recognized using the
percentage  of  completion  method of  accounting.  Revenue  recognized on these
contracts is based on estimated  completion to date (the total  contract  amount
multiplied by percent of performance,  based on total costs incurred in relation
to total  estimated  cost at  completion).  Contract  costs  include  all direct
material and labor costs and those indirect costs related

                                       20

<PAGE>



to contract  performance.  Risks and  uncertainties  inherent in the  estimation
process could affect the amounts reported in our financial  statements.  The key
assumptions  used in the estimate of costs to complete relate to labor costs and
indirect  costs  required to complete  the  contract.  The estimate of rates and
hours as well as the  application  of  overhead  costs is  reviewed on a regular
basis.  If our  business  conditions  were  different,  or if we used  different
assumptions in the  application  of this and other  accounting  policies,  it is
likely that  materially  different  amounts  would be reported on our  financial
statements.

Prospective  losses  on  contracts  are  based  upon the  anticipated  excess of
manufacturing  costs over the selling  price of the units to be delivered  under
the contract and are recorded when first reasonably determinable.  Actual losses
could differ from those  estimated due to changes in the ultimate  manufacturing
costs.

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.

Under the  non-amortization  approach in accounting  for goodwill under SFAS No.
142,  goodwill  is not  amortized  into  results of  operations  but  instead is
reviewed for impairment and written down and charged to results of operations in
the period in which the recorded  value of goodwill is more than its fair value.
An annual impairment test is performed in the fourth quarter of each fiscal year
and any impairment of goodwill is charged to operations.

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.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of  Financial  Accounting  Standards  ("SFAS")  No. 143,  "Accounting  for Asset
Retirement  Obligations."  SFAS  No.  143  addresses  financial  accounting  and
reporting for obligations  associated with the retirement of tangible long-lived
assets and the associated asset retirement  costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002.  Management adopted this standard on
July 29, 2002 and has  determined  that the adoption did not have a  significant
impact on the  financial  position,  results of  operations or cash flows of the
Company.

In August 2001,  the FASB issued SFAS No 144  "Accounting  for the Impairment or
Disposal  of  Long-Lived  Assets"  which  addresses  financial   accounting  and
reporting for the impairment of long-lived  assets and for long- lived assets to
be  disposed  of.  SFAS No 144  supersedes  SFAS No.  121,  "Accounting  for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of,"
and retains the fundamental  provisions of Statement 121 for (a) recognition and
measurement of the  impairment of long-lived  assets to be held and used and (b)
measurement  of  long-lived  assets  to be  disposed  of by sale.  SFAS 144 also
supersedes  the  accounting  and  reporting  provisions  of APB  Opinion No. 30,
"Reporting  the Results of  Operations -- Reporting the Effects of Disposal of a
Segment of a Business,  and  Extraordinary,  Unusual and Infrequently  Occurring
Events and  Transactions,"  for  segments of a business  to be disposed  of, but
retains  the  requirement  of  Opinion  30  to  report  discontinued  operations
separately from continuing  operations and extends that reporting to a component
of an entity that either has been disposed of (by sale, by abandonment,  or in a
distribution  to owners) or is  classified as held for sale.  The  provisions of
this statement were adopted by the Company effective on July 30, 2001.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical  Corrections."
This statement is effective for fiscal years  beginning after May 15, 2002. SFAS
145 requires, among other things,  eliminating reporting debt extinguishments as
an extraordinary item in the income statement.  Management adopted this standard
on July 29, 2002 and has

                                       21

<PAGE>



determined that the adoption did not have a significant  impact on the financial
position, results of operations or cash flows of the Company.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities."  The statement is effective for fiscal years
beginning after December 31, 2002. SFAS No. 146 requires  companies to recognize
costs associated with exit or disposal  activities when they are incurred rather
than at the date of a commitment to an exit or disposal  plan.  Management  does
not believe the  adoption of this  standard  will have a material  impact on the
Company's financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness  of  Others"  ("FIN  45").  FIN  45  requires  the  recognition  of
liabilities  for guarantees  that are issued or modified  subsequent to December
31, 2002. The liabilities  should reflect the fair value,  at inception,  of the
guarantors'  obligations  to  stand  ready to  perform,  in the  event  that the
specified  triggering  events or  conditions  occur.  The  Company is  currently
evaluating the provisions of this  interpretation;  however, it does not believe
they will have a material  effect on the Company's  future results of operations
or financial condition.

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123."
The new statement is effective,  with respect to the transition provisions,  for
fiscal years ending after  December 15, 2002; and with respect to the disclosure
provisions,  for financial reports containing condensed financial statements for
interim  periods  beginning  after  December  15,  2002.  SFAS No. 148  provides
transition  alternatives  for  companies  adopting  the fair  value  recognition
provisions of FASB Statement No. 123 for stock-based employee compensation;  and
requires  the  pro  forma  disclosures  of SFAS  No.  123 in  interim  condensed
financial  statements for companies  continuing to rely on APB Opinion No. 25 as
if the provisions of SFAS No. 123 had been adopted.  The statement also requires
that the pro-forma disclosures of the impact on earnings and  earnings-per-share
be provided  in a tabular  format and  included  in the  Summary of  Significant
Accounting Policies or equivalent.

The effect of the  adoption of SFAS No. 148 was the  inclusion  of the  required
disclosures  in  the  Company's   condensed   consolidated   interim   financial
statements,  and the addition of a significant accounting policies note included
in this  Annual  Report  Form 10K for the year  ended  August  3, 2003 (See Note
A.14).

In January 2003, the Financial  Accounting  Standards Board ("FASB") issued FASB
Interpretation  No. 46,  "Consolidation  of  Variable  Interest  Entities."  The
Interpretation clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated  Financial  Statements,"  to certain  entities in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without  additional  subordinated  financial  support  from other  parties.  The
Interpretation  applies  immediately to variable interest entities created after
January 31, 2003, or in which the Company  obtains an interest  after that date.
The  Interpretation  is effective July 1, 2003 to variable  interest entities in
which the Company holds a variable  interest  acquired  before February 1, 2003.
The  Company  is in the  process  of  assessing  the  impact  of  adopting  this
Interpretation;  however,  it does not believe it will have a material effect on
its financial position or future results of operations.

In April  2003,  the FASB  issued  SFAS No. 149,  "Amendment  of  Statement  133
Derivative  Instruments  and  Hedging  Activities."  The  Statement  amends  and
clarifies  accounting for derivative  instruments,  including certain derivative
instruments  embedded  in other  contracts,  and for  hedging  activities  under
Statement 133. The Statement is effective for contracts entered into or modified
after  June 30,  2003,  except as stated  below  and for  hedging  relationships
designated after June 30, 2003.

The  provisions  of Statement  149 that relate to Statement  133  implementation
issues that have been effective for fiscal quarters that began prior to June 15,
2003, will continue to be applied in accordance with their respective  effective
dates. In addition, certain provisions relating to forward purchases or sales of
when-issued  securities or other securities that do not yet exist, will apply to
existing  contracts,  as well as new contracts entered into after June 30, 2003.
Management  has  determined  that the adoption of this Statement will not have a
significant

                                       22

<PAGE>



impact on the  financial  position,  results of  operations or cash flows of the
Company.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity." The Statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities  and  equity.  It  requires  that an  issuer  classify  a  financial
instrument  that is  within  its  scope  as a  liability  (or an  asset  in some
circumstances)  because that financial  instrument embodies an obligation of the
issuer.  Many of such  instruments  were  previously  classified as equity.  The
statement is effective for financial  instruments entered into or modified after
May 31, 2003,  and  otherwise is effective at the beginning of the first interim
period  beginning  after  June  15,  2003,  except  for  mandatorily  redeemable
financial instruments of nonpublic entities.  The Statement is to be implemented
by reporting  the  cumulative  effect of a change in  accounting  principle  for
financial  instruments  created before the issuance of the date of the Statement
and  still  existing  at  the  beginning  of the  interim  period  of  adoption.
Restatement  is not  permitted.  Management  believes  that the adoption of this
Statement will not have a significant impact on the financial position,  results
of operations or cash flows of the Company.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to market risk associated with changes in interest rates,
and foreign currency exchange.  The Company has not entered into any market risk
sensitive instruments for trading purposes.

In October  2001,  the Company  entered  into an interest  rate swap with a bank
pursuant to which it exchanged  floating rate  interest in  connection  with the
Bonds  discussed in Note H of the financial  statements 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 this 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 approximately $74,000 as of August 3, 2003. There was no
material  hedge  ineffectiveness  related to cash flow hedges  during the fiscal
years  presented  to be  recognized  in  earnings.  There  was no  gain  or loss
reclassified  from accumulated other  comprehensive  income into earnings during
the fiscal year ended August 3, 2003 as a result of the discontinuance of a cash
flow hedge due to the  probability of the original  forecasted  transaction  not
occurring.

The Company also has a $50,000,000  Revolving Credit Loan Syndication  agreement
with two banks on an  unsecured  basis which may be used for  general  corporate
purposes,  including  business  acquisitions.   The  revolving  credit  facility
requires  the  payment of  interest  only on a monthly  basis and payment of the
outstanding  principal  balance on January  31,  2005.  The Company may elect to
borrow up to a maximum of  $5,000,000  with  interest  based on the FOMC Federal
Funds  Target  Rate  plus a margin  of 1.50% to  1.80%,  or up to a  maximum  of
$45,000,000  with interest  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,  ranging from
less than .40 to 1.0, to greater than 1.0 to 1.0. The FOMC Federal  Funds Target
Rate and the LIBOR  rate was 1.00% and 1.10%,  respectively,  at August 3, 2003.
The credit line is reviewed on an annual basis.

Since the  acquisitions  of GMC and EWST, the Company is subject to movements in
foreign currency rate changes related to the Company's  operations in Israel and
in England.

The Company does not anticipate any other material changes in its primary market
risk exposures in fiscal 2004.



                                       23

<PAGE>



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

           Fiscal year ending:          Bonds
           ------------------           -----
              2004                    $  100
              2005                       105
              2006                       110
              2007                       115
              2008                       120
              2009 and later           2,355
                                       -----
                                      $2,905
                                       =====
            Fair value                $2,905
                                       =====

The  Company  does not  consider  the market risk  exposure  relating to foreign
currency exchange or interest rates to be material.

There were no borrowings  outstanding  under the revolving credit facility as of
August 3, 2003.

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

(a) Evaluation of Disclosure Controls and Procedures.

       The Company,  under the  supervision  and with the  participation  of its
       management,  including the Registrant's principal executive officer (Vice
       Chairman of the Board/Chief  Executive  Officer) and principal  financial
       officer (Vice President  Finance/Chief  Financial Officer), has evaluated
       the effectiveness of the Company's disclosure controls and procedures (as
       such  term is  defined  in Rules  13a-  15(e)  and  15d-15(e)  under  the
       Securities  Exchange Act of 1934, as amended (the "Exchange  Act")) as of
       August 3, 2003 (the "Evaluation  Date").  Based on such  evaluation,  the
       principal  executive  officer and the  principal  financial  officer have
       concluded  that, as of the  Evaluation  Date,  the  Company's  disclosure
       controls and  procedures are  effective,  and are reasonably  designed to
       ensure that all material  information  relating to the Company (including
       its consolidated  subsidiaries)  required to be included in the Company's
       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.

(b) Changes in Internal Control Over Financial Reporting.

       During the  quarter  ended  August 3, 2003,  there were no changes in the
       Company's  internal  control over  financial  reporting  that  materially
       affected,  or are reasonably likely to materially  affect,  such internal
       control over financial reporting.



                                       24

<PAGE>



PART III

The  information  required  by Part  III is  incorporated  by  reference  to the
Company's  definitive  proxy  statement in connection with its Annual Meeting of
Stockholders  scheduled  to be  held in  January  2004,  to be  filed  with  the
Securities  and Exchange  Commission  within 120 days  following  the end of the
Company's fiscal year ended August 3, 2003.

                                       25

<PAGE>



PART IV

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

(a)  Exhibits
      3.1   Certificate of  Incorporation,  as amended (Exhibit 3(a) of Form S-1
            Registration Statement No. 2- 87160).
      3.2   By-Laws,  as amended August 7, 2001 (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 Loan Agreement  dated June 19, 2002 among the  Registrant,  Allfirst
            Bank and Fulton Bank.  (Exhibit  10.10 of Annual Report on Form 10-K
            for the fiscal year ended July 28, 2002).
      10.12 Amendment  (dated May 2, 2003) to Loan Agreement dated June 19, 2002
            among the  Registrant,  Manufacturers  and  Traders  Trust  Company,
            successor in interest to Allfirst Bank, and Fulton Bank.
      10.13 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).
      10.14 Asset  Purchase  Agreement  dated as of  October  12,  2000  between
            Registrant and American  Microwave  Technology Inc. (Exhibit 10.1 of
            Form 10-Q dated December 12, 2000).
      10.15 Common Stock Purchase Agreement dated as of December 4, 2000 between
            Registrant  and  Terrasat,  Inc.  (Exhibit  10.2 of Form 10-Q  dated
            December 12, 2000).
      10.16 Lease  Agreement  dated  March 1, 2000  between  Registrant  and RSK
            Realty  LTD  (Exhibit  10.13 of  Annual  Report on Form 10-K for the
            fiscal year ended July 30, 2000).
      10.17 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).
      10.18 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).
      23.1  Consent of Deloitte & Touche LLP.
      31.1  Certification of Myron Levy pursuant to Rule 13a-14(a).
      31.2  Certification of Anello C. Garefino pursuant to Rule 13a-14(a).
      32.1  Certification of Myron Levy pursuant to 18 U.S.C. Section 1350.
      32.2  Certification  of Anello C. Garefino  pursuant to 18 U.S.C.  Section
            1350.


                                       26

<PAGE>



(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 29.

(c)  Reports on Form 8-K

         During the fourth  quarter of fiscal  2003,  the  Registrant  filed the
         following report under Form 8-K:

         The  Company  filed a report  on June 9,  2003 in  connection  with the
         release of its financial  results for the third quarter and nine months
         ended May 4, 2003.

                                       27

<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 31, 2003.

                                  HERLEY  INDUSTRIES,  INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been  signed  below on  October  31,  2003 by the  following  persons in the
capacities indicated:


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

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

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

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

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

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

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

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

                                       28

<PAGE>

<TABLE>
<CAPTION>

Schedule II - Valuation and Qualifying Accounts (in thousands)

          Column A                 Column B                 Column C                  Column D        Column E
          --------                 --------                 --------                  --------        --------
                                                            Additions
                                                  ----------------------------         Amount
                                                                    Charged to         written
                                  Balance at      Charged to          other              off         Balance at
                                   beginning       costs and        accounts -         against         end of
          Description              of period       expenses          describe          reserve         period
          -----------             ----------      ----------        ----------         -------       ----------

Valuation accounts deducted from assets to which they apply:

<S>                                <C>               <C>              <C>              <C>              <C>
       August 3, 2003:
          Inventory                $ 2,407           $ 526            $  -             $ 194            $ 2,739

       July 28, 2002:
          Inventory                $ 2,205           $ 202            $  -             $  -             $ 2,407

       July 29, 2001:
          Inventory                $ 1,891           $ 515            $ 153 (1)        $ 354            $ 2,205

<FN>
(1) Reserve established in connection with the acquisition of AMT.
</FN>
</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.

                                       29

<PAGE>

Item 8. Financial Statements and Supplementary Data


                             HERLEY INDUSTRIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page
                                                                            ----

INDEPENDENT AUDITORS' REPORT                                                F-2

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                    F-3

FINANCIAL STATEMENTS:

     Consolidated Balance Sheets, August 3, 2003 and July 28, 2002          F-4

     Consolidated Statements of Income for the 53 weeks ended
        August 3, 2003, and the 52 weeks ended July 28, 2002
        and July 29, 2001                                                   F-5

     Consolidated Statements of Shareholders' Equity for the 53 weeks
        ended August 3, 2003, and the 52 weeks ended July 28, 2002
        and July 29, 2001                                                   F-6

     Consolidated Statements of Cash Flows for the 53 weeks ended
        August 3, 2003, and the 52 weeks ended July 28, 2002
        and July 29, 2001                                                   F-7

     Notes to Consolidated Financial Statements                             F-8


















                                       F-1


<PAGE>




                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
  Herley Industries, Inc.

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Herley
Industries,  Inc. and Subsidiaries ("the Company") as of August 3, 2003 and July
28,  2002,  and the related  consolidated  statements  of income,  shareholders'
equity,  and cash flows for the years then ended.  Our audit also  included  the
financial statement schedule listed in the Index at Item 15 as it relates to the
years  ended  August 3, 2003 and July 28,  2002.  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
financial  statements and financial  statement  schedule based on our audit. The
financial  statements  of the  Company  for the year  ended  July 29,  2001 were
audited by other auditors who have ceased  operations.  Those auditors expressed
an  unqualified  opinion on those  financial  statements  in their  report dated
October 3, 2001,  except  with  respect to  disclosures  regarding  discontinued
operations,  now  included in Note Q to the  financial  statements,  as to which
their report was dated March 1, 2002.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company as of August 3, 2003
and July 28, 2002, and the results of their  operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States of America.  Also, in our opinion, such financial statement
schedule as it relates to the years ended August 3, 2003 and July 28, 2002, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly in all  material  respects  the  information  set forth
therein.

As discussed in Note A to the  consolidated  financial  statements,  in 2002 the
Company  changed its method of accounting for goodwill by adopting  Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."


/s/ DELOITTE & TOUCHE LLP

October 24, 2003
Baltimore, Maryland








                                       F-2


<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Herley Industries, Inc.

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

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Herley
Industries, Inc. and Subsidiaries as of July 30, 2000 and July 29, 2001, and the
consolidated  results of their  operations and their cash flows for the 52 weeks
ended  August  1,  1999,  July 30,  2000 and July 29,  2001 in  conformity  with
accounting principles generally accepted in the United States.



/s/ ARTHUR ANDERSEN LLP

Lancaster, PA

October 3, 2001 (except  with respect to the matters  discussed in Note P, as to
which the date is March 1, 2002.)

NOTE - This  report  represents  a copy  of  the  predecessor  auditor's  report
included in the Company's  Form S-3 dated April 4, 2002 and does not represent a
reissuance  of the  report.  Note  P, as  identified  in the  auditor's  report,
represents the Company's previous disclosure regarding  discontinued  operations
which is included in Note Q of the current notes to the  consolidated  financial
statements.










                                       F-3


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

<TABLE>
<CAPTION>
                                                                                       August 3,     July 28,
                                                                                         2003         2002
                                                                                       --------     --------

                                     ASSETS
Current Assets:
<S>                                                                                   <C>          <C>
               Cash and cash equivalents                                              $  81,523    $  86,210
               Accounts receivable                                                       16,525       14,486
               Costs incurred and income recognized in excess
                  of billings on uncompleted contracts                                    6,960        6,882
               Other receivables                                                            827          274
               Inventories, net of allowance of $2,739 in 2003
                 and $2,407 in 2002                                                      37,545       33,371
               Prepaid income taxes                                                           -          382
               Deferred taxes and other                                                   3,207        2,670
                                                                                       --------     --------
                        Total Current Assets                                            146,587      144,275
Property, Plant and Equipment, net                                                       22,406       22,231
Goodwill                                                                                 25,729       21,665
Intangibles, net of accumulated amortization of $403 in 2003
               and $145 in 2002                                                           1,542          423
Available-For-Sale Securities                                                                75           46
Other Investments                                                                           162          195
Other Assets                                                                              1,063        1,367
                                                                                       --------     --------
                                                                                      $ 197,564    $ 190,202
                                                                                       ========     ========
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
               Current portion of long-term debt                                      $     686    $     215
               Accounts payable and accrued expenses                                     14,026       12,857
               Income taxes payable                                                       2,670            -
               Reserve for contract losses                                                  736          820
               Advance payments on contracts                                                856        1,371
                                                                                       --------     --------
                        Total Current Liabilities                                        18,974       15,263
Long-term Debt                                                                            6,403        5,684
Deferred Income Taxes                                                                     4,945        3,897
                                                                                       --------     --------
                                                                                         30,322       24,844
                                                                                       --------     --------
Commitments and Contingencies
Shareholders' Equity:
               Common stock, $.10 par value; authorized
                 20,000,000 shares; issued and outstanding
                 13,969,151 in 2003 and 14,680,960 in 2002                                1,397        1,468
               Additional paid-in capital                                               104,551      116,579
               Retained earnings                                                         61,478       47,541
               Accumulated other comprehensive loss                                        (184)        (230)
                                                                                       --------     --------
                        Total Shareholders' Equity                                      167,242      165,358

                                                                                       --------     --------
                                                                                      $ 197,564    $ 190,202
                                                                                       ========     ========
</TABLE>

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

                                       F-4

<PAGE>


                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (In thousands, except per share data)

<TABLE>
<CAPTION>

                                                                                 52 weeks ended
                                                              53 weeks ended     --------------
                                                                 August 3,     July 28,    July 29,
                                                                   2003         2002        2001
                                                                 --------     --------    --------

<S>                                                             <C>          <C>         <C>
Net sales                                                       $ 110,223    $  92,881   $  76,494
                                                                 --------     --------    --------

Cost and expenses:
          Cost of products sold                                    73,222       61,947      50,691
          Selling and administrative expenses                      16,187       13,229      14,545
          Litigation costs                                          1,147        2,079         265
          Plant closing costs                                        -             406        -
                                                                 --------     --------    --------
                                                                   90,556       77,661      65,501
                                                                 --------     --------    --------

          Income from operations                                   19,667       15,220      10,993
Other income, net                                                     769          386         447
                                                                 --------     --------    --------

          Income from continuing operations
              before income taxes                                  20,436       15,606      11,440
Provision for income taxes                                          6,499        4,876       3,867
                                                                 --------     --------    --------

          Income from continuing operations                        13,937       10,730       7,573
Loss from discontinued operations
  (including net loss on sale of $1,166)
  net of income tax benefit                                          -            (921)       (168)
                                                                 --------     --------    --------
          Income before cumulative effect of change
            in accounting principle                                13,937        9,809       7,405
Cumulative effect of adopting SFAS 142                                -         (4,637)       -
                                                                 --------     --------    --------

          Net income                                            $  13,937    $   5,172   $   7,405
                                                                 ========     ========    ========

Earnings (loss) per common share - Basic
          Income from continuing operations                         $ .97        $ .89       $ .75
          Loss from discontinued operations                            -          (.08)       (.02)
          Cumulative effect of adopting SFAS 142                       -          (.39)         -
                                                                      ---          ---         ---
             Net earnings                                           $ .97        $ .43       $ .73
                                                                      ===          ===         ===

          Basic weighted average shares                            14,317       12,041      10,082
                                                                   ======       ======      ======

Earnings (loss) per common share - Diluted
          Income from continuing operations                         $ .93        $ .83       $ .69
          Loss from discontinued operations                            -          (.07)       (.02)
          Cumulative effect of adopting SFAS 142                       -          (.36)         -
                                                                      ---          ---         ---
             Net earnings                                           $ .93        $ .40       $ .68
                                                                      ===          ===         ===

          Diluted weighted average shares                          15,031       12,978      10,956
                                                                   ======       ======      ======
</TABLE>

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


                                       F-5

<PAGE>

<TABLE>
<CAPTION>


                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 53 weeks ended August 3, 2003, and the 52 weeks ended July 28, 2002 and July 29, 2001
                        (In thousands except share data)

                                                                                                              Accumulated
                                                        Common Stock    Additional                               Other
                                                        ------------     Paid-in     Retained    Treasury    Comprehensive
                                                   Shares      Amount    Capital     Earnings     Stock          Loss       Total
                                                   ------      ------    -------     --------     -----          ----       -----
<S>                                               <C>         <C>        <C>         <C>         <C>         <C>        <C>
Balance at July 30, 2000                          5,993,870   $   599    29,808      34,964        -             -      $  65,371

Net income                                                                            7,405                                 7,405
Exercise of warrants issued in
  connection with business acquired
   in 1999                                          946,349        95    14,664                                            14,759
Exercise of stock options
  and warrants                                       94,134        10     1,239                                             1,249
Tax benefit upon exercise of stock
  options                                                83                  83
Purchase of 10,800 shares
  of treasury stock                                                                                (194)                     (194)
Retirement of treasury shares                       (10,800)       (1)     (193)                    194                       -
Three-for-two stock split                         3,513,736       351      (351)                                              -

                                                 ----------     -----   -------      ------      ------         ---        ------
Balance at July 29, 2001                         10,537,289   $ 1,054    45,250      42,369        -             -      $  88,673

Net income                                                                            5,172                                 5,172
Net proceeds of public offering
  of 3,000,000 shares of common stock             3,000,000       300    64,512                                            64,812
Exercise of stock options
  and warrants                                    1,143,671       178    11,832                 (11,873)                      137
Tax benefit upon exercise of stock
  options                                                                 6,794                                             6,794
Retirement of treasury shares                                     (64)  (11,809)                 11,873                       -
Other comprehensive loss, net of tax:
    Unrealized loss from
        available-for-sale securities                                                                          (66)           (66)
   Unrealized loss on interest rate swap                                                                       (97)           (97)
   Foreign currency translation loss                                                                           (67)           (67)

                                                 ----------     -----   -------      ------      ------        ---        -------

Balance at July 28, 2002                         14,680,960   $ 1,468   116,579      47,541        -          (230)     $ 165,358

Net income                                                                           13,937                                13,937
Exercise of stock options                           227,799        23     1,971                                             1,994
Tax benefit upon exercise of stock
  options                                                                   575                                               575
Purchase of 939,608 shares of treasury stock                                                    (14,668)                  (14,668)
Retirement of treasury shares                      (939,608)      (94)  (14,574)                 14,668                       -
Other comprehensive income (loss) net of tax:
    Unrealized gain on
        available-for-sale securities                                                                           18             18
   Unrealized gain on interest rate swap                                                                        47             47
   Foreign currency translation (loss)                                                                         (19)           (19)

                                                 ----------     -----   -------      ------      ------        ---        -------
Balance at August 3, 2003                        13,969,151   $ 1,397   104,551      61,478        -          (184)     $ 167,242
                                                 ==========     =====   =======      ======      ======        ===        =======
</TABLE>


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




                                       F-6

<PAGE>



                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                        52 weeks ended
                                                                                 53 weeks ended         --------------
                                                                                     August 3,       July 28,    July 29,
                                                                                       2003            2002        2001
                                                                                       ----            ----        ----
<S>                                                                                 <C>             <C>         <C>
Cash flows from operating activities:
        Income from continuing operations                                           $ 13,937        $ 10,730    $  7,573
                                                                                      ------          ------      ------
        Adjustments to reconcile net income to net cash provided by operations:
               Depreciation and amortization                                           4,302           3,917       4,772
               (Gain) loss  on sale of fixed assets                                      (17)             45           4
               Equity in income of limited partnership                                   (16)            (48)        (49)
               (Increase) decrease in deferred tax assets                               (232)           (712)        962
               Increase (decrease) in deferred tax liabilities                         1,048            (471)     (1,119)
               Changes in operating assets and liabilities:
                     (Increase) decrease in accounts receivable                       (2,039)          1,583        (547)
                     (Increase) in costs incurred and income
                        recognized in excess of billings on
                        uncompleted contracts                                         (1,258)         (6,341)       (395)
                     (Increase) decrease in other receivables                           (380)             (2)        133
                     (Increase) in inventories                                        (3,846)         (1,974)     (6,880)
                     Decrease in prepaid expenses and other                              (52)           -             25
                     Increase in accounts payable
                       and accrued expenses                                              491             429       1,088
                     (Decrease) increase in billings in excess of
                       costs incurred and income recognized
                       on uncompleted contracts                                         -               (531)        531
                     Increase (decrease) in income taxes payable                       3,627           5,351        (281)
                     (Decrease) increase in reserve for contract losses                 (668)            348      (1,201)
                     (Decrease) increase in advance payments on contracts               (515)          1,110        (745)
                     Other, net                                                          185            (295)        (13)
                                                                                      ------          ------      ------
                            Total adjustments                                            630           2,409      (3,715)
                                                                                      ------          ------      ------

               Net cash provided by continuing operations                             14,567          13,139       3,858
                                                                                      ------          ------      ------

Cash flows from investing activities:
        Acquisition of businesses, net of cash acquired                               (2,542)           -         (8,373)
        Payment of deferred purchase price of acquired business                         -             (3,000)       -
        Investment in technology license                                                -               (500)       -
        Proceeds from sale of fixed assets                                                25              85          16
        Partial distribution from limited partnership                                     49             626         296
        Capital expenditures                                                          (3,876)         (5,488)     (3,679)
                                                                                      ------          ------      ------
               Net cash used in investing activities                                  (6,344)         (8,277)    (11,740)
                                                                                      ------          ------      ------

Cash flows from financing activities:
        Borrowings under bank line of credit                                            -              4,300       7,100
        Proceeds from industrial revenue bond financing                                 -              3,000        -
        Net proceeds from public offering of common stock                               -             64,812        -
        Proceeds from exercise of stock options and warrants, net                      1,994           3,984      16,008
        Payments under lines of credit                                                  -             (4,300)     (7,100)
        Payments of long-term debt                                                      (236)           (201)       (908)
        Purchase of treasury stock                                                   (14,668)         (3,847)       (194)
                                                                                      ------          ------      ------
               Net cash provided by (used in) financing activities                   (12,910)         67,748      14,906
                                                                                      ------          ------      ------

Net cash provided by (used in) discontinued operations                                  -                559      (1,648)
                                                                                      ------          ------      ------

               Net increase in cash and cash equivalents                              (4,687)         73,169       5,376

Cash and cash equivalents at beginning of period                                      86,210          13,041       7,665
                                                                                      ------          ------      ------
Cash and cash equivalents at end of period                                          $ 81,523        $ 86,210    $ 13,041
                                                                                      ======          ======      ======

Supplemental cash flow information:
        Cashless exercise of stock options                                          $   -           $  8,026    $   -
                                                                                      ======          ======      ======
        Tax benefit related to stock options                                        $    575        $  6,794    $     83
                                                                                      ======          ======      ======
</TABLE>

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

                                       F-7

<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.   Nature of Operations

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

2.   Fiscal Year

     The Company's  fiscal year ends on the Sunday closest to July 31.  Normally
     each  fiscal  year  consists  of 52 weeks,  but every five or six years the
     fiscal  year will  consist of 53 weeks.  Fiscal year 2003  consisted  of 53
     weeks and all other fiscal years presented consisted of 52 weeks.

3.   Basis of Financial Statement Presentation

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

4.   Cash and Cash Equivalents

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

5.   Concentration of Credit Risk

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

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.

                                       F-8

<PAGE>



7.   Property, Plant and Equipment

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

8.   Goodwill and Other Intangible Assets

     The Company  adopted the  provisions  of SFAS No. 142  "Goodwill  and Other
     Intangible  Assets" on July 30,  2001.  SFAS No. 142  requires the use of a
     non-amortization  approach to account for  purchased  goodwill  and certain
     intangibles.  Under  a  non-amortization  approach,  goodwill  and  certain
     intangibles  are not amortized into results of operations,  but instead are
     reviewed  for  impairment  and  written  down and  charged  to  results  of
     operations  in the  periods in which the  recorded  value of  goodwill  and
     certain  intangibles  is more than its fair  value.  The  adoption  of SFAS
     No.142  resulted in the Company's  discontinuation  of  amortization of its
     goodwill and certain  intangible assets. The Company was required to assess
     its goodwill  for  impairment  under the new standard  within six months of
     adoption and completed its assessment in the second quarter of fiscal 2002.
     The Company  operates as a single  integrated  business and as such has one
     operating  segment which is also the reportable  segment as defined in SFAS
     131.  Within  the  operating  segment,   the  Company  has  identified  two
     components  as  reporting   units  as  defined  under  SFAS  142,   defense
     electronics  and  commercial  technologies.   The  Company  determined  the
     carrying value of each reporting unit by assigning  assets and liabilities,
     including the existing  goodwill and intangible  assets, to those reporting
     units as of July 30, 2001.  The Company  determined  that an  impairment of
     goodwill  in the  commercial  technologies  unit  had  occurred  due to the
     overcapacity in the telecom industry and deteriorating economic conditions.
     Accordingly,  a  transition  adjustment  in the  amount of  $4,637,000  was
     recorded  as of July  30,  2001  as a  cumulative  effect  of a  change  in
     accounting  principle.   There  is  no  tax  benefit  associated  with  the
     adjustment  since the impaired  goodwill is not  deductible  for income tax
     purposes.

     The change in the carrying amount of goodwill, based upon the fair value of
     assets acquired and liabilities  assumed related to the acquisition of EWST
     (See  Note  B),  for the  year  ended  August  3,  2003 is as  follows  (in
     thousands):

                 Balance at July 28, 2002                     $ 21,665
                 Goodwill acquired during period                 4,064
                                                                ------
                 Balance at August 3, 2003                    $ 25,729
                                                                ======

     An annual impairment test is performed in the fourth quarter of each fiscal
     year and any future  impairment of goodwill will be charged to  operations.
     There was no  impairment  in  goodwill  at August 3, 2003  based on current
     market capitalization of the Company.

     Amortization of goodwill charged to continuing operations for the fifty-two
     weeks ended July 29, 2001 was  approximately  $1,296,000.  Amortization  of
     goodwill  charged to discontinued  operations for the fifty-two weeks ended
     July 29, 2001 was approximately  $208,000. Pro forma income from continuing
     operations  and net income and  earnings per share in  connection  with the
     adoption of SFAS 142 is as follows (in thousands except per share data):




                                       F-9

<PAGE>

<TABLE>
<CAPTION>


     Income from continuing operations:

                                                      53 weeks        Fifty-two weeks ended
                                                        ended        -----------------------
                                                      August 3,      July 28,       July 29,
                                                        2003           2002           2001
                                                        ----           ----           ----
<S>                                                  <C>             <C>            <C>
       Income from continuing operations
         as reported                                 $  13,937       $ 10,730       $   7,573
       Add goodwill amortization, net of
         income tax benefit                               -              -                850
                                                        ------         ------           -----
           Adjusted  income from continuing
               operations                            $  13,937       $ 10,730       $   8,423
                                                        ======         ======           =====

       Earnings per common share-basic:
          From continuing operations as reported     $     .97       $    .89       $     .75
          Goodwill amortization                             -              -              .08
                                                           ---            ---             ---
            Adjusted                                 $     .97       $    .89       $     .83
                                                           ===            ===             ===

       Earnings per common share-diluted:
          From continuing operations as reported     $     .93       $    .83       $     .69
          Goodwill amortization                             -              -              .08
                                                           ---            ---             ---
            Adjusted                                 $     .93       $    .83       $     .77
                                                           ===            ===             ===
</TABLE>

<TABLE>
<CAPTION>
     Net income :

                                                      53 weeks        Fifty-two weeks ended
                                                       ended          ---------------------
                                                      August 3,      July 28,       July 29,
                                                        2003           2002           2001
                                                        ----           ----           ----

<S>                                                  <C>             <C>            <C>
       Net income as reported                        $  13,937       $  5,172       $   7,405
       Add goodwill amortization, net of
          income tax benefit                              -              -                987
                                                        ------          -----           -----

            Adjusted net income                      $  13,937       $  5,172       $   8,392
                                                        ======          =====           =====

       Earnings per common share-basic:
          As reported                                $     .97       $    .43       $     .73
          Goodwill amortization                             -              -              .10
                                                           ---            ---             ---
            Adjusted                                 $     .97       $    .43       $     .83
                                                           ===            ===             ===

       Earnings per common share-diluted:
          As reported                                $     .93       $    .40       $     .68
          Goodwill amortization                             -              -              .09
                                                           ---            ---             ---
            Adjusted                                 $     .93       $    .40       $     .77
                                                           ===            ===             ===
</TABLE>



                                      F-10

<PAGE>



     Intangibles consist of the following (in thousands):

                                          August 3,    July 28,     Estimated
                                            2003         2002      useful life
                                            ----         ----      -----------

         Technology (1)                  $ 1,021        $  -        15 years
         Backlog (1)                         325           -         2 years
         Non-compete (1)                      31           -         5 years
         Patents                             568          568       14 years
                                           -----          ---
                                           1,945          568
         Accumulated amortization            403          145
                                           -----          ---
                                         $ 1,542        $ 423
                                           =====          ===
---------
 (1) Related to the acquisition of EWST (See Note B.)

     Amortization  expense for the  fifty-three and fifty-two weeks ended August
     3,  2003  and  July 28,  2002,  was  approximately  $258,000  and  $41,000,
     respectively.

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

                                    2004        $ 277
                                    2005          129
                                    2006          116
                                    2007          115
                                    2008          109

     The carrying amount of intangibles is evaluated on a recurring basis.

9.   Marketable Securities

     The Company  accounts  for its  investments  in  marketable  securities  in
     accordance  with  Statement  of  Financial  Accounting  Standards  No. 115,
     "Accounting  for  Certain  Investments  in  Debt  and  Equity  Securities."
     Management determines the appropriate  classification of debt securities at
     the time of purchase and  reevaluates  such  designation as of each balance
     sheet date.  Debt  securities are classified as held-to-  maturity when the
     Company  has the  positive  intent and  ability to hold the  securities  to
     maturity.  Marketable  equity securities and debt securities not classified
     as     held-to-maturity     are    classified    as     available-for-sale.
     Available-for-sale  securities  are carried at fair  market  value with net
     unrealized  holding  gains or losses,  net of income  taxes,  reported as a
     separate component of other  comprehensive  loss. Realized gains and losses
     and  declines in value  judged to be  other-than-temporary  are included in
     other  income,  net. The cost of  securities  sold is based on the specific
     identification method. Interest and dividends on securities are included in
     other income, net.

10.  Other Investments

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

11.  Revenue and Cost Recognition

     Substantially  all  of  our  customer   contracts  are  firm,  fixed  price
     contracts,  providing for a predetermined fixed price for the products that
     we sell,  regardless of the costs we incur.  Under  fixed-price  contracts,
     revenue and related costs are recorded  primarily as  deliveries  are made.
     Certain costs under long-term,  fixed-price  contracts  (principally either
     directly  or  indirectly  with the U.S.  Government),  which  include  non-
     recurring  billable  engineering,   are  deferred  until  these  costs  are
     contractually billable. Revenue under

                                      F-11

<PAGE>



     certain long-term, fixed price contracts is recognized using the percentage
     of completion method of accounting.  Revenue  recognized on these contracts
     is based  on  estimated  completion  to date  (the  total  contract  amount
     multiplied  by percent of  performance,  based on total  costs  incurred in
     relation to total  estimated  cost at  completion).  Prospective  losses on
     long-term  contracts are based upon the anticipated excess of inventoriable
     manufacturing  costs over the selling  price of the  remaining  units to be
     delivered  and are recorded 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
     $3,083,000,  $2,269,000,  and  $2,588,000 in fiscal 2003,  2002,  and 2001,
     respectively, and are included in cost of products sold.

13.  Income Taxes

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

14.  Stock-Based Compensation

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

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
     Compensation-Transition  and Disclosure, an amendment of FASB Statement No.
     123." The new  statement  is  effective,  with  respect  to the  transition
     provisions,  for fiscal  years ending  after  December  15, 2002;  and with
     respect to the  disclosure  provisions,  for financial  reports  containing
     condensed financial statements for interim periods beginning after December
     15,  2002.  SFAS No. 148 provides  transition  alternatives  for  companies
     adopting the fair value  recognition  provisions of FASB  Statement No. 123
     for  stock-based  employee  compensation;  and requires  that the pro-forma
     disclosures of the impact on earnings and earnings- per-share for companies
     continuing  to rely on APB No.  25 be  provided  in a  tabular  format  and
     included in the Summary of Significant Accounting Policies or equivalent as
     if the provisions of SFAS No. 123 had been adopted.

     The  effect  of the  adoption  of SFAS  No.  148 was the  inclusion  of the
     required  disclosures  in  the  Company's  condensed  consolidated  interim
     financial statements,  and the addition of the following information in the
     significant accounting policies note for the year ended August 3, 2003.

                                      F-12

<PAGE>



     The Company has various fixed option plans which  reserve  shares of common
     stock for issuance to executives,  key employees and directors. The Company
     continues  to use  the  intrinsic  value  method  in  accordance  with  the
     recognition  and  measurement  principles of APB Opinion No. 25 and related
     Interpretations  in  accounting  for these  plans.  Statement  of Financial
     Accounting  Standards  No.123,  "Accounting for  Stock-Based  Compensation"
     ("SFAS 123") was issued by the FASB in 1995 and , if fully adopted, changes
     the  methods  for  recognition  of cost on  plans  similar  to those of the
     Company. The Company has adopted the disclosure-only provisions of SFAS 123
     and SFAS 148.  Accordingly,  no stock- based employee compensation cost has
     been recognized for options granted under the stock option plans. Pro forma
     information  regarding  net income and  earnings  per share as  required by
     Statements 123 and 148 has been  determined as if the Company had accounted
     for its  employee  stock  options  under the fair value method of Statement
     123.

     The fair value for options  granted is estimated at the date of grant using
     a Black-Scholes  option pricing model. The  Black-Scholes  option valuation
     model was developed for use in estimating  the fair value of traded options
     which have no vesting restrictions and are fully transferable. In addition,
     option valuation models require the input of highly subjective  assumptions
     including the expected stock price volatility.

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

                                     53 weeks       Fifty-two weeks ended
                                       ended        ---------------------
                                     August 3,      July 28,     July 29,
                                       2003           2002         2001
                                       ----           ----         ----
       Expected life of options     1.51 years      1.51 years   .73 years
       Volatility                   .68             .68          .70
       Risk-free interest rate      2.8%            2.8%         3.4%
       Dividend yield               zero            zero         zero

     Had compensation cost for stock options granted in fiscal years 2003, 2002,
     and  2001  been  determined  based  on the fair  value  at the  grant  date
     consistent  with the  provisions  of SFAS 123, the Company's net income and
     earnings  per share  would  have  been  reduced  to the pro  forma  amounts
     indicated  below using the  statutory  income tax rate of 34% (in thousands
     except per share data):

                                                    2003       2002       2001
                                                    ----       ----       ----
       Net income  -  as reported                 $13,937     $5,172     $7,405
       Deduct: total stock-based employee
        compensation expense determined
        under fair value based method for all
        awards, net of related tax effects         (1,926)    (4,425)    (1,610)
                                                   ------      -----      -----
       Net income  -  pro forma                   $12,011     $  747     $5,795
                                                   ======      =====      =====

       Earnings per share  -  as reported
            Basic                                   $.97       $.43       $.73
            Diluted                                  .93        .40        .68
       Earnings per share  - pro forma
            Basic                                   $.84       $.06       $.57
            Diluted                                  .80        .06        .53

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



                                      F-13

<PAGE>



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  loss' in the  accompanying
     consolidated statements of shareholders' equity.

16.  Derivatives

     The Company  recognizes all derivatives on the 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.  New Accounting Pronouncements

     In June 2001, the Financial  Accounting  Standards  Board  ("FASB")  issued
     Statement of Financial  Accounting  Standards ("SFAS") No. 143, "Accounting
     for  Asset  Retirement  Obligations."  SFAS  No.  143  addresses  financial
     accounting and reporting for obligations  associated with the retirement of
     tangible long- lived assets and the associated asset retirement costs. SFAS
     No.  143 is  effective  for fiscal  years  beginning  after June 15,  2002.
     Management  adopted this standard on July 29, 2002 and has determined  that
     the adoption did not have a significant  impact on the financial  position,
     results of operations or cash flows of the Company.

     In August 2001, the FASB issued SFAS No 144  "Accounting for the Impairment
     or Disposal of Long-Lived Assets" which addresses financial  accounting and
     reporting for the impairment of long-lived assets and for long-lived assets
     to be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the
     Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed
     Of," and  retains  the  fundamental  provisions  of  Statement  121 for (a)
     recognition  and  measurement of the impairment of long- lived assets to be
     held and used and (b) measurement of long-lived assets to be disposed of by
     sale. SFAS 144 also  supersedes the accounting and reporting  provisions of
     APB Opinion No. 30,  "Reporting  the Results of Operations -- Reporting the
     Effects of Disposal of a Segment of a Business, and Extraordinary,  Unusual
     and  Infrequently  Occurring  Events and  Transactions,"  for segments of a
     business to be disposed  of, but retains the  requirement  of Opinion 30 to
     report discontinued  operations  separately from continuing  operations and
     extends  that  reporting  to a component  of an entity that either has been
     disposed of (by sale, by abandonment, or in a distribution to owners) or is
     classified as held for sale.  The provisions of this statement were adopted
     by the Company effective on July 30, 2001.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
     No. 4, 44, and 64,  Amendment  of FASB  Statement  No.  13,  and  Technical
     Corrections."  This statement is effective for fiscal years beginning after
     May 15, 2002. SFAS 145 requires, among other things,  eliminating reporting
     debt  extinguishments  as an  extraordinary  item in the income  statement.
     Management  adopted this standard on July 29, 2002 and has determined  that
     the adoption did not have a significant  impact on the financial  position,
     results of operations or cash flows of the Company.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
     Associated  with Exit or Disposal  Activities."  The statement is effective
     for fiscal years  beginning  after December 31, 2002. SFAS No. 146 requires
     companies to recognize costs  associated  with exit or disposal  activities
     when they are incurred

                                      F-14

<PAGE>



     rather  than at the  date of a  commitment  to an  exit or  disposal  plan.
     Management  does not believe  the  adoption  of this  standard  will have a
     material  impact  on  the  Company's   financial  position  or  results  of
     operations.

     In November  2002,  the FASB  issued  Interpretation  No. 45,  "Guarantor's
     Accounting and Disclosure  Requirements for Guarantees,  Including Indirect
     Guarantees  of  Indebtedness  of Others"  ("FIN 45").  FIN 45 requires  the
     recognition  of  liabilities  for  guarantees  that are issued or  modified
     subsequent to December 31, 2002.  The  liabilities  should reflect the fair
     value,  at  inception,  of the  guarantors'  obligations  to stand ready to
     perform,  in the event that the specified  triggering  events or conditions
     occur.  The  Company  is  currently   evaluating  the  provisions  of  this
     interpretation;  however,  it does not  believe  they will have a  material
     effect  on  the  Company's   future  results  of  operations  or  financial
     condition.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
     Compensation-Transition  and Disclosure, an amendment of FASB Statement No.
     123." The new  statement  is  effective,  with  respect  to the  transition
     provisions,  for fiscal  years ending  after  December  15, 2002;  and with
     respect to the  disclosure  provisions,  for financial  reports  containing
     condensed financial statements for interim periods beginning after December
     15,  2002.  SFAS No. 148 provides  transition  alternatives  for  companies
     adopting the fair value  recognition  provisions of FASB  Statement No. 123
     for  stock-based  employee   compensation;   and  requires  the  pro  forma
     disclosures of SFAS No. 123 in interim condensed  financial  statements for
     companies  continuing to rely on APB Opinion No. 25 as if the provisions of
     SFAS No. 123 had been  adopted.  The  statement  also requires that the pro
     forma  disclosures  of the impact on  earnings  and  earnings  per share be
     provided in a tabular  format and  included  in the Summary of  Significant
     Accounting Policies or equivalent.

     The  effect  of the  adoption  of SFAS  No.  148 was the  inclusion  of the
     required  disclosures  in  the  Company's  condensed  consolidated  interim
     financial  statements and the addition of the following  information in the
     significant accounting policies note for the year ended August 3, 2003.

     In January 2003, the Financial  Accounting  Standards Board ("FASB") issued
     FASB Interpretation No. 46,  "Consolidation of Variable Interest Entities."
     The  Interpretation   clarifies  the  application  of  Accounting  Research
     Bulletin No. 51, "Consolidated  Financial  Statements," to certain entities
     in  which  the  equity  investors  do not  have  the  characteristics  of a
     controlling financial interest or do not have sufficient equity at risk for
     the  entity to  finance  its  activities  without  additional  subordinated
     financial   support  from  other  parties.   The   Interpretation   applies
     immediately to variable  interest  entities created after January 31, 2003,
     or  in  which  the  Company  obtains  an  interest  after  that  date.  The
     Interpretation  is effective July 1, 2003 to variable  interest entities in
     which the Company holds a variable  interest  acquired  before  February 1,
     2003.  The  Company is in the process of  assessing  the impact of adopting
     this  Interpretation;  however, it does not believe it will have a material
     effect on its financial position or future results of operations.

     In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of Statement 133
     Derivative  Instruments and Hedging  Activities."  The Statement amends and
     clarifies   accounting  for  derivative   instruments,   including  certain
     derivative  instruments  embedded  in  other  contracts,  and  for  hedging
     activities  under  Statement  133. The Statement is effective for contracts
     entered into or modified  after June 30,  2003,  except as stated below and
     for hedging relationships designated after June 30, 2003.

     The provisions of Statement 149 that relate to Statement 133 implementation
     issues that have been  effective  for fiscal  quarters  that began prior to
     June 15,  2003,  will  continue  to be  applied  in  accordance  with their
     respective  effective dates. In addition,  certain  provisions  relating to
     forward  purchases or sales of when- issued  securities or other securities
     that do not yet exist,  will apply to  existing  contracts,  as well as new
     contracts entered into after June 30, 2003.  Management has determined that
     the adoption of this  Statement  will not have a significant  impact on the
     financial position, results of operations or cash flows of the Company.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial Instruments with

                                      F-15

<PAGE>



     Characteristics of both Liabilities and Equity." The Statement  establishes
     standards  for how an issuer  classifies  and measures in its  statement of
     financial  position certain financial  instruments with  characteristics of
     both  liabilities  and  equity.  It  requires  that an  issuer  classify  a
     financial  instrument  that is within its scope as a liability (or an asset
     in some  circumstances)  because  that  financial  instrument  embodies  an
     obligation  of  the  issuer.  Many  of  such  instruments  were  previously
     classified as equity. The statement is effective for financial  instruments
     entered into or modified  after May 31, 2003, and otherwise is effective at
     the beginning of the first interim  period  beginning  after June 15, 2003,
     except  for  mandatorily  redeemable  financial  instruments  of  nonpublic
     entities.  The Statement is to be  implemented  by reporting the cumulative
     effect  of a change  in  accounting  principle  for  financial  instruments
     created before the issuance of the date of the Statement and still existing
     at the  beginning  of the interim  period of adoption.  Restatement  is not
     permitted. Management believes that the adoption of this Statement will not
     have a significant impact on the financial position,  results of operations
     or cash flows of the Company.

NOTE B - ACQUISITIONS

     The Company  entered into an agreement as of September 1, 2002,  to acquire
     all of the issued and outstanding common stock of EW Simulation Technology,
     Limited ("EWST"),  a British company of Aldershot,  UK, which operates as a
     wholly-owned subsidiary of the Company. EWST designs, develops and produces
     electronic  warfare  simulator  systems for prime defense  contractors  and
     countries worldwide. The acquisition of EW Simulation Technology was driven
     by a two part strategic initiative:  a) to leverage the Company's microwave
     expertise  vertically into the  international  threat and jamming simulator
     markets, and b) to increase the amount of microwave content supplied by the
     Company on each  simulator  platform.  This  strategy is expected to expand
     international  revenues  from new sources and increase  content to existing
     customers.  The transaction,  which closed on September 20, 2002,  provides
     for  payment of  $3,000,000  in cash and a note for  $1,500,000,  including
     interest  at 1.8%  based on LIBOR at the date of  acquisition,  payable  in
     annual installments of $500,000.  The transaction has been 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 Company engaged an independent third party to complete
     a valuation of the intangible assets of EWST as of the acquisition date.

     The allocation of the aggregate  purchase price, based on a detailed review
     of the fair value of assets acquired and liabilities assumed, including the
     fair value appraisal of identified intangible assets is as follows:

                Aggregate purchase price                        $4,658
                                                                 =====

                Current assets                                  $1,407
                Furniture and equipment                            251
                Technology                                       1,021
                Backlog                                            325
                Non-compete                                         31
                Goodwill                                         4,064
                Current liabilities                             (2,441)

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

     The Company  entered into an  agreement,  as of January 3, 2000, to acquire
     substantially all of the assets of Robinson Laboratories,  Inc. ("Robinson"
     or "Robinson Labs"), a New Hampshire corporation, which

                                      F-16

<PAGE>



     operates as a division of Herley Industries,  Inc. The transaction provided
     for the payment of $6,000,000 in cash, the issuance of 50,762 (as adjusted)
     shares of Common Stock of the Company valued at $10.125 per share,  and the
     assumption of  approximately  $3,140,000 in liabilities.  In addition,  the
     agreement provided for the issuance of additional shares of Common Stock up
     to a maximum of 146,761  shares (as  adjusted)  based on new orders  booked
     through January 2001. The Company determined that new orders booked through
     January  2001 did not meet the earn out  provisions  of the Asset  Purchase
     Agreement (See Note F "Litigation"). The transaction has been accounted for
     under the purchase method.

NOTE C - INVENTORIES

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

                                                     August 3,      July 28,
                                                       2003           2002
                                                       ----           ----
           Purchased parts and raw materials         $19,690       $ 18,680
           Work in process                            18,646         15,707
           Finished products                           1,948          1,391
                                                     -------        -------
                                                      40,284         35,778
           Less reserve                                2,739          2,407
                                                     -------        -------
                                                    $ 37,545       $ 33,371
                                                      ======         ======

NOTE D - OTHER INVESTMENTS

     In July 1994, the Company  invested  $1,000,000  for a limited  partnership
     interest in M.D. Sass  Municipal  Finance  Partners-I,  a Delaware  limited
     partnership.  The objectives of the  partnership are the  preservation  and
     protection of its capital and the earning of income through the purchase of
     certificates  or other  documentation  that evidence liens for unpaid local
     taxes on parcels of real property.  At August 3, 2003 and July 28, 2002 the
     percentage of ownership was  approximately  10%. The Company's  interest in
     the partnership may be transferred to a substitute  limited  partner,  upon
     written notice to the managing  general  partners,  only with the unanimous
     consent of both  general  partners  at their sole  discretion.  The Company
     received partial  distributions of approximately  $49,000 and $626,000 from
     the Partnership in fiscal 2003 and 2002, respectively. As of August 3, 2003
     the  Company's  limited  partnership  interest  had  a  carrying  value  of
     $162,000, based on the equity method of accounting.

NOTE E - PROPERTY, PLANT AND EQUIPMENT

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

                                           August 3,   July 28,    Estimated
                                            2003         2002      Useful Life
                                            ----         ----      -----------
       Land                                $ 2,908    $  2,908
       Building and building
            improvements                     9,291       9,857    10-40 years
       Machinery and equipment              37,802      33,698     5- 8 years
       Furniture and fixtures                1,186       1,058     5-10 years
       Automobiles                            -             91        3 years
       Tools                                  -             25        5 years
       Leasehold improvements                1,385       1,589     5-10 years
                                           -------      ------
                                            52,572      49,226
       Less accumulated depreciation        30,166      26,995
                                            ------      ------
                                          $ 22,406    $ 22,231
                                            ======      ======

     Depreciation  charges  totaled  $3,944,000,  $3,776,000,  and $3,127,000 in
     fiscal 2003, 2002, and 2001, respectively.

                                      F-17

<PAGE>



NOTE F - COMMITMENTS AND CONTINGENCIES

     Leases

     The  Company  leases  office,  production  and  warehouse  space as well as
     computer equipment and automobiles under  noncancellable  operating leases.
     Rent expense for the 53 weeks ended August 3, 2003,  and the 52 weeks ended
     July 28, 2002 and July 29, 2001, was approximately $1,393,000,  $1,244,000,
     and $1,506,000,  respectively.  Minimum annual rentals under noncancellable
     operating leases are as follows (in thousands):

                                                            Amount
                                                            ------
                     Year ending fiscal 2004               $ 1,121
                                        2005                 1,033
                                        2006                   978
                                        2007                   957
                                        2008                   932
                                      Future                 1,143

     Employment Agreements

     The  Company has  employment  agreements  with  certain  executives  of the
     Company which expire December 31, 2008, subject to extension for additional
     one-year  periods  annually each January 1 with a final  expiration date of
     December 31, 2010. The agreements  provide for aggregate annual salaries as
     of August 3, 2003 of  $1,364,000  and  provide  for a  semi-annual  cost of
     living  adjustment  based on the consumer price index.  The agreements also
     provide for incentive  compensation at 7% in the aggregate of pretax income
     of the Company.  Incentive  compensation  in the amount of  $1,571,000  and
     $956,000   was   charged  to  expense  in  fiscal   years  2003  and  2002,
     respectively. The executives waived their incentive compensation for fiscal
     2001.

     The agreements also provide that, in the event there is a change in control
     of the Company, as defined, the executives have the option to terminate the
     agreements  and receive a lump-sum  payment  equal to the sum of the salary
     payable for the remainder of the employment  term,  plus the annual bonuses
     (based on the average of the three highest  annual  bonuses  awarded during
     the ten preceding  years) for the remainder of the  employment  term. As of
     August 3, 2003, the amount payable in the event of such  termination  would
     be approximately $13,729,000.

     The agreements  also provide for consulting  periods,  one for five and one
     for  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.

     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.

     Six  officers of the Company have  severance  agreements  providing  for an
     aggregate  lump-sum payment of $2,070,000 through September 30, 2004 in the
     event of a change of control of the Company as defined in the agreements.

     Litigation

     On August 14, 2001,  Robinson  Laboratories,  Inc. ("RLI") and Ben Robinson
     ("Robinson")  filed an Amended  Complaint against Herley  Industries,  Inc.
     ("Herley").  Although the Amended Complaint sets forth fifteen counts,  the
     core  allegations  are (i) that  Herley  failed to issue  97,841  shares of
     common stock in connection with certain earn out requirements  contained in
     an Asset  Purchase  Agreement  dated  February  1, 2000;  (ii) that  Herley
     breached  an  Employment   Agreement  with  Robinson  by  terminating   his
     employment

                                      F-18

<PAGE>



     on August 5, 2001; and (iii) that Herley breached a Stock Option  Agreement
     dated  January 31,  2000,  with  Robinson.  RLI and  Robinson  asserted (i)
     violations of state and federal  securities laws; (ii) fraud claims;  (iii)
     breach of contract claims; and (iv) other equitable claims arising from the
     above core factual allegations.

     On September  17, 2001,  Herley filed an Answer,  Affirmative  Defenses and
     Counterclaims  in this  matter.  In the  Answer and  Affirmative  Defenses,
     Herley denied the material  allegations  of the Amended  Complaint.  Herley
     also  filed  Counterclaims   against  both  RLI  and  Robinson.   In  these
     counterclaims,  Herley's core allegations concern Robinson's misconduct (i)
     in  connection  with the  manner he  attempted  to  satisfy  RLI's earn out
     requirements;  (ii)  misrepresentations  made in connection  with the Asset
     Purchase  Agreement;  (iii)  wrongdoing as a Herley employee leading to his
     termination and (iv) post-Herley employment wrongdoing in connection with a
     new company known as RH Laboratories.  In addition to seeking a Declaratory
     Judgment  pursuant to 28 U.S.C.  ss. 2201 et.  seq.,  Herley also  asserted
     claims for,  among  other  things,  fraud,  breach of  contract,  breach of
     fiduciary duty,  unfair  competition and tortious  interference with actual
     and prospective contractual relationships.

     On August 5, 2002, a jury trial  commenced.  A jury verdict was rendered on
     August 21, 2002 in which the jury determined,  among other things, that (i)
     Herley was not required to pay any additional  stock;  (ii) Herley breached
     the Employment Agreement with Robinson and awarded Robinson $1.5 million in
     damages;  (iii)  Herley  breached  the Lease  Agreement  with  Robinson and
     awarded  Robinson  approximately  $552,000 in  compensatory  damages;  (iv)
     Robinson breached fiduciary duties to Herley and awarded Herley $400,000 in
     compensatory  damages; (v) Robinson and RLI breached indemnity  obligations
     and awarded Herley $100,000 in damages;  (vi) RLI breached  representations
     and warranties given to Herley and awarded Herley $320,000 in damages.

     On October 18, 2002, the Court entered a final judgment consistent with the
     above,  and both parties filed  post-trial  motions.  Additionally,  as the
     prevailing  party in connection with the claims asserted by RLI relating to
     the  earn-out  stock,  as well as claims  advanced  relating to the various
     breaches of the Asset Purchase Agreement,  Herley filed a petition for fees
     and  costs  against  both  RLI  and  Robinson  on  November  27,  2002  for
     approximately $2,000,000.  RLI and Robinson also filed petitions to recover
     attorneys fees of  approximately  $240,000 for certain claims in which they
     contend that they were the prevailing party. On February 5, 2003, the Court
     denied the post-trial  motions filed by the parties,  thus leaving the jury
     verdict undisturbed.

     At a proceeding on April 28, 2003, the Court decided to delay ruling on all
     of the  petitions  for fees and costs  until after  appeals are  exhausted.
     Accordingly, by Order dated May 6, 2003, the Court denied without prejudice
     all of the parties' petitions.  On May 12, 2003, Herley filed its appeal to
     the United States Court of Appeals for the Second Circuit. On May 28, 2003,
     RLI filed a notice of cross-appeal. Robinson has not appealed. Herley filed
     its brief in support of its appeal before the Second  Circuit on August 22,
     2003.  RLI timely  filed its brief in response  to  Herley's  appeal and in
     support of RLI's cross-appeal. Herley is now required to file a response to
     RLI's brief and thereafter RLI will file a response to Herley's brief. Oral
     argument has not yet been scheduled.

     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 with a bank that provides
     for the issuance of stand-by  letters of credit and requires the payment of
     a fee of 1.0% per annum of the amounts outstanding under the facility.  The
     facility  expires  January 31, 2005. At August 3, 2003 stand-by  letters of
     credit  aggregating  approximately  $12,454,000 were outstanding under this
     facility.

                                      F-19

<PAGE>



NOTE G - INCOME TAXES

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

                                 53 weeks      Fifty-two weeks ended
                                  ended        ---------------------
                                 August 3,     July 28,     July 29,
                                   2003          2002         2001
                                   ----          ----         ----
       Current
                  Federal        $ 5,465       $ 5,333       $ 3,050
                  State              533           520           275
                  Foreign            379           204           202
                                   -----         -----         -----
                                   6,377         6,057         3,527
                                   -----         -----         -----
       Deferred
                  Federal           (233)       (1,090)          248
                  State              (23)         (106)           92
                  Foreign            378            15          -
                                   -----         -----         -----
                                     122        (1,181)          340
                                   -----         -----         -----

                                 $ 6,499       $ 4,876       $ 3,867
                                   =====         =====         =====

     The Company paid income taxes of approximately  $4,164,000,  $680,000,  and
     $4,427,000 in fiscal 2003, 2002, and 2001, respectively. The following is a
     reconciliation of the U. S. statutory income tax rate and the effective tax
     rate on pretax income:

                                                53 weeks   Fifty-two weeks ended
                                                 ended     ---------------------
                                                August 3,    July 28,  July 29,
                                                  2003         2002      2001
                                                  ----         ----      ----
       Statutory income tax rate                  34.0 %       34.0 %    34.0 %
       State income taxes, net of
          federal income tax benefit               1.7          0.9       2.4
       Benefit of foreign sales corporation         -            -       (2.6)
       Benefit of extra territorial income        (1.0)        (2.4)       -
       Non-deductible expenses                     0.6          0.2       2.5
       Benefit of foreign and
          foreign-source income                   (3.4)        (1.4)     (2.3)
       Other, net                                 (0.1)        (0.1)      0.4
                                                  ----         ----      ----
          Effective tax rate                      31.8 %       31.2 %    34.4 %
                                                  ====         ====      ====

     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.



                                      F-20

<PAGE>



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

                                August 3, 2003           July 28, 2002
                             -------------------      -------------------
                             Deferred   Deferred      Deferred   Deferred
                                Tax        Tax           Tax        Tax
                              Assets   Liabilities     Assets   Liabilities

    Intangibles               $  -       $ 2,298       $  -        $ 1,738
    Accrued vacation pay          260       -              386        -
    Accrued bonus                 516       -               53        -
    Warranty costs                 88       -              136        -
    Inventory                   1,125       -            1,101        -
    Depreciation                 -         2,647          -          2,159
    Contract losses               302       -              362        -
    Net operating loss
       carry-forwards             230       -              230        -
    Other                         352       -              120        -
                                -----      -----         -----       -----
                              $ 2,873    $ 4,945       $ 2,388     $ 3,897
                                =====      =====         =====       =====

     As of  August  3,  2003  the  Company  has  available  net  operating  loss
     carry-forwards  for federal and state income tax purposes of  approximately
     $489,000 and  $2,800,000,  respectively  which  expire  through  2020.  The
     Federal net operating  loss arose through the  acquisition  of Terrasat and
     its utilization is subject to certain limitations.

NOTE H- LONG-TERM DEBT

     Long-term debt is summarized as follows (in thousands):

                                                           August 3,  July 28,
                                            Rate             2003       2002
                                         ---------------     ----       ----
       Revolving loan facility (a)       2.50% and 2.90%   $  -        $  -
       Mortgage note (b)                 7.43%               2,610       2,691
       Industrial Revenue Bonds (c)      4.07%               2,905       3,000
       Note for acquired business (d)    1.8%                1,500        -
       Other                                   -                74         208
                                                             -----       -----
                                                             7,089       5,899
       Less current portion                                    686         215
                                                             -----       -----
                                                           $ 6,403     $ 5,684
                                                             =====       =====

       (a) In June 2002, the Company  entered into a new  $50,000,000  Revolving
           Credit  Loan  Syndication  agreement  with two banks on an  unsecured
           basis which may be used for  general  corporate  purposes,  including
           business  acquisitions.  The revolving  credit facility  requires the
           payment  of  interest  only on a  monthly  basis and  payment  of the
           outstanding  principal balance on January 31, 2005 (as amended).  The
           Company  may  elect to  borrow up to a  maximum  of  $5,000,000  with
           interest based on the FOMC Federal Funds Target Rate plus a margin of
           1.50% to 1.80%, or up to a maximum of $45,000,000 with interest 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, ranging from less
           than .40 to 1.0, to greater than 1.0 to 1.0.  The FOMC Federal  Funds
           Target Rate and the LIBOR rate was 1.00% and 1.10%, respectively,  at
           August 3,  2003.  There is a fee of 15 basis  points per annum on the
           unused portion of the  $45,000,000  LIBOR based portion of the credit
           facility payable quarterly. There are no borrowings under the line at
           August 3, 2003 and July 28, 2002.

           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

                                      F-21

<PAGE>



           other borrowings.  The Company is in compliance with all covenants at
           August 3, 2003.

       (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 $1,770,000.

           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 covenants at August 3, 2003. In connection  with
           this loan, the Company paid approximately $45,000 in financing costs.
           Such  costs  are  included  in  Other  Assets  in  the   accompanying
           consolidated  balance sheets at August 3, 2003 and July 28, 2002, 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 August 3,  2003 was  1.00%.  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 PA, and for manufacturing equipment.

           The Bonds are secured by a letter of credit expiring October 18, 2006
           and a mortgage on the related properties  pledged as collateral.  The
           net book value of the land and  building  covered by the  mortgage is
           approximately $1,776,000 at August 3, 2003.

       (d) In connection  with the  acquisition of EWST as of September 1, 2002,
           the Company issued a note for $1,500,000, including interest at 1.8%,
           payable in annual installments of $500,000 beginning October 1, 2003.

     The Company paid interest in 2003, 2002 and 2001of approximately  $355,000,
     $316,000 and $289,000, respectively.

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

                    Fiscal year ending during:         Amount
                    -------------------------          ------
                              2004                    $   686
                              2005                        698
                              2006                        711
                              2007                        223
                              2008                        236
                              Future                    4,535
                                                        -----
                                                      $ 7,089
                                                        =====


                                      F-22

<PAGE>



NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

                                                    August 3,      July 28,
                                                      2003           2002
                                                      ----           ----
         Accounts payable                           $ 7,152         $ 5,832
         Accrued payroll costs and bonuses            4,257           3,906
         Accrued commissions                            508             666
         Accrued royalties                              284              43
         Accrued interest                              -                 11
         Accrued legal expenses                          20           1,018
         Accrued warranty costs                         359             235
         Accrued severance                              849             706
         Accrued rent expense                           189             163
         Lease termination cost                          17              58
         Unearned income                                 86             108
         Other accrued expenses                         305             111
                                                     ------          ------
                                                   $ 14,026        $ 12,857
                                                     ======          ======

NOTE J - EMPLOYEE BENEFIT PLANS

     In August 1985,  the Board of Directors  approved an Employee  Savings Plan
     ("Plan")  which  qualified  as a thrift  plan under  Section  401(k) of the
     Internal Revenue Code. This Plan, as amended and restated, allows employees
     to  contribute  between  2% and 15% of  their  salaries  to the  Plan.  The
     Company,  at its  discretion  can  contribute  100% of the  first 2% of the
     employees'  contribution  and  25%  of  the  next  4%.  Additional  Company
     contributions  can be made  depending  on profits.  The  aggregate  benefit
     payable to an  employee is  dependent  upon his rate of  contribution,  the
     earnings of the fund,  and the length of time such employee  continues as a
     participant. The Company has recognized expenses of approximately $513,000,
     $533,000 and $164,000 under the Plan for the 53 weeks ended August 3, 2003,
     and the 52 weeks ended July 28, 2002 and July 29, 2001, respectively.

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

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

NOTE K - RELATED PARTY TRANSACTIONS

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

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

                                      F-23

<PAGE>



     year lease with the same  partnership  for  additional  space.  The initial
     minimum annual rent of $92,000 is subject to escalation of approximately 4%
     annually.

NOTE L - COMPUTATION OF PER SHARE EARNINGS

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

                                                             53 weeks      Fifty-two weeks ended
                                                              ended        ---------------------
                                                             August 3,     July 28,     July 29,
                                                               2003          2002         2001
                                                               ----          ----         ----
<S>                                                          <C>          <C>          <C>
Numerator:
      Income from continuing operations                      $ 13,937     $ 10,730     $ 7,573
      Loss from discontinued operations                          -            (921)       (168)
      Cumulative effect of adopting SFAS 142                     -          (4,637)       -
                                                               ------        ------      ------
      Net Income                                             $ 13,937     $  5,172     $ 7,405
                                                               ======        ======      ======

Denominator:
      Basic weighted-average shares                             14,317       12,041      10,082
      Effect of dilutive securities:
         Employee stock options and warrants                       714          937         874
                                                                ------       ------      ------
      Diluted weighted-average shares                           15,031       12,978      10,956
                                                                ======       ======      ======

Stock options and warrants not included in computation             702          126         544
                                                                   ===          ===         ===
</TABLE>

     The number of stock options and warrants not included in the computation of
     diluted EPS relates to stock options and warrants  having  exercise  prices
     ranging  from $17.12 to $19.52  which are greater  than the average  market
     price  of  the  common  shares  during  the  period,  and  therefore,   are
     antidilutive. The options and warrants, which were outstanding as of August
     3, 2003, expire at various dates through October 3, 2008.

NOTE M - SHAREHOLDERS' EQUITY

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

     On April 30, 2002,  the Company  completed the sale of 3,000,000  shares of
     common stock to the public at $23.00.  The Company received net proceeds of
     approximately  $64,812,000 after underwriting discounts and commissions and
     other expenses of the offering.

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

     The Company has various fixed option plans which  reserve  shares of common
     stock for issuance to executives,  key employees and directors. The Company
     continues  to use  the  intrinsic  value  method  in  accordance  with  the
     recognition and measurement  principles of APB Opinion No. 25,  "Accounting
     for Stock Issued to Employees," and related  Interpretations  in accounting
     for  these  plans.  Accordingly,  compensation  cost for stock  options  is
     measured as the excess, if any, of the quoted market price of the Company's
     stock at the date of the  grant  over the  amount an  employee  must pay to
     acquire the stock.  Because the exercise  price of the  Company's  employee
     stock options equals the market price of the underlying stock on the date

                                      F-24

<PAGE>



     of grant, no compensation expense is recognized.

     Statement  of  Financial  Accounting  Standards  No.123,   "Accounting  for
     Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and ,
     if fully  adopted,  changes the methods  for  recognition  of cost on plans
     similar to those of the Company. In December 2002, the FASB issued SFAS No.
     148, "Accounting for Stock-Based Compensation-Transition and Disclosure, an
     amendment of FASB  Statement  No.  123." SFAS No. 148  provides  transition
     alternatives for companies  adopting the fair value recognition  provisions
     of FASB  Statement  No.  123 for  stock-based  employee  compensation;  and
     requires   pro  forma   disclosures   of  the   impact  on   earnings   and
     earnings-per-share  for  companies  continuing  to rely on APB No.  25. The
     Company  has adopted the  disclosure-only  provisions  of SFAS 123 and SFAS
     148.  Accordingly,  no stock-  based  employee  compensation  cost has been
     recognized  for options  granted  under the stock option  plans.  Pro forma
     information  regarding  net income and  earnings  per share as  required by
     Statements 123 and 148 has been  determined as if the Company had accounted
     for its  employee  stock  options  under the fair value method of Statement
     123.

     The fair value for options  granted is estimated at the date of grant using
     a Black-Scholes  option pricing model. The  Black-Scholes  option valuation
     model was developed for use in estimating  the fair value of traded options
     which have no vesting restrictions and are fully transferable. In addition,
     option valuation models require the input of highly subjective  assumptions
     including the expected stock price volatility.

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

                                   53 weeks        Fifty-two weeks ended
                                     ended        -----------------------
                                   August 3,      July 28,       July 29,
                                     2003           2002           2001
                                     ----           ----           ----
     Expected life of options      1.51 years     1.51 years     .73 years
     Volatility                     .68            .68            .70
     Risk-free interest rate       2.8%           2.8%           3.4%
     Dividend yield                zero           zero           zero

     Had compensation cost for stock options granted in fiscal years 2003, 2002,
     and  2001  been  determined  based  on the fair  value  at the  grant  date
     consistent  with the  provisions  of SFAS 123, the Company's net income and
     earnings  per share  would  have  been  reduced  to the pro  forma  amounts
     indicated  below using the  statutory  income tax rate of 34% (in thousands
     except per share data):

                                                     2003       2002      2001
                                                     ----       ----      ----
        Net income  -  as reported                 $13,937     $5,172    $7,405
        Deduct: total stock-based employee
         compensation expense determined
         under fair value based method for all
         awards, net of related tax effects         (1,926)    (4,425)   (1,610)
                                                    ------      -----     -----
        Net income  -  pro forma                   $12,011    $   747    $5,795
                                                    ======      =====     =====

        Earnings per share  -  as reported
             Basic                                    $.97       $.43      $.73
             Diluted                                   .93        .40       .68
        Earnings per share  - pro forma
             Basic                                    $.84       $.06      $.57
             Diluted                                   .80        .06       .53

     The effects of applying the pro forma  disclosures  of SFAS 123 and 148 are
     not likely to be  representative  of the effects on reported net income for
     future years due to the various vesting schedules.

                                      F-25

<PAGE>



     In March 2003,  the Board of Directors  approved the 2003 Stock Option Plan
     which  covers  1,000,000  shares of the  Company's  common  stock.  Options
     granted under the plan are non-qualified stock options.  Under the terms of
     the plan, the exercise price for options granted under the plan will be the
     fair market value at the date of grant. The nature and terms of the options
     to be  granted  are  determined  at the time of  grant by the  compensation
     committee or the board of directors.  The options  expire no later than ten
     years from the date of grant, subject to certain  restrictions.  No options
     have been granted under the plan.

     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
     108,500 and  1,010,250  shares were  granted  during the fiscal years ended
     August 3, 2003 and July 28, 2002, respectively.

     In April 1998,  the Board of Directors  approved the 1998 Stock Option Plan
     which  covers  2,250,000  shares of the  Company's  common  stock.  Options
     granted  under the plan may be  incentive  stock  options  qualified  under
     Section 422 of the  Internal  Revenue Code of 1986 or  non-qualified  stock
     options.  Under the  terms of the  plan,  the  exercise  price for  options
     granted  under the plan will be the fair market value at the date of grant.
     Prices for incentive stock options granted to employees who own 10% or more
     of the Company's  stock are at least 110% of market value at date of grant.
     The nature and terms of the  options to be granted  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 368,342 and 440,250 shares were granted
     during  the  fiscal   years  ended  July  28,  2002  and  July  29,   2001,
     respectively.  No options  were  granted  under this plan during the fiscal
     year ended August 3, 2003.

     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.  Options for 21,151 and 14,250,  shares were granted
     during  the  fiscal   years  ended  July  28,  2002  and  July  29,   2001,
     respectively.  No options  were  granted  under this plan during the fiscal
     year ended August 3, 2003.

     In October 1995, the Board of Directors approved the 1996 Stock Option Plan
     which  covers  1,000,000  shares of the  Company's  common  stock.  Options
     granted  under the plan may be  incentive  stock  options  qualified  under
     Section 422 of the  Internal  Revenue Code of 1986 or  non-qualified  stock
     options.  Under the  terms of the  Plan,  the  exercise  price for  options
     granted  under the plan will be the fair market value at the date of grant.
     Prices for incentive stock options granted to employees who own 10% or more
     of the Company's  stock are at least 110% of market value at date of grant.
     The nature and terms of the  options to be granted  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 ten years from the date of grant.  Options for
     7,007  shares were granted  during the fiscal year ended July 28, 2002.  No
     options were granted under this plan during the fiscal year ended August 3,
     2003.



                                      F-26

<PAGE>



     A summary of stock option  activity  under all plans for the 53 weeks ended
     August 3, 2003 and the 52 weeks ended July 28, 2002 and July 29, 2001 is as
     follows:
<TABLE>
<CAPTION>

                           Non-Qualified Stock Options
       -------------------------------------------------------------------------
                                                                        Weighted         Warrant Agreements
                                                                         Average      ----------------------
                                          Number        Price Range     Exercise       Number      Price per
                                        of shares        per share       Price        of shares     share
                                        ---------       -------------    -----        ----------   ---------

<S>                                     <C>            <C>      <C>    <C>              <C>          <C>
       Outstanding July 30, 2000        3,014,140      $ 4.06 - 11.91  $  8.43          320,000      $ 3.09
          Granted                         829,500        8.38 - 14.25     8.99
          Exercised                       (37,254)       4.06 - 10.46     6.72
          Canceled                        (48,600)       4.31 - 14.25    10.76
                                        ---------       -------------    -----          -------        ----
       Outstanding July 29, 2001        3,757,786      $ 4.06 - 13.67  $  8.55          320,000      $ 3.09
          Granted                       1,406,750       11.90 - 19.52    16.05
          Exercised                    (1,454,660)       4.06 - 13.67     7.50         (320,000)       3.09
          Cancelled                      (282,700)       7.63 - 13.15    10.31
                                        ---------       -------------    -----          -------        ----
       Outstanding July 28, 2002        3,427,176      $ 4.06 - 19.52  $ 11.92             -
          Granted                         108,500       14.50 - 19.03    17.68
          Exercised                      (227,799)       4.06 - 13.10     8.80
          Cancelled                        (9,650)       8.38 - 13.10    11.36
                                        ---------       -------------    -----          -------        ----
       Outstanding August 3, 2003       3,298,227      $ 4.06 - 19.52  $ 12.33             -
                                        =========                                       =======
</TABLE>

     Options  Outstanding  and  Exercisable  by Price Range as of August 3,2003,
     with  expiration  dates  ranging  from May 12,  2005 to June 6, 2013 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>           <C>             <C>
       $ 4.06  -   $   8.08                 211,877            4.7           $  6.23         209,477       $ 6.21
         8.38  -      10.20                 865,750            5.5              8.66         674,050         8.71
        10.46  -      11.92                 729,050            5.3             10.51         696,450        10.49
        13.10  -      13.10                 732,050            7.0             13.10         574,650        13.10
        14.50  -      19.52                 759,500            7.7             19.22         588,200        19.36
                                          ---------            ---             -----       ---------        -----
       $ 4.06  -    $ 19.52               3,298,277            6.2           $ 12.33       2,642,827      $ 12.24
                                          =========                                        =========
</TABLE>

     In December 1995, common stock warrants were issued to certain officers for
     the right to acquire  440,000  shares of common stock of the Company at the
     fair market value of $3.09 per share at date of issue.  The  warrants  vest
     immediately  and expire  December  13,  2005.  The  remaining  warrants for
     320,000  shares  outstanding  at July 29,  2001 were  exercised  during the
     fiscal year ended July 28, 2002.

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

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

                                      F-27

<PAGE>



     Revenues  for fiscal  years 2003,  2002 and 2001 were as  follows:  defense
     electronics,  $103,746,000,  $80,615,000 and $61,977,000, respectively; and
     commercial   technologies,   $6,477,000,   $12,266,000,   and  $14,517,000,
     respectively.   Defense   electronics   includes   revenue  of  $11,212,000
     attributable to the EWST acquisition.

     Net sales to the U.S.  Government in fiscal 2003,  2002 and 2001  accounted
     for  approximately  25%, 17% and 19% of net sales,  respectively.  No other
     customer accounted for shipments in excess of 10% of consolidated net sales
     during the period.  Foreign  sales  amounted to  approximately  $39,646,000
     (including  $11,212,000 in sales for EWST),  $30,070,000 and $20,683,000 in
     fiscal 2003, 2002 and 2001, respectively.

     Geographic net sales based on place of contract performance were as follows
(in thousands):

                                         2003        2002         2001
                                         ----        ----         ----
                United States        $  88,294    $ 82,432      $67,597
                Israel                  10,717      10,449        8,897
                England                 11,212        -            -
                                       -------      ------      ------
                                     $ 110,223    $ 92,881    $ 76,494
                                       =======      ======      ======

     Net property,  plant and  equipment by  geographic  area was as follows (in
thousands):

                                      2003             2002
                                      ----             ----
                United States      $ 18,945         $ 19,351
                Israel                3,071            2,880
                England                 390             -
                                     ------           ------
                                   $ 22,406         $ 22,231
                                     ======           ======

NOTE O - DERIVATIVE FINANCIAL INSTRUMENTS

     In October 2001, the Company entered into an interest rate swap with a bank
     pursuant to which it exchanged  floating rate  interest in connection  with
     the Bonds  discussed  in Note H on a notional  amount of  $3,000,000  for a
     fixed  rate of 4.07% for a 10 year  period  ending  October  1,  2011.  The
     notional  amount  reduces each year in tandem with the annual  installments
     due on the Bonds.  The fixing of the interest rate for this 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 $74,000  as of August 3, 2003.  There was no
     material  hedge  ineffectiveness  related  to cash flow  hedges  during the
     period to be recognized in earnings. There was no gain or loss reclassified
     from accumulated other comprehensive income into earnings during the fiscal
     year ended August 3, 2003 as a result of the  discontinuance of a cash flow
     hedge due to the  probability of the original  forecasted  transaction  not
     occurring.

NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

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

         Long-term  debt:  The  fair  value  of  the  mortgage  note  and
         industrial  revenue bonds  (including the related  interest rate
         swap) were estimated using discounted cash flow analyses,  based
         on the

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<PAGE>



          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):
                                                      August 3, 2003
                                              ---------------------------
                                              Carrying Amount  Fair Value
                                              ---------------  ----------
         Cash and cash equivalents               $ 81,523       $ 81,523
         Available-for-sale securities                 75             75
         Long-term debt                             6,403          7,333

NOTE Q - DISCONTINUED OPERATIONS

     The Company entered into an agreement effective as of the close of business
     September  30, 2000,  to acquire all of the issued and  outstanding  common
     stock of Terrasat, Inc. ("Terrasat"),  a California corporation for cash in
     the amount of $6,000,000, $3,000,000 of which was paid in December 2000 and
     $3,000,000 of which was paid in December  2001. In addition,  the agreement
     provided for additional cash payments in the future up to $2,000,000, based
     on gross  revenues  through  December 31, 2001. The targeted gross revenues
     under the agreement were not achieved,  therefore no addition cash payments
     were required.

     In August 2001, the FASB issued SFAS No 144  "Accounting for the Impairment
     or Disposal of Long-Lived Assets" which addresses financial  accounting and
     reporting for the impairment of long-lived assets and for long-lived assets
     to be disposed of. SFAS No 144 supersedes SFAS No. 121, "Accounting for the
     Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed
     Of,"  retains  the   fundamental   provisions  of  Statement  121  for  (a)
     recognition  and  measurement of the impairment of long-lived  assets to be
     held and used and (b) measurement of long-lived assets to be disposed of by
     sale. SFAS 144 also  supersedes the accounting and reporting  provisions of
     APB Opinion No. 30,  "Reporting  the Results of Operations -- Reporting the
     Effects of Disposal of a Segment of a Business, and Extraordinary,  Unusual
     and  Infrequently  Occurring  Events and  Transactions,"  for segments of a
     business to be disposed  of, but retains the  requirement  of Opinion 30 to
     report discontinued  operations  separately from continuing  operations and
     extends  that  reporting  to a component  of an entity that either has been
     disposed of (by sale, by abandonment, or in a distribution to owners) or is
     classified as held for sale.  The provisions of this statement were adopted
     by the Company effective on July 30, 2001.

     In  January  2002  the  Board  of  Directors  of  the  Company  decided  to
     discontinue  the  operations  of  Terrasat  and to  seek a  buyer  for  the
     business.  The Company believed that Terrasat would not be able to generate
     sufficient returns to justify continued  investment due to the overcapacity
     in the telecom industry and deteriorating economic conditions in Terrasat's
     primary  markets.  Consequently,  the accompanying  consolidated  financial
     statements  reflect Terrasat as discontinued  operations in accordance with
     SFAS No. 144.  Results of  operations  and cash flows of Terrasat have been
     classified as "Loss from discontinued  operations",  and "Net cash provided
     by (used in) discontinued operations", respectively.

     The sale of certain  assets and  liabilities,  and the business of Terrasat
     was consummated on March 1, 2002,  effective the close of business  January
     27,  2002,  to certain  current  employees  of Terrasat for cash and a note
     which approximates the carrying value of the net assets held for sale as of
     January 27, 2002 of $878,000.



                                      F-29

<PAGE>


     Summarized below are the results of discontinued operations:

                                                      52 weeks ended
                                                 -----------------------
                                                 July 28,       July 29,
                                                   2002           2001
                                                   ----           ----

        Net sales                               $ 2,147        $ 4,103
                                                  -----          -----

        Loss from discontinued operations        (1,395)          (147)
        Income tax (benefit) provision             (474)            21
                                                  -----            ---

     Net loss from discontinued operations      $  (921)       $  (168)
                                                    ===            ===




                                  ************

                                      F-30