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

                                    FORM 10-K
(Mark One)
                   [X]  ANNUAL  REPORT  PURSUANT  TO  SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended July 28, 2002

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

                           Commission File No. 0-5411

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

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

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

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

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

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

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

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

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

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

Based on the closing sale price of $16.47 as of October 21, 2002  the  aggregate
market value of the voting stock held by non-  affiliates of the  registrant was
$242,503,605.

The number of shares  outstanding of registrant's  common stock, $ .10 par value
as of October 21, 2002 was 14,723,959.

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                                                   10
   Item 3     Legal Proceedings                                            11
   Item 4     Submission of Matters to a Vote of Security Holders          11

PART II
   Item 5     Market for Registrant's Common Equity and Related
                 Stockholder Matters                                       11
   Item 6     Selected Financial Data                                      11
   Item 7     Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                       13
   Item 7A    Quantitative and Qualitative Disclosures About Market Risk   21
   Item 8     Financial Statements and Supplementary Data                  22
   Item 9     Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure                       22
PART III
   Item 10    Directors and Executive Officers of the Registrant           22
   Item 11    Executive Compensation                                       22
   Item 12    Security Ownership of Certain Beneficial
                 Owners and Management                                     22
   Item 13    Certain Relationships and Related Transactions               22
PART IV
   Item 14    Exhibits, Financial Statement Schedules and Reports
              on Form 8K                                                   23

SIGNATURES                                                                 25

CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY
   ACT OF 2002                                                             26

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES                  F-1


<PAGE>



PART I

Forward-Looking Statements

All statements  other than statements of historical fact included in this Annual
Report, including without limitation statements under,  "Management's Discussion
and Analysis of Financial  Condition and Results of Operations"  and "Business,"
regarding 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 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 through internal growth and 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 35 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; and Jerusalem, Israel. We have developed
and rewarded 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  17%,  representing more
than 10% of our fiscal 2002 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 32% of our revenues in
fiscal 2002.

-  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  35  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 2002, we spent over $5.6
million on new product development,  of which our customers funded approximately
$3.3 million. Our emphasis on new product development enables us to maintain our
technological  leadership in current  products and to develop new  capabilities.
This spending helps  solidify and strengthen our position on different  programs
and may serve as a barrier to entry for competitors.

- EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over 21 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

<PAGE>



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 Teleplan AS
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

<PAGE>



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.

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.

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 July 28, 2002,  approximately  17% 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.


                                        6

<PAGE>



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 2002, sales to foreign  customers  accounted for approximately 32%
of our net sales. The governments of Egypt,  Japan, South Korea,  Taiwan and the
United Kingdom are all significant  customers of ours. All of our contracts with
foreign customers are payable in U.S. dollars.  International  sales are subject
to numerous  risks,  including  political  and economic  instability  in foreign
markets,  including  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.

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.


                                        7

<PAGE>



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

BACKLOG

Our total backlog of orders was approximately  $82.7 million on July 28, 2002 as
compared  to $79.4  million  on July 29,  2001.  Of our total  backlog  of $82.7
million at July 28, 2002,  $54.3 million is  attributable to domestic orders and
$28.4 million is  attributable to foreign orders.  Management  anticipates  that
approximately  $70.7  million of its backlog  will be shipped  during the fiscal
year ending August 3, 2003.

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  $5.6 million in fiscal 2002, $4.6 million in fiscal 2001 and $3.5
million in fiscal 2000, of

                                        8

<PAGE>

which we paid  approximately $2.3 million in fiscal 2002, $2.6 million in fiscal
2001 and $2.3 million in 2000. 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.

INTELLECTUAL PROPERTY

We rely primarily on a combination of trade secrets and employee and third-party
nondisclosure  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 or with respect to our products for which we have
indemnified certain of our customers.  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 September 29, 2002, we employed 618 persons full time. Of these employees,
105 comprise the engineering staff, 445 constitute  manufacturing  personnel, 24
occupy sales and marketing positions, and 44 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.

SUBSEQUENT EVENT

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  is expected  to be operated

                                       9

<PAGE>

as a wholly-owned  subsidiary.  EWST designs,  develops and produces  electronic
warfare simulator systems for prime defense contractors and countries worldwide.
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%,
payable in annual installments of $500,000.

OFFICERS OF THE REGISTRANT

                                    Served as
Name                  Age         Officer Since      Position(s) and Offices
----                  ---         -------------      -----------------------

Lee N. Blatt           74             1965           Chairman of the Board
Myron Levy             61             1988           Chief Executive Officer
                                                      and Director
John M. Kelley         49             1998           Executive Vice President
Howard M. Eckstein     51             1998           Senior Vice President
Mitchell Tuckman       52             1999           Senior Vice President
William Wilson         53             2002           Senior Vice President
Rozalie Schachter      55             2000           Senior Vice President
Anello C. Garefino     55             1993           Vice President-Finance,
                                                      Treasurer and Chief
                                                      Financial Officer
David H. Lieberman     57             1985           Secretary and Director


Item 2.  Properties

Our facilities are as follows:
<TABLE>
<CAPTION>

                                                                                                 Owned
                                                                                                   or
Location                                Purpose of Property                         Area         Leased
--------                                -------------------                         ----         ------
<S>                         <C>                                                 <C>              <C>
Lancaster, PA (1)           Production, engineering, administrative             86,200 sq. ft.   Owned
                              and executive offices
Woburn, MA                  Production, engineering and administration          60,000 sq. ft.   Owned
Farmingdale, NY (2)         Production, engineering and administration          46,000 sq. ft.   Leased
                                                                                14,000 sq. ft.   Leased
Jerusalem, Israel           Production, engineering and administration          12,000 sq. ft.   Owned
Aldershot, England (3)      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) The Company's  executive offices occupy  approximately 4,000 sq. ft. of
space at this facility with  engineering and  administrative  offices  occupying
10,000 sq. ft. each.
     (2) On September 23, 1999 the Company closed on the sale of its prior owned
facility in  Amityville,  NY and relocated the plant to this leased  facility in
Farmingdale,  NY. The Company  entered into 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.
     (3) 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 R 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 lease.  The Company is looking to sublease this
facility.

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

                                       10
<PAGE>

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 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.  The court has still not  entered  final
judgment  following the jury  verdict,  and both parties are expected to appeal.
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  intends to file a
petition  for  attorney's  fees and  costs  against  both RLI and  Robinson  for
approximately $2,000,000.

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 effect
           retroactively to the three-for-two stock split of the Common Stock on
           September 10, 2001.


                                       11

<PAGE>


                                                          Common Stock
                                                        -----------------
                                                        High          Low
                                                        ----          ---
     Fiscal Year 2001
         First Quarter...............................$ 15.17        $ 11.63
         Second Quarter..............................  15.46           8.79
         Third Quarter...............................  10.89           8.38
         Fourth Quarter..............................  13.15           9.97
     Fiscal Year 2002
         First Quarter...............................  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 (through October 21, 2002)....  21.30          14.73

     The closing price on October 21, 2002 was $16.47.

     (b)   As of October  21,  2002,  there were  approximately  234  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>
                                                                         52 Weeks ended
                                                   -------------------------------------------------------------
                                                   July 28,      July 29,     July 30,     August 1,   August 2,
                                                     2002          2001         2000         1999        1998
                                                     ----          ----         ----         ----        ----

<S>                                             <C>               <C>          <C>          <C>         <C>
Net sales (4)                                   $   92,881        76,494       70,537       61,036      40,798

Income from continuing operations before
     extraordinary item                         $   10,730         7,573        7,639        7,862       5,497

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

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

Net income                                      $    5,172         7,405        7,639        7,735       5,497

Per share data from continuing operations (1),
  (2), (3)
     Basic                                      $       .89           .75        1.05         1 00         .74
     Assuming Dilution                          $       .83           .69         .96          .92         .68

Total Assets                                    $   190,202       114,597      86,656       74,056      57,553
Total Current Liabilities                       $    15,263        18,732      12,783       10,513       9,843
Long-Term Debt net of current portion           $     5,684         2,740       2,931       15,437       4,111

<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>


                                       12

<PAGE>



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

Results of Operations

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

<TABLE>
<CAPTION>
                                                                             52 weeks ended
                                                                     ------------------------------
                                                                 July 28,       July 29,       July 30,
                                                                   2002           2001           2000
                                                                   ----           ----           ----

<S>                                                               <C>            <C>            <C>
Net sales                                                         100.0 %        100.0 %        100.0 %
Cost of products sold                                              66.7 %         66.3 %         62.9 %
                                                                  -----          -----          -----

Gross profit                                                       33.3 %         33.7 %         37.1 %

Selling and administrative expenses                                14.3 %         19.0 %         19.2 %
Litigation costs                                                    2.2 %          0.3 %          -
Plant closing costs                                                 0.4 %          -              -
                                                                  -----          -----          -----

Income from operations                                             16.4 %         14.4 %         17.9 %
                                                                  -----          -----          -----

Other income (expense), net:
     Investment income                                              0.8 %          0.9 %          0.3 %
     Interest expense                                              (0.4)%         (0.3)%         (1.6)%
                                                                  -----          -----          -----
                                                                    0.4 %          0.6 %         (1.3)%
                                                                  -----          -----          -----
Income from continuing operations before
     income taxes                                                  16.8 %         15.0 %         16.6 %
Provision for income taxes                                          5.2 %          5.1 %          5.8 %
                                                                  -----          -----          -----
Income from continuing operations                                  11.6 %          9.9 %         10.8 %
Loss from discontinued operations                                   1.0 %          0.2 %          -
                                                                  -----          -----          -----
Income before cumulative effect of change
     In accounting principle                                       10.6 %          9.7 %         10.8 %
Cumulative effect of adopting SFAS 142                             (5.0)%            -                -
                                                                  -----          -----          -----
Net income                                                          5.6 %          9.7 %         10.8 %
                                                                  =====          =====          =====
</TABLE>


                                       13

<PAGE>



     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
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.

     Fiscal 2001 Compared to Fiscal 2000

Net sales from  continuing  operations for the 52 weeks ended July 29, 2001 were
approximately $76,494,000 compared to $70,537,000 for fiscal 2000. The net sales
increase of $5,957,000  (8.4%) is  attributable  to the  acquisition of American
Microwave in the first  quarter of fiscal 2001 which  contributed  $6,812,000 in
net sales,  as well as an increase in net sales of  approximately  $4,573,000 in
commercial  products.  Defense  electronics  experienced  a drop in  revenue  of
approximately $5,428,000 due to delayed orders from various customers.

Gross  profit of 33.7%  for the 52 weeks  ended  July 29,  2001 is less than the
prior year of 37.1%.  The  decline in margin of 3.4% is due  primarily  to lower
margins on commercial products and certain defense electronics products. Margins
also have been impacted by certain  inefficiencies at the Nashua facility.  This
operation  is now  being  consolidated  into  the New  England  and  Farmingdale
facilities.

Selling and  administrative  expenses  for the 52 weeks ended July 29, 2001 were
$14,545,000  compared to $13,497,000 for fiscal 2000, an increase of $1,048,000.
The primary  increase is due to businesses  acquired  which added  $1,563,000 in
fiscal 2001 and $486,000 in additional  personnel expenses associated with power
amplifier marketing costs. Incentive compensation decreased $707,000.


                                       14

<PAGE>



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

The  effective  income tax rate  decreased to 33.8% in fiscal 2001 from 35.0% in
2000 due to various favorable tax benefits  including a lower effective tax rate
on foreign-source 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 value of the net assets held for sale as of January 27, 2002 of $878,000.

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.


                                       15

<PAGE>



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.

There  was no  impairment  in  the  remaining  goodwill  at  July  28,  2002  of
approximately  $21,665,000  related to the defense  electronics  reporting  unit
based on current market capitalization of the Company. 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 years
ended July 29, 2001 and July 30, 2000 was approximately $1,296,000 and $958,000,
respectively.  Amortization of goodwill  charged to discontinued  operations for
the fiscal year ended July 29, 2001 was approximately $208,000.


                                       16

<PAGE>



Quarterly Results

The  following is a summary of the  unaudited  quarterly  operations  for the 52
weeks ended July 28, 2002 and July 29, 2001 (in thousands,  except for per share
data).


<TABLE>
<CAPTION>
                                                                              October 28,  January 27, April 28,   July 28,
                                                                                 2001        2002        2002         2002
                                                                               --------    --------    --------    ---------
<S>                                                                            <C>           <C>         <C>          <C>
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>

<TABLE>
<CAPTION>

                                                                              October 29,  January 28, April 29,   July 29,
                                                                                 2000        2001        2001         2001
                                                                               --------    --------    --------    ---------
<S>                                                                            <C>           <C>         <C>          <C>
Net sales                                                                      $ 17,758      17,065      18,987       22,684
Gross profit                                                                      6,777       5,718       6,578        6,730
Income from continuing operations                                                 2,042       1,627       1,721        2,183
Loss from discontinued operations                                                   (12)        (23)        (47)         (86)

     Net income                                                                $  2,030       1,604       1,674        2,097
                                                                                 ======      ======      ======       ======

Earnings (loss) per common share - Basic
     Income from continuing operations                                         $    .23         .16         .16          .21
     Loss from discontinued operations                                         $     -           -           -          (.01)
                                                                                 ------      ------      ------       ------
     Net income                                                                $    .23         .16         .16          .20
                                                                                 ======      ======      ======       ======

Basic weighted average shares                                                     8,985      10,263      10,530       10,535
                                                                                 ======      ======      ======       ======

Earnings (loss) per common share - Diluted
     Income from continuing operations                                         $    .20         .15         .16          .19
     Loss from discontinued operations                                         $     -           -           -          (.01)
                                                                                 ------      ------      ------       ------
       Net income                                                              $    .20         .14         .15          .19
                                                                                 ======      ======      ======       ======

Diluted weighted average shares                                                  10,134      11,100      11,045       11,280
                                                                                 ======      ======      ======       ======
</TABLE>

                                       17

<PAGE>



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").

Liquidity and Capital Resources

As of July 28, 2002 and July 29,  2001,  working  capital was  $129,012,000  and
$46,804,000,   respectively,   and  the  ratio  of  current  assets  to  current
liabilities was 9.45 to 1 and 3.50 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 $1,371,000 at July 28, 2002, and $261,000 at July 29, 2001.

Net cash provided by continuing  operations  was  approximately  $13,139,000  in
fiscal 2002 as compared to $3,858,000 in 2001. Significant items contributing to
the sources of funds include income from operations of $14,647,000 (adjusted for
depreciation and amortization), a decrease in accounts receivable of $1,583,000,
increases in accounts payable and accrued expenses of $429,000,  income taxes of
$5,351,000,  and advanced payments on contracts of $1,110,000.  Offsetting these
sources of funds are an  increase in costs  incurred  and income  recognized  in
excess of  billings  on  uncompleted  contracts  of  $6,341,000,  an increase in
inventory of $1,974,000, and a net change in deferred taxes of $1,183,000.

Net cash  used in  investing  activities  consists  of  $5,488,000  for  capital
expenditures,  $500,000 for a license of certain technology,  and the $3,000,000
deferred  payment  of  the  Terrasat   purchase  price;   offset  by  a  partial
distribution from the limited partnership of $626,000.

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, 2004. 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 1.75% and 1.81%, respectively,  at July
28, 2002.  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 July 28,  2002 and July 29,  2001.
During the fiscal  year ended July 28,  2002,  the Company  borrowed  and repaid
$4,300,000 under the credit facility for working capital needs. Stand-by letters
of credit were outstanding in the amount of $5,062,000 under the credit facility
at July 28, 2002.

During the fiscal year ended July 28,  2002,  the Company  received  proceeds of
$3,000,000 from the issuance of industrial  revenue bonds in connection with the
financing of the plant  expansion in  Lancaster  PA, and received  approximately
$3,984,000 from the exercise of common stock options by employees.

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

The  Company  received  206,756  shares of common  stock  during the fiscal year
valued at $3,847,000 in exchange for payroll taxes due from  employees  upon the
exercise of stock options.


                                       18

<PAGE>



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 2003 will
be generated from its existing backlog of sales orders. The backlog of orders at
July 28, 2002 was approximately $82,678,000.  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 contracts. The
Company  has  $44,938,000  available  under  its bank  credit  facility,  net of
outstanding stand-by letters of credit of $5,062,000,  and cash reserves at July
28, 2002 of approximately $86,210,000.

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


    During                             Industrial
    fiscal                Mortgage       revenue
     year      Total        note          bonds       Other
     ----      -----        ----          -----       -----
     2003    $   215       $    81       $    95        39
     2004        208            86           100        22
     2005        198            93           105        -
     2006        211           101           110        -
     2007        223           108           115        -
    Future     4,844         2,222         2,475       147
               -----         -----         -----       ---
             $ 5,899       $ 2,691       $ 3,000       208
               =====         =====         =====       ===


Stand-by letters of credit expire as follows:

               During
               fiscal
                year             Amount
                ----             ------
                2003            $ 1,607
                2004              3,065
                2005                115
                2006                275

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

               During
               fiscal
                year             Amount
                ----             ------
                2003            $ 1,129
                2004                966
                2005                860
                2006                875
                2007                901
               Future             2,049


                                       19

<PAGE>



Critical Accounting Policies

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.
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).  Prospective  losses  on  long-term
contracts are based upon the anticipated  excess of inventoriable  manufacturing
costs over the selling  price of the  remaining  units to be  delivered  and are
recorded when first reasonably  determinable.  Contract costs include all direct
material  and  labor  costs  and  those   indirect  costs  related  to  contract
performance.  Actual losses could differ from those  estimated due to changes in
the  ultimate  manufacturing  costs.  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.

Subsequent Event

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 is expected to be operated
as a wholly-owned  subsidiary.  EWST designs,  develops and produces  electronic
warfare simulator systems for prime defense contractors and countries worldwide.
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%,
payable in annual  installments of $500,000.  The transaction  will be accounted
for in accordance with the provisions of SFAS No. 141, "Business  Combinations",
which  requires  that all  business  combinations  be  accounted  for  using the
purchase method.  The allocation of the aggregate  estimated purchase price will
be determined  based on detailed  reviews of the fair value of assets  acquired,
including  identified  intangible assets, and liabilities assumed. Any remaining
excess cost over the fair value of net assets  acquired  will be  recognized  as
goodwill.

New Accounting Pronouncements

In June 2001,  the FASB issued 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 does not believe the adoption of this
standard  will have a material  impact on the  Company's  financial  position or
results of operations.

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 does not believe the
adoption of this standard will have a material impact on the Company's financial
position or results of operations.

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

                                       20

<PAGE>



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.

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 $147,000  as of July 28,  2002.  There was no material
hedge  ineffectiveness  related  to cash flow  hedges  during  the  period to be
recognized in earnings.  There was no gain or loss reclassified from accumulated
other  comprehensive  income into earnings during the fiscal year ended July 28,
2002  as a  result  of  the  discontinuance  of a  cash  flow  hedge  due to the
probability of the original forecasted transaction not occurring.

Other debt of the Company  consists of a mortgage on its facility in  Lancaster,
PA at a fixed rate of 7.43%, and 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, 2004. 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 1.75% and 1.81%, respectively, at July 28, 2002. The
credit line is reviewed on an annual basis.

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

The Company does not anticipate any other material changes in its primary market
risk exposures in fiscal 2003.

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:              Mortgage          Bonds
    ------------------               --------          -----

             2003                   $    81          $    95
             2004                        86              100
             2005                        93              105
             2006                       101              110
             2007                       108              115
             2008 and later           2,222            2,475
                                      -----            -----
                                    $ 2,691          $ 3,000
                                      =====            =====

    Fair value                      $ 3,557          $ 3,000
                                      =====            =====


                                       21

<PAGE>



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
July 28, 2002.

Item 8.  Financial Statements and Supplementary Data

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

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

Not applicable

PART III

The  information  required  by Part  III is  incorporated  by  reference  to the
Company's  definitive  proxy  statement in connection with its Annual Meeting of
Stockholders  scheduled  to be  held in  January  2003,  to be  filed  with  the
Securities  and Exchange  Commission  within 120 days  following  the end of the
Company's fiscal year ended July 28, 2002.

                                       22

<PAGE>



PART IV

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

(a)  Exhibits

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

      3.2   By-Laws,  as amended August 7, 2001 (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  Employment  Agreement  between  Herley  Industries,  Inc. and Lee N.
            Blatt dated as of July 29, 2002.

      10.6  Employment Agreement between Herley Industries,  Inc. and Myron Levy
            dated as of July 29, 2002.

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

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

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

      10.10 Loan Agreement dated June 19, 2002 among the Registrant and Allfirst
            Bank and Fulton Bank.

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

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

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

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

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

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

      10.17 Common  Stock  Purchase  Agreement  dated as of  September  20, 2002
            between Registrant and EW Simulation Technology, Limited.

      10.18 Trust Indenture dated as of October 19, 2001 between Registrant, and
            East  Hempfield  Township  Industrial   Development   Authority  and
            Allfirst Bank, as Trustee.

      23.1  Consent of Deloitte & Touche LLP.

      99.1  Certification  required by 18 U.S.C.  ss. 906 of the  Sarbanes-Oxley
            Act of 2002.

(b)  Financial Statements

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

         (2) Schedule II - Valuation and  Qualifying  Accounts  filed as part of
             this Form 10-K at page 27.



                                       23

<PAGE>



(c) Reports on Form 8-K

         During the fourth  quarter of fiscal  2002,  the  Registrant  filed the
         following reports under Form 8-K:

         The Company filed a report on May 24, 2002 for the appointment of Ernst
         & Young LLP as its independent auditors for the fiscal year ending July
         28, 2002 to replace Arthur Andersen.

         The  Company  filed a report on July 17,  2002 for the  appointment  of
         Deloitte & Touche LLP as its  independent  auditors for the fiscal year
         ending July 28, 2002 to replace Arthur Andersen.


                                       24

<PAGE>



SIGNATURES:

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on October 21, 2002.

                                   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  21,  2002 by the  following  persons in the
capacities indicated:


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

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

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

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

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

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

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

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

                                       25

<PAGE>



                    Certification of Chief Executive Officer
          pursuant to Section 302(a) of the SARBANES-OXLEY ACT OF 2002

      I, Myron Levy,  Chief Executive  Officer of Herley  Industries,  Inc. (the
      "Registrant"), certify that:

         (a)      I have  reviewed  this  annual  report  on Form 10-K of Herley
                  Industries, Inc. for the fiscal year ended July 28, 2002;

         (b)      Based on my knowledge, this annual report does not contain any
                  untrue  statement  of a  material  fact  or  omit  to  state a
                  material fact necessary to make the statements  made, in light
                  of the  circumstances  under which such  statements were made,
                  not  misleading  with  respect to the  period  covered by this
                  annual report; and

         (c)      Based on my  knowledge,  the financial  statements,  and other
                  financial  information included in this annual report,  fairly
                  present in all  material  respects  the  financial  condition,
                  results of operations  and cash flows of the Registrant as of,
                  and for, the periods presented in this annual report.



Dated:   October 21, 2002                      By:         /s/ Myron Levy
                                                        ------------------------
                                                        Myron Levy
                                                        Chief Executive Officer


                    Certification of Chief Financial Officer
          pursuant to Section 302(a) of the SARBANES-OXLEY ACT OF 2002

      I, Anello C. Garefino, Chief Financial Officer of Herley Industries,  Inc.
      (the "Registrant"), certify that:

         (a)      I have  reviewed  this  annual  report  on Form 10-K of Herley
                  Industries, Inc. for the fiscal year ended July 28, 2002;

         (b)      Based on my knowledge, this annual report does not contain any
                  untrue  statement  of a  material  fact  or  omit  to  state a
                  material fact necessary to make the statements  made, in light
                  of the  circumstances  under which such  statements were made,
                  not  misleading  with  respect to the  period  covered by this
                  annual report; and

         (c)      Based on my  knowledge,  the financial  statements,  and other
                  financial  information included in this annual report,  fairly
                  present in all  material  respects  the  financial  condition,
                  results of operations  and cash flows of the Registrant as of,
                  and for, the periods presented in this annual report.



Dated:   October 21, 2002                   By:         /s/ Anello C. Garefino
                                                     -------------------------
                                                     Anello C. Garefino
                                                     Chief Financial Officer

                                       26

<PAGE>

<TABLE>
<CAPTION>

Schedule II - Valuation and Qualifying Accounts

          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>
       July 28, 2002:
          Inventory              $ 2,204,993       $ 202,035$         -          $      -            $ 2,407,028

       July 29, 2001:
          Inventory                1,891,443         514,663       152,505 (1)        353,618          2,204,993

       July 30, 2000:
          Inventory                1,935,832          83,317       -                  127,706          1,891,443
<FN>

(1) Reserve established for the acquisition of AMT.
</FN>
</TABLE>


                                       27

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

                                                                                    July 28,      July 29,
                                                                                      2002          2001
                                                                                   ----------    ----------

                          ASSETS
<S>                                                                              <C>           <C>
Current Assets:
         Cash and cash equivalents                                               $    86,210   $    13,041
         Accounts receivable                                                          14,486        16,069
         Costs incurred and income recognized in excess
            of billings on uncompleted contracts                                       6,882           541
         Other receivables                                                               274           160
         Inventories, net of allowance of $2,407 in 2002
           and $1,774 in 2001                                                         33,371        31,397
         Prepaid income taxes                                                            382         -
         Assets held for sale                                                          -             2,370
         Deferred taxes and other                                                      2,670         1,958
                                                                                   ----------    ----------
                                 Total Current Assets                                144,275        65,536
Property, Plant and Equipment, net                                                    22,231        21,312
Goodwill                                                                              21,665        26,302
Intangibles, net of accumulated amortization of $145 in 2002
         and $104 in 2001                                                                423           464
Available-For-Sale Securities                                                             46           146
Other Investments                                                                        195           773
Other Assets                                                                           1,367            64
                                                                                   ----------    ----------
                                                                                 $   190,202   $   114,597
                                                                                   ==========    ==========
         LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
         Current portion of long-term debt                                       $       215   $       213
         Accounts payable and accrued expenses                                        12,857        15,304
         Billings in excess of costs incurred and
             income recognized on uncompleted contracts                                -               531
         Income taxes payable                                                          -             1,061
         Reserve for contract losses                                                     820           472
         Advance payments on contracts                                                 1,371           261
         Liabilities held for sale                                                     -               890
                                                                                   ----------    ----------
                                 Total Current Liabilities                            15,263        18,732
Long-term Debt                                                                         5,684         2,740
Deferred Income Taxes                                                                  3,897         4,452
                                                                                   ----------    ----------
                                                                                      24,844        25,924
                                                                                   ----------    ----------
Commitments and Contingencies
Shareholders' Equity:
         Common stock, $.10 par value; authorized
           20,000,000 shares; issued and outstanding
           14,680,960 in 2002 and 10,537,289 in 2001                                   1,468         1,054
         Additional paid-in capital                                                  116,579        45,250
         Retained earnings                                                            47,541        42,369
         Accumulated other comprehensive loss                                           (230)        -
                                                                                   ----------    ----------
                                 Total Shareholders' Equity                          165,358        88,673

                                                                                   ----------    ----------
                                                                                 $   190,202   $   114,597
                                                                                   ==========    ==========
</TABLE>

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

                                       F-4
<PAGE>
<TABLE>
<CAPTION>
                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (In thousands except per share data)


                                                                        52 weeks ended
                                                       --------------------------------------------------
                                                         July 28,          July 29,          July 30,
                                                           2002              2001              2000
                                                       -------------     -------------     --------------

<S>                                                  <C>               <C>               <C>
Net sales                                            $       92,881    $       76,494    $        70,537
                                                       -------------     -------------     --------------

Cost and expenses:
       Cost of products sold                                 61,947            50,691             44,382
       Selling and administrative expenses                   13,229            14,545             13,497
       Litigation costs                                       2,079               265            -
       Plant closing costs                                      406           -                  -
                                                       -------------     -------------     --------------
                                                             77,661            65,501             57,879
                                                       -------------     -------------     --------------

       Income from operations                                15,220            10,993             12,658
Other income (expense), net                                     386               447               (906)
                                                       -------------     -------------     --------------

       Income from continuing operations
           before income taxes                               15,606            11,440             11,752
Provision for income taxes                                    4,876             3,867              4,113
                                                       -------------     -------------     --------------

       Income from continuing operations                     10,730             7,573              7,639
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                              9,809             7,405              7,639
Cumulative effect of adopting SFAS 142                       (4,637)          -                  -
                                                       -------------     -------------     --------------

       Net income                                    $        5,172    $        7,405    $         7,639
                                                       =============     =============     ==============

Earnings (loss) per common share - Basic
       Income from continuing operations                   .89               .75               1.05
       Loss from discontinued operations                  (.08)             (.02)                -
       Cumulative effect of adopting SFAS 142             (.39)               -                  -
                                                       -------------     -------------     --------------
          Net earnings                               $     .43         $     .73         $     1.05
                                                       =============     =============     ==============

       Basic weighted average shares                      12,041            10,082             7,308
                                                       =============     =============     ==============

Earnings (loss) per common share - Diluted
       Income from continuing operations                   .83               .69                .96
       Loss from discontinued operations                  (.07)             (.02)                -
       Cumulative effect of adopting SFAS 142             (.36)               -                  -
                                                       -------------     -------------     --------------
          Net earnings                               $     .40         $     .68         $      .96
                                                       =============     =============     ==============

       Diluted weighted average shares                    12,978            10,956             7,928
                                                       =============     =============     ==============
</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
         52 weeks ended July 28, 2002, July 29, 2001 and July 30, 2000
                        (In thousands except share data)
                                                                                                             Accumulated
                                                                       Additional                             Other
                                                         Common Stock  Paid-in      Retained    Treasury    Comprehensive
                                               Shares         Amount   Capital      Earnings    Stock          Loss          Total
                                               ------         ------   -------      --------    -----          ----          -----

<S>                                          <C>         <C>           <C>         <C>         <C>         <C>            <C>
Balance at August 1, 1999                     5,030,283   $   503       15,072      27,325        -             -         $  42,900

Net income                                                                           7,639                                    7,639
Issuance of common stock in connection
  with business acquired                         33,841         3          511                                                  514
Exercise of warrants issued in
  connection with public offering
  in 1998                                     1,313,613       131       20,361                                               20,492
Exercise of stock options
  and warrants                                  137,115        14        1,213                    (140)                       1,087
Tax benefit upon exercise of stock
  options                                                                  304                                                  304
Purchase of 512,000 shares
  of treasury stock                                                                             (7,565)                      (7,565)
Retirement of treasury shares                  (520,982)      (52)      (7,653)                  7,705                            0

                                             -----------    ------     --------    --------    --------    -------------    --------
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                            0
Three-for-two stock split                     3,513,736       351         (351)                                                   0

                                             -----------    ------     --------    --------    --------    -------------    --------
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                            0
Other comprehensive loss:
    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
                                             ===========    ======     ========    ========    ========    =============    ========
</TABLE>



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




                                       F-6
<PAGE>
<TABLE>
<CAPTION>
                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                                                                                 52 weeks ended
                                                                             -------------------------------------------
                                                                              July 28,         July 29,        July 30,
                                                                                2002             2001            2000
                                                                             ----------       ----------      ----------

<S>                                                                        <C>              <C>             <C>
Cash flows from operating activities:
  Income from continuing operations                                        $    10,730      $     7,573     $     7,639
                                                                             ----------       ----------      ----------
  Adjustments to reconcile net income to net cash provided by operations:
        Depreciation and amortization                                            3,917            4,772           3,998
        Loss (gain) on sale of fixed assets                                         45                4             (21)
        Equity in income of limited partnership                                    (48)             (49)            (71)
        (Increase) decrease in deferred tax assets                                (712)             962            (148)
        (Decrease) increase in deferred tax liabilities                           (471)          (1,119)            342
        Changes in operating assets and liabilities:
               Decrease (increase) in accounts receivable                        1,583             (547)         (1,568)
               (Increase) in costs incurred and income
                  recognized in excess of billings on
                  uncompleted contracts                                         (6,341)            (395)           (146)
               (Increase) decrease in other receivables                             (2)             133             (20)
               (Increase) in inventories                                        (1,974)          (6,880)         (1,625)
               Decrease in prepaid expenses and other                              -                 25               4
               Increase in accounts payable
                 and accrued expenses                                              429            1,088             685
               (Decrease) increase in billings in excess of
                 costs incurred and income recognized
                 on uncompleted contracts                                         (531)             531             -
               Increase (decrease) in income taxes payable                       5,351             (281)          1,458
               Increase (decrease) in reserve for contract losses                  348           (1,201)         (1,038)
               Increase (decrease) in advance payments on contracts              1,110             (745)            195
               Other, net                                                         (295)             (13)            170
                                                                             ----------       ----------      ----------
                     Total adjustments                                           2,409           (3,715)          2,215
                                                                             ----------       ----------      ----------

        Net cash provided by continuing operations                              13,139            3,858           9,854
                                                                             ----------       ----------      ----------

Cash flows from investing activities:
  Acquisition of businesses, net of cash acquired                                  -             (8,373)         (6,095)
  Payment of deferred purchase price of acquired business                       (3,000)             -               -
  Investment in technology license                                                (500)             -               -
  Proceeds from sale of fixed assets                                                85               16           4,142
  Partial distribution from limited partnership                                    626              296             -
  Capital expenditures                                                          (5,488)          (3,679)         (2,618)
                                                                             ----------       ----------      ----------
        Net cash used in investing activities                                   (8,277)         (11,740)         (4,571)
                                                                             ----------       ----------      ----------

Cash flows from financing activities:
  Borrowings under bank line of credit                                           4,300            7,100          13,900
  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                      3,984           16,008          21,574
  Payments under lines of credit                                                (4,300)          (7,100)        (26,400)
  Payments of long-term debt                                                      (201)            (908)         (1,868)
  Purchase of treasury stock                                                    (3,847)            (194)         (7,565)
                                                                             ----------       ----------      ----------
        Net cash provided by (used in) financing activities                     67,748           14,906            (359)
                                                                             ----------       ----------      ----------

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

        Net increase in cash and cash equivalents                               73,169            5,376           4,924

Cash and cash equivalents at beginning of period                                13,041            7,665           2,741
                                                                             ----------       ----------      ----------

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

Supplemental cash flow information:
  Cashless exercise of stock options                                       $     8,026      $      -        $        80
                                                                             ==========       ==========      ==========
  Stock issued for business acquired                                       $       -        $      -        $       514
                                                                             ==========       ==========      ==========
  Tax benefit related to stock options                                     $     6,794      $        83     $       304
                                                                             ==========       ==========      ==========
</TABLE>

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

                                       F-7
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, July 28, 2002 and July 29, 2001       F-4

     Consolidated Statements of Income for the 52 weeks ended
        July 28, 2002, July 29, 2001 and July 30, 2000                  F-5

     Consolidated Statements of Shareholders' Equity for the 52 weeks
        ended July 28, 2002, July 29, 2001 and July 30, 2000            F-6

     Consolidated Statements of Cash Flows for the 52 Weeks Ended
        July 28, 2002, July 29, 2001 and July 30, 2000                  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  sheet  of  Herley
Industries,  Inc. and Subsidiaries  ("the Company") as of July 28, 2002, and the
related consolidated  statement of income,  shareholders' equity, and cash flows
for the year then  ended.  Our  audit  also  included  the  financial  statement
schedule listed in the Index at Item 14 as it relates to the year ended 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
years ended July 29, 2001 and July 30, 2000 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, updated as of March
1, 2002.

We conducted our audit 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  audit  provides  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 July 28, 2002,
and the results of their operations and their cash flows for the year 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 year ended 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 15, 2002
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>



                   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. All fiscal years presented  consisted
     of 52 weeks.

3.   Basis of Financial Statement Presentation

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

4.   Cash and Cash Equivalents

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

5.   Concentration of Credit Risk

     Financial  instruments which potentially subject the Company to credit risk
     consist  primarily of trade accounts  receivable.  Accounts  receivable are
     principally from the U.S.  Government,  major U.S. Government  contractors,
     several  foreign  governments,  and  domestic  customers  in  the  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 recorded in
     other income (expense).

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.

     Amortization of goodwill charged to continuing operations for the fifty-two
     weeks ended July 29, 2001 and July 30,  2000 was  approximately  $1,296,000
     and $958,000 respectively. 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:

                                                               Fifty-two weeks ended
                                                               ---------------------
                                                      July 28,       July 29,       July 30,
                                                        2002           2001           2000
                                                        ----           ----           ----
<S>                                                  <C>             <C>            <C>
       Income from continuing operations
         as reported                                 $  10,730       $  7,573       $   7,639
       Add goodwill amortization, net of
         income tax benefit                               -               850             623
                                                        ------         ------          ------
           Adjusted  income from continuing
               operations                            $  10,730       $  8,423       $   8,262
                                                        ======          =====           =====

       Earnings per common share-basic:
          From continuing operations as reported     $     .89       $    .75       $    1.05
          Goodwill amortization                            -              .08             .08
                                                           ---            ---            ----
            Adjusted                                 $     .89       $    .83       $    1.13
                                                           ===            ===            ====

       Earnings per common share-diluted:
          From continuing operations as reported     $     .83       $    .69       $     .96
          Goodwill amortization                            -              .08             .08
                                                           ---            ---            ----
            Adjusted                                 $     .83       $    .77       $    1.04
                                                           ===            ===            ====
</TABLE>

<TABLE>
<CAPTION>

     Net income :
                                                               Fifty-two weeks ended
                                                               ---------------------
                                                      July 28,       July 29,       July 30,
                                                        2002           2001           2000
                                                        ----           ----           ----

<S>                                                  <C>             <C>            <C>
       Net income as reported                        $   5,172       $  7,405       $   7,639
       Add goodwill amortization, net of
          income tax benefit                              -               987             623
                                                         -----          -----           -----

            Adjusted net income                      $   5,172       $  8,392       $   8,262
                                                         =====          =====           =====

       Earnings per common share-basic:
          As reported                                $     .43       $    .73       $    1.05
          Goodwill amortization                            -              .10             .08
                                                           ---            ---            ----
            Adjusted                                 $     .43       $    .83       $    1.13
                                                           ===            ===            ====

       Earnings per common share-diluted:
          As reported                                $     .40       $    .68       $     .96
          Goodwill amortization                            -              .09             .08
                                                           ---            ---            ----
            Adjusted                                 $     .40       $    .77       $    1.04
                                                           ===            ===            ====
</TABLE>

     Intangibles,  consisting  of patents  having an  estimated  useful  life of
     fourteen  years,  are carried at an aggregate gross amount of $568,000 with
     accumulated amortization at July 29, 2002 of $145,000. Amortization expense
     for the  fifty-two  weeks  ended  July  29,  2002  and  July  30,  2001 was
     approximately $41,000.

     The carrying amount of intangibles is evaluated on a recurring basis. There
     was  no  impairment  in  the  remaining   goodwill  at  July  28,  2002  of
     approximately $21,665,000 related to the defense electronics reporting unit
     based on current market capitalization of the Company. 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.


                                      F-10

<PAGE>



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.

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  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
     $2,269,000,  $2,588,000,  and  $2,264,000 in fiscal 2002,  2001,  and 2000,
     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.


                                      F-11

<PAGE>



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.

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 an average
     rate for 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").  Changes in the fair value of a
     derivative that is designated as, and meets all the required  criteria for,
     a fair value  hedge,  along  with the gain or loss on the  hedged  asset or
     liability that is  attributable to the hedged risk, are recorded in current
     period  earnings.  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.
     The  portion of the change in fair value of a  derivative  associated  with
     hedge  ineffectiveness or the component of a derivative instrument excluded
     from the  assessment  of  hedge  effectiveness  is  recorded  currently  in
     earnings.  Also,  changes in the entire fair value of a derivative  that is
     not designated as a hedge are recorded immediately in earnings. The Company
     formally documents all relationships between hedging instruments and hedged
     items,  as  well  as  its   risk-management   objective  and  strategy  for
     undertaking various hedge transactions.  This process includes relating all
     derivatives  that are  designated  as fair  value or cash  flow  hedges  to
     specific  assets and  liabilities  on the balance sheet or to specific firm
     commitments or forecasted transactions.

     The Company also formally assesses,  both at the inception of the hedge and
     on an  ongoing  basis,  whether  each  derivative  is highly  effective  in
     offsetting  changes in fair values or cash flows of the hedged item.  If it
     is determined that a derivative is not highly  effective as a hedge or if a
     derivative  ceases  to  be a  highly  effective  hedge,  the  Company  will
     discontinue hedge accounting prospectively.

17.    New Accounting Pronouncements

     In June  2001,  the  FASB  issued  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
     does not believe the adoption of this standard will have a material  impact
     on the Company's financial position or results of operations.


                                      F-12

<PAGE>



     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  does not believe  the  adoption  of this  standard  will have a
     material  impact  on  the  Company's   financial  position  or  results  of
     operations.

     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.

NOTE B - ACQUISITIONS

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

     The Company  entered into an  agreement,  as of January 3, 2000, to acquire
     substantially all of the assets of Robinson Laboratories,  Inc. ("Robinson"
     or "Robinson  Labs"),  a New  Hampshire  corporation,  which  operates as a
     division  of Herley  Industries,  Inc.  The  transaction  provided  for the
     payment of $6,000,000 in cash, the issuance of 50,762 (as adjusted)  shares
     of  Common  Stock of the  Company  valued at  $10.125  per  share,  and the
     assumption of  approximately  $3,140,000 in liabilities.  In addition,  the
     agreement 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.  The  consolidated  statements of income include
     the results of Robinson's operations from January 3, 2000.

     Unaudited  pro  forma   consolidated   results  of  operations  as  if  the
     acquisitions  discussed  above had taken place at the  beginning  of fiscal
     2000 would not have been materially different from the amounts reported.

     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 R.


                                      F-13

<PAGE>



NOTE C - INVENTORIES

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

                                                  July 28,          July 29,
                                                    2002              2001
                                                    ----              ----
           Purchased parts and raw materials        $18,680         $ 18,322
           Work in process                           15,707           12,854
           Finished products                          1,391            1,995
                                                    -------          -------
                                                     35,778           33,171
           Less reserve                               2,407            1,774
                                                      -----            -----
                                                   $ 33,371         $ 31,397
                                                     ======           ======

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 July 28, 2002 and July 29, 2001 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  $626,000 and $296,000 from
     the Partnership in fiscal 2002 and 2001, respectively.  As of July 28, 2002
     the  Company's  limited  partnership  interest  had  a  carrying  value  of
     $195,000.

NOTE E - PROPERTY, PLANT AND EQUIPMENT

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

                                         July 28,    July 29,       Estimated
                                          2002         2001         Useful Life
                                          ----         ----         -----------
       Land                             $   2,908   $   2,908
       Building and building
            improvements                    9,857       8,643       10-40 years
       Machinery and equipment             33,698      30,403        5- 8 years
       Furniture and fixtures               1,058       1,049        5-10 years
       Automobiles                             91          91           3 years
       Tools                                   25          34           5 years
       Leasehold improvements               1,589       1,586        5-10 years
                                          -------      ------
                                           49,226      44,714
       Less accumulated depreciation       26,995      23,402
                                           ------      ------
                                         $ 22,231    $ 21,312
                                           ======      ======

     Depreciation  charges  totaled  $3,776,000,  $3,127,000,  and $2,889,000 in
     fiscal 2002, 2001, and 2000, respectively.

NOTE F - COMMITMENTS AND CONTINGENCIES

     Leases

     The  Company  leases  office,  production  and  warehouse  space as well as
     computer equipment and automobiles under  noncancellable  operating leases.
     Rent expense for the 52 weeks ended July 28, 2002,  July 29, 2001, and July
     30,  2000,  was  approximately  $1,244,000,   $1,506,000,  and  $1,053,000,
     respectively.

                                      F-14

<PAGE>



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

                                                       Amount
                 Year ending fiscal 2003               $ 1,129
                                    2004                   966
                                    2005                   860
                                    2006                   875
                                    2007                   901
                                  Future                 2,049

     Employment Agreements

     The  Company has  employment  agreements  with  certain  executives  of the
     Company which expire December 31, 2007, 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 July 29, 2002 of $1,327,000 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 $956,000 and $971,000 was
     expensed in fiscal years 2002 and 2000, respectively. The executives waived
     their incentive for fiscal 2001.

     The agreements also provide that, in the event there is a change in control
     of the Company, as defined, the executives have the option to terminate the
     agreements  and receive a lump-sum  payment  equal to the sum of the salary
     payable for the remainder of the employment  term,  plus the annual bonuses
     (based on the average of the three highest  annual  bonuses  awarded during
     the ten preceding  years) for the remainder of the  employment  term. As of
     July 29, 2002, the amount payable in the event of such termination would be
     approximately $12,416,000.

     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 $1,820,000 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 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

                                      F-15

<PAGE>



     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.  The
     court has still not entered final judgment following the jury verdict,  and
     both parties are expected to appeal. 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 intends to file a petition for attorney's
     fees and costs against both RLI and Robinson for approximately $2,000,000.

     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, 2004. At July 28, 2002  stand-by  letters of
     credit  aggregating  approximately  $5,062,000 were outstanding  under this
     facility.

NOTE G - INCOME TAXES

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

                                           52 Weeks ended
                              --------------------------------------
                              July 28,         July 29,      July 30,
                                2002             2001          2000
                                ----             ----          ----
       Current
                  Federal     $ 5,333           $ 3,050      $ 3,573
                  State           520               275          192
                  Foreign         204               202          154
                                -----             -----        -----
                                6,057             3,527        3,919
                                -----             -----        -----
       Deferred
                  Federal      (1,090)              248          215
                  State          (106)               92          (21)
                  Foreign          15               -            -
                                -----             -----        -----
                               (1,181)              340          194
                                -----             -----        -----

                              $ 4,876           $ 3,867      $ 4,113
                                =====             =====        =====

     The Company paid income taxes of approximately  $680,000,  $4,427,000,  and
     $2,241000 in fiscal 2002, 2001, and 2000, respectively.  The following is a
     reconciliation of the U. S. statutory income tax rate and

                                      F-16

<PAGE>



     the effective tax rate on pretax income:

                                                          52 Weeks ended
                                                 ------------------------------
                                                July 28,    July 29,   July 30,
                                                  2002        2001       2000
                                                  ----        ----       ----
       Statutory income tax rate                  34.0 %      34.0 %     34.0 %
       State income taxes, net of
          federal income tax benefit               0.9         2.4        0.9
       Benefit of foreign sales corporation         -         (2.6)      (2.1)
       Benefit of extra territorial income        (2.4)         -          -
       Non-deductible expenses                     0.2         2.5        1.8
       Benefit of foreign and
          foreign-source income                   (1.4)       (2.3)      (1.8)
       Other, net                                 (0.1)        0.4        2.2
                                                  ----        ----       ----
          Effective tax rate                      31.2 %      34.4 %     35.0 %
                                                  ====        ====       ====

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

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

                                       July 28, 2002           July 29, 2001
                                   ---------------------   ---------------------
                                   Deferred   Deferred     Deferred   Deferred
                                      Tax        Tax          Tax        Tax
                                    Assets   Liabilities    Assets   Liabilities

         Intangibles               $   -       $ 1,738     $   -        $ 1,943
         Accrued vacation pay           386       -             446        -
         Accrued bonus                   53       -              39        -
         Warranty costs                 136       -             100        -
         Inventory                    1,101       -             838        -
         Depreciation                  -         2,159         -          2,873
         Contract losses                362       -             146        -
         Net operating loss
            carry-forwards              230       -             230        -
         Other                          120       -             342          99
                                      -----      -----        -----       -----
                                    $ 2,388    $ 3,897      $ 2,141     $ 4,915
                                      =====      =====        =====       =====

     As  of  July  28,  2002  the  Company  has  available  net  operating  loss
     carry-forwards  for federal and state income tax purposes of  approximately
     $489,000 and $956,000,  respectively which expire through 2020. The Federal
     net  operating  loss arose  through the  acquisition  of  Terrasat  and its
     utilization is subject to certain limitations.


                                      F-17

<PAGE>



NOTE H- LONG-TERM DEBT

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

                                                          July 28,    July 29,
                                         Rate               2002        2001
                                      ---------------       ----        ----
       Revolving loan facility (a)    3.25% and 3.16%     $   -      $    -
       Mortgage note (b)              7.43%                 2,691       2,765
       Industrial Revenue Bonds (c)   4.07%                 3,000         -
       Other                                 -                208         188
                                                            -----       -----
                                                            5,899       2,953
       Less current portion                                   215         213
                                                            -----       -----
                                                          $ 5,684    $  2,740
                                                            =====       =====

     (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, 2004. 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
          1.75% and 1.81%, respectively,  at July 28, 2002. 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 July 28, 2002 and July 29, 2001.

          The agreement contains various financial covenants,  including,  among
          other  matters,  minimum  tangible  net worth,  total  liabilities  to
          tangible net worth, debt service  coverage,  and restrictions on other
          borrowings.  The Company is in  compliance  with all covenants at July
          28, 2002.

     (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  $1,845,000.  The  proceeds  of the
          mortgage loan were used to prepay the existing mortgage note having an
          outstanding  balance  of  $2,890,000  plus  a  prepayment  premium  of
          $115,600.

          The mortgage note  agreement  contains  various  financial  covenants,
          including, among other matters, the maintenance of specific amounts of
          tangible net worth, debt to tangible net worth, debt service coverage,
          and  restrictions  on other  borrowings.  The Company is in compliance
          with all covenants at July 28, 2002. In connection with this loan, the
          Company paid approximately  $45,000 in financing costs. Such costs are
          included  in Other  Assets in the  accompanying  consolidated  balance
          sheets at July 28,  2002 and July 29,  2001,  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  is due  October  1,  2002  and
          increases  each year until the final payment of $225,000 in 2021.  The
          interest  rate on the Bonds is reset weekly at the  prevailing  market
          rate of the BMA  Municipal  index.  The initial  rate of interest  was
          2.1%,  which,  after giving  effect to a ten year  interest  rate swap
          agreement  (See Note O)  becomes a fixed rate of 4.07%.  The  interest
          rate at July 28, 2002 was 1.59%. 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

                                      F-18

<PAGE>



          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 $1,802,000 at July 28, 2002.

     The Company paid interest of  approximately  $316,000 in 2002,  $289,000 in
     2001, and $1,200,000 in 2000.

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

                    Fiscal year
                   ending during:     Amount
                   -------------      ------
                       2003          $   215
                       2004              208
                       2005              198
                       2006              211
                       2007              223
                       Future          4,844
                                       -----
                                     $ 5,899



NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

                                              July 28,       July 29,
                                                2002           2001
                                                ----           ----
         Accounts payable                     $ 5,832         $ 6,760
         Accrued payroll and bonuses            3,724           3,002
         Due for business acquired               -              3,000
         Accrued commissions                      822             591
         Accrued interest                          11            -
         Accrued legal expenses                 1,018             174
         Accrued warranty costs                   235             255
         Accrued severance                        706             780
         Accrued rent expense                     163             132
         Lease termination cost                    58              54
         Unearned income                          108            -
         Other accrued expenses                   180             556
                                               ------          ------
                                             $ 12,857        $ 15,304
                                               ======          ======

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 $533,000,
     $164,000, and $415,000 under the Plan for the 52 weeks ended July 28, 2002,
     July 29, 2001, and July 30, 2000, respectively.


                                      F-19

<PAGE>



     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.

     Net pension  income  recorded by the  Company in fiscal 2000  includes  the
     following components (in thousands):
                                                                July 30,
                                                                  2000
                                                                --------
              Service cost - benefits earned during the period  $    -
              Interest cost                                        237
              Return on assets                                    (736)
                                                                  ----
                   Net pension income                           $ (499)
                                                                  ====

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

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

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

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

                                      F-20

<PAGE>



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

NOTE L - COMPUTATION OF PER SHARE EARNINGS

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

                                                                            52 Weeks ended
                                                              -------------------------------------------
                                                              July 28, 2002  July 29, 2001  July 30, 2000
                                                              -------------  -------------  -------------
<S>                                                               <C>            <C>            <C>
Numerator:

      Income from continuing operations                           $ 10,730       $ 7,573        $ 7,639
      Loss from discontinued operations                               (921)         (168)           -
      Cumulative effect of adopting SFAS 142                        (4,637)           -             -
                                                                    ------         -----         -----
      Net Income                                                  $  5,172       $ 7,405        $ 7,639
                                                                    ======         =====         =====

Denominator:
      Basic weighted-average shares                                  12,041        10,082        7,308
      Effect of dilutive securities:
         Employee stock options and warrants                            937           874          620
                                                                     ------        ------        -----
      Diluted weighted-average shares                                12,978        10,956        7,928
                                                                     ======        ======        =====

Stock options and warrants not included in computation                  126          544         2,472
                                                                        ===          ===         =====
</TABLE>

     The number of stock options and warrants not included in the computation of
     diluted EPS relates to stock options and warrants  having  exercise  prices
     that are greater than the average  market price of the common shares during
     the period, and therefore, are antidilutive.  The options and warrants with
     exercise  prices  ranging  from $17.42 to $19.52,  which  expire at various
     dates through May 21, 2007 were outstanding as of July 28, 2002.

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
     applies APB Opinion No. 25 and related  Interpretations  in accounting  for
     these  plans.   Statement  of  Financial   Accounting   Standards   No.123,
     "Accounting  for Stock-Based  Compensation"  ("SFAS 123") was issued by the
     FASB in 1995 and , if fully

                                      F-21

<PAGE>



     adopted,  changes the methods for  recognition  of cost on plans similar to
     those  of  the  Company.   The  Company  has  adopted  the  disclosure-only
     provisions  of  SFAS  123.  Accordingly,  no  compensation  cost  has  been
     recognized for the stock option plans. Pro forma information  regarding net
     income and earnings  per share is required by  Statement  123, and has been
     determined as if the Company had  accounted for its employee  stock options
     under the fair value method of that Statement.

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

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

                                                52 Weeks ended
                                 ---------------------------------------------
                                 July 28, 2002   July 29, 2001   July 30, 2000
                                 -------------   -------------   -------------
       Expected life of options    1.51 years       .73 years       .71 years
       Volatility                         .68             .70             .72
       Risk-free interest rate           2.8%            3.4%            6.1%
       Dividend yield                    zero            zero            zero

     Had compensation cost for stock options granted in fiscal years 2002, 2001,
     and  2000  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):

                                                  2002       2001       2000
                                                  ----       ----       ----
          Net income  -  as reported           $ 5,172    $ 7,405    $ 7,639
          Net income  -  pro forma                 747      5,795      5,952
          Earnings per share  -  as reported
               Basic                              $.43       $.73      $1.05
               Diluted                             .40        .68        .96
          Earnings per share  - pro forma
               Basic                              $.06       $.57       $.81
               Diluted                             .06        .53        .75

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

     In September  2000,  the Board of Directors  approved the 2000 Stock Option
     Plan which covers 1,500,000  shares of the Company's common stock.  Options
     granted under the plan are non-qualified stock options.  Under the terms of
     the plan, the exercise price for options granted under the plan will be the
     fair market value at the date of grant. The nature and terms of the options
     to be  granted  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
     1,010,250  and 375,000  shares were  granted  during the fiscal years ended
     July 28, 2002 and July 29, 2001, 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

                                      F-22

<PAGE>



     expire no later than ten years  from the date of grant,  subject to certain
     restrictions.  Options for 368,342, 440,250 and 969,750 shares were granted
     during the fiscal  years  ended July 28,  2002,  July 29, 2001 and July 30,
     2000, respectively.

     In May 1997,  the Board of  Directors  approved  the 1997 Stock Option Plan
     which  covers  2,500,000  shares of the  Company's  common  stock.  Options
     granted  under the plan may be  incentive  stock  options  qualified  under
     Section 422 of the  Internal  Revenue Code of 1986 or  non-qualified  stock
     options.  Under the  terms of the  plan,  the  exercise  price for  options
     granted  under the plan will be the fair market value at the date of grant.
     Prices for incentive stock options granted to employees who own 10% or more
     of the Company's  stock are at least 110% of market value at date of grant.
     The nature and terms of the  options to be granted  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,  14,250, and 129,000 shares were
     granted during the fiscal years ended July 28, 2002, July 29, 2001 and July
     30, 2000, respectively.

     In October 1995, the Board of Directors approved the 1996 Stock Option Plan
     which  covers  1,000,000  shares of the  Company's  common  stock.  Options
     granted  under the plan may be  incentive  stock  options  qualified  under
     Section 422 of the  Internal  Revenue Code of 1986 or  non-qualified  stock
     options.  Under the  terms of the  Plan,  the  exercise  price for  options
     granted  under the plan will be the fair market value at the date of grant.
     Prices for incentive stock options granted to employees who own 10% or more
     of the Company's  stock are at least 110% of market value at date of grant.
     The nature and terms of the  options to be granted  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.

     A summary of stock option  activity  under all plans for the 52 weeks ended
     July 28, 2002, July 29, 2001 and July 30, 2000 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>
       Outstanding August 1, 1999       2,091,925      $ 1.69 - 10.97  $  7.15          320,000      $ 3.09
          Granted                       1,098,750        9.25 - 11.91    10.33
          Exercised                      (155,985)       1.69 -  9.83     4.68
          Canceled                        (20,550)       7.41 - 10.46     8.47
                                        ---------       ------------   --------        -------      ------
       Outstanding July 30, 2000        3,014,140      $ 4.06 - 11.91  $  8.43          320,000      $ 3.09
          Granted                         829,500        8.38 - 14.25     8.99
          Exercised                       (37,254)       4.06 - 10.46     6.72
          Canceled                        (48,600)       4.31 - 14.25    10.76
                                        ---------       -------------   -------         -------      ------
       Outstanding July 29, 2001        3,757,786     $  4.06 - 13.67  $  8.55          320,000      $ 3.09
          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             -
                                        =========                                       =======

</TABLE>


                                      F-23

<PAGE>



     Options  Outstanding  and  Exercisable  by Price Range as of July 28, 2002,
     with  expiration  dates  ranging  from May 12,  2005 to May 21, 2012 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                274,726             5.7               $ 6.21          234,751        $ 5.97
         8.38  -       8.67                638,350             6.5                 8.38          392,500          8.38
         8.77  -      10.46              1,044,900             6.4                10.08          838,125         10.04
        10.50  -      13.10                818,200             7.9                12.95           23,800         11.26
        15.90  -      19.52                651,000             9.1                19.47          547,500         19.52
                                        ----------             ---                -----        ---------         -----

       $ 4.06  -    $ 19.52              3,427,176             7.2               $ 8.55        2,714,738        $ 8.21
                                         =========                                             =========
</TABLE>

     In December 1995, common stock warrants were issued to certain officers for
     the right to acquire  440,000  shares of common stock of the Company at the
     fair market value of $3.09 per share at date of issue.  The  warrants  vest
     immediately  and expire  December  13,  2005.  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, AND EXPORT SALES

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

     Revenues  for fiscal  years 2002,  2001 and 2000 were as  follows:  defense
     electronics,  $80,615,000,  $61,977,000 and $67,405,000,  respectively; and
     commercial   technologies,   $12,266,000,   $14,517,000,   and  $3,132,000,
     respectively.

     Net  sales to the U.S.  Government  in 2002,  2001 and 2000  accounted  for
     approximately  17%,  19%  and  26% of net  sales,  respectively.  No  other
     customer accounted for shipments in excess of 10% of consolidated net sales
     in fiscal  2002,  2001 or 2000.  Foreign  sales  amounted to  approximately
     $30,070,000,  $20,683,000  and  $16,506,000 in fiscal 2002,  2001 and 2000,
     respectively.

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 $147,000  as of July 28,  2002.  There was no
     material hedge ineffectiveness related to cash flow

                                      F-24

<PAGE>



     hedges during the period to be recognized in earnings. There was no gain or
     loss reclassified from accumulated other comprehensive income into earnings
     during  the  fiscal   year  ended  July  28,   2002  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 Company's  current
         incremental borrowing rate for similar types of borrowing arrangements.

     The carrying amounts and fair values of the Company's financial instruments
     are presented below (in thousands):
                                                     July 28, 2002
                                              ---------------------------
                                              Carrying Amount  Fair Value
                                              ---------------  ----------
         Cash and cash equivalents               $ 86,210        $ 86,210
         Available-for-sale securities                 46              46
         Long-term debt                             5,684           6,550

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

                                      F-25

<PAGE>


     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 value of the net assets held for sale as of January
     27, 2002 of $878,000.

     The  following  table shows the  components  of assets and  liabilities  of
     Terrasat held for sale as of July 29, 2001:

                    Assets held for sale:
                      Accounts receivable         $   978
                      Prepaid expenses                 21
                      Inventory                     1,371
                                                    -----
                                                  $ 2,370
                                                    =====
                    Liabilities held for sale:
                      Accounts payable              $ 626
                      Accrued expenses                264
                                                      ---
                                                    $ 890
                                                      ===
     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)
                                                   ===        ===

NOTE R - SUBSEQUENT EVENT

     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 is expected to
     be  operated as a  wholly-owned  subsidiary.  EWST  designs,  develops  and
     produces electronic warfare simulator systems for prime defense contractors
     and countries  worldwide.  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%, payable in annual installments of $500,000. The
     transaction will be accounted for in accordance with the provisions of SFAS
     No.  141,  "Business  Combinations",   which  requires  that  all  business
     combinations be accounted for using the purchase method.  The allocation of
     the aggregate estimated purchase price will be determined based on detailed
     reviews  of  the  fair  value  of  assets  acquired,  including  identified
     intangible assets, and liabilities  assumed. Any remaining excess cost over
     the fair value of net assets acquired will be recognized as goodwill.


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

                                      F-26