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

                                    FORM 10-K
(Mark One)
                   [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended August 1, 2004

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

        For the transition period from ...............to ...............

                           Commission File No. 0-5411

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

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

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

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

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

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

The  aggregate  market  value of the  Registrant's  voting  Common Stock held by
non-affiliates of the Registrant,  based on the closing sale price of the Common
Stock of $21.80 as  reported  on the Nasdaq  National  Market as of  February 1,
2004, the last business day of the Registrant's  most recently  completed second
fiscal quarter, was approximately $278,597,000.

The number of shares  outstanding of Registrant's  Common Stock, $ .10 par value
on October 4, 2004 was 14,282,857.

Documents incorporated by reference:
-----------------------------------
Portions of the  Registrant's  definitive  proxy statement for use in connection
with its Annual Meeting of  Stockholders to be held in January 2005, to be filed
pursuant  to  Regulation  14A of  the  Securities  Exchange  Act  of  1934,  are
incorporated by reference into Part III of this Annual Report Form 10-K.


<PAGE>



                             HERLEY INDUSTRIES, INC.

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>


                                                                                                        Page
                                                                                                        ----
PART I
<S>             <C>                                                                                     <C>
                Item 1.    Business.                                                                      1
                Item 2.    Properties.                                                                   11
                Item 3.    Legal Proceedings.                                                            12
                Item 4.    Submission of Matters to a Vote of Security Holders.                          13
PART II
                Item 5.    Market for Registrant's Common Equity, Related Stockholder
                              Matters, and Issuer Purchases of Equity Securities.                        14
                Item 6.    Selected Financial Data.                                                      15
                Item 7.    Management's Discussion and Analysis of Financial
                              Condition and Results of Operations.                                       16
                Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.                   25
                Item 8.    Financial Statements and Supplementary Data.                                  26
                Item 9.    Changes in and Disagreements with Accountants on
                              Accounting and Financial Disclosure.                                       26
                Item 9A.   Controls and Procedures.                                                      26
                Item 9B.   Other Information                                                             26
PART III
                Item 10.   Directors and Executive Officers of the Registrant.                           27
                Item 11.   Executive Compensation.                                                       27
                Item 12.   Security Ownership of Certain Beneficial Owners and
                             Management.                                                                 27
                Item 13.   Certain Relationships and Related Transactions.                               27
                Item 14.   Principal Accounting Fees and Services                                        27
PART IV
                Item 15.   Exhibits and Financial Statement Schedules.                                   27
SIGNATURES                                                                                               29
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                              F-1

</TABLE>

<PAGE>



PART I

Item 1.  Business

FORWARD-LOOKING STATEMENTS

All statements  other than statements of historical fact included in this Annual
Report, including without limitation statements under,  "Management's Discussion
and Analysis of Financial  Condition and Results of Operations"  and "Business,"
regarding our financial position, business strategy and our plans and objectives
of  management   for  future   operations,   are   forward-looking   statements.
Forward-looking   statements  involve  various  important  assumptions,   risks,
uncertainties  and other factors which could cause our actual  results to differ
materially   from   those   expressed   in  such   forward-looking   statements.
Forward-looking statements in this Annual Report can be identified by words such
as  "anticipate,"  "believe,"  "estimate,"  "expect,"  "plan,"  "intend," "may,"
"should"  or the  negative of these  terms or similar  expressions.  Although we
believe that the expectations  reflected in the  forward-looking  statements are
reasonable,  we cannot  guarantee  future  results,  performance or achievement.
Actual  results  could  differ   materially  from  those   contemplated  by  the
forward-looking  statements  as a result of certain  factors  including  but not
limited to,  competitive  factors and  pricing  pressures,  changes in legal and
regulatory   requirements,   technological   change  or  difficulties,   product
development  risks,   commercialization  and  trade  difficulties,  and  general
economic  conditions as well as the factors set forth in our public filings with
the Securities and Exchange Commission.

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

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

GENERAL

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

BACKGROUND

Herley is a leading  supplier of  microwave  products and systems to defense and
aerospace entities worldwide.  Our primary customers include large defense prime
contractors (including Raytheon,  Northrop Grumman, Lockheed Martin and Boeing),
the U.S.  Government  (including the Department of Defense,  NASA and other U.S.
Government  agencies)  and  international  customers  (including  the  Egyptian,
German,  Japanese and South Korean  militaries  and  suppliers to  international
militaries).  We are a leading  provider of  microwave  technologies  for use in
command  and  control  systems,  flight  instrumentation,  weapons  sensors  and
electronic  warfare  systems.  We have served the defense industry since 1965 by
designing and manufacturing microwave devices for use in high technology defense
electronics  applications.  Our products and systems are currently deployed on a
wide range of high profile military  platforms,  including the F-16 Falcon,  the
F/A-18E/F  Super Hornet,  the RC-135 Rivet Joint,  the E-2C  Hawkeye,  the AEGIS
class surface combatants,  the EA-6B Prowler, the AMRAAM air to air missile, and
unmanned aerial vehicles,  or UAVs, as well as high priority  national  security
programs such as National Missile Defense and the Trident II D-5.


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ACQUISITIONS

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

- 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.

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

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

- In January 1999, we acquired General Microwave Corporation of Farmingdale, New
York, a manufacturer of microwave components and electronic systems.

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

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

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

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

- In September 2004, we acquired Reliable System Services  Corporation  ("RSS"),
of Melbourne,  Florida,  a manufacturer  of satellite  based command and control
systems for defense customers.  The RSS Iridium based command and control system
provides  secure  (encryption,  anti-spoof)  global service  coverage,  allowing
multiple  target  operations,  and is  complementary  with the Company's  MAGIC2
command and control systems.

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.


                                        2

<PAGE>



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

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

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

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

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

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

COMPETITIVE STRENGTHS

Our competitive strengths include:

- TECHNICAL  EXPERTISE.  We have  developed  a leading  position in the field of
microwave  technology  through our 38 year focus on research and development and
our  state-of-the-art  design and  production  capabilities.  In fiscal  2002 we
completed the expansion of our facilities in Lancaster, Pennsylvania,  including
state-of-the-art  manufacturing  capacity,  where  we now  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; Whippany,
New Jersey; Melbourne,  Florida; Aldershot,  England; and Jerusalem,  Israel. We
continue to develop and reward our  engineers in order to maintain our expertise
in-house.

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

- DIVERSE  PRODUCT AND  CUSTOMER  BASE.  We have a diverse  product and customer
base,  with only the U.S.  Government  at  approximately  17%,  and  Raytheon at
approximately 10%,  representing 10% or more of our fiscal 2004 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 2004.


                                        3

<PAGE>



-  LONG-STANDING  INDUSTRY  RELATIONSHIPS.  We  have  established  long-standing
relationships  with the U.S.  Government  and  other  key  organizations  in the
aerospace  and  defense  industry  after  38  years  in the  defense  electronic
industry. Over this period, we have become recognized for our ability to develop
new technologies and meet stringent program requirements.

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

-  EMPHASIS  ON  RESEARCH  AND  DEVELOPMENT.  In  fiscal  year  2004,  we  spent
approximately $11.1 million on new product  development,  of which our customers
funded  approximately  $5.7  million.  Our  emphasis on new product  development
enables us to maintain our  technological  leadership in current products and to
develop new  capabilities.  This  spending  helps  solidify and  strengthen  our
position  on  different  programs  and may  serve  as a  barrier  to  entry  for
competitors.

- EXPERIENCED MANAGEMENT TEAM. Our senior management team averages over 23 years
of experience in the defense electronics industry.

PRODUCTS AND SERVICES

We are a leading  supplier  of  microwave  products  and  systems to defense and
aerospace entities worldwide. We design and manufacture microwave components and
subassemblies which are embedded in a variety of radars, flight instrumentation,
weapons sensors,  electronic warfare systems and guidance systems. Our microwave
devices are used on our subassemblies and integrated  systems (e.g.  command and
control systems, telemetry systems,  transponders,  flight termination receivers
and identification friend or foe, or IFF,  interrogators),  in addition to being
sold on a component basis.

The following are descriptions of our major systems and products:

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

We are a leading  manufacturer of Pulse Code  Modulation,  or PCM, and Frequency
Modulation, or FM, telemetry and data acquisition systems for severe environment
applications,  and our  products  are used  worldwide  for testing  space launch
vehicle instrumentation,  aircraft flight testing, and amphibian, industrial and
automotive vehicle testing.  The product portfolio ranges in size and complexity
from miniature encoders to completely programmable data acquisition systems.

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

Command and Control Systems.  Our command and control ("C2") systems principally
are used to fly remotely a large variety of unmanned aerial  vehicles,  or UAVs,
typically aircraft used as target drones or Remotely Piloted Vehicles,  or RPVs.
Our C2 systems also control surface  targets.  Operations have been conducted by
users on the open ocean,  remote land masses, and instrumented test and training
ranges. Our C2 systems are currently in service throughout the world. C2 systems
permit a  ground  operator  to fly a  target  or a UAV  through  a pre-  planned
mission.  The mission may be for  reconnaissance,  where the vehicle is equipped
with high definition

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TV  sensors  and the  necessary  data links to send  information  back to its C2
systems ground station.  The UAV may also be used as a decoy, since the operator
can direct the flight  operations  that will make the small drone appear to be a
larger combat aircraft.

Our MAGIC2 system affords  over-the-horizon C2 using GPS guidance and control of
multiple  targets from a single ground station.  The ability to control multiple
targets at increased distances represents a significant product improvement. The
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.

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

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

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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 Megahertz (" MHz") to 12 GHz with power levels
from  multi-kilowatts  up to 15W,  depending  on the  frequency.  Our high power
amplifier  applications  include but are not  limited to defense  communication,
electronic warfare, radar and avionics. We have an exclusive sales and marketing
agreement  through  MRCM  GmbH,  Germany  for  high  power  amplifiers  used  in
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.

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

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

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

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

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

The RSS8000 Series Radar Threat Simulator  generates real-time user programmable
radar  threats  and  provides  output   configurations   in  digital   (On-board
trainer-OBT) and RF (RSS series) formats. The system can be used

                                        6

<PAGE>



for EW  system  test  and  evaluation  as well as for EW  operator  training  in
laboratory and more rugged environments. The RSS8000 equipment covers the 100MHz
to 40 GHz range and can be  configured to suit any  application  from a portable
single RF source unit to a multiple RF source and multiple  port DF system.  The
DF systems are available in amplitude,  DTOA and/or phase formats with the ports
being capable of angular rotation.

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

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

Medical  Products.  Our medical products vary in complexity from single modules,
to rack mounted amplifiers, to complete systems. The rack-mounted amplifiers and
complete systems  typically  include  detection/protection  circuitry,  built-in
power  supplies,  front panel  metering  and  digital  and/or  analog  interface
controls.  Both  forced air and/or  water  cooling  are used,  depending  on the
customer's  requirements.  Our medical  products are used in Magnetic  Resonance
Imaging,  or MRI,  systems.  All amplifiers have dual mode capability and can be
operated in either a pulsed or  continuous  wave mode,  and cover the  frequency
ranges of 10 MHz to 200 MHz with  power  levels as high as 12.0KW  peak power at
10% duty cycle.  Medical customers include both OEM, as well as universities and
research centers.

All products feature highly reliable  technical  solutions designed for improved
production and reliability. Producibility is enhanced through the use of surface
mount  components  and circuit  designs  which  eliminate the need for excessive
alignment during the production  cycle. High reliability is achieved through the
implementation  of conservative  thermal and RF circuit design and sophisticated
self-protection schemes. Reliability is further enhanced during the design phase
by employing detailed environmental testing.

CUSTOMERS

During the fiscal year ended August 1, 2004,  approximately 17% of our net sales
were attributable to contracts with offices and agencies of the U.S. Government,
and Raytheon  accounted for  approximately  10% of net sales. No other customers
accounted for shipments of 10% or more of net sales.

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

      Boeing                    BAE Systems                Harris
      Lockheed Martin           Northrop Grumman           Raytheon

During fiscal 2004, sales to foreign  customers  accounted for approximately 32%
of our net sales.  Domestic sales to foreign customers  accounted for 15% of net
sales.  Sales  from  England  were 7%,  and  Israel  10% of net sales to foreign
customers.  The governments of Egypt,  Japan, South Korea, Taiwan and the United
Kingdom are all  significant  customers of ours.  All of our domestic  contracts
with foreign  customers are payable in U.S.  dollars.  Contracts  with customers
originating  in Israel  and  England  are  either in U.S.  dollars  or the local
functional  currency.   International  sales  are  subject  to  numerous  risks,
including  political and economic  instability in foreign markets,  currency and
economic  difficulties in the Pacific Rim, restrictive trade policies of foreign
governments, inconsistent product regulation by foreign agencies or governments,
imposition  of product  tariffs and burdens and costs of  complying  with a wide
variety of international and U.S. export laws and regulatory  requirements.  Our
international sales also are subject to us obtaining export licenses for certain
products and

                                        7

<PAGE>



systems.

SALES AND MARKETING

We  market  our  products  worldwide  to the  United  States  Government,  prime
contractors  and various  countries  in defense  markets,  and to OEM,  research
institutions and universities in commercial markets. Sales are primarily through
a sales force  generally  organized by  geographic  territory  and  markets.  In
addition,  we have contracts with  manufacturers'  representatives in the United
States and international  representatives who are located in Western Europe, the
Middle East and Asia.  As part of our marketing  efforts,  we advertise in major
trade publications and attend major industrial shows in the commercial, medical,
satellite communications and defense markets.

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

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

MANUFACTURING

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

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

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

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

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

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

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


                                        8

<PAGE>



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

Lancaster, Pennsylvania
Farmingdale, New York
Woburn, Massachusetts
Whippany, New Jersey (acquired in March 2004)
Melbourne, Florida (acquired in September 2004)
Jerusalem, Israel
Aldershot, England

BACKLOG

Our total backlog of orders was approximately  $100 million on August 1, 2004 as
compared to approximately $90 million on August 3, 2003. Of our total backlog at
August 1, 2004,  $71 million (71%) is  attributable  to domestic  orders and $29
million (29%) is  attributable to foreign orders.  Management  anticipates  that
approximately  88% of this backlog will be shipped during the fiscal year ending
July 31, 2005.

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.  We focus our primary  efforts on  engineering
design and product development  activities rather than pure research. Our policy
is to assign the required engineering and support people, on an ad hoc basis, to
new product  development as needs require and budgets permit.  The cost of these
development activities, including employees' time and prototype development, was
approximately $11.1 million in fiscal 2004, $6.3 million in fiscal 2003 and $5.6
million in fiscal 2002.  The portion of these costs not  reimbursed by customers
was  approximately  $5.4 million in fiscal 2004, $3.1 million in fiscal 2003 and
$2.3 million in 2002. These increases in development spending were undertaken to
continue  to provide  future  business  opportunities  for the  Company.  Future
product  development  costs  will  depend  on the  availability  of  appropriate
development opportunities within the markets served by the Company.

COMPETITION

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

Competition is generally based upon  technology,  design,  past  performance and
price. Our ability to compete  depends,  in part, on our ability to offer better
design and performance than our competitors and our readiness

                                        9

<PAGE>



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

EMPLOYEES

As of  August  1,  2004 we had 832  employees.  We  believe  that  our  employee
relations are  satisfactory.  None of our approximately 690 U.S. based employees
are represented by a labor union.  Employment by functional area as of August 1,
2004 is as follows:

          Executive                     10
          Administration                41
          Manufacturing                578
          Engineering                  160
          Sales and Marketing           43
                                      ----
          Total                        832
                                       ===

We believe  that our future  success  will  depend,  in part,  on our  continued
ability to recruit and retain highly skilled technical, managerial and marketing
personnel,  including microwave engineers. To assist in recruiting and retaining
such personnel, we have established  competitive benefits programs,  including a
401(k) employee savings plan for our U.S. employees, and stock option plans.


                                       10

<PAGE>



OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>

Name                                   Age         Served as Officer Since          Position(s) and Offices
----                                   ---         -----------------------          -----------------------
<S>                                    <C>                  <C>
Lee N. Blatt                           76                   1965                    Chairman of the Board
Myron Levy                             63                   1988                    Vice Chairman, Chief
                                                                                     Executive Officer, and
                                                                                     Director
John M. Kelley                         51                   1998                    President
William Wilson                         56                   2002                    Vice President and
                                                                                     Chief Operating Officer
Thomas V. Gilboy                       50                   2004                    Vice President and
                                                                                     Chief Financial Officer
Rozalie Schachter                      58                   2000                    Vice President - Business
                                                                                      Development
Anello C. Garefino                     57                   1993                    Vice President - Finance
John A. Carroll                        53                   2003                    Vice President - Human
                                                                                     Resources
Richard Poirier                        39                   2003                    Vice President

</TABLE>

Item 2.  Properties

Our facilities are as follows:
<TABLE>
<CAPTION>
                                                                                                 Owned
                                                                                                    or
Location                                Purpose of Property                         Area         Leased
--------                                -------------------                        -------       ------
<S>                         <C>                                                 <C>              <C>
Lancaster, PA               Corporate headquarters                              3,300 sq. ft.    Leased
Lancaster, PA               Production, engineering and administration          86,200 sq. ft.   Owned
Woburn, MA                  Production, engineering and administration          60,000 sq. ft.   Owned
Farmingdale, NY (1)         Production, engineering and administration          46,000 sq. ft.   Leased
                                                                                14,000 sq. ft.   Leased
Whippany, NJ (2)            Production, engineering and administration          23,000 sq. ft.   Leased
Melbourne, FL (3)           Production, engineering and administration          12,000 sq. ft.   Leased
Jerusalem, Israel           Production, engineering and administration          20,000 sq. ft.   Owned
Aldershot, England (4)      Production, engineering and administration            6,300 sq. ft.  Leased
Chicago, IL                 Engineering and administration                        3,000 sq. ft.  Leased
Lancaster, PA               Land held for expansion                                20.4 Acres    Owned
--------------
<FN>
     (1) On September 23, 1999 we closed on the sale of its prior owned facility
in  Amityville,   NY  and  relocated  the  plant  to  this  leased  facility  in
Farmingdale,  NY. The Company  entered into two 10 year lease  agreements with a
partnership  owned by the children of Messrs Blatt and Levy.  The leases provide
for  initial  minimum  annual  rent  of  approximately   $312,000  and  $92,000,
respectively,  in each case subject to escalation of  approximately  4% annually
throughout the 10 year term.
     (2) We entered into an  agreement  as of March 29, 2004 to acquire  certain
assets and the business of Communication Techniques, Inc. as discussed in Note B
of the financial statements.
     (3) As of  September  1, 2004,  we  entered  into an  agreement  to acquire
certain  assets and the  business of Reliable  System  Services  Corporation  as
discussed in Note S of the financial statements.
     (4) As of September 1, 2002, we entered into an agreement to acquire all of
the issued and outstanding common stock of EW Simulation Technology,  Limited as
discussed in Note B of the financial statements.
</FN>
</TABLE>

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


                                       11

<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.

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

At a proceeding  on April 28, 2003,  the Court decided to delay ruling on all of
the petitions for fees and costs until after appeals are exhausted. Accordingly,
by Order  dated May 6,  2003,  the Court  denied  without  prejudice  all of the
parties'  petitions.  On May 12,  2003,  Herley  filed its  appeal to the United
States Court of Appeals for the Second  Circuit.  On May 28,  2003,  RLI filed a
notice of  cross-appeal.  Robinson  did not  appeal.  Herley  filed its brief in
support of its appeal before the Second  Circuit on August 22, 2003.  RLI timely
filed  its  brief  in  response  to  Herley's  appeal  and in  support  of RLI's
cross-appeal.  Herley timely filed a response to RLI's brief and  thereafter RLI
timely filed a response to Herley's  brief.  Oral  argument was held on December
18, 2003.

By Summary  Order on January 26,  2004,  the Second  Circuit  affirmed the trial
court  judgment in its  entirety.  On February 4, 2004,  RLI  submitted a letter
request to the trial court for relief  from the  judgment on RLI's claim for the
earn-out  stock under Federal Rule of Civil  Procedure 60. RLI contended that it
has "newly  discovered  evidence,"  first learned in August 2003, to justify its
requested  relief.  Herley  submitted its response in opposition by letter dated
February 10, 2004. On February 26, 2004, the parties  appeared  before the Court
concerning the various  applications and were directed to submit legal briefs on
various legal  issues.  By Order dated May 28, 2004 the trial court denied RLI's
Motion for a New Trial.  The Court also denied Herley's request that it exercise
its general equitable power to hold Ben Robinson  personally liable for any fees
Herley might recover against RLI.

                                       12

<PAGE>



On June 28,  2004,  Herley filed suit against Ben Robinson and Frank Holt in the
Superior  Court of  Hillsborough  County,  New Hampshire,  asserting  claims for
fraudulent   conveyance  and  piercing  the  corporate  veil  to  hold  Robinson
personally  liable for the fees  incurred by Herley in  defending  RLI's  claims
discussed above. In response,  Robinson took steps to collect damages awarded to
him under the jury verdict. On July 21, 2004, Herley brought an Emergency Motion
for  Injunctive  Relief and moved for an immediate  order from the New Hampshire
court  allowing  Herley to escrow the  judgment  owed to  Robinson  to be offset
against  any award of fees to Herley.  The court  entered an order  denying  the
requested relief. On July 27, 2004, Herley paid $1,594,621  (including interest)
to Ben  Robinson,  an amount  calculated  by deducting  Herley's  award  against
Robinson from the amounts awarded to Robinson on his claims under the Employment
Agreement and the Lease Agreement.  On July 28, 2004, the parties filed a Notice
of Partial  Satisfaction  of  Judgment.  Herley's  judgment  against RLI remains
unsatisfied. Cross petitions for attorney's fees are still pending.

We are involved in various other legal  proceedings and claims.  While any legal
proceedings  or claims  contain an element of  uncertainty,  we believe that the
outcome of such legal  proceedings  or claims  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.



                                       13

<PAGE>



PART II

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

     (a)   Our Common  Stock is traded in the NASDAQ  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 our Common
           Stock for the periods indicated.
<TABLE>
<CAPTION>

                                                                         Common Stock
                                                                         ------------
                                                                       High          Low
                                                                       ----          ---
     Fiscal Year 2003
<S>                                                                 <C>            <C>
         First Quarter............................................. $ 21.30        $ 14.50
         Second Quarter............................................   18.54          14.00
         Third Quarter.............................................   17.43          13.06
         Fourth Quarter............................................   18.56          14.50

     Fiscal Year 2004
         First Quarter.............................................   20.55          17.50
         Second Quarter............................................   22.85          18.24
         Third Quarter.............................................   21.90          18.88
         Fourth Quarter............................................   21.92          18.50

     Fiscal Year 2005
         First Quarter (through October 11, 2004)..................   19.77          17.45
</TABLE>

     The closing price on October 11, 2004 was $18.89.

     As of October 1, 2004,  there were  approximately  210 holders of record of
     our Common Stock.

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

     (b) Not applicable.

     (c) We did not repurchase any of our Common Stock during the fourth quarter
         of fiscal 2004.



                                       14

<PAGE>



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

                                                   52 weeks      53 weeks               52 weeks ended
                                                     ended         ended      ----------------------------------
                                                   August 1,     August 3,    July 28,     July 29,     July 30,
                                                     2004          2003         2002         2001         2000
                                                     ----          ----         ----         ----         ----

<S>       <C>                                    <C>              <C>         <C>          <C>          <C>
Net sales (3)                                    $  122,154       110,223     92,881       76,494       70,537

Income from continuing operations                $   13,673        13,937     10,730        7,573        7,639

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

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

Net income                                       $   13,673        13,937      5,172        7,405        7,639

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

Total Assets                                     $  220,971       197,564    190,202      114,597       86,656
Total Current Liabilities                        $   23,846        18,125     14,557       17,976       12,239
Long-Term Debt net of current portion            $    5,845         6,403      5,684        2,740        2,931
Other Long-Term Liabilities                      $      932           849        706          756          544
<FN>

     (1)  Earnings  per share  from  continuing  operations  are  presented  and
     calculated  before  discontinued  operations  in 2002 and 2001,  and before
     cumulative effect of accounting change in 2002.

     (2) No cash dividends have been  distributed in any of the years presented.

     (3) See "Acquisitions" under Item 1. "Business".
</FN>
</TABLE>


                                       15

<PAGE>



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

Results of Operations

We are a leading  supplier  of  microwave  products  and  systems to defense and
aerospace entities worldwide.  Our primary customers include large defense prime
contractors (including Raytheon,  Northrop Grumman, Lockheed Martin and Boeing),
the U.S.  Government  (including the Department of Defense,  NASA and other U.S.
Government  agencies)  and  international  customers  (including  the  Egyptian,
German,  Japanese and South Korean  militaries  and  suppliers to  international
militaries).  We are a leading  provider of  microwave  technologies  for use in
command  and  control  systems,  flight  instrumentation,  weapons  sensors  and
electronic  warfare  systems.  We have served the defense industry since 1965 by
designing and manufacturing microwave devices for use in high technology defense
electronics  applications.  Our products and systems are currently deployed on a
wide range of high profile military  platforms,  including the F-16 Falcon,  the
F/A-18E/F  Super Hornet,  the RC-135 Rivet Joint,  the E-2C  Hawkeye,  the AEGIS
class surface combatants,  the EA-6B Prowler, the AMRAAM air to air missile, and
unmanned aerial vehicles,  or UAVs, as well as high priority  national  security
programs such as National Missile Defense and the Trident II D-5.

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

<TABLE>
<CAPTION>
                                                                 52 weeks       53 weeks       52 weeks
                                                                   ended          ended          ended
                                                                 August 1,      August 3,      July 28,
                                                                   2004           2003           2002
                                                                   ----           ----           ----

<S>                                                               <C>            <C>            <C>
Net sales                                                         100.0%         100.0%         100.0%
Cost of products sold                                              65.1%          66.4%          66.7%
                                                                  -----           ----           ----

Gross profit                                                       34.9%          33.6%          33.3%

Selling and administrative expenses                                17.3%          14.7%          14.3%
Litigation costs                                                    1.6%           1.1%           2.2%
Plant closing costs                                                  -              -             0.4%
                                                                   ----           ----           ----

Income from operations                                             16.0%          17.8%          16.4%
                                                                   ----           ----           ----

Other income (expense), net:
     Investment income                                              0.6%           1.0%           0.8%
     Interest expense                                              (0.3)%         (0.3)%         (0.4)%
     Foreign exchange (loss)                                       (0.1)%           -              -
                                                                    ---            ---           -----
                                                                    0.1%           0.7%           0.4%
                                                                    ---            ---           ----
Income from continuing operations before
     income taxes                                                  16.2%          18.5%          16.8%
Provision for income taxes                                          5.0%           5.9%           5.2%
                                                                   ----           ----           -----
Income from continuing operations                                  11.2%          12.6%          11.6%
Loss from discontinued operations                                    -              -             1.0%
                                                                   ----           ----           -----
Income before cumulative effect of change
     In accounting principle                                       11.2%          12.6%          10.6%
Cumulative effect of adopting SFAS 142                               -              -            (5.0)%
                                                                   ----           ----           -----
Net income                                                         11.2%          12.6%           5.6%
                                                                   ====           ====            ===
</TABLE>


                                       16

<PAGE>



     Fiscal 2004 Compared to Fiscal 2003

Net sales for the 52 weeks ended August 1, 2004 were approximately  $122,154,000
compared to $110,223,000  for fiscal 2003. The net sales increase of $11,931,000
(11%) is  attributable  to increased  revenue in defense  electronics  microwave
systems and components of $9,426,000 (including  $1,078,000  attributable to the
acquisition  of CTI as of March 29, 2004).  This increase also includes  revenue
from products shipped under new programs as well as increases on legacy products
and programs.  Net sales in  commercial  technologies  increased by  $2,505,000,
which includes  revenue  attributable  to the  acquisition of CTI of $3,045,000,
offset by a decrease of $540,000 in medical and  scientific  products due to the
decline in demand in the  industry for  Magnetic  Resonance  Imaging and Nuclear
Magnetic  Resonance  systems.  As a result,  we expect  revenues  in medical and
scientific products to remain relatively flat.

The  gross  profit  margin  for the 52 weeks  ended  August  1,  2004 was 35% as
compared to the margin of 34% in fiscal 2003. Gross profit increased  $5,648,000
primarily  as a  result  of  increased  volume  over  fiscal  2003  and  greater
absorption of fixed costs.  Margins also improved in microwave components due to
production  efficiencies,  including the automation of certain  processes.  This
improvement  was  offset by lower  margins on revenue  relating  to  engineering
programs  which are essential for long-term  technology  development  and future
revenue growth. In addition,  consolidated  gross profit margins were negatively
impacted  by  approximately  one half  percent  due to  revisions  in total cost
estimates  (including  the  effect  of  foreign  exchange  translations  on non-
Sterling denominated contracts) at our EWST subsidiary in the UK.

Selling and administrative expenses for the fifty-two weeks ended August 1, 2004
were  17% of net  sales as  compared  to 15% in  fiscal  2003.  There  was a net
increase  in  expenses  of  $4,936,000   which  includes   expenses  of  CTI  of
approximately  $900,000, an increase in incentive  compensation under employment
contracts and discretionary bonuses of $320,000,  and additional  administrative
and business development personnel and related costs of $2,019,000.  The Company
reorganized and expanded its business  development group to focus and capitalize
on worldwide  market  opportunities  for all of its  products.  Other  increases
include  amortization of acquired  intangibles of $90,000,  sales representative
fees and  commissions of $623,000,  and $303,000 in consulting fees primarily in
connection with our Sarbanes-Oxley,  Section 404 preparation which will continue
in fiscal 2005.

Litigation  costs in fiscal 2004  increased  $777,000 from the level incurred in
fiscal 2003.  These costs are directly  related to the Robinson Labs  litigation
and  include  a  payment  of the jury  award to Ben  Robinson  of  approximately
$1,595,000 in July 2004. We do not anticipate our litigation costs in connection
with  this  matter  to be  significant  in  the  future.  (See  Item  3.  "Legal
Proceedings").

Income from  operations  for the year was  $19,602,000  or 16% of net sales,  as
compared to  $19,667,000  or 18% of net sales in fiscal  2003.  The  decrease in
operating  income is  primarily  attributable  to the  increases  in selling and
administrative  expenses and litigation  costs as discussed  above. In addition,
our foreign operations  contributed  $3,017,000 in operating income for the year
as compared to $4,250,000 in fiscal 2003.  Revenues from our foreign  operations
decreased  by  $520,000  as  compared  to fiscal  2003.  The drop in revenue and
operating  income  within our foreign  operations  was due to revisions in total
cost  estimates  (including  the  effect of  foreign  exchange  translations  on
non-Sterling denominated contracts) at our EWST subsidiary in the UK.

Investment  income  decreased  by  $439,000  in fiscal 2004 as a result of a 29%
decline in the rate of interest earned on the investment of excess cash reserves
during the 2004 fiscal year as compared to interest  rates in fiscal 2003, and a
decrease on average of approximately $6,655,000 in funds invested.



                                       17

<PAGE>



The net foreign  exchange loss of $194,000 in fiscal 2004 is attributable to the
weaker  U.S.  Dollar  during the fiscal year  causing  our  foreign  denominated
liabilities to increase in value, and the U.S. Dollar  denominated  contracts in
the United Kingdom to decrease in value. In addition,  we recorded an unrealized
gain on U.S.  Dollar  denominated  loans to EWST which are expected to be repaid
during fiscal 2005. The realized and unrealized  exchange gains and (losses) are
as follows:

                                                           Gain (Loss)
                                                     ---------------------
                                                     Unrealized   Realized
                                                     ----------   --------
         Foreign denominated liabilities           $ (212,000)   $ (56,000)
         U.S. Dollar denominated contracts
            In the United Kingdom                    (102,000)
         Other foreign exchange transactions                        23,000
         U.S. Dollar denominated loans to EWST        153,000
                                                      -------       ------
                                                   $ (161,000)   $ (33,000)
                                                      =======       ======

The effective  income tax rate for fiscal 2004 was 30.8% as compared to 31.8% in
fiscal 2003. The overall  effective tax rate is lower than the statutory  income
tax rate of 35% in fiscal 2004 due to various favorable tax benefits including a
lower effective tax rate on foreign-source  income, the tax benefit attributable
to extra territorial income, and research and development credits.

Fiscal 2003 Compared to Fiscal 2002

Net sales for the 53 weeks ended August 3, 2003 were approximately  $110,223,000
compared to  $92,881,000  for fiscal 2002. The net sales increase of $17,342,000
(19%) is attributable to increased revenue in defense electronics of $23,131,000
(including $11,212,000 through the acquisition of EWST); offset by a decrease of
$5,789,000 in commercial technologies.

Gross  profit of 34% for the 53 weeks ended  August 3, 2003 is  slightly  better
than the prior year of 33%. We  benefited  from  increased  absorption  of fixed
overhead  costs and  production  efficiencies,  including  automation of certain
processes.  Offsetting  these  benefits was the increased  investment in product
development up from approximately $2.3 million in fiscal 2002 to $3.1 million in
fiscal  2003.  In  addition,  the  margins on the EWST sales were lower than our
historical margins.

Selling and  administrative  expenses for the 53 weeks ended August 3, 2003 were
15% of net sales as compared to 14% in fiscal 2002.  There was a net increase in
expenses  of  $2,958,000  which  includes  expenses of EWST of  $1,096,000,  and
increases in: incentive  compensation under employment  contracts of $1,072,000,
amortization of acquired  intangibles of $217,000 related to EWST, audit and tax
fees of $134,000,  payroll costs of $322,000,  and travel  expenses of $121,000;
offset by a decrease in  commissions  and fees of $174,000.  Various  other line
item expenses  increased during the 53 weeks ended August 3, 2003 by $170,000 on
a net basis.

Litigation  costs in fiscal 2003  decreased  $932,000  from the fees incurred in
fiscal 2002.  The  litigation  costs are 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  $389,000 was
paid as of August 3, 2003.

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

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

                                       18

<PAGE>


Discontinued operations

We 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,"
but 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 us effective on July 30, 2001.

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

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

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  impairment  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 us on July 30, 2001. The adoption of SFAS No.142 resulted in our
discontinuation of amortization of goodwill as of July 30, 2001.

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

We  operate  as a single  integrated  business  and as such  have one  operating
segment which is also the reportable  segment as defined in SFAS 131. Within the
operating  segment in fiscal 2001,  we  identified  two  components as reporting
units  as  defined  under  SFAS  142,  'defense   electronics'  and  'commercial
technologies.'  We  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.  In January  2002,  we
decided to  discontinue  the  operations  of Terrasat  (the only business in the
commercial technologies reporting unit), and to

                                       19

<PAGE>



seek a buyer for the business.  In connection with this decision in fiscal 2002,
we determined that an impairment of goodwill in the commercial technologies unit
had occurred.  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 was no tax benefit  associated with the adjustment
since the impaired goodwill is not deductible for income tax purposes.

An impairment test based on a single  reporting unit was performed in the fourth
quarter of fiscal  2004 using our  current  market  capitalization,  which in an
active  market for our common  stock,  we consider a  reasonable  indication  of
implied fair value.  Based on this initial step in the test for  impairment,  we
concluded  there was no  impairment  of  goodwill  at August 1, 2004.  An annual
impairment  test will be performed in the fourth quarter of each fiscal year, or
when an indication of impairment  exists,  and any future impairment of goodwill
will be charged to operations.

Quarterly Results (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
the 52 weeks ended  August 1, 2004 and for the 53 weeks ended August 3, 2003 (in
thousands, except for per share data).

                                      2004
                                      ----
<TABLE>
<CAPTION>
                                                  November 2,     February 1,      May 2,        August 1,
                                                     2003            2004           2004           2004
                                                     ----            ----           ----           ----
<S>                                               <C>                <C>            <C>             <C>
Net sales                                         $   28,267         29,408         30,233          34,246
Gross profit                                          10,642         10,363         10,768          10,876

Net income                                        $    3,941          3,546          3,876           2,310
                                                     =======        =======        =======         =======

Earnings per common share - Basic                 $      .28            .25            .27             .16
                                                         ===            ===            ===             ===

Basic weighted average shares                         14,013         14,073         14,129          14,205
                                                      ======         ======         ======          ======

Earnings per common share - Diluted               $      .27            .24            .26             .15
                                                         ===            ===            ===             ===

Diluted weighted average shares                       14,782         14,880         14,932          14,962
                                                      ======         ======         ======          ======

                                      2003
                                      ----
                                                  November 3,     February 2,      May 4,        August 3,
                                                     2002            2003           2003           2003
                                                     ----            ----           ----           ----
Net sales                                         $   27,290         25,015         26,897          31,021
Gross profit                                           9,191          8,673          8,851          10,286

Net income                                        $    3,352          3,287          3,359           3,939
                                                     =======        =======        =======         =======

Earnings per common share - Basic                 $      .23            .23            .24             .28
                                                         ===           ====           ====            ====

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

Earnings per common share - Diluted               $      .22            .22            .23             .27
                                                        ====           ====           ====             ===

Diluted weighted average shares                       15,506         15,124         14,848          14,600
                                                      ======         ======         ======          ======
</TABLE>

The fourth quarter has  historically  been our strongest  quarter for shipments.
The third and fourth quarter of fiscal 2004 includes revenue attributable to the
acquisition of CTI of $1,116,000 and $3,007,000, respectively.

                                       20

<PAGE>



The  gross  margin  percentage  in the  fourth  quarter  of 2004 was  negatively
impacted  (as  compared to 2003) due to  revisions  in total cost  estimates  on
certain long term contracts at our EWST subsidiary,  offset by an improvement in
margins at one of our other facilities in the U.S. due to costs incurred in last
year's fourth  quarter in connection  with the start up of a new product line at
that facility. In addition,  the gross profit margin also varies from quarter to
quarter due to changes in product mix.

Included in the results of the fourth  quarter of 2004 is a $1.6 million  pretax
payment in  connection  with the Robinson Labs  litigation.  (See Item 3. "Legal
Proceedings").

Liquidity and Capital Resources

As of August 1, 2004 and August 3, 2003,  working capital was  $130,273,000  and
$128,462,000,   respectively,  and  the  ratio  of  current  assets  to  current
liabilities was 6.5 to 1 and 8.1 to 1, respectively.

As is customary  in the defense  industry,  inventory  is partially  financed by
progress  payments.  In  addition,  it is customary  for us to receive  advanced
payments  from  customers  on major  contracts at the time a contract is entered
into.  The  unliquidated  balance of these advanced  payments was  approximately
$1,180,000 at August 1, 2004, and $856,000 at August 3, 2003.

Net cash  provided by  continuing  operations  was  approximately  $3,610,000 in
fiscal 2004 as compared to $14,567,000 in 2003.  Significant items  contributing
to the sources of funds include the following:
<TABLE>
<CAPTION>

    --------------------------------------   -----------------------------   -----------------------------------
<S>                                          <C>                             <C>
    Income from operations                   $17,917,000 in fiscal 2004 as      As adjusted for depreciation and
                                             compared to $18,239,000 in         amortization.
                                                    fiscal 2003
    --------------------------------------   -----------------------------   -----------------------------------
    Increase in accounts payable and                $3,431,000                  Due to growth of business.
    accrued expenses
    --------------------------------------   -----------------------------   -----------------------------------
    Increase in billings in excess of               $1,303,000                  Due to growth of business and in
    costs incurred on certain                                                   contacts incorporating payments
    uncompleted contracts                                                       in advance of costs incurred.
    --------------------------------------   -----------------------------   -----------------------------------
</TABLE>

The following major items offset the sources of funds noted above:

<TABLE>
<CAPTION>
    --------------------------   -------------   ---------------------------------------------------------------
<S>                               <C>            <C>
    Funds invested in             $6,923,000        Due to growth of business.
    increases in accounts
    receivable
    --------------------------   -------------   ---------------------------------------------------------------
    Increase in costs incurred    $7,250,000        Due to growth of business, including exercise of options on
    and income recognized                           existing contracts, plus the impact of foreign exchange
    in excess of billings on                        translation of costs on certain contacts at EWST to US
    uncompleted contracts                           Dollars.
    --------------------------   -------------   ---------------------------------------------------------------
    Funds invested in             $5,806,000        Due to growth of business, including engineering costs
    increases in inventory                          incurred on new contracts with customers (such as the
                                                    ICAP program and certain high power amplifier contracts),
                                                    plus the impact of foreign exchange translation of inventory
                                                    costs at EWST to US Dollars.
    --------------------------   -------------   ---------------------------------------------------------------
</TABLE>

Costs  incurred  and income  recognized  in excess of  billings  on  uncompleted
contracts  are  classified in the financial  statements  as current  assets.  We
expect  to  bill  and  collect  substantially  all  costs  incurred  and  income
recognized in excess of billings within one year. However, we anticipate that it
will incur additional costs and recognize income on uncompleted contracts in the
future, as new contracts are negotiated.

Net cash used in investing  activities was  approximately  $20,724,000 in fiscal
2004 as  compared  to  approximately  $6,344,000  in fiscal  2003.  Cash used in
investing   activities  in  fiscal  2004  consists  of  $5,884,000  for  capital
expenditures, and $14,914,000 for the acquisition of CTI. In connection with the
acquisition of

                                       21

<PAGE>



EWST as of September 1, 2002,  we issued a note for 1,000,000  Pounds  Sterling,
including  interest at 1.8%,  payable in annual  installments  of 333,334 Pounds
Sterling beginning October 1, 2003. Based on the spot rate of exchange at August
1, 2004 of 1.8183  the U.S.  Dollar  equivalent  of the annual  installments  is
approximately $606,000.

During  the  fiscal  year  ended  August  1,  2004,  we  received  approximately
$2,458,000 from the exercise of common stock options by employees.

On May 30,  2003 we  announced  an  expansion  of the stock  repurchase  program
initially  announced in October 2002 from 1,000,000 to an aggregate of 2,000,000
shares. As of August 1, 2004, we acquired approximately 940,000 shares of common
stock under this program at an aggregate cost of approximately $14,668,000.

In June 2002, we entered into a new $50,000,000  Revolving Credit Loan 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, 2006 (as amended). We may elect to
borrow up to a maximum of $5,000,000  with  interest  based on the 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.  The Federal  Funds Target
Rate and the LIBOR  rate was 1.25% and 1.48%,  respectively,  at August 1, 2004.
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 under the line at August 1, 2004 and August 3, 2003. Stand-by
letters of credit were outstanding in the amount of $11,389,000 under the credit
facility at August 1, 2004.

We believe that presently  anticipated future cash requirements will be provided
by internally  generated  funds, our existing  unsecured  credit  facility,  and
existing cash  reserves.  A  significant  portion of our revenue for fiscal 2005
will be generated  from our  existing  backlog of sales  orders.  The backlog of
orders at August 1, 2004 was approximately $100 million.  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 our backlog,  we will be required to rely more
heavily  on  cash  reserves  and  our  existing  credit  facility  to  fund  our
operations. We are not aware of any events which are reasonably likely to result
in  any  cancellation  of  its  government  contracts.   We  have  approximately
$38,611,000  available  under  our  bank  credit  facility,  net of  outstanding
stand-by  letters of credit of approximately  $11,389,000,  and cash reserves at
August 1, 2004 of approximately $66,181,000.

Contractual Obligations and Commitments

Our obligations and commitments to make future payments under contracts, such as
purchase  orders,   and  debt  and  lease   agreements,   and  under  contingent
commitments, such as stand-by letters of credit are as follows:

We have outstanding an aggregate of  approximately  $16,448,000 in open purchase
orders as of August 1, 2004.  These open  purchase  orders  represent  executory
contracts  for the  purchase of goods and services  which will be  substantially
fulfilled in the next six months.



                                       22

<PAGE>



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

               During                          Industrial
               fiscal               Mortgage     revenue       EWST
                year       Total      note        bonds        note    Other
                ----       -----      ----        -----        ----    -----
                2005    $   804    $    93     $   105      $   606   $ -
                2006        817        101         110          606     -
                2007        223        108         115                  -
                2008        236        116         120        -         -
                2009        198         73         125        -         -
               Future     4,371      2,033       2,230        -         108
                          -----      -----       -----        -----     ---
                        $ 6,649    $ 2,524     $ 2,805      $ 1,212   $ 108
                          =====      =====       =====        =====     ===

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

               During
               fiscal
                year             Amount
                ----             ------
                2005            $ 1,649
                2006              1,513
                2007              1,272
                2008              1,206
                2009              1,256
               Future               856

Stand-by letters of credit expire as follows (in thousands):

               During
               fiscal
                year             Amount
                ----             ------
                2005          $   4,881
                2006              2,437
                2007              3,873
                2008                 30
                2009                168
                               --------
                               $ 11,389

In  addition,  we have  employment  agreements  with certain  executives  of the
Company  which expire  December 31, 2008,  subject to extension  for  additional
one-year  periods  annually  each  January  1 with a  final  expiration  date of
December 31, 2015. The agreements  provide for aggregate  annual  salaries as of
August  1, 2004 of  $1,427,000  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.

The  agreements  also provide that, in the event there is a change in control of
the Company,  the  executives  have the option to terminate the  agreements  and
receive  a  lump-sum  payment  equal to the sum of the  salary  payable  for the
remainder of the employment  term, plus the annual bonuses (based on the average
of the three highest annual bonuses awarded during the ten preceding  years) for
the remainder of the  employment  term. As of August 1, 2004, the amount payable
in the event of such termination would be approximately $16,318,000.

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.



                                       23

<PAGE>



Critical Accounting Policies and Estimates

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

We generally  recognize revenue when products are shipped and the customer takes
ownership  and assumes risk of loss,  collection  of the relevant  receivable is
probable,  persuasive  evidence of an arrangement  exists and the sales price is
fixed or determinable.  Payments  received from customers in advance of products
delivered are recorded as customer advance payments until earned.  Substantially
all of our customer  contracts are firm, fixed price contracts,  providing for a
predetermined  fixed  price  for the  products  sold,  regardless  of the  costs
incurred.  Approximately 13% to 16% of revenues over the last three fiscal years
were  derived  from  long-term,  fixed price  contracts  for which  revenues and
estimated  profits are recognized  using the percentage of completion  method of
accounting  based on estimated  completion  to date (the total  contract  amount
multiplied by the  percentage of  performance,  based on total costs incurred in
relation to total  estimated  cost at  completion).  Contract  costs include all
direct  material and labor costs and those  indirect  costs  related to contract
performance. Selling, general and administrative costs are charged to expense as
incurred.  Risks and  uncertainties  inherent in the  estimation  process  could
affect the amounts  reported in our financial  statements.  The key  assumptions
used in the  estimate  of costs to complete  relate to labor costs and  indirect
costs required to complete the contract. The estimate of rates and hours as well
as the  application  of overhead  costs is reviewed on a regular  basis.  If our
business conditions were different,  or if we used different  assumptions in the
application of this and other accounting policies,  it is likely that materially
different amounts would be reported on our financial statements.

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

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

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

An impairment test based on a single  reporting unit was performed in the fourth
quarter of fiscal  2004 using our  current  market  capitalization,  which in an
active  market for our common  stock,  we consider a  reasonable  indication  of
implied fair value.  Based on this initial step in the test for  impairment,  we
concluded there was no impairment of goodwill at August 1, 2004.

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


                                       24

<PAGE>



Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

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

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

Based on our historical  results and expected future results,  EWST accounts for
approximately  7% to 10% of our  total  revenues,  based  in part on the rate at
which EWST's  Sterling  denominated  financial  statements  have been or will be
converted into U.S. dollars. Since its acquisition in fiscal year 2003, EWST has
contributed  approximately 10% to our consolidated  operating  income.  Having a
portion of our future revenue and income  denominated in Sterling  exposes us to
market risk with  respect to  fluctuations  in the U.S.  dollar  value of future
Sterling denominated revenue and earnings. A 10% decline in the average value of
Sterling in fiscal 2004, for example,  would have reduced sales by approximately
$910,000,  and  would  have  decreased  our  consolidated  operating  income  by
approximately  $75,000 (due to the reduction in the U.S.  dollar value of EWST's
sales and operating income).

We have a foreign  denominated  liability as of August 1, 2004 of  approximately
667,000  Pounds  Sterling in  connection  with the  acquisition  of EWST that is
subject  to  foreign  exchange  rate  fluctuations.  Based on the  spot  rate of
exchange at August 1, 2004 of 1.818, the U.S. Dollar equivalent of the liability
is approximately $1,212,000.

We  have  made  inter-company  advances  to  EWST  in the  aggregate  amount  of
approximately  $6  million  at August 1,  2004 that were  previously  considered
long-term advances.  However, since the advances are denominated in U.S. Dollars
and EWST  anticipates  reducing the amount of advances  during fiscal year 2005,
the amount outstanding is subject to foreign exchange rate fluctuations.

In October  2001,  we entered into an interest rate swap with a bank pursuant to
which it exchanged floating rate interest in connection with the Bonds discussed
in Note 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 our exposure to
the  uncertainty of floating  interest rates on the Bonds,  and as such has been
designated as a cash flow hedge.  The hedge is deemed to be highly effective and
any  ineffectiveness  will be  recognized  in interest  expense in the reporting
period.   The  fair  value  of  the  interest  rate  swap  was  a  liability  of
approximately  $108,000  as of  August 1,  2004.  There  was no  material  hedge
ineffectiveness related to cash flow hedges during the fiscal years presented to
be recognized in earnings.

We also have a $50,000,000  Revolving Credit Loan 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,  2006.  We may  elect to  borrow  up to a  maximum  of
$5,000,000 with interest based on the 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. The Federal Funds Target Rate and the LIBOR rate was 1.25% and
1.48%, respectively, at August 1, 2004. The credit line is reviewed on an annual
basis.

There were no borrowings  outstanding  under our revolving credit facility as of
August 1, 2004.


                                       25

<PAGE>



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

                    Fiscal year ending:            Bonds
                    ------------------             -----
                             2005               $   105
                             2006                   110
                             2007                   115
                             2008                   120
                             2009                   125
                             2010 and later       2,230
                                                  -----
                                                $ 2,805

                    Fair value                  $ 2,913
                                                  =====

We do not  anticipate  any other  material  changes in its  primary  market risk
exposures in fiscal 2005.

Item 8.  Financial Statements and Supplementary Data

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

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

Not applicable

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

       Under  the  supervision  and with the  participation  of our  management,
       including  our  principal   executive   officer  (Vice  Chairman  of  the
       Board/Chief  Executive  Officer) and  principal  financial  officer (Vice
       President/Chief  Financial Officer),  we have evaluated the effectiveness
       of our  disclosure  controls and  procedures  (as such term is defined in
       Rules 13a-15(e) and 15d-15(e) under the Securities  Exchange Act of 1934,
       as amended  (the  "Exchange  Act") as of August 1, 2004 (the  "Evaluation
       Date"). Based on such evaluation, the principal executive officer and the
       principal  financial  officer have  concluded  that, as of the Evaluation
       Date,  our disclosure  controls and  procedures  are  effective,  and are
       reasonably  designed to ensure that all material  information  (including
       our  consolidated  subsidiaries)  required  to be included in our reports
       filed  or  submitted  under  the  Exchange  Act is  recorded,  processed,
       summarized  and reported  within the time periods  specified in the rules
       and forms of the Securities and Exchange Commission.

(b) Changes in Internal Control Over Financial Reporting.

       During the  quarter  ended  August 1, 2004,  there were no changes in the
       Company's  internal  control over  financial  reporting  that  materially
       affected,  or are reasonably likely to materially  affect,  such internal
       control over financial reporting.

Item 9B. Other Information

       Not applicable


                                       26

<PAGE>



PART III

The  information  required  by Part  III is  incorporated  by  reference  to our
definitive proxy statement in connection with our Annual Meeting of Stockholders
scheduled  to be held in  January  2005,  to be filed  with the  Securities  and
Exchange  Commission  within 120 days following the end of our fiscal year ended
August 1, 2004.

PART IV

Item 15.  Exhibits and Financial Statement Schedules

(a)  Exhibits

3.1   Certificate  of  Incorporation,  as  amended  (Exhibit  3(a) of  Form  S-1
      Registration Statement No. 2- 87160).
3.2   By-Laws,  as amended  August 7, 2001 (Exhibit 3.2 of Annual Report on Form
      10-K for the fiscal year ended July 29, 2001).
10.1  1996 Stock Option Plan (Exhibit 10.1 of Annual Report on Form 10-K for the
      fiscal year ended July 28, 1996).
10.2  1997 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated June 10,
      1997).
10.3  1998 Stock Option Plan (Exhibit 10.3 of Annual Report on Form 10-K for the
      fiscal year ended August 1, 1999).
10.4  2000 Stock Option Plan  (Exhibit  4.1 of Report on Form S-8 dated  October
      12, 2001).
10.5  2003 Stock Option Plan (Exhibit 10.1 of Report on Form 10-Q dated June 11,
      2003).
10.6  Employment  Agreement  between  Herley  Industries,  Inc. and Lee N. Blatt
      dated as of July 29, 2002. (Exhibit 10.5 of Annual Report on Form 10-K for
      the fiscal year ended July 28, 2002).
10.7  Employment Agreement between Herley Industries,  Inc. and Myron Levy dated
      as of July 29, 2002.  (Exhibit  10.6 of Annual Report on Form 10-K for the
      fiscal year ended July 28, 2002).
10.8  Agreement  and Plan of  Reorganization  dated as of July 8, 1997 among the
      Company,  Metraplex  Acquisition  Corporation  and  Metraplex  Corporation
      (Exhibit 2.1 of Registration Statement Form S-3 dated September 4, 1997).
10.9  Agreement  and Plan of Merger  dated as of August 21,  1998 among  General
      Microwave  Corp.,  Eleven  General  Microwave  Corp.,  Shareholders,   GMC
      Acquisition  Corporation  and Registrant  (Exhibit 1 of Schedule 13D dated
      August 28, 1998).
10.10 Lease Agreement dated September 1, 1999 between  Registrant and RSK Realty
      LTD. (Exhibit 10.8 of Annual Report on Form 10-K for the fiscal year ended
      August 1, 1999).
10.11 Loan Agreement dated June 19, 2002 among the Registrant, Allfirst Bank and
      Fulton Bank.  (Exhibit  10.10 of Annual Report on Form 10-K for the fiscal
      year ended July 28, 2002).
10.12 Amendment  (dated May 2, 2003) to Loan Agreement dated June 19, 2002 among
      the  Registrant,  Manufacturers  and Traders Trust  Company,  successor in
      interest to  Allfirst  Bank,  and Fulton  Bank.  (Exhibit  10.12 of Annual
      Report on Form 10-K for the fiscal year ended August 3, 2003).
10.13 Asset Purchase  Agreement dated as of February 1, 2000 between  Registrant
      and Robinson Laboratories, Inc. (Exhibit 10.2 of Form 10-Q dated March 13,
      2000).
10.14 Asset Purchase  Agreement dated as of October 12, 2000 between  Registrant
      and American  Microwave  Technology Inc.  (Exhibit 10.1 of Form 10-Q dated
      December 12, 2000).
10.15 Asset Purchase Agreement dated as of March 29, 2004 between Registrant and
      Communication Techniques, Inc.
10.16 Lease Agreement dated March 1, 2000 between  Registrant and RSK Realty LTD
      (Exhibit  10.13 of Annual  Report on Form 10-K for the  fiscal  year ended
      July 30, 2000).
10.17 Common Stock  Purchase  Agreement  dated as of September  20, 2002 between
      Registrant and EW Simulation Technology, Limited. (Exhibit 10.17 of Annual
      Report on Form 10-K for the fiscal year ended July 28, 2002).
10.18 Trust Indenture dated as of October 19, 2001 between Registrant,  and East
      Hempfield Township Industrial  Development Authority and Allfirst Bank, as
      Trustee.  (Exhibit 10.18 of Annual Report on Form 10-K for the fiscal year
      ended July 28, 2002).

                                       27

<PAGE>

10.19 Amendment  (dated  April 2, 2004) to Loan  Agreement  dated June 19,  2002
      among the Registrant,  Manufacturers and Traders Trust Company,  successor
      in interest to Allfirst Bank, and Fulton Bank.
10.20 Asset Purchase  Agreement dated as of September 1, 2004 between Registrant
      and Reliable System Services Corp.
10.21 Amendment  dated December 9, 2003 to Employment  Agreement  between Herley
      Industries, Inc. and Myron Levy dated as of July 29, 2002.
10.22 Amendment  dated December 9, 2003to  Employment  Agreement  between Herley
      Industries, Inc. and Lee N. Blatt dated as of July 29, 2002.
23.1  Consent of Deloitte & Touche LLP.
31.1  Certification of Myron Levy pursuant to Rule 13a-14(a).
31.2  Certification of Thomas V. Gilboy pursuant to Rule 13a-14(a).
32.1  Certification of Myron Levy pursuant to 18 U.S.C. Section 1350.
32.2  Certification of Thomas V. Gilboy pursuant to 18 U.S.C. Section 1350.

(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 30.

                                       28

<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 15, 2004.

                                    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  15,  2004 by the  following  persons in the
capacities indicated:


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

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

By:    /S/ Thomas V. Gilboy              Vice President and
   ---------------------------------     Chief Financial Officer
      Thomas V. Gilboy                   (Principal Financial Officer)

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

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

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

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

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

                                       29

<PAGE>


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

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

Valuation accounts deducted from assets to which they apply:


       August 1, 2004:
<S>                                  <C>              <C>           <C>   <C>       <C>           <C>
          Inventory                  $ 2,739          $ 859         $ 715 (1)       $ 901         $ 3,412

       August 3, 2003:
          Inventory                  $ 2,407          $ 526         $  -            $ 194         $ 2,739

       July 28, 2002:
          Inventory                  $ 2,205          $ 202         $  -            $  -          $ 2,407
</TABLE>

(1) Represents valuation reserves acquired through the acquisition of CTI.

All other  Schedules  have been omitted since they are either not required,  not
applicable,  or the  information is otherwise  included in this Annual Report on
Form 10-K.

                                       30

<PAGE>



Item 8. Financial Statements and Supplementary Data


                                              HERLEY INDUSTRIES, INC.

                                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                       Page
                                                                                                       ----
INDEPENDENT AUDITORS' REPORT                                                                           F-2

FINANCIAL STATEMENTS:

<S>                                                                                                    <C>
     Consolidated Balance Sheets, August 1, 2004 and August 3, 2003                                    F-3

     Consolidated Statements of Income for the 52 weeks ended August 1, 2004, the
      53 weeks ended August 3, 2003, and 52 weeks ended July 28, 2002                                  F-4

     Consolidated Statements of Shareholders' Equity for the 52 weeks ended August 1,
        2004, the 53 weeks ended August 3, 2003 and 52 weeks ended July 28, 2002                       F-5

     Consolidated Statements of Cash Flows for the 52 weeks ended August 1, 2004,
        the 53 weeks ended August 3, 2003, and the 52 weeks ended July 28, 2002                        F-6

     Notes to Consolidated Financial Statements                                                        F-7

</TABLE>

















                                       F-1


<PAGE>



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Herley Industries, Inc.
Lancaster, Pennsylvania

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Herley
Industries,  Inc.  and  subsidiaries  (the  "Company")  as of August 1, 2004 and
August 3, 2003, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended August 1,
2004. Our audits also included the financial  statement  schedule  listed in the
Index at Item 15. These 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 audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial  position of the Company as of August 1, 2004
and August 3, 2003,  and the  results of its  operations  and its cash flows for
each of the three years in the period ended August 1, 2004, in  conformity  with
accounting principles generally accepted in the United States of America.  Also,
in our opinion,  such financial statement schedule,  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."


DELOITTE & TOUCHE LLP
Baltimore, Maryland
October 14, 2004








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

                                                                                     August 1,   August 3,
                                                                                        2004        2003
                                                                                     ---------   ---------

                                                ASSETS
Current Assets:
<S>                                                                                  <C>         <C>
               Cash and cash equivalents                                             $  66,181   $  81,523
               Trade accounts receivable                                                24,664      16,525
               Costs incurred and income recognized in excess
                  of billings on uncompleted contracts                                  14,210       6,960
               Other receivables                                                           576         827
               Inventories, net of allowance of $3,412 in 2004
                 and $2,739 in 2003                                                     44,909      37,545
               Deferred taxes and other                                                  3,579       3,207
                                                                                     ---------   ---------
                              Total Current Assets                                     154,119     146,587
Property, Plant and Equipment, net                                                      25,968      22,406
Goodwill                                                                                35,165      25,729
Intangibles, net of accumulated amortization of $752 in 2004
               and $403 in 2003                                                          4,555       1,542
Available-For-Sale Securities                                                              147          75
Other Investments                                                                          117         162
Other Assets                                                                               900       1,063
                                                                                     ---------   ---------
                                                                                     $ 220,971   $ 197,564
                                                                                     =========   =========
               LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
               Current portion of long-term debt                                     $     804   $     686
               Accounts payable and accrued expenses                                    17,514      13,177
               Billings in excess of costs incurred and
                   income recognized on uncompleted contracts                            1,303           -
               Income taxes payable                                                      2,091       2,670
               Reserve for contract losses                                                 954         736
               Advance payments on contracts                                             1,180         856
                                                                                     ---------   ---------
                              Total Current Liabilities                                 23,846      18,125
Long-term Debt                                                                           5,845       6,403
Other Long-term Liabilities                                                                932         849
Deferred Income Taxes                                                                    4,848       4,945
                                                                                     ---------   ---------
                                                                                        35,471      30,322
                                                                                     ---------   ---------
Commitments and Contingencies (Note F)
Shareholders' Equity:
               Common stock, $.10 par value; authorized
                 20,000,000 shares; issued and outstanding
                 14,220,508 in 2004 and 13,969,151 in 2003                               1,422       1,397
               Additional paid-in capital                                              107,671     104,551
               Retained earnings                                                        75,151      61,478
               Accumulated other comprehensive income (loss)                             1,256        (184)
                                                                                     ---------   ---------
                             Total Shareholders' Equity                                185,500     167,242
                                                                                     ---------   ---------
                                                                                     $ 220,971   $ 197,564
                                                                                     =========   =========
</TABLE>

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

                                       F-3
<PAGE>

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

                                                              52 weeks     53 weeks     52 weeks
                                                                ended        ended        ended
                                                              August 1,    August 3,     July 28,
                                                                 2004         2003         2002
                                                              ---------    ---------    ---------

<S>                                                           <C>          <C>          <C>
Net sales                                                     $ 122,154    $ 110,223    $  92,881
                                                              ---------    ---------    ---------

Cost and expenses:
         Cost of products sold                                   79,505       73,222       61,947
         Selling and administrative expenses                     21,123       16,187       13,229
         Litigation costs                                         1,924        1,147        2,079
         Plant closing costs                                       -            -             406
                                                              ---------    ---------    ---------
                                                                102,552       90,556       77,661
                                                              ---------    ---------    ---------

         Income from operations                                  19,602       19,667       15,220
Other income (expense), net
         Investment income                                          674        1,113          718
         Interest expense                                          (326)        (344)        (332)
         Foreign exchange (loss)                                   (194)           -            -
                                                              ---------    ---------    ---------
                                                                    154          769          386
                                                              ---------    ---------    ---------

         Income from continuing operations
             before income taxes                                 19,756       20,436       15,606
Provision for income taxes                                        6,083        6,499        4,876
                                                              ---------    ---------    ---------

         Income from continuing operations                       13,673       13,937       10,730
Loss from discontinued operations
  (including net loss on sale of $1,166)
  net of income tax benefit                                        -            -            (921)
                                                              ---------    ---------    ---------
         Income before cumulative effect of change
           in accounting principle                               13,673       13,937        9,809
Cumulative effect of adopting SFAS 142                             -            -          (4,637)
                                                              ---------    ---------    ---------

         Net income                                           $  13,673    $  13,937    $   5,172
                                                              =========    =========    =========

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

         Basic weighted average shares                           14,105       14,317       12,041
                                                                 ======       ======       ======

Earnings (loss) per common share - Diluted
         Income from continuing operations                        $ .92        $ .93        $ .83
         Loss from discontinued operations                          -            -           (.07)
         Cumulative effect of adopting SFAS 142                     -            -           (.36)
                                                                   ----         ----         ----
            Net earnings                                          $ .92        $ .93        $ .40
                                                                   ====         ====         ====

         Diluted weighted average shares                         14,896       15,031       12,978
                                                                 ======       ======       ======
</TABLE>

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


                                       F-4
<PAGE>


                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
        52 weeks ended August 1, 2004, and 53 weeks ended August 3, 2003,
                      and the 52 weeks ended July 28, 2002
                        (In thousands except share data)
<TABLE>
<CAPTION>

                                                                                                             Accumulated
                                                                       Additional                              Other
                                                      Common Stock      Paid-in      Retained    Treasury   Comprehensive
                                                 Shares     Amount      Capital      Earnings      Stock    Income (loss)    Total
                                               ----------  --------   -----------   ----------   --------   -------------   -------

<S>                                            <C>         <C>        <C>           <C>          <C>        <C>            <C>
Balance at July 30, 2001                       10,537,289  $  1,054        45,250       42,369       -            -        $ 88,673

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           -
                                               ----------   -------   -----------   ----------   --------   -------------   -------
     Subtotal                                  14,680,960     1,468       116,579       42,369       -                -     160,416
                                               ----------   -------   -----------   ----------   --------   -------------   -------

Net income                                                                               5,172                                5,172
Other comprehensive loss, net of tax:
    Unrealized loss from
        available-for-sale securities                                                                                 (66)      (66)
   Unrealized loss on interest rate swap                                                                              (97)      (97)
   Foreign currency translation loss                                                                                  (67)      (67)
                                                                                                                            --------
Comprehensive income                                                                                                          4,942

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

Exercise of stock options                         227,799        23         1,971                                             1,994
Tax benefit upon exercise of stock
  options                                                                     575                                               575
Purchase of 939,608 shares of treasury stock                                                      (14,668)                  (14,668)
Retirement of treasury shares                    (939,608)      (94)      (14,574)                 14,668                      -
                                               ----------   -------   -----------   ----------   --------   -------------   -------
     Subtotal                                  13,969,151     1,397       104,551       47,541       -               (230)   153,259
                                               ----------   -------   -----------   ----------   --------   -------------   -------

Net income                                                                              13,937                               13,937
Other comprehensive income (loss) net of tax:
    Unrealized gain on
        available-for-sale securities                                                                                   18       18
   Unrealized gain on interest rate swap                                                                                47       47
   Foreign currency translation (loss)                                                                                 (19)     (19)
                                                                                                                            -------
Comprehensive income                                                                                                         13,983

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

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

Exercise of stock options                         251,357        25         2,433                                             2,458
Tax benefit upon exercise of stock
  options                                                                     687                                               687
                                               ----------   -------   -----------   ----------   --------   -------------   -------
     Subtotal                                  14,220,508     1,422       107,671       61,478       -               (184)  170,387
                                               ----------   -------   -----------   ----------   --------   -------------   -------

Net income                                                                              13,673                               13,673
Other comprehensive income (loss) net of tax:
    Unrealized gain on
        available-for-sale securities                                                                                  49        49
   Unrealized (loss) on interest rate swap                                                                            (23)      (23)
   Foreign currency translation gain                                                                                1,414     1,414
                                                                                                                            -------
Comprehensive income                                                                                                         15,113

                                               ----------   -------   -----------   ----------   --------   -------------   -------
Balance at August 1, 2004                      14,220,508  $  1,422       107,671       75,151       -              1,256  $185,500
                                               ==========   =======   ===========   ==========   ========   =============   =======
</TABLE>


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


                                       F-5
<PAGE>


                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                52 weeks    53 weeks    52 weeks
                                                                                  ended       ended       ended
                                                                                August 1,   August 3,   July 28,
                                                                                  2004        2003        2002
                                                                                --------    --------    --------
Cash flows from operating activities:
<S>                                                                             <C>         <C>         <C>
        Income from continuing operations                                       $ 13,673    $ 13,937    $ 10,730
                                                                                --------    --------    --------
        Adjustments to reconcile net income to
           net cash provided by operations:
               Depreciation and amortization                                       4,244       4,302       3,917
               Foreign exchange loss                                                 753        -           -
               (Gain) loss  on sale of fixed assets                                 -            (17)         45
               Equity in income of limited partnership                               (10)        (16)        (48)
               (Increase) in deferred tax assets                                    (316)       (232)       (712)
               (Decrease) increase in deferred tax liabilities                      (109)      1,048        (471)
               Changes in operating assets and liabilities:
                      (Increase) decrease in trade accounts receivable            (6,923)     (2,039)      1,583
                      (Increase) in costs incurred and income
                         recognized in excess of billings on
                         uncompleted contracts                                    (7,250)     (1,258)     (6,341)
                      Decrease (increase) in other receivables                       251        (380)         (2)
                      (Increase) in inventories                                   (5,806)     (3,846)     (1,974)
                      Decrease (increase) in prepaid expenses and other               31         (52)          -
                      Increase in accounts payable
                        and accrued expenses                                       3,431         491         429
                      Increase (decrease) in billings in excess of
                        costs incurred and income recognized
                        on uncompleted contracts                                   1,303        -           (531)
                      Increase in income taxes payable                               108       3,627       5,351
                      (Decrease) increase in reserve for contract losses            (240)       (668)        348
                      Increase (decrease) in advance payments on contracts           324        (515)      1,110
                      Other, net                                                     146         185        (295)
                                                                                --------    --------    --------
                             Total adjustments                                   (10,063)        630       2,409
                                                                                --------    --------    --------

               Net cash provided by continuing operations                          3,610      14,567      13,139
                                                                                --------    --------    --------

Cash flows from investing activities:
        Acquisition of businesses, net of cash acquired                          (14,914)     (2,542)       -
        Payment of deferred purchase price of acquired business                     -           -         (3,000)
        Investment in technology license                                            -           -           (500)
        Proceeds from sale of fixed assets                                            19          25          85
        Partial distribution from limited partnership                                 55          49         626
        Capital expenditures                                                      (5,884)     (3,876)     (5,488)
                                                                                --------    --------    --------
               Net cash used in investing activities                             (20,724)     (6,344)     (8,277)
                                                                                --------    --------    --------

Cash flows from financing activities:
        Borrowings under bank line of credit                                        -           -          4,300
        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                  2,458       1,994       3,984
        Payments under lines of credit                                              -           -         (4,300)
        Payments of long-term debt                                                  (686)       (236)       (201)
        Purchase of treasury stock                                                  -        (14,668)     (3,847)
                                                                                --------    --------    --------
               Net cash provided by (used in) financing activities                 1,772     (12,910)     67,748
                                                                                --------    --------    --------

Net cash provided by discontinued operations                                        -           -            559
                                                                                --------    --------    --------

               Net (decrease) increase in cash and cash equivalents              (15,342)     (4,687)     73,169

Cash and cash equivalents at beginning of period                                  81,523      86,210      13,041
                                                                                --------    --------    --------
Cash and cash equivalents at end of period                                      $ 66,181    $ 81,523    $ 86,210
                                                                                ========    ========    ========
</TABLE>


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

                                       F-6

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.   Nature of Operations

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

2.   Fiscal Year

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

3.   Basis of Financial Statement Presentation

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

4.   Cash and Cash Equivalents

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

5.   Concentration of Credit Risk

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

6.   Costs  Incurred and Income  Recognized in Excess of Billings on Uncompleted
     Contracts

     Costs  incurred and income  recognized in excess of billings on uncompleted
     contracts are classified in the financial  statements as current assets. We
     generally expect to bill and collect  substantially  all costs incurred and
     income recognized in excess of billings within one year.

7.   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

                                       F-7

<PAGE>



     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.

8.   Property, Plant and Equipment

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

     The Company reviews the recoverability of its long-lived assets when events
     or changes in  circumstances  occur that indicate the carrying value of the
     assets may not be recoverable.  The  measurement of possible  impairment is
     based on the Company's  ability to recover the carrying  value of the asset
     from the expected future undiscounted cash flows generated. The measurement
     of impairment  requires management to use estimates of expected future cash
     flows.  If an  impairment  loss  existed,  the  amount of the loss would be
     charged to operations.  It is possible that future events or  circumstances
     could cause these estimates to change.

9.   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 at least  annually 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.

     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 as
     defined in SFAS 131. In fiscal  2001,  within the  operating  segment,  the
     Company  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.  In January  2002 the Company
     decided to discontinue the operations of Terrasat (the only business in the
     commercial  technologies  reporting  unit),  and to  seek a  buyer  for the
     business.  In  connection  with this  decision in fiscal 2002,  the Company
     determined  that an impairment of goodwill in the  commercial  technologies
     unit had occurred.  Accordingly,  a transition  adjustment in the amount of
     $4,637,000  was  recorded  as of the  beginning  of  fiscal  year 2002 as a
     cumulative  effect of a change in  accounting  principle.  There was no tax
     benefit  associated with the adjustment since the impaired  goodwill is not
     deductible for income tax purposes.

     An impairment  test based on a single  reporting  unit was performed in the
     fourth  quarter of fiscal 2004 using the current market  capitalization  of
     the Company,  which in an active market for the Company's common stock, the
     Company considers a reasonable  indication of implied fair value.  Based on
     this initial step in the test for impairment,  the Company  concluded there
     was no impairment of goodwill at August 1, 2004. An annual  impairment test
     will be  performed in the fourth  quarter of each fiscal  year,  or when an
     indication of impairment exists, and any future impairment of goodwill will
     be charged to operations.



                                       F-8

<PAGE>



     The change in the carrying amount of goodwill for the years ended August 1,
     2004 and August 3, 2003,  based upon the fair value of assets  acquired and
     liabilities  assumed  related to the  acquisition of CTI in fiscal 2004 and
     EWST in fiscal 2003, is as follows (in thousands):

            Balance at July 28, 2002                             $ 21,665
               Goodwill acquired during period                      4,064
                                                                  -------
            Balance at August 3, 2003                            $ 25,729
               Goodwill acquired during period                      8,725
               Foreign currency translation adjustment                711
                                                                 --------
            Balance at August 1, 2004                            $ 35,165
                                                                   ======

     Intangibles consist of the following (in thousands):

                                             August 1,    August 3,   Estimated
                                               2004         2003     useful life
                                               ----         ----     -----------

         Technology (1)                     $ 3,421      $ 1,021      15 years
         Drawings (2)                           800         -         15 years
         Backlog (3)                            325          325       2 years
         Non-compete (3)                         31           31       5 years
         Foreign currency translation
            adjustment (3)                      162         -
         Patents                                568          568       14 years
                                              -----        -----
                                              5,307        1,945
         Accumulated amortization               752          403
                                              -----        -----
                                            $ 4,555      $ 1,542
                                              =====        =====
---------
(1)  Includes  $1,021 and $2,400  related to the  acquisitions  of EWST and CTI,
     respectively (See Note B.)
(2)  Related to the acquisition of CTI (See Note B.)
(3)  Related to the acquisition of EWST (See Note B.)

     Amortization expense for the fiscal periods ended August 1, 2004, August 3,
     2003 and July 28, 2002 was  approximately  $349,000,  $258,000 and $41,000,
     respectively.

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

                          2005        $ 342
                          2006          329
                          2007          328
                          2008          322
                          2009          322

     The carrying  amount of  intangibles  is reviewed for  recoverability  when
     events or changes in  circumstances  occur that  indicate that the carrying
     value of the assets may not be recovered.

10.  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.  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  income or loss.  Realized
     gains and losses and declines in value judged

                                       F-9

<PAGE>



     to be other-than-temporary are included in other income (expense), net. The
     cost of  securities  sold is based on the specific  identification  method.
     Interest and dividends on securities are included in other income.

11.  Other Investments

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

12.  Revenue and Cost Recognition

     The Company generally  recognizes revenue when products are shipped and the
     customer  takes  ownership  and  assumes  risk of loss,  collection  of the
     relevant  receivable  is probable,  persuasive  evidence of an  arrangement
     exists and the sales price is fixed or determinable. Payments received from
     customers in advance of products delivered are recorded as customer advance
     payments  until  earned.  Substantially  all of our customer  contracts are
     firm, fixed price contracts,  providing for a predetermined fixed price for
     the products sold,  regardless of the costs incurred.  Approximately 13% to
     16% of  revenues  over  the last  three  fiscal  years  were  derived  from
     long-term,  fixed price contracts for which revenues and estimated  profits
     are  recognized  using the  percentage of  completion  method of accounting
     based on estimated completion to date (the total contract amount multiplied
     by the percentage of performance, based on total costs incurred in relation
     to total estimated cost at  completion).  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.

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

13.  Product Development

     The Company's primary efforts are focused on engineering design and product
     development  activities  rather  than  pure  research.  The  cost of  these
     development   activities,   including   employees'   time   and   prototype
     development,   net  of  amounts  paid  by  customers,   was   approximately
     $5,422,000,  $3,083,000,  and  $2,269,000 in fiscal 2004,  2003,  and 2002,
     respectively, and are included in cost of products sold.

14.  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.

15.  Stock-Based Compensation

     The Company has various  fixed stock option plans which  reserve  shares of
     common stock for issuance to executives, key employees and directors.

     Statement of Financial  Accounting  Standards ("SFAS") 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 ("APB")  Opinion No. 25,  "Accounting for Stock Issued to
     Employees," and related Interpretations. Accordingly,

                                      F-10

<PAGE>



     compensation  cost for stock options is measured as the excess,  if any, of
     the quoted  market  price of the  Company's  stock at the date of the grant
     over the amount an  employee  must pay to acquire  the stock.  Because  the
     exercise  price of the Company's  employee  stock options equals the market
     price of the underlying stock on the date of grant, no compensation expense
     is recognized.

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

     The Company has adopted the disclosure-only provisions of SFAS 123 and SFAS
     148. Pro-forma  information  regarding net income and earnings per share as
     required by  Statements  123 and 148 has been  determined as if the Company
     had accounted for its employee stock options under the fair value method of
     Statement 123.

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

     For purposes of computing pro-forma (unaudited)  consolidated net earnings,
     the  following  assumptions  were used to calculate  the fair value of each
     option granted during each of the fiscal years ended August 1, 2004, August
     3, 2003, and July 28, 2002:

                           Expected life of options              1.51 years
                           Volatility                            .68
                           Risk-free interest rate               2.8%
                           Dividend yield                        zero

     Had compensation cost for stock options granted in fiscal years 2004, 2003,
     and  2002  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):
<TABLE>
<CAPTION>

                                                                2004              2003             2002
                                                                ----              ----             ----

<S>                                                           <C>              <C>               <C>
                Net income  -  as reported                    $ 13,673         $ 13,937          $  5,172
                Deduct: total stock-based employee
                 compensation expense determined
                 under fair value based method for all
                 awards, net of related tax effects               (627)          (1,926)           (4,425)
                                                                ------           ------            ------
                Net income  -  pro-forma                      $ 13,046         $ 12,011          $    747
                                                                ======           ======            ======

                Earnings per share  -  as reported
                     Basic                                        $ .97            $ .97             $ .43
                     Diluted                                        .92              .93               .40
                Earnings per share  - pro-forma
                     Basic                                        $ .92            $ .84             $ .06
                     Diluted                                        .88              .80               .06
</TABLE>

                                      F-11

<PAGE>



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

16.  Foreign Currency Translation

     Financial   statements  of  foreign  subsidiaries  are  prepared  in  their
     respective  functional  currencies and translated into U. S. Dollars at the
     current  exchange rates for assets and  liabilities  and a monthly  average
     rate during the year for revenues,  costs and expenses. Net gains or losses
     resulting from the translation of foreign financial  statements are charged
     or credited  directly to the 'Foreign  currency  translation'  component of
     'Other  comprehensive  income  (loss)'  in  the  accompanying  consolidated
     statements of shareholders' equity.

17.  Derivatives

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

NOTE B - ACQUISITIONS

     The  Company  entered  into an  agreement  as of March 29,  2004 to acquire
     certain  assets  and the  business,  subject to the  assumption  of certain
     liabilities,  of  Communication  Techniques,  Inc., a Delaware  corporation
     doing  business  in  Whippany,  New  Jersey.  The  facility  operates  as a
     wholly-owned  subsidiary of the Company as Herley-CTI,  Inc.  ("CTI").  CTI
     designs,   develops  and  produces   state-of-the-art   signal   generation
     components and integrated assemblies for digital radio, SONET, SatCom, test
     and instrumentation, datacom, and wired and wireless applications to 45 Ghz
     and 45 Gb/s.  Having a worldwide  reputation  for phase locked sources with
     low phase noise, the acquisition of CTI is a strategic fit for the Company.
     CTI recently  developed a fast frequency  changing direct synthesizer which
     when combined with the  capabilities of  Herley-Israel  puts the Company at
     the  forefront  of  producing   broadband   microwave  sources  for  radar,
     communication, electronic warfare, and microwave test systems. In addition,
     CTI is complementary to our existing  customer base,  expands our technical
     engineering  team,  complements  the Company's  core  technology,  and will
     enable the Company to leverage the combined capabilities into new markets.

     The  transaction  provides for a net payment of $14,914,000 in cash and the
     assumption of certain  liabilities.  The transaction has been accounted for
     in accordance with the provisions of SFAS No. 141, "Business Combinations",
     which  requires that all business  combinations  be accounted for using the
     purchase method.

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

              Aggregate purchase price        $ 14,914
                                                ======

              Current assets                    2,861
              Furniture and equipment           1,492
              Technology                        2,400
              Drawings                            800
              Goodwill                          8,725
              Current liabilities              (1,364)


                                      F-12

<PAGE>



The  Company  entered into an agreement as of September 1, 2002,  to acquire all
     of the issued and  outstanding  common stock of EW  Simulation  Technology,
     Limited ("EWST"),  a British company of Aldershot,  UK, which operates as a
     wholly-owned subsidiary of the Company. EWST designs, develops and produces
     electronic  warfare  simulator  systems for prime defense  contractors  and
     countries worldwide. The acquisition of EW Simulation Technology was driven
     by a two part strategic initiative:  a) to leverage the Company's microwave
     expertise  vertically into the  international  threat and jamming simulator
     markets, and b) to increase the amount of microwave content supplied by the
     Company  on each  simulator  platform.  The  transaction,  which  closed on
     September  20, 2002,  provides for payment of $3,000,000 in cash and a note
     for 1,000,000 Pounds Sterling, including interest at 1.8% based on LIBOR at
     the date of acquisition,  payable in annual  installments of 333,334 Pounds
     Sterling  beginning  October 1, 2003. Based on the spot rate of exchange at
     the date of acquisition of 1.50, the U.S. Dollar equivalent of the note was
     $1,500,000.  The note  has a  balance  of  $1,212,000  at  August  1,  2004
     (adjusted for foreign exchange rate fluctuations)  payable in two remaining
     installments  annually on October 1, 2004 and October 1, 2005 of  $606,000.
     The transaction has been accounted for in accordance with the provisions of
     SFAS No. 141,  "Business  Combinations",  which  requires that all business
     combinations be accounted for using the purchase method.

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

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

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

NOTE C - INVENTORIES

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

                                                    August 1,        August 3,
                                                       2004             2003
                                                       ----             ----
           Purchased parts and raw materials        $ 23,031         $ 19,690
           Work in process                            22,878           18,646
           Finished products                           2,412            1,948
                                                     -------          -------
                                                      48,321           40,284
           Less reserve                                3,412            2,739
                                                     -------          -------
                                                    $ 44,909         $ 37,545
                                                      ======           ======

NOTE D - OTHER INVESTMENTS

     In July 1994, the Company  invested  $1,000,000  for a limited  partnership
     interest in M.D. Sass  Municipal  Finance  Partners-I,  a Delaware  limited
     partnership.  The objectives of the  partnership are the  preservation  and
     protection of its capital and the earning of income through the purchase of
     certificates  or other  documentation  that evidence liens for unpaid local
     taxes on parcels of real property. At August 1, 2004 and August 3, 2003 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 partnership
     is in the process of being  liquidated and accordingly the Company received
     partial  distributions  of  approximately  $55,000  and  $49,000  from  the
     Partnership in fiscal 2004 and 2003, respectively. As of

                                      F-13

<PAGE>



     August 1, 2004 the Company's  limited  partnership  interest had a carrying
     value of approximately $117,000, based on the equity method of accounting.

NOTE E - PROPERTY, PLANT AND EQUIPMENT

     Property,   plant  and   equipment  are  comprised  of  the  following  (in
     thousands):
<TABLE>
<CAPTION>

                                                 August 1,     August 3,      Estimated
                                                  2004          2003         Useful Life
                                                  ----          ----         -----------
<S>                                             <C>           <C>            <C>
       Land                                     $  3,781      $  2,908
       Building and building improvements         10,043         9,291       10-40 years
       Machinery and equipment                    43,225        37,802        5- 8 years
       Furniture and fixtures                      1,347         1,186        5-10 years
       Automobiles                                     7          -              3 years
       Leasehold improvements                      1,526         1,385        5-10 years
                                                 -------       -------
                                                  59,929        52,572
       Less accumulated depreciation              33,961        30,166
                                                  ------        ------
                                                $ 25,968      $ 22,406
                                                  ======        ======
</TABLE>

     Depreciation  charges totaled  approximately  $3,796,000,  $3,944,000,  and
     $3,776,000 in fiscal 2004, 2003, and 2002, 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 August 1, 2004,  and the 53 weeks ended
     August  3,  2003  and 52  weeks  ended  July 28,  2002,  was  approximately
     $1,749,000,  $1,393,000,  and  $1,244,000,   respectively.  Minimum  annual
     rentals  under   noncancellable   operating   leases  are  as  follows  (in
     thousands):

                                                            Amount
                                                            ------
                     Year ending fiscal 2005               $ 1,649
                                        2006                 1,513
                                        2007                 1,272
                                        2008                 1,206
                                        2009                 1,256
                                      Future                   856

     Employment Agreements

     The  Company has  employment  agreements  with  certain  executives  of the
     Company which expire December 31, 2008, subject to extension for additional
     one-year  periods  annually each January 1 with a final  expiration date of
     December 31, 2015 (as amended December 9, 2003). The agreements provide for
     aggregate  annual  salaries as of August 1, 2004 of $1,427,000  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  $2,214,000  (including  a  supplemental  payment of $650,000 for
     fiscal 2003),  and  $1,571,000  was charged to expense in fiscal years 2004
     and 2003, respectively.

     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

                                      F-14

<PAGE>



     average  of the  three  highest  annual  bonuses  awarded  during  the  ten
     preceding  years) for the remainder of the employment term. As of August 1,
     2004,  the  amount  payable  in the  event  of such  termination  would  be
     approximately $16,318,000.

     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.

     Eight  officers of the Company have severance  agreements  providing for an
     aggregate  lump-sum payment of $2,830,000 through September 30, 2006 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 earn out
     requirements;  (ii)  misrepresentations  made in connection  with the Asset
     Purchase  Agreement;  (iii)  wrongdoing as a Herley employee leading to his
     termination and (iv) post-Herley employment wrongdoing in connection with a
     new company known as RH Laboratories.  In addition to seeking a Declaratory
     Judgment  pursuant to 28 U.S.C.  ss. 2201 et.  seq.,  Herley also  asserted
     claims for,  among  other  things,  fraud,  breach of  contract,  breach of
     fiduciary duty,  unfair  competition and tortious  interference with actual
     and prospective contractual relationships.

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

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

                                      F-15

<PAGE>



     February 5, 2003,  the Court  denied the  post-trial  motions  filed by the
     parties, thus leaving the jury verdict undisturbed.

     At a proceeding on April 28, 2003, the Court decided to delay ruling on all
     of the  petitions  for fees and costs  until after  appeals are  exhausted.
     Accordingly, by Order dated May 6, 2003, the Court denied without prejudice
     all of the parties' petitions.  On May 12, 2003, Herley filed its appeal to
     the United States Court of Appeals for the Second Circuit. On May 28, 2003,
     RLI filed a notice of cross-appeal.  Robinson did not appeal.  Herley filed
     its brief in support of its appeal before the Second  Circuit on August 22,
     2003.  RLI timely  filed its brief in response  to  Herley's  appeal and in
     support of RLI's  cross-appeal.  Herley  timely  filed a response  to RLI's
     brief and  thereafter RLI timely filed a response to Herley's  brief.  Oral
     argument was held on December 18, 2003.

     By Summary Order on January 26, 2004, the Second Circuit affirmed the trial
     court judgment in its entirety. On February 4, 2004, RLI submitted a letter
     request to the trial court for relief from the  judgment on RLI's claim for
     the earn-out  stock under Federal Rule of Civil  Procedure 60. RLI contends
     that it has "newly  discovered  evidence," first learned in August 2003, to
     justify its requested  relief.  Herley submitted its response in opposition
     by letter  dated  February 10,  2004.  On February  26,  2004,  the parties
     appeared  before the Court  concerning  the various  applications  and were
     directed to submit legal briefs on various legal issues. By Order dated May
     28, 2004 the trial court  denied  RLI's  Motion for a New Trial.  The Court
     also denied Herley's  request that it exercise its general  equitable power
     to hold Ben Robinson  personally  liable for any fees Herley might  recover
     against RLI.

     On June 28, 2004,  Herley filed suit against Ben Robinson and Frank Holt in
     the Superior Court of Hillsborough County, New Hampshire,  asserting claims
     for fraudulent  conveyance and piercing the corporate veil to hold Robinson
     personally liable for the fees incurred by Herley in defending RLI's claims
     discussed  above.  In  response,  Robinson  took steps to  collect  damages
     awarded to him under the jury verdict.  On July 21, 2004, Herley brought an
     Emergency  Motion for  Injunctive  Relief and moved for an immediate  order
     from the New Hampshire court allowing Herley to escrow the judgment owed to
     Robinson  to be  offset  against  any  award of fees to  Herley.  The court
     entered an order denying the  requested  relief.  On July 27, 2004,  Herley
     paid $1,594,621  (including interest) to Ben Robinson, an amount calculated
     by deducting  Herley's award against  Robinson from the amounts  awarded to
     Robinson  on his  claims  under  the  Employment  Agreement  and the  Lease
     Agreement.  On July  28,  2004,  the  parties  filed a  Notice  of  Partial
     Satisfaction   of   Judgment.   Herley's   judgment   against  RLI  remains
     unsatisfied. Cross petitions for attorney's fees are still pending.

     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, 2006. At August 1, 2004 stand-by  letters of
     credit  aggregating  approximately  $11,389,000 were outstanding under this
     facility.

     Outstanding Purchase Commitments

     The Company has  outstanding an aggregate of  approximately  $16,448,000 in
     open  purchase  orders as of August 1,  2004.  These open  purchase  orders
     represent  executory contracts for the purchase of goods and services which
     will be substantially fulfilled in the next six months.



                                      F-16

<PAGE>



NOTE G - INCOME TAXES

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

                              52 weeks ended   53 weeks ended   52 weeks ended
                                 August 1,        August 3,        July 28,
                                   2004             2003             2002
                                   ----             ----             ----
       Current
                  Federal        $ 5,514          $ 5,465          $ 5,333
                  State              549              533              520
                  Foreign            431              379              204
                                   -----            -----            -----
                                   6,494            6,377            6,057
                                   -----            -----            -----
       Deferred
                  Federal           (372)            (233)          (1,090)
                  State              (44)             (23)            (106)
                  Foreign              5              378               15
                                   -----            -----            ------
                                    (411)             122           (1,181)
                                   -----            -----           ------
                                 $ 6,083          $ 6,499          $ 4,876
                                   =====            =====           ======

     The Company paid income taxes of approximately $5,496,000,  $4,164,000, and
     $680,000 in fiscal 2004, 2003, and 2002,  respectively.  The following is a
     reconciliation of the U. S. statutory income tax rate and the effective tax
     rate on pretax income:
<TABLE>
<CAPTION>

                                                        52 weeks    53 weeks    52 weeks
                                                          ended       ended       ended
                                                        August 1,   August 3,   July 28,
                                                          2004        2003        2002
                                                          ----        ----        ----
<S>                                                       <C>         <C>         <C>
         Statutory income tax rate                        35.0 %      34.0 %      34.0 %
         State income taxes, net of
            federal income tax benefit                     1.7         1.7         0.9
         Benefit of extra territorial income              (1.4)       (1.0)       (2.4)
         Non-deductible expenses                           0.6         0.6         0.2
         Benefit of foreign and
            foreign-source income                         (3.9)       (3.4)       (1.4)
         Research and development credits                 (1.0)         -           -
         Other, net                                       (0.2)       (0.1)       (0.1)
                                                          ----        ----        ----
            Effective tax rate                            30.8 %      31.8 %      31.2 %
                                                          ====        ====        ====
</TABLE>

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



                                      F-17

<PAGE>



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

                                                          August 1, 2004                August 3, 2003
                                                   ---------------------------   ---------------------------
                                                   Deferred         Deferred     Deferred         Deferred
                                                      Tax              Tax          Tax              Tax
                                                    Assets         Liabilities    Assets         Liabilities
                                                    ------         -----------    ------         -----------
<S>                                                  <C>            <C>      <C>                  <C>
         Intangibles                                 $  -           $ 2,186  $       -            $ 2,298
         Accrued vacation pay                            335           -             260             -
         Accrued bonus                                   583           -             516             -
         Accrued warranty and other expenses             297           -             194             -
         Inventory                                     1,256           -           1,125             -
         Depreciation                                   -             2,662         -               2,647
         Contract losses                                 221           -             183             -
         Net operating loss
            carry-forwards                               230           -             230             -
         Other                                           267           -             365             -
                                                       -----          -----        -----            -----
                                                     $ 3,189        $ 4,848      $ 2,873          $ 4,945
                                                       =====          =====        =====            =====
</TABLE>

     As of  August  1,  2004  the  Company  has  available  net  operating  loss
     carry-forwards  for state income tax purposes of  approximately  $1,300,000
     which expire through fiscal 2020.

NOTE H- LONG-TERM DEBT

     Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                     August 1,      August 3,
                                                   Rate                2004           2003
                                             --------------------      ----           ----
<S>                                             <C>       <C>        <C>            <C>
       Revolving loan facility (a)              2.75% and 3.28%      $  -           $  -
       Mortgage note (b)                        7.43%                  2,524          2,610
       Industrial Revenue Bonds (c)             4.07%                  2,805          2,905
       Note for acquired business (d)           1.8%                   1,212          1,500
       Other                                        -                    108             74
                                                                       -----          -----
                                                                       6,649          7,089
       Less current portion                                              804            686
                                                                       -----          -----
                                                                     $ 5,845        $ 6,403
                                                                       =====          =====
</TABLE>

       (a) In June 2002, the Company  entered into a new  $50,000,000  Revolving
           Credit Loan 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, 2006 (as amended).  The Company may
           elect to borrow up to a maximum of $5,000,000  with interest based on
           the 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. The Federal Funds Target Rate and
           the LIBOR rate was 1.25% and 1.48%, respectively,  at August 1, 2004.
           There is a fee of 15 basis points per annum on the unused  portion of
           the $45,000,000  LIBOR based portion of the credit  facility  payable
           quarterly.  There are no borrowings  under the line at August 1, 2004
           and August 3, 2003.

           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 August
           1, 2004.


                                      F-18

<PAGE>



       (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 $1,653,000.

           The mortgage note agreement  contains  various  financial  covenants,
           including,  among other matters,  the maintenance of specific amounts
           of tangible  net worth,  debt to  tangible  net worth,  debt  service
           coverage,  and  restrictions on other  borrowings.  The Company is in
           compliance  with all covenants at August 1, 2004. In connection  with
           this loan, the Company paid approximately $45,000 in financing costs.
           Such  costs  are  included  in  Other  Assets  in  the   accompanying
           consolidated balance sheets at August 1, 2004 and August 3, 2003, and
           are being amortized over the term of the loan (10 years).

       (c) On October 19, 2001, the Company received $3,000,000 in proceeds from
           the East Hempfield Township Industrial Development Authority Variable
           Rate  Demand/Fixed  Rate Revenue Bonds Series of 2001 (the  "Bonds").
           The Bonds are due in varying annual  installments  through October 1,
           2021. The initial installment of $95,000 was paid October 1, 2002 and
           increases  each year until the final payment of $225,000 in 2021. The
           interest rate on the Bonds is reset weekly at the  prevailing  market
           rate of the BMA  Municipal  index.  The initial  rate of interest was
           2.1%,  which,  after giving  effect to a ten year  interest rate swap
           agreement  (See Note O) becomes a fixed rate of 4.07%.  The  interest
           rate at August 1,  2004 was  1.23%.  The bond  agreement  requires  a
           sinking  fund  payment on a monthly  basis to fund the  annual  Bonds
           redemption  installment.  Proceeds  from the Bonds  were used for the
           construction  of a 15,000  square  foot  expansion  of the  Company's
           facilities   in  Lancaster   Pennsylvania,   and  for   manufacturing
           equipment.

           The Bonds are secured by a letter of credit 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 $1,749,000 at August 1, 2004.

     (d)  In connection  with the  acquisition  of EWST as of September 1, 2002,
          the Company  issued a note for 1,000,000  Pounds  Sterling,  including
          interest at 1.8%,  payable in annual  installments  of 333,334  Pounds
          Sterling beginning October 1, 2003. Based on the spot rate of exchange
          at August 1, 2004 of 1.8183 the U.S.  Dollar  equivalent of the annual
          installments is approximately $606,000.

     The Company paid interest in 2004, 2003 and 2002 of approximately $314,000,
     $355,000 and $316,000, respectively.

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

                    Fiscal year ending during:         Amount
                    -------------------------          ------
                              2005                    $   804
                              2006                        817
                              2007                        223
                              2008                        236
                              2009                        198
                              Future                    4,371
                                                        -----
                                                      $ 6,649



                                      F-19

<PAGE>



NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

                                                    August 1,      August 3,
                                                      2004           2003
                                                      ----           ----
         Accounts payable                          $ 10,089       $  7,152
         Accrued payroll costs and bonuses            4,987          4,257
         Accrued commissions                            692            508
         Accrued royalties                                8            284
         Accrued legal and accounting fees              240             20
         Accrued warranty costs                         580            359
         Accrued rent expense                           197            189
         Unearned income                                 81             86
         Other accrued expenses                         640            322
                                                     ------         ------
                                                   $ 17,514       $ 13,177
                                                     ======         ======

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 $618,000,
     $513,000 and $533,000 under the Plan for the 52 weeks ended August 1, 2004,
     and the 53 weeks  ended  August 3, 2003 and 52 weeks  ended July 28,  2002,
     respectively.

     The  Company's   Israeli   subsidiary   provides  for  employee   severance
     liabilities pursuant to the Israeli severance pay law and labor agreements.
     The Company's liability is fully provided for by monthly payments deposited
     with  insurers  and by a reserve  established  by the  Company to cover the
     portion  of this  liability  not  covered  by the  Company's  deposits.  In
     addition  to  recognizing  an  expense  for the  funding  to the  insurance
     programs for this severance obligation, the Company also records as expense
     the net increase in its unfunded  severance  liability.  The  liability for
     this  unfunded   severance   obligation  is  carried  in  Other   Long-term
     Liabilities  on  the  accompanying  Consolidated  Balance  Sheets  and  was
     $932,000 and  $849,000 at August 1, 2004 and August 3, 2003,  respectively.
     The total  expense  recognized  for employee  severance  programs in Israel
     (both the funded and unfunded  portion of the  program)  was  approximately
     $313,000,  $353,000  and  $226,000  for fiscal  years 2004,  2003 and 2002,
     respectively.

NOTE K - RELATED PARTY TRANSACTIONS

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



                                      F-20

<PAGE>



NOTE L - COMPUTATION OF PER SHARE EARNINGS

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

                                                       52 weeks          53 weeks          52 weeks
                                                         ended             ended             ended
                                                       August 1,         August 3,         July 28,
                                                         2004              2003              2002
                                                         ----              ----              ----
Numerator:
<S>                                                     <C>               <C>             <C>
      Income from continuing operations                 $ 13,673          $ 13,937        $ 10,730
      Loss from discontinued operations                     -                 -               (921)
      Cumulative effect of adopting SFAS 142                -                 -             (4,637)
                                                          ------            ------           -----
      Net Income                                        $ 13,673          $ 13,937        $  5,172
                                                          ======            ======           =====

Denominator:
      Basic weighted-average shares                       14,105            14,317          12,041
      Effect of dilutive securities:
         Employee stock options and warrants                 791               714             937
                                                          ------            ------          ------
      Diluted weighted-average shares                     14,896            15,031          12,978
                                                          ======            ======          ======

Stock options and warrants not included in computation         4               702             126
                                                               =               ===             ===
</TABLE>

     The number of stock options not included in the  computation of diluted EPS
     relates to stock  options  having  exercise  prices  ranging from $17.12 to
     $20.45 which are greater than the average market price of the common shares
     during the period, and therefore, are antidilutive. The options, which were
     outstanding  as of August 1, 2004,  expire at various dates through May 14,
     2009.

NOTE M - SHAREHOLDERS' EQUITY

     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.

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

     In September  2000,  the Board of Directors  approved the 2000 Stock Option
     Plan which covers 1,500,000  shares of the Company's common stock.  Options
     granted under the plan are non-qualified stock options.  Under the terms of
     the plan, the exercise price for options granted under the plan will be the
     fair market value at the date of grant. The nature and terms of the options
     to be  granted  are  determined  at the time of  grant by the  compensation
     committee or the board of directors.  The options  expire no later than ten
     years from the date of grant, subject to certain  restrictions.  No options
     have been granted  under the plan during  fiscal year ended August 1, 2004.
     Options for 108,500 shares were granted during the fiscal year ended August
     3, 2003.

     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

                                      F-21

<PAGE>



     grant.  Prices for incentive stock options granted to employees who own 10%
     or more of the Company's stock are at least 110% of market value at date of
     grant.  The nature and terms of the options to be granted are determined at
     the time of grant by the compensation  committee or the board of directors.
     The options expire no later than ten years from the date of grant,  subject
     to certain restrictions. Non-qualified stock options for 40,000 shares were
     granted  during the  fiscal  year ended  August 1,  2004.  No options  were
     granted under this plan during the fiscal year ended August 3, 2003.

     In May 1997,  the Board of  Directors  approved  the 1997 Stock Option Plan
     which  covers  2,500,000  shares of the  Company's  common  stock.  Options
     granted  under the plan may be  incentive  stock  options  qualified  under
     Section 422 of the  Internal  Revenue Code of 1986 or  non-qualified  stock
     options.  Under the  terms of the  plan,  the  exercise  price for  options
     granted  under the plan will be the fair market value at the date of grant.
     Prices for incentive stock options granted to employees who own 10% or more
     of the Company's  stock are at least 110% of market value at date of grant.
     The nature and terms of the  options to be granted  are  determined  at the
     time of grant by the compensation committee or the board of directors.  The
     options  expire no later than ten years from the date of grant,  subject to
     certain  restrictions.  Non-qualified  stock  options for 7,500 shares were
     granted  during the  fiscal  year ended  August 1,  2004.  No options  were
     granted under this plan during the fiscal year ended August 3, 2003.

     A summary of stock option  activity  under all plans for the 52 weeks ended
     August 1, 2004 and the 53 weeks ended August 3, 2003 and the 52 weeks ended
     July 28, 2002 is as follows:

<TABLE>
<CAPTION>

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

<S>                     <C> <C>         <C>           <C>       <C>     <C>          <C>             <C>
       Outstanding July 30, 2001        3,757,786     $  4.06 - 13.67   $  8.55      320,000         $ 3.09
          Granted                       1,406,750       11.90 - 19.52     16.05
          Exercised                    (1,454,660)       4.06 - 13.67      7.50     (320,000)          3.09
          Cancelled                      (282,700)       7.63 - 13.15     10.31
                                       -----------       ------------     -----      -------           ----
       Outstanding July 28, 2002        3,427,176     $  4.06 - 19.52   $ 11.92         -               -
          Granted                         108,500       14.50 - 19.03     17.68
          Exercised                      (227,799)       4.06 - 13.10      8.80
          Cancelled                        (9,650)       8.38 - 13.10     11.36
                                     -------------       ------------     -----      -------           ----
       Outstanding August 3, 2003       3,298,227     $  4.06 - 19.52   $ 12.33         -               -
          Granted                          53,500       17.32 - 20.45     19.38
          Exercised                      (253,598)       4.06 - 19.52      9.88
          Canceled                        (77,200)       8.38 - 17.67     11.91
                                       -----------       ------------     -----      -------           ----
       Outstanding August 1, 2004       3,020,929     $  4.06 - 20.45   $ 12.66         -               -
                                        =========                                    =======           ====
</TABLE>

     Options  Outstanding  and  Exercisable  by Price Range as of August 1,2004,
     with  expiration  dates  ranging  from May 12,  2005 to June 6, 2013 are as
     follows:
<TABLE>
<CAPTION>

                                                      Options Outstanding                   Options Exercisable
                                          --------------------------------------------   -------------------------
                                                             Weighted
                                                              Average       Weighted                     Weighted
        Range of Exercise                    Number         Remaining        Average        Number        Average
             Prices                       Outstanding   Contractual Life  Exercise Price  Exercisable Exercise Price
        -----------------                 -----------   ----------------  --------------  ----------- --------------

<S>   <C>           <C>                     <C>                 <C>        <C>               <C>          <C>
      $  4.06  -    $  8.38                 657,879             4.6        $   8.01          554,979      $  7.94
         8.42  -      10.20                 269,550             4.6            9.18          267,150         9.17
        10.46  -      11.92                 636,650             4.7           10.49          580,850        10.48
        13.10  -      13.10                 683,850             6.2           13.10          578,400        13.10
        14.25  -      20.45                 773,000             6.7           19.23          615,200        19.30
                                          ---------             ---           -----        ---------        -----
      $  4.06  -    $ 20.45               3,020,929             5.5         $ 12.66        2,596,579      $ 12.48
                                          =========                                        =========


                                      F-22
</TABLE>

<PAGE>



     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 - SEGMENT REPORTING, MAJOR CUSTOMERS, EXPORT SALES, AND GEOGRAPHIC
            INFORMATION

     The Company's  chief  operating  decision  makers are  considered to be the
     Chairman and the Chief Executive Officer (CEO). The Company's  Chairman and
     CEO evaluate both  consolidated and  disaggregated  financial  information,
     primarily  gross revenues and cash  generated,  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 2004,  2003 and 2002 were as  follows:  defense
     electronics, $113,172,000,  $103,746,000 and $80,615,000, respectively; and
     commercial   technologies,   $8,982,000,   $6,477,000,   and   $12,266,000,
     respectively.  Defense  electronics  includes  revenues of $1,078,000,  and
     commercial technologies includes revenue of $3,045,000, from March 29, 2004
     attributable to the acquisition of CTI (See Note B.)

     Net sales to the U.S.  Government in fiscal 2004,  2003 and 2002  accounted
     for approximately 17%, 25% and 17% of net sales, respectively. The Raytheon
     Company  accounted  for  approximately  10% of net sales in fiscal 2004. No
     other customer accounted for shipments in excess of 10% of consolidated net
     sales during the periods presented. Foreign sales amounted to approximately
     $39,697,000   (including   $9,103,000  in  sales  for  EWST),   $39,646,000
     (including  $11,212,000 in sales for EWST), and $30,070,000 in fiscal 2004,
     2003 and 2002, respectively.

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

                                        2004          2003          2002
                                        ----          ----          ----
                United States       $ 100,746     $  88,294     $ 82,432
                Israel                 12,305        10,717       10,449
                England                 9,103        11,212         -
                                      -------       -------       ------
                                    $ 122,154     $ 110,223     $ 92,881
                                      =======       =======       ======

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

                                        2004         2003
                                        ----         ----
                United States        $ 21,544     $ 18,945
                Israel                  3,499        3,071
                England                   925          390
                                       ------       ------
                                     $ 25,968     $ 22,406
                                       ======       ======

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

                                      F-23

<PAGE>



     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   $108,000  as  of  August  1,  2004.   There  was  no  material   hedge
     ineffectiveness  related  to cash  flow  hedges  during  the  period  to be
     recognized in earnings.

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):
                                                      August 1, 2004
                                                      --------------
                                                Carrying Amount  Fair Value
                                                ---------------  ----------

           Cash and cash equivalents               $ 66,181      $ 66,181
           Available-for-sale securities                147           147
           Long-term debt                             5,845         6,644

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.


                                      F-24

<PAGE>



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

     Summarized below are the results of discontinued operations (in thousands):

                                                         52 weeks ended
                                                            July 28,
                                                              2002
                                                              ----
        Net sales                                         $  2,147
                                                             -----

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

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



                                      F-25

<PAGE>



NOTE R - QUARTERLY RESULTS

     The following is a summary of the unaudited quarterly results of operations
     for the 52 weeks ended  August 1, 2004 and for the 53 weeks ended August 3,
     2003 (in thousands, except for per share data).


<TABLE>
<CAPTION>
                                      2004
                                      ----
                                                  November 2,     February 1,      May 2,        August 1,
                                                     2003            2004           2004           2004
                                                     ----            ----           ----           ----
<S>                                               <C>                <C>            <C>             <C>
     Net sales                                    $   28,267         29,408         30,233          34,246
     Gross profit                                     10,642         10,363         10,768          10,876

     Net income                                   $    3,941          3,546          3,876           2,310
                                                     =======        =======        =======         =======

     Earnings per common share - Basic            $      .28            .25            .27             .16
                                                         ===            ===            ===             ===

     Basic weighted average shares                    14,013         14,073         14,129          14,205
                                                      ======         ======         ======          ======

     Earnings per common share - Diluted          $      .27            .24            .26             .15
                                                         ===            ===            ===             ===

     Diluted weighted average shares                  14,782         14,880         14,932          14,962
                                                      ======         ======         ======          ======

                                      2003
                                      ----
                                                  November 3,     February 2,      May 4,        August 3,
                                                     2002            2003           2003           2003
                                                     ----            ----           ----           ----
     Net sales                                    $   27,290         25,015         26,897          31,021
     Gross profit                                      9,191          8,673          8,851          10,286

     Net income                                   $    3,352          3,287          3,359           3,939
                                                     =======        =======        =======         =======

     Earnings per common share - Basic            $      .23            .23            .24             .28
                                                         ===           ====           ====            ====

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

     Earnings per common share - Diluted          $      .22            .22            .23             .27
                                                        ====           ====           ====             ===

     Diluted weighted average shares                  15,506         15,124         14,848          14,600
                                                      ======         ======         ======          ======
</TABLE>

     The fourth quarter has historically  been the Company's  strongest  quarter
     for shipments. The third and fourth quarter of fiscal 2004 includes revenue
     attributable  to  the  acquisition  of CTI of  $1,116,000  and  $3,007,000,
     respectively.

     The gross profit  margin in the fourth  quarter of 2004 was affected by the
     investment  in  engineering  programs,  which are  essential  for long-term
     technology  development  and future revenue  growth.  Changes in total cost
     estimates on uncompleted contracts at EWST, also contributed to the decline
     in gross  profit in the fourth  quarter of fiscal  2004.  The gross  profit
     margin also varies from quarter to quarter due to changes in product mix.

     Included  in the  results of the fourth  quarter of 2004 is a $1.6  million
     pretax payment in connection with the Robinson Labs  litigation.  (See Note
     F).




                                      F-26

<PAGE>


NOTE S - SUBSEQUENT EVENT

     The Company  entered  into an agreement as of September 1, 2004 to purchase
     the  majority of the assets and assume the majority of the  liabilities  of
     Reliable System Services Corporation ("RSS"), of Melbourne,  Florida for an
     aggregate of  $3,725,000  in cash.  The Company  expects to operate the RSS
     business  as a  wholly-owned  subsidiary  under the name  Herley-RSS,  Inc.
     Herley-RSS  designs,  develops  and  produces  satellite-based  command and
     control  systems for prime  defense  contractors  and  entities  worldwide.
     Consideration  paid for the  purchase,  which closed on September 20, 2004,
     was entirely in cash. 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-27