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


                                  FORM 10-K/A
                                  Amendment 1

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

                     For the fiscal year ended July 31, 2005

                                       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 [ ]

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

The  aggregate  market  value of the  Registrant's  voting  Common Stock held by
non-affiliates of the Registrant,  based on the closing sale price of the Common
Stock of $19.20 as  reported  on the NASDAQ  National  Market as of January  30,
2005, the last business day of the Registrant's  most recently  completed second
fiscal quarter, was approximately $251,349,000.

The number of shares  outstanding of Registrant's  Common Stock, $ .10 par value
on October 17, 2005 was 14,463,975.


Documents incorporated by reference:

None


<PAGE>


                                EXPLANATORY NOTE

Herley  Industries,  Inc., (the  "Company,"  "we," "us" or "our") is filing this
Amendment  No. 1 on Form  10-K/A to our Report on Form 10K for the  fiscal  year
ended July 31, 2005 (the "Report") for the purpose of including information that
was to be incorporated by reference from our definitive proxy statement pursuant
to  Regulation  14A of the  Securities  Exchange  Act of 1934,  as amended  (the
"Exchange  Act").  We will not file our proxy  statement  within 120 days of our
fiscal year ended July 31, 2005, and are,  therefore,  amending and restating in
their  entirety  Items  10,  11,  12,  13 and 14 of Part III of the  Report.  We
anticipate  filing our definitive  proxy  statement in January 2006 for our 2005
Annual Stockholders Meeting, which is currently scheduled to be held on February
23, 2006.

In addition,  we are amending Item 8,  "Financial  Statements and  Supplementary
Data" to  incorporate  the  unaudited  pro  forma  disclosures  relating  to the
acquisitions of Herley-RSS,  Inc.  ("RSS"),  Micro Systems,  Inc.  ("MSI"),  and
Innovative Concepts,  Inc. ("ICI"), which were acquired as of September 1, 2004,
February 1, 2005 and April 1, 2005, respectively.

Additionally,  in connection  with the filing of this  Amendment and pursuant to
Rules  12b-15 and 13a-14  under the  Exchange  Act, we are  including  with this
amendment a currently dated certification.

Except as described  above,  no other  amendments  are being made to the Report.
This Form 10-K/A does not reflect  events  occurring  after the October 31, 2005
filing of our Report modify or update the disclosure  contained in the Report in
any way other than as  required to reflect the  amendments  discussed  above and
reflected below.


<PAGE>


                            HERLEY INDUSTRIES, INC.

                               TABLE OF CONTENTS

                                                                        Page
PART I


     Item 1. Business.                                                    4

     Item 2. Properties.                                                 12

     Item 3. Legal Proceedings.                                          13

     Item 4. Submission of Matters to a Vote of Security Holders.        14

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. 23

     Item 8. Financial Statements and Supplementary Data.                24

     Item 9. Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure.                        24

     Item 9A.Controls and Procedures.                                    24

     Item 9B.Other Information                                           27

PART III

     Item 10.Directors and Executive Officers of the Registrant.         27

     Item 11.Executive Compensation.                                     29

     Item 12.Security Ownership of Certain Beneficial Owners and
             Management.                                                 33

     Item 13.Certain Relationships and Related Transactions.             35

     Item 14.Principal Accounting Fees and Services                      35

PART IV

     Item 15.Exhibits and Financial Statement Schedules.                 36

SIGNATURES                                                               38

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                              F-1

                                       3
<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

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

ACQUISITIONS

We have grown  internally and through  strategic  acquisitions  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.  Over the
last ten years, our acquisitions have included the following:

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

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

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

                                       4
<PAGE>

-    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.

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

-    In April 2005,  we acquired  Innovative  Concepts,  Inc.  ("ICI"),  McLean,
     Virginia,  which has a  successful  history  of  developing  and  providing
     wireless   communications   technology  and  real-time   embedded  systems,
     software,  hardware  and  high-speed  processing  in support of the defense
     industry.

BUSINESS STRATEGY

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

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

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

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

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

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

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

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

                                       5
<PAGE>

COMPETITIVE STRENGTHS

Our competitive strengths include:

-    TECHNICAL  EXPERTISE.  We have developed a leading position in the field of
     microwave  technology through our 40 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;  Fort Walton  Beach FL;
     Farnborough,  England;  and Jerusalem,  Israel.  We continue to develop and
     reward our engineers in order to maintain our expertise in-house.

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

-    DIVERSE  PRODUCT AND CUSTOMER BASE. We have a diverse  product and customer
     base,  with only the U.S.  Government  at  approximately  25%, and Northrop
     Grumman at approximately  11%,  representing 11% or more of our fiscal 2005
     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  26%  of  our
     revenues in fiscal 2005.

-    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 40 years in the defense  electronic
     industry.  Over this period,  we have become  recognized for our ability to
     develop new technologies and meet stringent program requirements.

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

-    EMPHASIS  ON  RESEARCH  AND  DEVELOPMENT.  In fiscal  year  2005,  we spent
     approximately  $10.3  million  on new  product  development,  of which  our
     customers funded  approximately  $5.3 million.  Our emphasis on new product
     development enables us to maintain our technological  leadership in current
     products and to develop new capabilities.  This spending helps solidify and
     strengthen our position on different programs and may serve as a barrier to
     entry for competitors.

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

PRODUCTS AND SERVICES

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

The following are descriptions of our major systems and products:

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

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

                                       6
<PAGE>
We offer a complete  airborne data link system.  With our digital  capability in
data  encoding  and  acquisition  elements  combined  with our  radio  frequency
capability in providing telemetry transmitters and flight termination receivers,
we offer a full line of narrow and wide-band  airborne telemetry systems to meet
a wide variety of industrial needs, both domestically and internationally.

Command and Control Systems.  Our command and control ("C2") systems principally
are used to fly remotely a large variety of unmanned aerial  vehicles,  or UAVs,
typically aircraft used as target drones or Remotely Piloted Vehicles,  or RPVs.
Our C2 systems also control surface  targets.  Operations have been conducted by
users on the open ocean,  remote land masses, and instrumented test and training
ranges. Our C2 systems are currently in service throughout the world. C2 systems
permit a ground operator to fly a target or a UAV through a pre-planned mission.
The mission may be for  reconnaissance,  where the vehicle is equipped with high
definition TV sensors and the necessary data links to send  information  back to
its C2 systems ground  station.  The UAV may also be used as a decoy,  since the
operator can direct the flight  operations that will make the small drone appear
to be a larger combat aircraft.

Our MONTAGE system affords over-the-horizon C2 using GPS guidance and control of
multiple  targets from a single ground station.  The ability to control multiple
targets at increased distances represents a significant product improvement. The
MONTAGE is a highly  flexible,  multiple  processor  design with high resolution
graphics,  which can be field-  configured  within minutes to fly or control any
selected  vehicle  for which it is  equipped.  The MONTAGE is used in support of
missile,  aircraft and other weapons systems development and testing. The system
meets a growing  requirement to test against multiple threats with the automated
defense capabilities of ships like the AEGIS cruiser and the E-2C aircraft.

In  September  2004,  we closed on the  purchase  of  Reliable  System  Services
Corporation ("RSS"). In addition to complementing and adding to our capabilities
in  Telemetry,  Electronic  Warfare  ("EW")  Simulation  Equipment,  EW  Jamming
Equipment  and Range  Safety  Commanding  applications,  RSS 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  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.
                                       7
<PAGE>

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.

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 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.

                                       8
<PAGE>

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

FDuring the fiscal year ended July 31, 2005, approximately 25% of our net sales
were attributable to contracts with offices and agencies of the U.S. Government,
and Northrop Grumman accounted for approximately 11% of net sales. No other
customers accounted for shipments of 11% 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:

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

During fiscal 2005, sales to foreign  customers  accounted for approximately 26%
of our net sales.  Domestic sales to foreign customers  accounted for 13% of net
sales.  Sales  from  England  were 5%,  and  Israel 8% of net  sales to  foreign
customers.  The governments of Egypt,  Japan, South Korea, Taiwan and the United
Kingdom are all  significant  customers of ours.  All of our domestic  contracts
with foreign  customers are payable in U.S.  dollars.  Contracts  with customers
originating  in Israel  and  England  are  either in U.S.  dollars  or the local
functional  currency.   International  sales  are  subject  to  numerous  risks,
including  political and economic  instability in foreign markets,  currency and
economic  difficulties in the Pacific Rim, restrictive trade policies of foreign
governments, inconsistent product regulation by foreign agencies or governments,
imposition  of product  tariffs and burdens and costs of  complying  with a wide
variety of international and U.S. export laws and regulatory  requirements.  Our
international sales also are subject to us obtaining export licenses for certain
products and systems.

SALES AND MARKETING

We  market  our  products  worldwide  to the  United  States  Government,  prime
contractors  and various  countries  in defense  markets,  and to 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

                                       9
<PAGE>

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

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

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

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

Our primary manufacturing facilities have earned the ISO 9001 Registration.  The
ISO 9000 series  standards are  internationally  recognized  quality  management
system requirements.  ISO 9001, the most comprehensive  Standard in the ISO 9000
Series,  covers  design,  manufacturing,  installation,  and servicing  systems.
Assembly,  test,  package and shipment of products are done at our manufacturing
facilities located in the following cities:

Lancaster, Pennsylvania
Farmingdale, New York
Woburn, Massachusetts
Whippany, New Jersey (acquired in March 2004)
Melbourne, Florida (acquired in September 2004)
Fort Walton Beach, Florida (acquired in February 2005)
McLean, Virginia (acquired in April 2005)
Jerusalem, Israel
Farnborough, England

BACKLOG

Our total backlog of orders was  approximately  $145 million on July 31, 2005 as
compared to  approximately  $100 million on August 1, 2004. Of our total backlog
at July 31, 2005,  $109 million (75%) is attributable to domestic orders and $36
million (25%) is  attributable to foreign orders.  Management  anticipates  that
approximately  84% of this backlog will be shipped during the fiscal year ending
July 30, 2006.

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.

Approximately  90% 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.

                                       10
<PAGE>
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  $10.3  million in fiscal 2005,  $11.1  million in fiscal 2004 and
$6.3  million in fiscal  2003.  The  portion of these  costs not  reimbursed  by
customers was approximately  $5.0 million in fiscal 2005, $5.4 million in fiscal
2004 and $3.1 million in 2003.  These  increases in  development  spending  were
undertaken to continue to provide future business opportunities for the Company.
Future product  development costs will depend on the availability of appropriate
development opportunities within the markets served by the Company.

COMPETITION

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

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

GOVERNMENT REGULATION

Because of our participation in the defense  industry,  we are subject to audits
by various government  agencies for our compliance with government  regulations.
We are also  subject  to a  variety  of  local,  state  and  federal  government
regulations relating to, among other things, the storage,  discharge,  handling,
omission,  generation,  manufacture  and  disposal  of toxic or other  hazardous
substances  used to  manufacture  our  products.  We believe that we operate our
business in material  compliance with applicable laws and regulations.  However,
any failure to comply with existing or future laws or  regulations  could have a
material  adverse  impact on our  business,  financial  condition and results of
operations.

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 July 31,  2005 we had  1,026  employees.  We  believe  that  our  employee
relations are  satisfactory.  None of our approximately 889 U.S. based employees
are  represented by a labor union.  Employment by functional area as of July 31,
2005 is as follows:
                        Executive                    15
                        Administration               55
                        Manufacturing               638
                        Engineering                 260
                        Sales and Marketing          58
                                                  ------
                        Total                     1,026
                                                  ======
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.

                                       11
<PAGE>
OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name                                   Age         Served as Officer Since          Position(s) and Offices
----                                   ---         -----------------------          -----------------------
<S>                                    <C>                  <C>
Lee N. Blatt                           77                   1965                    Chairman of the Board
Myron Levy                             64                   1988                    Vice Chairman, Chief
                                                                                     Executive Officer, and
                                                                                     Director
John M. Kelley                         52                   1998                    President
William Wilson                         57                   2002                    Vice President and
                                                                                     Chief Operating Officer
Rozalie Schachter                      59                   2000                    Vice President - Business
                                                                                      Development
Anello C. Garefino                     58                   1993                    Vice President - Finance
John A. Carroll                        54                   2003                    Vice President - Human
                                                                                     Resources
Richard Poirier                        40                   2003                    Vice President

</TABLE>

Item 2.  Properties

Our facilities are as follows:
<TABLE>
<CAPTION>
                                                                                                 Owned
                                                                                                    or
Location                                Purpose of Property                         Area         Leased
--------                                -------------------                         ----         ------

<S>                                                                               <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
Fort Walton Beach, FL (5)   Production, engineering and administration          31,500 sq. ft.   Leased
McLean, VA (6)              Production, engineering and administration          43,260 sq. ft.   Leased
Jerusalem, Israel           Production, engineering and administration          29,580 sq. ft.   Leased
Farnborough, England (4)    Production, engineering and administration           7,570 sq. ft.   Leased
Chicago, IL                 Engineering and administration                       3,000 sq. ft.   Leased
Lancaster, PA               Land held for expansion                                 37 Acres     Owned
______________
<FN>
(1)  On September 23, 1999 we closed on the sale of its prior owned  facility in
     Amityville,  NY  and  relocated  the  plant  to  this  leased  facility  in
     Farmingdale, NY. The Company entered into two 10 year lease agreements with
     a  partnership  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 B 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.
(5)  As of February 1, 2005,  we entered into an agreement to acquire all of the
     issued and outstanding common stock of Micro Systems,  Inc. as discussed in
     Note B of the financial  statements.  Prior to the  acquisition of MSI, MSI
     had leased one of its two buildings in Fort Walton Beach,  Florida from MSI
     Investments,  a Florida  General  Partnership.  MSI Investments is owned by
     four individuals,  three of whom are currently employees of MSI. This lease
     has an original term of 15 years, ending December 31, 2012. The lease costs
     currently  are  approximately  $278,000 on an annual  basis,  including the
     tenant's obligation to pay for insurance and property taxes. The base lease
     rate is adjusted  every  January for changes in the  consumer  price index,
     using 1997 as the base year.
(6)  As of April 1, 2005,  we entered  into an  agreement  to acquire all of the
     issued and outstanding common stock of Innovative Concepts, Inc., including
     its wholly owned subsidiary Stapor in Chantilly,  VA as discussed in Note B
     of the financial statements.
</FN>
</TABLE>

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

                                       12
<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. Sec. 2201 et.
seq.,  Herley also asserted  claims for,  among other things,  fraud,  breach of
contract, breach of fiduciary duty, unfair competition and tortious interference
with actual and prospective contractual relationships.

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

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

At a proceeding  on April 28, 2003,  the Court decided to delay ruling on all of
the petitions for fees and costs until after appeals are exhausted. Accordingly,
by Order  dated May 6,  2003,  the Court  denied  without  prejudice  all of the
parties'  petitions.  On May 12,  2003,  Herley  filed its  appeal to the United
States Court of Appeals for the Second  Circuit.  On May 28,  2003,  RLI filed a
notice of  cross-appeal.  Robinson  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

                                     13

<PAGE>
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.

By Order dated February 8, 2005, the Superior court of Hillsborough  County, New
Hampshire,  granted Ben Robinson=s and Frank Holt=s Motion for Summary  Judgment
in the New Hampshire  action.  By Order Dated February 17, 2005, the Court ruled
upon the parties= cross-petitions for attorneys' fees, granting all petitions in
their  entirety.  Herley  was  awarded  $2,146,882  against  RLI under the Asset
Purchase  Agreement.  RLI was awarded  $54,426 against Herley for its successful
defense of an indemnity by Herley.  Ben  Robinson was awarded  $259,295  against
Herley under the Lease Agreement.

On June 10, 2005, Herley reached an agreement with Robinson,  RLI and Holt under
which Herley agreed to pay Robinson  $260,000 for the attorneys  fees awarded to
him by the New York Court.  Further,  all claims,  counterclaims  and appeals in
Herley  Industries,  Inc.  v.  Benjamin  Robinson  and Frank  Holt,  Docket  No.
04-E-0266 and Herley Industries, Inc. v. RH Laboratories, Inc., Stephen Robinson
and Michael  Gravelese,  No. 02-11140 (D. Mass),  were dismissed with prejudice.
Based upon this agreement, the Company recorded a provision in the third quarter
of fiscal 2005 to account for this  settlement.  The  settlement was paid in the
fourth quarter of fiscal 2005.

The Company is involved in various  other  legal  proceedings  and claims  which
arise in the ordinary course of its business.  While any litigation  contains an
element of uncertainty,  management believes that the outcome of such litigation
will not have a material adverse effect on the Company's  financial  position or
results of operations.

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

        Not Applicable.

PART II

Item 5.  Market for 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
                                                      ----    ---
<S>                                                  <C>     <C>
     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                                19.77   17.32
        Second Quarter                               20.60   18.04
        Third Quarter                                20.27   16.40
        Fourth Quarter                               19.82   17.38

     Fiscal Year 2006
        First Quarter (through October 17, 2005)     21.54   17.29
</TABLE>

The closing price on October 17, 2005 was $18.21.

As of October  17,  2005,  there were  approximately  200  holders of record and
approximately 4,800 beneficial holders of our Common Stock.

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

(b)  Not applicable.




                                       14
<PAGE>

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

<TABLE>
<CAPTION>

                                                     52 weeks ended           53 weeks             52 weeks ended
                                          ----------------------------------   ended       -----------------------------
                                                  July 31,        August 1,    August 3,       July 28,        July 29,
                                                   2005             2004        2003            2002            2001
                                                   ----             ----      -----------       ----            ----

<S>                                                <C>              <C>        <C>             <C>             <C>
Net sales (3)                                      151,415          122,154     110,223         92,881          76,494

Income from continuing operations                   10,781           13,673      13,937         10,730           7,573

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

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

Net income                                          10,781           13,673      13,937          5,172           7,405

Per share data from continuing operations (1) (2)
     Basic                                            0.75             0.97        0.97           0.89            0.75
     Assuming Dilution                                0.72             0.92        0.93           0.83            0.69

Total Assets                                       244,101          220,971     197,564        190,202         114,597
Total Current Liabilities                           34,168           23,846      18,125         14,557          17,976
Long-Term Debt net of current portion                5,000            5,845       6,403          5,684           2,740
Other Long-Term Liabilities                          1,042              932         849            706             756
<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 Northrop Grumman,  Lockheed Martin, Raytheon and Boeing),
the U.S.  Government  (including the Department of Defense,  NASA and other U.S.
Government  agencies)  and  international  customers  (including  the  Egyptian,
German,  Japanese and South Korean  militaries  and  suppliers to  international
militaries).  We are a leading  provider of  microwave  technologies  for use in
command  and  control  systems,  flight  instrumentation,  weapons  sensors  and
electronic  warfare  systems.  We have served the defense industry since 1965 by
designing and manufacturing microwave devices for use in high technology defense
electronics  applications.  Our products and systems are currently deployed on a
wide range of high profile military  platforms,  including the F-16 Falcon,  the
F/A-18E/F  Super Hornet,  the 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 ended       53 weeks
                                                -----------------------    ended
                                                July 31,      August 1,   August 3,
                                                 2005          2004       2003
                                                 ----          ----       ----
<S>                                             <C>           <C>         <C>
Net sales                                       100.0%        100.0%      100.0%
Cost of products sold                            70.3%         65.1%       66.4%
                                                ------        ------      ------

Gross profit                                     29.7%         34.9%       33.6%

Selling and administrative expenses              20.0%         18.9%       15.8%

Income from operations                            9.7%         16.0%       17.8%
                                                ------        ------      ------
Other income (expense), net:
     Investment income                            0.6%          0.6%        1.0%
     Interest expense                            (0.2)%        (0.3)%      (0.3)%
     Foreign exchange (loss)                     (0.2)%        (0.1)%        -
                                                ------        ------      ------
                                                  0.2%          0.1%        0.7%
                                                ------        ------      ------
Income before income taxes                        9.9%         16.2%       18.5%
Provision for income taxes                        2.8%          5.0%        5.9%
                                                ------        ------      ------
Net income                                        7.1%         11.2%       12.6%
                                                ======        ======      ======
</TABLE>

     Fiscal 2005 Compared to Fiscal 2004

Net sales for the 52 weeks ended July 31, 2005 were  approximately  $151,415,000
compared to  $122,154,000  for fiscal 2004, an increase of  approximately  $29.3
million  (24%).  Net sales at our three  acquisitions  completed  in fiscal 2005
(RSS, MSI and ICI), accounted for an increase of approximately $22.3 million, or
approximately  three  quarters of the  increase  for the 52 weeks ended July 31,
2005.  Approximately $11.2 million of net sales increase is attributable to CTI,
which was consolidated into our results for only 4 months in fiscal 2004, versus
a full 12 months in  fiscal  2005.  In  addition  to this  impact of a full year
results for CTI, CTI has experienced  growth of greater than 20% in sales in the
fourth  quarter of fiscal 2005 as compared to the fourth quarter of fiscal 2004,
principally  due to growth at CTI in sales of military  products in CTI's direct
synthesizer products.

                                       16
<PAGE>

Other than these acquisition driven impacts,  our other divisions  experienced a
net decline in sales for the year. The largest decline occurred in our Lancaster
operation  with the  decline  in 2005  versus  2004 net  sales  being  primarily
attributable  to a reduction of $1.3 million in foreign sales and a reduction in
revenues  from  the ACLS  program  of $1.7  million.  Our UK  subsidiary,  EWST,
experienced a reduction in revenue of approximately  $1.8 million in fiscal 2005
versus fiscal 2004, principally due to revisions to (and increases in) estimated
costs to complete  certain  contracts,  which resulted in a reduction in revenue
recognized on these contracts.

Our level of  intercompany  sales increased from  approximately  $6.1 million in
fiscal 2004 to $7.3 million in fiscal 2005.

The gross profit margin for the 52 weeks ended July 31, 2005 was 30% as compared
to the margin of 35% in fiscal 2004 a decline of 5%. Excluding the impact of our
three  acquisitions  completed in fiscal 2005 (RSS, MSI and ICI), the decline in
gross  profit  margins  would have been  larger.  The  decrease in gross  profit
margins is primarily attributable to:

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

--   Decreases of gross margins at EWST,  principally due to changes in contract
     cost  estimates at that  operation  versus  contract cost  estimates in the
     prior  fiscal year for the same  projects.  The  changes in  contract  cost
     estimates were principally due to unanticipated delays in meeting technical
     requirements and delivery dates on certain EWST contracts.

offset by

--   Higher  margins  contributed  by signal  generation  components  and direct
     sources, principally due to the fact that the prior year included only four
     months of results for CTI,  which was  acquired  effective  as of March 29,
     2004.

Selling and administrative  expenses for the fifty-two weeks ended July 31, 2005
were 20% of net sales as compared to 17% in fiscal 2004,  or an increase of $7.3
million. Large increases during the period included:

--   Increases  of  approximately   $4.0  million   attributable  to  our  three
     acquisitions completed in fiscal 2005 (RSS, MSI and ICI); and

--   An increase of  approximately  $2.0  million due to the fact that the prior
     year only  included  four  months of results  for CTI,  which was  acquired
     effective as of March 29, 2004;

--   An  increase of  approximately  $935,000  in legal  costs  associated  with
     Robinson Laboratories and a continuing investigation by the U.S. Attorneys'
     office in  Pennsylvania  which,  inter  alia,  involves  pricing  under two
     contracts with the U.S.  Department of Defense  relating to voltage control
     oscillators and a contract relating to powerheads.

We spent approximately  $658,000 in out of pocket consulting fees in fiscal 2005
in connection with our Sarbanes-Oxley  Section 404 compliance program. We expect
some of these costs to continue in fiscal 2006.

As a result of the above trends,  our Operating  Income for fiscal year 2005 was
$14,669,000 or 10% of net sales,  as compared to $19,602,000 or 16% of net sales
in fiscal 2004. Our foreign operations  contributed $872,000 in operating income
for the year as compared to $3,017,000 in fiscal 2004. Revenues from our foreign
operations  decreased  by  $1,319,000  as compared to fiscal  2004.  The drop in
revenue and operating income within our foreign  operations was due to revisions
in total cost estimates at our EWST subsidiary in the UK.

Investment  income  increased  by  $260,000 in fiscal 2005 as a result of an 89%
increase  in the rate of  interest  earned  on the  investment  of  excess  cash
reserves  during the 2005 fiscal  year as  compared to interest  rates in fiscal
2004,  and a  decrease  on  average  of  approximately  $27.5  million  in funds
invested.

The  effective  income tax rate for fiscal  2005 was 28% as  compared  to 31% in
fiscal 2004. The effective tax rate is lower than the statutory  income tax rate
of 35% in fiscal 2005 due to various favorable tax benefits. The largest benefit
was from the  recognition of multi year research and development tax credits now
being  realized.   Other  benefits  included  a  lower  effective  tax  rate  on
foreign-source  income,  the US tax benefits  attributable to extra  territorial
income (i.e. - export sales) and tax exempt interest income.

                                       17
<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 Nuclear  Magnetic  Resonance  systems.  We
expect  revenues  for medical  products to increase 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  19% of net  sales as  compared  to 16% in  fiscal  2003.  There  was a net
increase in expenses of $5,713,000 which includes:

--   expenses of CTI of approximately $900,000;

--   an  increase  of  litigation  costs of  $777,000  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.  (See Item 3. "Legal
     Proceedings");

--   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.

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.

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  effective  income tax rate for fiscal  2004 was 31% as  compared  to 32% 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.

                                       18
<PAGE>
Quarterly Results (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
the 52 weeks ended July 31,  2005 and for the 52 weeks ended  August 1, 2004 (in
thousands, except for per share data).

<TABLE>
<CAPTION>

                                                       October 31,      January 30,      May 1,       July 31,
2005                                                         2004             2005        2005           2005
----                                               ---------------   -------------    --------    -----------
<S>                                             <C>                        <C>         <C>            <C>
Net sales                                       $          33,590          33,754      41,266         42,805
Gross profit                                               10,859           9,880      13,421         11,398

Net income                                      $           3,553           2,077       3,627          1,524
                                                   ===============   =============    ========    ===========

Earnings per common share - Basic               $            0.25            0.14        0.25           0.11
                                                   ===============   =============    ========    ===========

Basic weighted average shares                              14,252          14,335      14,313         14,340
                                                   ===============   =============    ========    ===========

Earnings per common share - Diluted             $            0.24            0.14        0.24           0.10
                                                   ===============   =============    ========    ===========

Diluted weighted average shares                            14,936          15,044      14,936         14,952
                                                   ===============   =============    ========    ===========


                                                       November 2,     February 1,      May 2,     August 1,
2004                                                         2003            2004        2004          2004
----                                              ---------------   -------------    --------    -----------
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               $            0.28            0.25        0.27           0.16
                                                   ===============   =============    ========    ===========

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

Earnings per common share - Diluted             $            0.27            0.24        0.26           0.15
                                                   ===============   =============    ========    ===========

Diluted weighted average shares                            14,782          14,880      14,932         14,962
                                                   ===============   =============    ========    ===========
</TABLE>

The fourth quarter has  historically  been our strongest  quarter for shipments.
The third and fourth  quarters of fiscal 2005 includes  revenue  attributable to
the acquisitions of MSI of $5,294,000 and $2,824,000,  respectively,  and ICI of
$3,401,000 and $8,389,000,  respectively. 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  margin  percentage  in the  fourth  quarter  of 2005 was  negatively
impacted  (as  compared to 2004) due to  revisions  in total cost  estimates  on
certain long term  contracts at our EWST  subsidiary  which resulted in negative
gross profit.  In addition,  the gross profit margin also varies from quarter to
quarter due to changes in product mix.

Included  in the  results of the third  quarter of fiscal  2005 is an accrual of
$260,000,  and in  the  fourth  quarter  of  2004 a  payment  of  $1,595,000  in
connection with the Robinson Labs litigation. (See Item 3. "Legal Proceedings").

Liquidity and Capital Resources

As of July 31,  2005 and August 1, 2004,  working  capital was  $88,343,000  and
$130,273,000,   respectively,  and  the  ratio  of  current  assets  to  current
liabilities was 3.6 to 1 and 6.5 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

                                       19
<PAGE>

payments  from  customers  on major  contracts at the time a contract is entered
into. The unliquidated  balance of these advanced  payments was  approximately
$3,966,000 at July 31, 2005, and $1,180,000 at August 1, 2004.

Net cash provided by operations was approximately  $12,968,000 in fiscal 2005 as
compared to  $3,610,000  in 2004,  an increase of  approximately  $9.4  million.
Income  from  operations   (adjusted  for  depreciation  and  amortization)  was
$16,464,000 in fiscal 2005 as compared to $17,917,000 in fiscal 2004, a decrease
of approximately $1.5 million. Significant items contributing to the increase in
cash provided by operations include the following:

1.   an increase of approximately $9.5 million in cash generated from collection
     of accounts receivable during fiscal 2005 versus fiscal 2004,

2.   a reduction of approximately $5.6 million in the amount of cash invested in
     "Costs incurred and income  recognized in excess of billings on uncompleted
     contracts",

3.   a reduction of approximately $2.0 million in the amount of cash invested in
     inventories during fiscal 2005 versus fiscal 2004, and

4.   other net sources of cash

offset by

5.   a decrease of approximately  $3.1 million in cash generated through advance
     payments from customers on contracts during the course of fiscal 2005, and

6.   a decrease of  approximately  $2.9 million in cash generated from "Billings
     in excess of costs incurred and income recognized on uncompleted contracts"
     during the course of fiscal 2005.

Of the changes noted in (1) and (2) above,  the largest  impact was from a major
contract at our  Lancaster  facility in  connection  with an upgrade for US Navy
aircraft.  This program was accounted  for on a percentage of completion  basis,
and in last year's fourth quarter,  we were accumulating  significant costs into
this  contract.  The job was  largely  shipped  during  fiscal 2004 and early in
fiscal  2005,  which also  contributed  to the  increase in accounts  receivable
collections in fiscal 2005.

Net cash used in investing activities includes:

1.   A net payment of $51.4  million in connection  with the three  acquisitions
     completed in fiscal 2005 (RSS $3.7  million,  MSI $20.7 million and ICI $27
     million.) (See Note B.)

2.   A payment of $2.3 million in connection with the  acquisition  from Xytrans
     of certain  technology to be used in missile and millimeter  wave products.
     (See Note A-8.)

3.   Capital  expenditures of $5.4 million including  approximately $2.1 million
     related  to  new  expanded   facilities  occupied  by  our  Israel  and  UK
     operations.  The setup costs and capital expenditures associated with these
     new facilities  are now  substantially  completed.  We also invested in our
     engineering  and  test  facilities  throughout  our  U.S.  operations,  and
     expanded certain production facilities at our Lancaster plant.

Net cash provided by financing  activities of $2,000  reflects the net impact of
proceeds of from the exercise of stock options for $3.5  million,  offset by the
purchase of treasury stock for  approximately  $2.7 million,  and the payment of
the deferred purchase price of EWST.

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, 2007 (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 3.25% and  3.49%,  respectively,  at July 31,  2005.
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 July 31, 2005 and August 1, 2004.  Stand-by
letters of credit were outstanding in the amount of $10,703,000 under the credit
facility at July 31, 2005.

                                       20
<PAGE>
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 July 31, 2005 was approximately  $145 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  our  government  contracts.   We  have  approximately
$39,297,000  available  under  our  bank  credit  facility,  net of  outstanding
stand-by  letters of credit of approximately  $10,703,000,  and cash reserves at
July 31, 2005 of approximately $20,331,000.

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  $22,038,000 in open purchase
orders as of July 31,  2005.  These open  purchase  orders  represent  executory
contracts  for the  purchase of goods and services  which will be  substantially
fulfilled in the next six months.


The following table summarizes the Company=s contractual obligations and other
contingent commitments, including interest, at July 31, 2005 (in thousands):

<TABLE>
<CAPTION>
                                                       Within         2-3          4-5        After 5
             Obligations                  Total        1 Year        Years        Years        Years
             -----------                  -----        ------        -----        -----       -------
<S>                                    <C>          <C>          <C>            <C>          <C>
     Mortgage Note                     $    2,571   $      124   $      270     $    308     $  1,869
     Industrial Revenue Bonds               3,811          220          442          442        2,707
     EWST Note                                606          606            -        -                -
     Operating Lease Obligations           17,095        2,876        5,629        3,655        4,935
     Purchase Obligations                  22,038       17,739        3,106        1,063          130
                                           ------       ------       ------       ------       ------
                                           46,121       21,565        9,447        5,468        9,641
     Standby Letters of Credit             10,703        2,327        7,989          325           62
                                           ------       ------       ------       ------       ------
     Total Contractual Obligations     $   56,824   $   23,892   $   17,436     $  5,793     $  9,703
                                           ======       ======       ======       ======       ======
</TABLE>
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
July 31,  2005 of  $1,460,000  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 July 31, 2005, the amount payable in
the event of such termination would be approximately $16,797,000.

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

Recent Accounting Pronouncements

In November  2004, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement  of  Financial  Accounting  Standards  No. 151  "Inventory  Costs,  an
amendment  of APB No.  43,  Chapter 4" ("SFAS  151.")  SFAS 151  clarifies  that
abnormal  inventory costs such as costs of idle  facilities,  excess freight and
handling costs, and wasted materials (spoilage) are required to be recognized as
current  period  charges.  The  provisions  of SFAS 151 are effective for fiscal
years beginning after June 15, 2005. We will adopt this pronouncement  beginning
with the first  quarter of fiscal  2006,  and do not expect that the adoption of
SFAS 151 will have a material impact on our consolidated  financial  position or
result of operations.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29".  SFAS No. 153  eliminates  the  exception
from fair value  measurement  for  nonmonetary  exchanges of similar  productive
assets in paragraph  21(b) of APB Opinion No. 29,  "Accounting  for  Nonmonetary
Transactions,"  and replaces it with an exception for exchanges that do not have
                                       21
<PAGE>
commercial  substance.  SFAS No 153 specifies  that a  nonmonetary  exchange has
commercial  substance  if the future  cash flows of the entity are  expected  to
change significantly as a result of the exchange.  SFAS No. 153 is effective for
the fiscal periods  beginning after June 15, 2005, and is required to be adopted
by the Company effective August 1, 2006. We do not expect SFAS No. 153 to have a
material impact on the Company's  consolidated  financial position or results of
operations.

In December 2004, the FASB issued  Statement of Financial  Accounting  Standards
No.  123(R),  "Share-Based  Payment,"  which  is a  revision  of SFAS  No.  123,
"Accounting for Stock-Based  Compensation" ("SFAS 123R.") SFAS 123R is effective
for publicly-traded companies for interim or annual periods beginning after June
15, 2005, supersedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows."

SFAS 123R requires the  measurement  of all  share-based  payments to employees,
including grants of employee stock options, using a fair-value-based  method and
the recording of such expense in the  consolidated  statements  of income.  SFAS
123R will be  effective  for the  Company  beginning  with the first  quarter of
fiscal 2006.

The pro forma disclosures previously permitted under SFAS No. 123 will no longer
be an alternative to financial statement recognition. See Note A 14 - Summary of
Significant  Accounting Policies in Notes to Consolidated  Financial  Statements
for the estimated  impact on net income and net income per diluted share amounts
of recording share-based payments in the Consolidated Statements of Income using
a  fair-value-based  method  similar to the methods  required under SFAS 123R to
measure compensation expense for employee stock options.

In March 2005,  the FASB  issued FASB  Interpretation  No. 47,  "Accounting  for
Conditional  Asset Retirement  Obligations - An Interpretation of SFAS No. 143."
This  Interpretation  provides  additional  guidance as to when companies should
record  the  fair  value  of a  liability  for a  conditional  asset  retirement
obligation  when  there is  uncertainty  about  the  timing  and (or)  method of
settlement of the obligation. This Interpretation is effective no later than the
end of fiscal  years  ending  after  December  15,  2005.  We do not  expect the
adoption  of  FASB  Interpretation  No.  47 to  have a  material  impact  on the
Company's consolidated financial position or results of operations.

In May 2005,  the FASB issued  Statement of Financial  Accounting  Standards No.
154,  "Accounting Changes and Error Corrections" ("SFAS 154.") SFAS 154 replaces
APB Opinion No. 20  "Accounting  Changes"  and FASB  Statement  No. 3 "Reporting
Accounting  Changes in Interim  Financial  Statements." SFAS 154 requires that a
voluntary  change in accounting  principle be applied  retrospectively  with all
prior period  financial  statements  presented on the new accounting  principle,
unless it is impracticable to do so. SFAS 154 also provides that a correction of
errors  in  previously   issued   financial   statements   should  be  termed  a
"restatement."  The  new  standard  is  effective  for  accounting  changes  and
correction of errors for fiscal years  beginning  after December 15, 2005. We do
not expect  that the  adoption  of SFAS 154 will have a  material  impact on the
Company's consolidated financial position or results of operations.

Critical Accounting Policies and Estimates

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

We generally  recognize revenue when products are shipped and the customer takes
ownership  and assumes risk of loss,  collection  of the relevant  receivable is
probable,  persuasive  evidence of an arrangement  exists and the sales price is
fixed or determinable.  Payments  received from customers in advance of products
delivered are recorded as customer advance payments until earned.  Approximately
90% 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 14% 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.
                                       22
<PAGE>

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  2005 using our  current  market  capitalization,  which in an
active  market for our common  stock,  we consider a  reasonable  indication  of
implied fair value.  Based on this initial step in the test for  impairment,  we
concluded there was no impairment of goodwill at July 31, 2005.

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Since the acquisitions of General Microwave Corporation and EWST, we are subject
to  movements in foreign  currency  rate changes  related to our  operations  in
Israel and in  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 2.2% 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.

We have a foreign  denominated  liability  as of July 31, 2005 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 July 31, 2005 of 1.7593, the U.S. Dollar equivalent of the liability
is approximately $586,000.

We  have  made  inter-company  advances  to  EWST  in the  aggregate  amount  of
approximately  $6  million  at July 31,  2005  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 2006,
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  $80,000  as of  July  31,  2005.  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

                                       23
<PAGE>
balance  on  January  31,  2007.  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 3.25% and
3.49%, respectively,  at July 31, 2005. The credit line is reviewed on an annual
basis.

There were no borrowings  outstanding  under our revolving credit facility as of
July 31, 2005.

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:
<TABLE>
<CAPTION>
                Fiscal year ending:      Bonds
                ------------------       -----
<S>                   <C>               <C>
                      2006              $  110
                      2007                 115
                      2008                 120
                      2009                 125
                      2010                 130
                      2011 and later     2,100
                                       -------
                                       $ 2,700
                                       =======
                Fair value             $ 2,780
                                       =======
</TABLE>

We do not  anticipate  any other  material  changes in its  primary  market risk
exposures in fiscal 2006.

Item 8.  Financial Statements and Supplementary Data

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

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

Not applicable

Item 9A.  Controls and Procedures

I.   Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the  participation  of our management,  including
our principal  executive  officer (Vice  Chairman of the  Board/Chief  Executive
Officer) and principal  financial officer (Vice President  Finance/ Acting Chief
Financial  Officer),  we have  evaluated  the  effectiveness  of our  disclosure
controls  and  procedures  (as  such  term is  defined  in Rules  13a-15(e)  and
15d-15(e)  under the Securities  Exchange Act of 1934, as amended (the "Exchange
Act") as of July 31, 2005 (the "Evaluation Date"). Based on such evaluation, the
principal  executive officer and the principal  financial officer have concluded
that, as of the  Evaluation  Date,  our  disclosure  controls and procedures are
effective,  and are reasonably designed to ensure that all material  information
(including our consolidated subsidiaries) required to be included in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported  within  the time  periods  specified  in the  rules  and  forms of the
Securities and Exchange Commission.

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

                                       24
<PAGE>
II. Changes in Internal Control over Financial Reporting.

During the  quarter  ended July 31,  2005,  there  were  certain  changes in the
Company's internal control over financial  reporting which resulted from control
improvement and remediation efforts. These changes have not materially affected,
and are not likely to materially  affect,  such internal  control over financial
reporting.

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

We are responsible for establishing and maintaining an adequate internal control
structure  and  procedures  over  financial  reporting.  We  have  assessed  the
effectiveness of internal control over financial  reporting as of July 31, 2005.
Our  assessment  was based on criteria set forth by the  Committee of Sponsoring
Organizations  of the Treadway  Commission  (COSO)  Internal  Control-Integrated
Framework.

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

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

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

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

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

Our evaluation of and conclusion on the  effectiveness  of internal control over
financial  reporting  excludes Herley- RSS, Inc.  ("RSS"),  Micro Systems,  Inc.
("MSI"),  and  Innovative  Concepts,  Inc.  ("ICI"),  which were  acquired as of
September  1,  2004,  February  1, 2005 and  April 1,  2005,  respectively.  The
acquisitions  of RSS, MSI and ICI contributed  approximately  fifteen percent of
our total revenue in fiscal 2005 and accounted  for  approximately  twenty-seven
percent of our total assets at July 31, 2005.  The aggregate  purchase  price of
the acquisitions was approximately $51.4 million.

Based on the COSO  criteria,  we believe our  internal  control  over  financial
reporting as of July 31, 2005 was effective.

Our  management's  assessment of the  effectiveness of our internal control over
financial  reporting as of July 31, 2005 has been  audited by BDO Seidman,  LLP,
independent  registered  public accounting firm, as stated in their report which
is included below.

Important Considerations

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

                                       25
<PAGE>

Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting

To The Board of Directors of Herley Industries, Inc. and subsidiaries:

     We have audited  management's  assessment,  included in Management's Annual
Report on Internal  Control Over Financial  Reporting,  that Herley  Industries,
Inc. and subsidiaries (the "Company") maintained effective internal control over
financial  reporting  as of July 31,  2005,  based on  criteria  established  in
Internal  Control - Integrated  Framework  issued by the Committee of Sponsoring
Organizations  of the Treadway  Commission  (the COSO  criteria).  The Company's
management  is  responsible  for  maintaining  effective  internal  control over
financial  reporting  and for its  assessment of the  effectiveness  of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the Company's
internal control over financial reporting based on our audit.

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

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

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

     As indicated in the  accompanying  Management's  Annual  Report on Internal
Control over Financial Reporting and scope of management's report,  management's
assessment  of and  conclusion  of the  effectiveness  of internal  control over
financial  reporting did not include the internal  controls of Herley-RSS,  Inc.
("RSS"),  Micro Systems,  Inc. ("MSI"), and Innovative  Concepts,  Inc. ("ICI"),
which were  included in the fiscal 2005  consolidated  financial  statements  of
Herley  Industries,  Inc. and  constituted  $22.3 million of net revenue for the
year ended July 31, 2005. The aggregate  purchase price of the  acquisitions was
approximately  $51.4  million.  Management did not assess the  effectiveness  of
internal  control  over  financial  reporting  of these  entities  as they  were
acquired  during  fiscal  2005.  Our audit of internal  control  over  financial
reporting  of Herley  Industries,  Inc.  also did not include an  evaluation  of
internal control over financial  reporting of Herley-RSS,  Inc.  ("RSS"),  Micro
Systems,  Inc. ("MSI"), and Innovative  Concepts,  Inc. ("ICI").

     In our opinion,  management's  assessment that Herley Industries,  Inc. and
subsidiaries  maintained  effective internal control over financial reporting as
of July 31, 2005, is fairly stated, in all material respects,  based on the COSO
criteria.  Also,  in our  opinion,  the  Company  maintained,  in  all  material
respects,  effective  internal  control over financial  reporting as of July 31,
2005, based on the COSO criteria.

     We have also audited,  in accordance  with  standards of the Public Company
Accounting  Oversight Board (United States),  the consolidated  balance sheet of
Herley  Industries,  Inc. and  subsidiaries as of July 31, 2005, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for the year ended July 31,  2005,  and our report  dated  October 7, 2005
expressed an unqualified  opinion thereon.

/s/ BDO SEIDMAN,  LLP
Philadelphia, Pennsylvania
October 7, 2005
                                       26
<PAGE>
Item 9B.  Other Information

Not applicable


PART III

Item 10.  Directors and Executive Officers of the Registrant

Directors of the Registrant

<TABLE>
<CAPTION>
                                                                                                        Director
         Name of Director                        Age      Principal Occupation                            Since
         ----------------                        ---      --------------------                          ---------
<S>                                              <C>                                                      <C>
  Lee N. Blatt                                   77       Chairman of the Board                           1965
  Myron Levy                                     65       Vice Chairman of the Board                      2003
                                                             and Chief Executive Officer                  2001
  Admiral Edward K. Walker, Jr.(Ret.)(1)(2)(3)   72       Director of Corporate Strategy                  1997
                                                             Resource Consultants, Inc.
  Dr. Edward A. Bogucz (1) (3)                   49       Executive Director of the New York Center       2003
                                                             of Excellence in Environmental Systems
  Adm. Robert M. Moore (Ret.) (1) (2)            66       Business and Financial Management Consultant    2003
  John A Thonet                                  55       President of Thonet Associates                  1991
  Carlos C. Campbell (2) (3)                     68       Business and Financial Management Consultant    2005
--------------------
<FN>

(1)  Member  of  Compensation  and Audit  Committees  (2)  Member  of  Corporate
     Governance Committee (3) Member of Nominating Committee
</FN>
</TABLE>

Mr. Lee N. Blatt is a  co-founder  of Herley  and has been our  Chairman  of the
Board since its  organization  in 1965.  Mr.  Blatt holds a Bachelors  Degree in
Electrical Engineering from Syracuse University and a Masters Degree in Business
Administration from City College of New York.

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

Admiral Edward K. Walker, Jr. (Ret.) has been the Director of Corporate Strategy
for Resource  Consultants,  Inc., a privately  held  corporation  supporting the
Department of Defense and other government  agencies,  since his retirement from
the United States Navy in 1988.  Prior to his retirement  from the United States
Navy,  Admiral  Walker served for 34 years in various  naval officer  positions,
including  Commander of the Naval Supply  Systems  Command,  and Chief of Supply
Corps.  Admiral  Walker  holds a Bachelors  Degree from the United  States Naval
Academy and Masters Degree in Business Administration from The George Washington
University.

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

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

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

                                       27
<PAGE>
Carlos C. Campbell operates a consulting business in Reston, Virginia and serves
on the Board of Directors for Resource America, Inc, NetWolves Corporation,  and
Pico holdings,  Inc., all NASDAQ listed companies. He is a veteran of nine years
as a Naval Flight Officer and served in the  Administration  of President Reagan
as  the  Assistant  Secretary  for  Economic  Development,  U.S.  Department  of
Commerce.

Executive Officers of the Registrant

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

  Lee N. Blatt          77       Chairman of the Board
  Myron Levy            65       Vice Chairman of the Board, Chief Executive
                                     Officer, and Director
  John M. Kelley        52       President
  William Wilson        57       Vice President and Chief Operating Officer

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

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

William R. Wilson was appointed  Vice President and Chief  Operating  Officer in
August 2003 and served as Senior Vice  President  since January 2002.  From 1991
until his employment with us, Mr. Wilson held several  executive  positions with
the Litton  Laser  Systems,  a division  of  Northrop  Grumman  including,  Vice
President of Technical  Operations and Special  Projects from 1998 until January
2002. Mr. Wilson holds a Bachelors  Degree in Engineering from the University of
Arkansas.

Committees of the Board of Directors

Audit Committee and Audit Committee Financial Expert

The Board has a standing Audit Committee. The Board has affirmatively determined
that each director who serves on the Audit Committee is independent, as the term
is defined by applicable Nasdaq and Securities and Exchange  Commission  ("SEC")
rules. During 2005, the Audit Committee of the Board of Directors of the Company
consisted of Edward K. Walker (Chairman), Robert M. Moore, and Edward A. Boguez.
The members of the audit committee have substantial  experience in assessing the
performance of companies,  gained as members of the Company's board of directors
and audit  committee,  as well as by  serving  in  various  capacities  in other
companies or governmental agencies. As a result, they each have an understanding
of financial  statements.  However,  none of them keep current on all aspects of
generally accepted accounting  principles.  Accordingly,  the board of directors
does not consider  any of them to be a financial  expert as that term is defined
in applicable  regulations.  Nevertheless,  the board of directors believes that
they competently  perform the functions required of them as members of the audit
committee and, given their backgrounds,  it would not be in the best interest of
the  Company to replace any of them with  another  person to qualify a member of
the audit committee as a financial expert.

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

Compensation Committee

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

Nominating Committee

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

                                       28
<PAGE>

Corporate Governance Committee

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

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

Section  16(a)  of the  Securities  Exchange  Act of  1934  requires  directors,
executive  officers and persons who beneficially own more than 10% of our common
stock  (collectively,  "Reporting Persons") to file initial reports of ownership
and reports of changes in ownership of our common stock with the  Securities and
Exchange  Commission.  Reporting  Persons  are  required by SEC  regulations  to
furnish us with copies of all Section 16(a) reports they file. To our knowledge,
based  solely on our review of the copies of such  reports  received  or written
representations  from  certain  Reporting  Persons  that no other  reports  were
required,  we believe that during  fiscal 2005,  all  Reporting  Persons  timely
complied with all applicable filing requirements.

Corporate Governance - Code of Ethics

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

Item 11.  Executive Compensation

The  following  table  sets forth the annual  and  long-term  compensation  with
respect to our  Chairman,  Chief  Executive  Officer,  and our other most highly
compensated  executive  officers other than the Chief Executive Officer who were
serving as executive  officers at the end of the last completed fiscal year, and
certain former executive officers as required under SEC rules (collectively, the
"Named  Executive  Officers")  for services  rendered for the fiscal years ended
July 31, 2005, August 1, 2004 and August 3, 2003.


                                       29
<PAGE>
<TABLE>
<CAPTION>

                                                      Summary Compensation Table

                                    Annual Compensation (1)                     Long-Term Compensation
                     ---------------------------------------------------   ----------------------------------
Name and                                                                   Securities
Principal            Fiscal                                                Underlying           All Other
Position             Year        Salary (2)          Bonus (3)             Options              Compensation
----------           -------     ----------          ---------             -------------       --------------

<S>                    <C>       <C>               <C>                      <C>      <C>        <C>       <C>
Lee N. Blatt           2005      $ 824,830         $   650,131              200,000  (4)        $   6,150 (5)
Chairman of            2004        787,950           1,207,680                                      6,500
the Board              2003        782,835             898,000                                      6,000

Myron Levy             2005      $ 660,363           $ 487,598              200,000  (4)        $  10,722 (5)
Chief Executive        2004        630,851             987,010                                     11,072
Officer                2003        624,048             673,000                                      8,376

John M. Kelley         2005      $ 250,016         $       -                 50,000  (4)        $   6,836  (5)
President              2004        227,884              35,000                                      6,741
                       2003        193,282              50,000                                      6,828

William R. Wilson      2005      $ 240,011         $       -                 25,000  (4)        $   7,698  (5)
Chief Operating        2004        214,528              80,000                                      8,048
Officer                2003        163,070              52,000                                      1,853

Thomas V. Gilboy       2005      $ 179,242         $       -                 23,000  (4)        $   5,444  (5)
Chief Financial
Officer (6)

--------
<FN>
(1)  Does not  include  Other  Annual  Compensation  because  amounts of certain
     perquisites  and other non-cash  benefits  provided by us do not exceed the
     lesser of $50,000 or 10% of the total annual compensation disclosed in this
     table for the respective officer.
(2)  Amounts set forth  herein  include cost of living  adjustments  for Messrs.
     Blatt and Levy under employment contracts.
(3)  Represents  for  Messrs.  Blatt  and  Levy  incentive   compensation  under
     employment  agreements.  Bonuses for all other employees are  discretionary
     bonuses.
(4)  Consisting  of the  following  options  issued in May 2005 for the right to
     purchase  our Common  Stock at a price of  $17.98:  Lee N. Blatt - 200,000,
     Myron Levy - 200,000, John M. Kelley - 40,000, and William Wilson - 20,000;
     options  issued in December 2004 for the right to purchase our Common Stock
     at a price of $19.83:  John M. Kelley - 10,000,  William R. Wilson - 5,000,
     and Thomas V.  Gilboy - 3,000;  and  options  issued in August 2004 for the
     right to purchase our Common Stock at a price of $18.39 to Thomas V. Gilboy
     - 20,000.
(5)  All Other Compensation  includes: (a) group term life insurance as follows:
     $4,572 for Mr. Levy, $828 for each of Messrs. Kelley and Gilboy, $1,548 for
     Mr. Wilson,  and (b)  contributions  to our 401(k) Plan as a pre-tax salary
     deferral as follows:  $6,150 for each of Messrs.  Blatt,  Levy, and Wilson,
     $6,008 for Mr. Kelley, and $4,616 for Mr. Gilboy.
(6)  Mr. Gilboy was appointed  Vice  President  and Chief  Financial  Officer in
     September 2004. Mr. Gilboy resigned his position in September 2005.
</FN>
</TABLE>


                                       30
<PAGE>

Option Grants in Last Fiscal Year

The following table sets forth certain information concerning the stock options
granted to the named executive officers during fiscal 2005.

<TABLE>
<CAPTION>

                                          Individual Grants
                        --------------------------------------------------------
                         Number of                                                     Potential Realized Value at
                        Securities      % of Total                                     Assumed Annual Rates of
                        Underlying    Options Issued    Exercise                       Stock Price Appreciation
                          Options     to Employees in     Price     Expiration             Option Term (3)
Name                    Granted(1)    Fiscal Year(2)     ($/Sh)        Date            0%         5%        10%
----                    ----------    --------------   -----------  ----------        ---         ---       ---
<S>                       <C>                <C>       <C>            <C>            <C>     <C>         <C>
Lee N. Blatt              200,000            20        $ 17.98        5/02/15        $ 0.00  $2,261,505  $5,731,098

Myron Levy                200,000            20        $ 17.98        5/02/15        $ 0.00  $2,261,505  $5,731,098

John M. Kelley             40,000             4        $ 17.98        5/02/10        $ 0.00  $  198,702  $  439,079
                           10,000             1        $ 19.83       12/23/09        $ 0.00  $   54,787  $  121,064

William Wilson             20,000             2        $ 17.98        5/02/10        $ 0.00  $   99,351  $  219,539
                            5,000             -        $ 19.83       12/23/09        $ 0.00  $   27,393  $   60,532

Thomas V. Gilboy            3,000             -        $ 19.83       12/23/09        $ 0.00  $   16,436  $   36,319
                           20,000             2        $ 18.39       11/30/09        $ 0.00  $  107,361  $  238,790
-----------
<FN>
(1)  Options  were  issued in fiscal  2005 at 100% of the  closing  price of our
     common stock on dates of issue and vest as follows:  Lee N. Blatt and Myron
     Levy- at date of grant,  John M.  Kelley,  Thomas V.  Gilboy,  and  William
     Wilson - one fifth of the options  vest one year from date of grant and one
     fifth each year  thereafter.  The options issued to Messrs.  Blatt and Levy
     are  exercisable  only in the  event of a  change  in our  control  or upon
     retirement from full time employment.
(2)  Total options issued in fiscal 2005 to employees were for 981,000 shares of
     common stock,  and to outside  directors  were for 100,000 shares of common
     stock.
(3)  The amounts  under the columns  labeled  "5%" and "10%" are  included by us
     pursuant  to  certain  rules  promulgated  by the  Commission  and  are not
     intended  to  forecast  future  appreciation,  if any,  in the price of the
     common  stock.  Such  amounts  are based on the  assumption  that the named
     persons hold the options for the full term of the options. The actual value
     of the options will vary in accordance  with the market price of the common
     stock.  The column headed "0%" is included to demonstrate  that the options
     were  issued with an exercise  price  greater  than or equal to the trading
     price of the  Common  Stock so that the  holders  of the  options  will not
     recognize any gain without an increase in the stock price,  which  increase
     benefits all stockholders commensurately.
</FN>
</TABLE>

Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

     The following table sets forth stock options  exercised  during fiscal 2005
and all  unexercised  stock options held by the named  executive  officers as of
July 31, 2005.
<TABLE>
<CAPTION>
                                                                                       Value of Unexercised
                                                      Number of Unexercised                In the-Money
                       Shares                           Options at Fiscal                Options at Fiscal
                     Acquired on       Value                Year-End                       Year-End (2)
Name                 Exercise(#)  Realized($)(1)   Exercisable    Unexercisable    Exercisable    Unexercisable
----                ------------- --------------   ------------   -------------    ------------   -------------
<S>                                                 <C>                            <C>
Lee N. Blatt             -             -            1,301,000          -           $ 8,006,868        -
Myron Levy               -             -            1,075,000          -             5,644,998        -
John M. Kelley           -             -               99,000          -               366,181        -
William R. Wilson        -             -               45,000          -                52,600        -
Thomas V. Gilboy         -             -               23,000          -                23,000        -
-------
<FN>
(1)  Values are  calculated by  subtracting  the exercise price from the trading
     price of the  common  stock as of the  exercise  date.
(2)  Based  upon the  closing  price of the  common  stock of $19.54 on July 31,
     2005.
</FN>
</TABLE>

                                       31
<PAGE>

Employment Agreements

     Lee N. Blatt entered into an employment agreement with us, dated as of July
29, 2002 which expires  December 31, 2009,  subject to extension for  additional
one-year  periods  annually  each  January  1 with a  final  expiration  date of
December 31, 2015 (as amended December 9, 2003).  The agreement  provides for an
annual  salary as of July 31, 2005 of $810,753 and  provides  for a  semi-annual
cost of living  adjustment based on the consumer price index. The agreement also
provides for incentive compensation at 4% in the aggregate of our pretax income.
Incentive  compensation earned for fiscal year ended July 31, 2005 was $650,131.
At the end of the  employment  period,  the agreement  provides for a five- year
consulting  period at an annual  compensation rate equivalent to one-half of Mr.
Blatt's annual salary in effect at the end of the employment period,  subject to
annual cost of living adjustments.

     Myron Levy entered into an employment  agreement  with us, dated as of July
29, 2002 which expires  December 31, 2009,  subject to extension for  additional
one-year  periods  annually  each  January  1 with a  final  expiration  date of
December 31, 2015 (as amended December 9, 2003).  The agreement  provides for an
annual  salary as of July 31, 2005 of $613,975 and  provides  for a  semi-annual
cost of living  adjustment based on the consumer price index. The agreement also
provides for incentive compensation at 3% in the aggregate of our pretax income.
Incentive  compensation earned for fiscal year ended July 31, 2005 was $487,598.
At the end of the  employment  period,  the  agreement  provides  for a ten-year
consulting  period at an annual  compensation rate equivalent to one-half of Mr.
Levy's annual salary in effect at the end of the employment  period,  subject to
annual cost of living adjustments.

     The employment  agreements with Messrs.  Blatt and Levy provide for certain
payments  following  death or  disability,  and also provide  that, in the event
there is a change in control of the Company, as defined, the executives have the
option to terminate the agreements  and receive a lump-sum  payment equal to the
sum of the salary  payable for the remainder of the  employment  term,  plus the
annual bonuses (based on the average of the three highest annual bonuses awarded
during the ten preceding  years) for the remainder of the employment term. As of
July 31,  2005,  the amount  payable in the event of such  termination  would be
approximately $16,797,000.

     Messrs. Kelley and Wilson have each entered into a severance agreement with
us which  provides  that in the event of a change in our  control,  as  defined,
prior to  September  30, 2006,  each is entitled to two years' base salary.  The
base salary of Messrs.  Kelley and Wilson as of July 31,  2005 is  $250,000  and
$240,000, respectively.

     Five other  officers have severance  agreements  providing for an aggregate
lump sum  payment of  $1,590,000  through  September  30, 2006 in the event of a
change of control of the Company as defined in the agreements.

Directors' Compensation

     Directors who are our  employees  receive no  additional  compensation  for
serving as Directors.  Directors who are not our employees receive an annual fee
of  $15,000  and a fee of $1,500 for each  interim  board of  directors  meeting
attended.  The Corporate Governance Committee Chairman receives an annual fee of
$7,500, and other members of the Corporate  Governance  Committee receive $5,000
annually.  The Audit Committee  Chairman receives an annual fee of $15,000,  and
other members of the Audit Committee receive $10,000 annually.  The Compensation
Committee  Chairman  receives an annual fee of $7,500,  and other members of the
Compensation  Committee receive $5,000 annually. We also reimburse each Director
for the  reasonable  expenses  incurred  in  attending  meetings of the Board of
Directors and committee meetings.

Board of Directors Interlocks and Insider Participation

     In fiscal 2005,  our  Compensation  Committee  consisted  of Dr.  Edward A.
Bogucz,  and Messrs.  Edward K. Walker,  Jr., and Robert M. Moore. None of these
persons  were  our  officers  or  employees  during  fiscal  2005  nor  had  any
relationship requiring disclosures in this Annual Report.

Indemnification Agreements

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

                                       32
<PAGE>

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The following  table sets forth the  beneficial  ownership of shares of our
common  stock  as of  October  31,  2005  of  (i)  each  person  known  by us to
beneficially  own 5% or more of the shares of  outstanding  common stock,  based
solely on filings with the Securities and Exchange Commission,  (ii) each of our
executive  officers and directors,  and (iii) all of our executive  officers and
directors as a group. Except as otherwise indicated, all shares are beneficially
owned, and investment and voting power is held by the persons named as owners.

<TABLE>
<CAPTION>
                                            Common Stock             % of Outstanding
Name of Beneficial Owner              Beneficially Owned (1) (2)          Shares
------------------------              --------------------------     -----------------
<S>          <C>                             <C>                           <C>
Lee N. Blatt (3)                             1,612,295                     10.2%
Myron Levy (4)                               1,531,615                      9.9%
John M. Kelley                                 116,423                         *
William R. Wilson                               45,000                         *
Thomas V. Gilboy (5)                            24,000                         *
Carlos C. Campbell                              25,000                         *
John A. Thonet (6)                             118,038                         *
Adm. Edward K. Walker, Jr. (Ret.)               58,000                         *
Dr. Edward A. Bogucz                            25,075                         *
Adm. Robert M. Moore (Ret.)                     25,000                         *
Dimensional Fund Advisors, Inc. (7)          1,113,697                      7.7%
BlackRock Advisors, Inc. (8)                 1,071,600                      7.4%
Third Avenue Management, Inc. (9)              733,578                      5.1%
Directors and executive
  officers  as a group
  (10 persons)                               3,580,946                     20.8%
---------
<FN>

 *      Indicates ownership of less than one percent.

(1)  No officer or director owns more than one percent of the outstanding shares
     of common stock  unless  otherwise  indicated.  Ownership  represents  sole
     voting and investment power.
(2)  Includes beneficial ownership of the following number of shares that may be
     acquired  within 60 days of October  31,  2005  pursuant  to stock  options
     awarded under our stock option plans:

     Lee N. Blatt               1,301,000    John A. Thonet              97,500
     Myron Levy                 1,075,000    Adm. Edward K. Walker, Jr.  57,000
     John M. Kelley                99,000    Dr. Edward A. Bogucz        25,000
     William R. Wilson             45,000    Adm. Robert M. Moore        25,000
     Thomas V. Gilboy              23,000    Carlos C. Campbell          25,000
     Directors and executive
       officers as a group      2,772,500

(3)  Does not include an  aggregate of 431,773  shares owned by family  members,
     including Hannah Thonet, Rebecca Thonet, Kathi Thonet, Randi Rossignol, Max
     Rossignol,  Henry  Rossignol,  and  Allyson  Brenner,  of which  Mr.  Blatt
     disclaims beneficial ownership.
(4)  Does not include an  aggregate of 20,000  shares  owned by family  members,
     including  Samantha  Roth,  Zachary Roth, Ian Steren,  and Jack Steren,  of
     which Mr. Levy disclaims beneficial ownership.
(5)  Mr.  Gilboy  resigned his position as Vice  President,  Treasurer and Chief
     Financial Officer in September 2005.
(6)  Does not include 155,998 shares, owned by Mr. Thonet's children, Hannah and
     Rebecca  Thonet,  and 31,287 shares owned by his wife,  Kathi  Thonet.  Mr.
     Thonet disclaims beneficial ownership of these shares.
(7)  Address is 1299 Ocean Avenue, Santa Monica, CA 90401.
(8)  Address is 40 East 52nd  Street,  New York,  NY 10022.
(9)  Address is 622 Third Avenue, New Your, NY 10017

</FN>
</TABLE>

                                       33
<PAGE>

Equity Compensation Plan Information

         The following table sets forth the indicated information as of
July 31, 2005 with respect to our equity compensation plans:

<TABLE>
<CAPTION>
                                                                                                  (c)
                                                                                         Number of securities
                                                (a)                                       Remaining available
                                       Number of securities             (b)               for future issuance
                                         to be issued upon       Weighted-average            under equity
                                            exercise of          exercise price of        compensation plans
                                       outstanding options,    outstanding options,      (excluding securities
Plan category                           warrants and rights     warrants and rights    reflected in column (a))
-------------                         ----------------------   --------------------    -------------------------
<S>                                          <C>                       <C>                     <C>
Equity compensation
Plans approved by
security holders                             2,735,023                 13.03                   12,958

Equity compensation
plans not approved
by security holders                          1,000,507                 18.19                    8,500

Total                                        3,735,530                 14.41                   21,458

</TABLE>

     The following information is provided about our stock option plans:

     1996 Stock Option Plan. The 1996 Stock Option Plan covers  1,000,000 shares
of common stock.  Options  granted under the plan may be incentive stock options
qualified under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options.  Under the terms of the plan, the exercise price of
options  granted  under  the plan will be the fair  market  value at the date of
grant.  Prices for incentive  stock options  granted to employees who own 10% or
more of our stock are at least  110% of market  value at the date of grant.  The
nature  and terms of the  options to be granted  are  determined  at the time of
grant by the compensation committee or the board of directors. If not specified,
100% of the  shares  can be  exercised  one year  after the date of  grant.  The
options expire not later than ten years from the date of grant.  No options were
granted  under this plan during the fiscal year ended July 31, 2005. At July 31,
2005,  non-  qualified  options to purchase  9,007  shares of common  stock were
outstanding under this plan.

     1997 Stock Option Plan. The 1997 Stock Option Plan covers  2,500,000 shares
of common stock.  Options  granted under the plan may be incentive stock options
qualified under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options.  Under the terms of the plan, the exercise price of
options  granted  under  the plan will be the fair  market  value at the date of
grant.  Prices for incentive  stock options  granted to employees who own 10% or
more of our stock are at least  110% of market  value at the date of grant.  The
nature  and terms of the  options to be granted  are  determined  at the time of
grant by the compensation committee or the board of directors. If not specified,
100% of the  shares  can be  exercised  one year  after the date of  grant.  The
options  expire  not later  than ten years  from the date of grant,  subject  to
certain restrictions.  Non-qualified stock options for 5,000 shares were granted
under this plan during the fiscal year ended July 31,  2005.  At July 31,  2005,
options to purchase 180,481 shares of common stock were  outstanding  under this
plan.

     1998 Stock Option Plan. The 1998 Stock Option Plan covers  2,250,000 shares
of common stock.  Options  granted under the plan may be incentive stock options
qualified under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified stock options.  Under the terms of the plan, the exercise price of
options  granted  under  the plan will be the fair  market  value at the date of
grant.  Prices for incentive  stock options  granted to employees who own 10% or
more of our stock are at least  110% of market  value at the date of grant.  The
nature  and terms of the  options to be granted  are  determined  at the time of
grant by the compensation committee or the board of directors. If not specified,
100% of the  shares  can be  exercised  one year  after the date of  grant.  The
options  expire  not later  than ten years  from the date of grant,  subject  to
certain restrictions. Non-qualified stock options for 29,500 shares were granted
under this plan during the fiscal year ended July 31,  2005.  At July 31,  2005,
options to purchase 1,213,692 shares of common stock were outstanding under this
plan.

     2000 Stock Option Plan. The 2000 Stock Option Plan covers  1,500,000 shares
of common stock. Options granted under the plan are non-qualified stock options.
Under the terms of the plan,  the exercise  price of options  granted  under the
plan will be the fair market value at the date of grant. The nature and terms of
the  options  to be  granted  are  determined  at  the  time  of  grant  by  the
compensation committee or the board of directors. If not specified,  100% of the

                                       34
<PAGE>
shares can be exercised one year after the date of grant. The options expire not
later  than ten years from the date of grant,  subject to certain  restrictions.
Options for 53,000  shares were  granted  under this plan during the fiscal year
ended July 31, 2005. At July 31, 2005,  options to purchase  1,340,850 shares of
common stock were outstanding under this plan.

     2003 Stock Option Plan. The 2003 Stock Option Plan covers  1,000,000 shares
of common stock. Options granted under the plan are non-qualified stock options.
Under the terms of the plan,  the exercise  price of options  granted  under the
plan will be the fair market value at the date of grant. The nature and terms of
the  options  to be  granted  are  determined  at  the  time  of  grant  by  the
compensation committee or the board of directors. If not specified,  100% of the
shares can be exercised one year after the date of grant. The options expire not
later  than ten years from the date of grant,  subject to certain  restrictions.
Options for 993,500  shares were granted  under this plan during the fiscal year
ended July 31, 2005.  At July 31, 2005,  options to purchase  991,500  shares of
common stock were outstanding under this plan.

Employee Savings Plan

     We maintain an Employee  Savings Plan that qualifies as a thrift plan under
Section  401(k) of the  Internal  Revenue  Code.  This plan allows  employees to
contribute  between 2% and 15% of their salaries to the plan. At our discretion,
we can contribute  100% of the first 2% of the employees'  salary so contributed
and 25% of the next 4% of salary.  Additional  contributions  can be made by us,
depending on profits.  The aggregate benefit payable to an employee depends upon
the employee's rate of contribution, the earnings of the fund, and the length of
time such  employee  continues  as a  participant.  We  recognized  expenses  of
approximately  $618,000,  $513,000,  and $533,000 in fiscal years 2004, 2003 and
2002, respectively. For the year ended August 1, 2004, $6,500 was contributed by
us to this plan for each of Messrs.  Blatt,  Levy,  Wilson,  and  Eckstein,  and
$5,913 for Mr. Kelley.  A total of $53,032 was  contributed for all officers and
directors as a group.

Item 13.  Certain Relationships and Related Transactions.

     Not applicable.

Item 14.  Principal Accountant Fees and Services.

     BDO SEIDMAN,  LLP is our independent  registered public accounting firm and
performed the audit of our  consolidated  financial  statements  for fiscal year
2005. Our consolidated financial statements for fiscal year 2004 were audited by
the independent  registered public accounting firm of Deloitte & Touche LLP. The
following table sets forth all fees for the fiscal years ended July 31, 2005 and
August 1, 2004:
<TABLE>
<CAPTION>
                                   2005           2004
                                   ----           ----
<S>                             <C>             <C>
        Audit Fees (1)  $       309,000 $       346,000
        Tax Fees (2)            27,000          52,000
--------------
<FN>
(1)  Audit Fees includes fees for professional  services  provided in connection
     with the audits of our  financial  statements,  the review of our quarterly
     financial statements,  Sarbanes-Oxley 404 related services,  consents,  and
     audit services  provided in connection  with other  statutory or regulatory
     filings. All such services were pre- approved by the Audit Committee.

(2)  Tax fees  principally  include fees for tax return  preparation and for tax
     advice  planning fees. All such services were provided by Deloitte & Touche
     LLP and were pre-approved by the Audit Committee.
</FN>
</TABLE>

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

     BDO  SEIDMAN,  LLP  did  not  render  any  services  related  to  financial
information systems design and implementation  during fiscal year 2005. Deloitte
& Touche LLP did not  render  any  services  related  to  financial  information
systems design and implementation during fiscal year 2004.


                                       35
<PAGE>
PART IV

Item 15.  Exhibits and Financial Statement Schedules

(a)  Exhibits

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

3.2  By-Laws,  as amended  August 7, 2001  (Exhibit 3.2 of Annual Report on Form
     10-K for the fiscal year ended July 29, 2001).

10.1 1996 Stock Option Plan  (Exhibit 10.1 of Annual Report on Form 10-K for the
     fiscal year ended July 28, 1996).

10.2 1997 Stock Option Plan  (Exhibit 10.1 of Report on Form 10-Q dated June 10,
     1997).

10.3 1998 Stock Option Plan  (Exhibit 10.3 of Annual Report on Form 10-K for the
     fiscal year ended August 1, 1999).

10.4 2000 Stock Option Plan (Exhibit 4.1 of Report on Form S-8 dated October 12,
     2001).

10.5 2003 Stock Option Plan  (Exhibit 10.1 of Report on Form 10-Q dated June 11,
     2003).

10.6 Employment Agreement between Herley Industries, Inc. and Lee N. Blatt dated
     as of July 29, 2002.  (Exhibit  10.5 of Annual  Report on Form 10-K for the
     fiscal year ended July 28, 2002).

10.7 Employment  Agreement between Herley Industries,  Inc. and Myron Levy dated
     as of July 29, 2002.  (Exhibit  10.6 of Annual  Report on Form 10-K for the
     fiscal year ended July 28, 2002).

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

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

10.10Lease 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).

10.11Loan 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).

10.12Amendment  (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).

10.13Asset 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).

10.14Asset 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).

10.15Asset Purchase  Agreement dated as of March 29, 2004 between Registrant and
     Communication Techniques, Inc. (Exhibit 10.15 of Annual Report on Form 10-K
     for the fiscal year ended August 1, 2004).

10.16Lease 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).

10.17Common 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).

10.18Trust 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).

                                       36
<PAGE>

10.19Amendment  (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. (Exhibit 10.19 of Annual Report
     on Form 10-K for the fiscal year ended August 1, 2004).

10.20Asset Purchase  Agreement dated as of September 1, 2004 between  Registrant
     and Reliable System Services Corp.  (Exhibit 10.20 of Annual Report on Form
     10-K for the fiscal year ended August 1, 2004).

10.21Amendment  dated  December 9, 2003 to Employment  Agreement  between Herley
     Industries,  Inc. and Myron Levy dated as of July 29, 2002.  (Exhibit 10.21
     of Annual Report on Form 10-K for the fiscal year ended August 1, 2004).

10.22Amendment  dated  December 9, 2003 to Employment  Agreement  between Herley
     Industries, Inc. and Lee N. Blatt dated as of July 29, 2002. (Exhibit 10.22
     of Annual Report on Form 10-K for the fiscal year ended August 1, 2004).

10.23Common  Stock  Purchase  Agreement  dated as of  February  1, 2005  between
     Registrant and Micro Systems,  Inc.  (Exhibit 2.1 of Form 8K dated February
     7, 2005).

10.24Common  Stock  Purchase  Agreement  dated  as of  April  12,  2005  between
     Registrant  and  Innovative  Concepts,  Inc.  (Exhibit 2.1 of Form 8K dated
     April 18, 2005).

10.25Amendment  (dated June 9, 2005) 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  10.1 of Form 10-Q
     dated June 10, 2005).

23.1 Consent of BDO Seidman, LLP.

23.2 Consent of Deloitte & Touche LLP.

31.1 Certifications  pursuant to Rules 13a-14(a) as adopted  pursuant to Section
     302 of the Sarbanes-Oxley Act of 2002.

32.1 Certifications  pursuant to 18 U.S.C.  Section 1350 as adopted  pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002.

(b)  Financial Statements

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


(2)  Schedule II - Valuation and Qualifying  Accounts filed as part of this Form
     10-K at page 39.


                                       37
<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 November 28, 2005.

                                        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 November 28, 2005 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
       Myron Levy                   Chief Executive Officer and Director
                                    (Principal Executive Officer)

By:    /S/ Anello C. Garefino       Vice President Finance and
       Anello C. Garefino           Acting Chief Financial Officer
                                    (Principal Financial Officer)

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

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

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

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

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



                                       38
<PAGE>


Schedule II - Valuation and Qualifying Accounts (in thousands)

<TABLE>
<CAPTION>

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

Valuation accounts deducted
    from assets to which they
    apply:
<S>                                    <C>                    <C>          <C>         <C>         <C>
July 31, 2005:
Inventory                              $ 3,938                $ 804        $   -       $ 250       $ 4,492

August 1, 2004:
Inventory                              $ 2,739                $ 859        $ 1,241 (1) $ 901       $ 3,938

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

(1)  Represents  valuation  reserves  acquired through the acquisition of CTI of
     $715 and a reclassification of $526 previously included as an offset in raw
     material inventory.
</FN>
</TABLE>


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


                                       39
<PAGE>


Item 8.  Financial Statements and Supplementary Data


                            HERLEY INDUSTRIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                          Page

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS                   F-2

FINANCIAL STATEMENTS:

  Consolidated Balance Sheets as of July 31, 2005 and August 1, 2004        F-4

  Consolidated Statements of Income for the 52 weeks ended July 31, 2005
    and August 1, 2004, and 53 weeks ended August 3, 2003                   F-5

  Consolidated Statements of Shareholders' Equity for the 52 weeks
    ended July 31, 2005 and August 1, 2004, and 53 weeks ended
    August 3, 2003                                                          F-6

  Consolidated Statements of Cash Flows for the 52 weeks ended
    July 31, 2005 and August 1, 2004, and the 53 weeks ended
    August 3, 2003                                                          F-7

  Notes to Consolidated Financial Statements                                F-8

                                      F-1
<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Herley
Industries,  Inc. and subsidiaries  (the "Company") as of July 31, 2005, and the
related consolidated statements of income,  shareholders' equity, and cash flows
for the year ended July 31, 2005. We have also audited the  financial  statement
schedule listed in the index at Item 15 as it relates to the year ended July 31,
2005.  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  based  on our  audit.  The  financial
statements  of the Company for the years ended August 1, 2004 and August 3, 2003
were audited by other  auditors who have  expressed  an  unqualified  opinion on
those financial statements in their report dated October 14, 2004.

We  conducted  our audit 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, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Herley Industries,
Inc. as of July 31, 2005,  and the results of its  operations and its cash flows
for the year ended July 31,  2005,  in  conformity  with  accounting  principles
generally accepted in the United States of America.

Also, in our opinion, the schedule, presents fairly in all material respects the
information  set forth  therein.

We also have  audited,  in accordance  with the standards of the Public  Company
Accounting   Oversight  Board  (United  States),  the  effectiveness  of  Herley
Industries,  Inc. internal control over financial reporting as of July 31, 2005,
based on criteria  established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring  Organizations  of the Treadway  Commission (COSO
criteria) and our report dated October 7, 2005 expressed an unqualified  opinion
thereon.

/s/ BDO SEIDMAN, LLP

Philadelphia, Pennsylvania
October 7, 2005

                                      F-2
<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We  have  audited  the  accompanying   consolidated   balance  sheet  of  Herley
Industries,  Inc. and subsidiaries  (the  Corporation) as of August 1, 2004, and
the related consolidated  statements of income,  shareholders'  equity, and cash
flows for each of the two years in the period ended  August 1, 2004.  Our audits
also  included the  financial  statement  schedule for the years ended August 1,
2004 and  August  3,  2003,  listed  in the  Index at Item 15.  These  financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Corporation's  management.  Our  responsibility  is to express an opinion on the
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal  control  over  financial  reporting  as a basis  for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Corporation's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
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 Herley  Industries,  Inc.  and
subsidiaries  at August 1, 2004,  and the results of their  operations and their
cash flows for each of the two 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 for the years
ended  August 1, 2004 and August 3, 2003,  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.

/s/ DELOITTE & TOUCHE LLP

Baltimore, Maryland
October 14, 2004


                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                            July 31,        August 1,
                                                                                              2005             2004
                                                                                           ------------     -----------
<S>                                                                                    <C>              <C>
                             ASSETS
Current Assets:
          Cash and cash equivalents                                                    $        20,331  $       66,181
          Trade accounts receivable                                                             27,258          24,664
          Costs incurred and income recognized in excess
             of billings on uncompleted contracts                                               16,058          14,210
          Other receivables                                                                      1,414             576
          Inventories, net of allowance of $4,492 in 2005
             and $3,938 in 2004                                                                 53,668          44,909
          Deferred taxes and other                                                               3,782           3,579
                                                                                           ------------     -----------
                                    Total Current Assets                                       122,511         154,119
Property, Plant and Equipment, net                                                              29,461          25,968
Goodwill                                                                                        70,831          35,165
Intangibles, net of accumulated amortization of $1,680 in 2005
          and $752 in 2004                                                                      20,554           4,555
Other Investments                                                                                   62             264
Other Assets                                                                                       682             900
                                                                                           ------------     -----------
                                                                                       $       244,101  $      220,971
                                                                                           ============     ===========
          LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
          Current portion of long-term debt                                            $           797  $          804
          Accounts payable and accrued expenses                                                 24,477          17,514
          Billings in excess of costs incurred and
              income recognized on uncompleted contracts                                           538           1,303
          Income taxes payable                                                                   3,760           2,091
          Reserve for contract losses                                                              630             954
          Advance payments on contracts                                                          3,966           1,180
                                                                                           ------------     -----------
                                    Total Current Liabilities                                   34,168          23,846
Long-term Debt                                                                                   5,000           5,845
Other Long-term Liabilities                                                                      1,042             932
Deferred Income Taxes                                                                            6,254           4,848
                                                                                           ------------     -----------
                                                                                                46,464          35,471
                                                                                           ------------     -----------
Commitments and Contingencies
Shareholders' Equity:
          Common stock, $.10 par value; authorized
            20,000,000 shares; issued and outstanding
            14,389,625 in 2005 and 14,220,508 in 2004                                            1,439           1,422
          Additional paid-in capital                                                           109,118         107,671
          Retained earnings                                                                     85,932          75,151
          Accumulated other comprehensive income                                                 1,148           1,256
                                                                                           ------------     -----------
                                    Total Shareholders' Equity                                 197,637         185,500
                                                                                           ------------     -----------
                                                                                       $       244,101  $      220,971
                                                                                           ============     ===========

          The accompanying notes are an integral part of these financial statements.
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                                      Fifty-three
                                                                    Fifty-two weeks ended             weeks ended
                                                              July 31,              August 1,          August 3,
                                                                2005                2004                 2003
                                                           ---------------     ----------------     ----------------
<S>                                                    <C>                 <C>                  <C>
Net sales                                              $          151,415  $           122,154  $           110,223
                                                           ---------------     ----------------     ----------------

Cost and expenses:
       Cost of products sold                                      106,441               79,505               73,222
       Selling and administrative expenses                         30,305               23,047               17,334
                                                           ---------------     ----------------     ----------------
                                                                  136,746              102,552               90,556
                                                           ---------------     ----------------     ----------------

       Income from operations                                      14,669               19,602               19,667
                                                           ---------------     ----------------     ----------------
Other income (expense), net
       Investment income                                              934                  674                1,113
       Interest expense                                              (286)                (326)                (344)
       Foreign exchange (loss)                                       (291)                (194)            -
                                                           ---------------     ----------------     ----------------
                                                                      357                  154                  769
                                                           ---------------     ----------------     ----------------

        Income before income taxes                                 15,026               19,756               20,436
Provision for income taxes                                          4,245                6,083                6,499
                                                           ---------------     ----------------     ----------------

       Net income                                      $           10,781  $            13,673  $            13,937
                                                           ===============     ================     ================

Earnings per common share - Basic                      $              .75        $         .97        $         .97
                                                           ===============     ================     ================

       Basic weighted average shares                               14,310               14,105               14,317
                                                           ===============     ================     ================

Earnings per common share - Diluted                    $              .72        $         .92        $         .93
                                                           ===============     ================     ================

       Diluted weighted average shares                             14,969               14,896               15,031
                                                           ===============     ================     ================

The accompanying notes are an integral part of these financial statements.
</TABLE>


                                       F-5

<PAGE>
<TABLE>
<CAPTION>

                                            HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             Fifty-two weeks ended July 31, 2005 and August 1, 2004, and the fifty-three weeks ended August 3, 2003
                                                    (In thousands except share data)


                                                                                                           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 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
Exercise of stock options                   329,349           33        3,501                                               3,534
Tax benefit upon exercise of stock options                                658                                                 658
Purchase of 160,232 shares of treasury stock                                                     (2,728)                   (2,728)
Retirement of treasury shares              (160,232)         (16)      (2,712)                    2,728                      -
                                         -----------   ----------   ----------   ----------   ----------   ----------   ----------
     Subtotal                            14,389,625        1,439      109,118       75,151         -           1,256      186,964
                                         -----------   ----------   ----------   ----------   ----------   ----------   ----------
Net income                                                                          10,781                                 10,781
Other comprehensive income (loss) net of tax:
    Unrealized loss on
        available-for-sale securities                                                                             (1)          (1)
   Unrealized gain on interest rate swap                                                                          18           18
   Foreign currency translation (loss)                                                                          (125)        (125)
                                                                                                                        ----------
Comprehensive income                                                                                                       10,673
                                         -----------   ----------   ----------   ----------   ----------   ----------   ----------
Balance at July 31, 2005                 14,389,625 $      1,439      109,118       85,932         -           1,148    $ 197,637
                                         ===========   ==========   ==========   ==========   ==========   ==========   ==========

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

</TABLE>

                                       F-6
<PAGE>
                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (In thousands)
<TABLE>
<CAPTION>
                                                                                              Fifty-three
                                                                     Fifty-two weeks ended    weeks ended
                                                                   July 31,       August 1,    August 3,
                                                                     2005          2004         2003
                                                                   --------     ----------    ----------
<S>                                                             <C>          <C>           <C>
Cash flows from operating activities:
      Income from continuing operations                         $    10,781  $     13,673  $     13,937
                                                                   ---------     ---------    ----------

      Adjustments to reconcile net income to
         net cash provided by operations:
           Depreciation and amortization                              5,683         4,244         4,302
           Foreign exchange (gain) loss                                 (20)          753         -
           Gain on sale of marketable securities                        (22)        -             -
           Gain on sale of fixed assets                                  (8)        -               (17)
           Equity in income of limited partnership                      (54)          (10)          (16)
           Decrease (increase) in deferred tax assets                   403          (316)         (232)
           Increase (decrease) in deferred tax liabilities            1,397          (109)        1,048
           Changes in operating assets and liabilities:
               Decrease (increase) in trade accounts receivable       2,590        (6,923)       (2,039)
               Increase in costs incurred and income
                  recognized in excess of billings on
                  uncompleted contracts                              (1,626)       (7,250)       (1,258)
               (Increase) decrease in other receivables                (576)          251          (380)
               Increase in inventories                               (3,789)       (5,806)       (3,846)
               (Increase) decrease in deferred taxes and other         (430)           31           (52)
               Increase in accounts payable
                 and accrued expenses                                   925         3,431           491
               (Decrease) increase in billings in excess of
                 costs incurred and income recognized
                 on uncompleted contracts                            (1,596)        1,303         -
               Increase in income taxes payable                       2,306           108         3,627
               Decrease in accrual for contract losses                 (500)         (240)         (668)
               (Decrease) increase in advance payments on contracts  (2,749)          324          (515)
               Other, net                                               253           146           185
                                                                   ---------     ---------    ----------
                    Total adjustments                                 2,187       (10,063)          630
                                                                   ---------     ---------    ----------

           Net cash provided by continuing operations                12,968         3,610        14,567
                                                                   ---------     ---------    ----------

Cash flows from investing activities:
      Acquisition of businesses, net of cash acquired               (51,407)      (14,914)       (2,542)
      Acquisition of technology license                              (2,300)        -             -
      Proceeds from sale of securities                                  165         -             -
      Proceeds from sale of fixed assets                                 17            19            25
      Partial distribution from limited partnership                     109            55            49
      Capital expenditures                                           (5,404)       (5,884)       (3,876)
                                                                   ---------     ---------    ----------
           Net cash used in investing activities                    (58,820)      (20,724)       (6,344)
                                                                   ---------     ---------    ----------

Cash flows from financing activities:
      Proceeds from exercise of stock options, net                    3,534         2,458         1,994
      Payments of long-term debt                                       (804)         (686)         (236)
      Purchase of treasury stock                                     (2,728)        -           (14,668)
                                                                   ---------     ---------    ----------
           Net cash provided by (used in) financing activities            2         1,772       (12,910)
                                                                   ---------     ---------    ----------

           Net decrease in cash and cash equivalents                (45,850)      (15,342)       (4,687)

Cash and cash equivalents at beginning of period                     66,181        81,523        86,210
                                                                   ---------     ---------    ----------

Cash and cash equivalents at end of period                      $    20,331  $     66,181  $     81,523
                                                                   =========     =========    ==========


The accompanying notes are an integral part of these financial statements.
</TABLE>

                                       F-7
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.   Nature of Operations

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

2.   Fiscal Year

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

3.   Basis of Financial Statement Presentation

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

4.   Cash and Cash Equivalents

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

5.   Concentration of Credit Risk

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

6.   Inventories

     Inventories, other than inventory costs relating to long-term contracts and
     programs, are stated at lower of cost (principally first-in,  first-out) or
     market.  Inventory  costs relating to long-term  contracts and programs are
     stated at the actual production costs, including factory overhead,  reduced
     by  amounts  identified  with  revenue  recognized  on units  delivered  or
     progress completed.

     Inventory costs relating to long-term contracts and programs are reduced by
     any amounts in excess of estimated realizable value.

                                      F-8
<PAGE>

7.   Property, Plant and Equipment

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

8.   Goodwill and Other Intangible Assets

     The Company  adopted the  provisions  of SFAS No. 142  "Goodwill  and Other
     Intangible  Assets" on July 30,  2001.  SFAS No. 142  requires the use of a
     non-amortization  approach to account for  purchased  goodwill  and certain
     intangibles.  Under  a  non-amortization  approach,  goodwill  and  certain
     intangibles  are not amortized into results of operations,  but instead are
     reviewed  for  impairment  and  written  down and  charged  to  results  of
     operations  in the  periods in which the  recorded  value of  goodwill  and
     certain  intangibles  is more than its fair  value.  The  adoption  of SFAS
     No.142  resulted in the Company's  discontinuation  of  amortization of its
     goodwill  and  certain  intangible  assets.  An annual  impairment  test is
     performed  in the  fourth  quarter  of each  fiscal  year  and  any  future
     impairment  of  goodwill  will  be  charged  to  operations.  There  was no
     impairment   in  goodwill  at  July  31,  2005  based  on  current   market
     capitalization of the Company.

     The change in the carrying  amount of goodwill for the years ended July 31,
     2005 and August 1, 2004, is principally based upon the fair value of assets
     acquired and  liabilities  assumed  related to the  acquisitions  of CTI in
     fiscal 2004 and RSS, MSI and ICI in fiscal 2005, as follows (in thousands):

<TABLE>
<CAPTION>

<S>                                                   <C>
        Balance at August 3, 2003                     $ 25,729
        Goodwill acquired during period (1)              8,725
        Foreign currency translation adjustment (2)        711
                                                      --------

        Balance at August 1, 2004                     $ 35,165
        Goodwill acquired during the period (3)         35,793
        Foreign currency translation adjustment (2)       (155)
        Other adjustments                                   28
                                                      --------
        Balance at July 31, 2005                      $ 70,831
                                                      ========
---------
<FN>

(1)  Related to the acquisition of CTI in fiscal 2004 (See Note B).
(2)  Related to the acquisition of EWST in fiscal 2003 (See Note B).
(3)  Related to the  acquisitions  of RSS,  MSI and ICI in fiscal 2005 (See Note
     B).
</FN>
</TABLE>


Intangibles consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                          July 31,  August 1,   Estimated
                                                                            2005       2004     useful life
                                                                          --------  --------   ------------
<S>                                                                         <C>          <C>
   Trademarks (acquired with MSI and ICI)                                   $2,800     $    -  Indefinite
   Technology (acquired with EWST, MSI and ICI)                             12,421       3,421  10-15 years
   Drawings                                                                    800         800  15 years
   Patents                                                                     568         568  14 years
   Backlog                                                                   3,125         325  2-5 years
   Non-compete                                                                  31          31  5 years
   Foreign currency translation adjustment                                     189         162
                                                                           -------      -------
                                                                            19,934       5,307
   Accumulated amortization                                                  1,680         752
                                                                          --------      -------
                                                                            18,254       4,555
   Technology license (for millimeter wave applications;  purchased from     2,300           -  (see below)
   Xytrans)                                                               --------      -------
                                                                           $20,554      $4,555
                                                                          ========      =======
</TABLE>

                                      F-9
<PAGE>

The Company entered into a license and development  agreement  ("agreement")  on
April 7, 2005 to license  millimeter wave  technology for military  applications
from Xytrans, Inc. Xytrans focuses on providing  high-frequency  transceiver and
outdoor unit design for the wireless  broadband  network market.  The technology
acquired  includes  exclusive access to a portfolio of patents and trade secrets
that improve the cost and  performance of millimeter  wave  subsystems  that are
used in weapons and radar systems.

In  January  2005,  the  Company  had made a deposit  payment of  $1,000,000  in
connection with this proposed transaction.  The deposit payment was secured by a
note  receivable,  which was  cancelled  upon  execution of the  agreement.  The
agreement provided for an additional payment on execution of $1,000,000, and for
certain additional  contingent payments,  of up to $4,500,000.  These contingent
payments are subject to achievement  of a series of development  milestones on a
US  Government  missile  program,  and / or receipt  by the  Company of a single
contract  award  using  millimeter  wave  technology  valued  at  a  minimum  of
$6,000,000,  amongst other  requirements.  The  agreement  also provides for the
payment  of  royalties  ranging  from 1% to 4% of  sales of  products  including
relevant  millimeter wave technology,  starting at the earliest January 1, 2006,
and generally ending 4 years later.

In the fourth  quarter  of fiscal  2005,  Xytrans  had  achieved  certain of the
development  milestones on the missile program  discussed above, and the Company
made additional  contingent payments totaling $300,000.  In the first quarter of
fiscal 2006 (as of October 14, 2005),  additional  contingent  payments totaling
$375,000 were made by the Company.

The investment in this licensed  technology of $2,300,000 as of July 31, 2005 is
included in the  Consolidated  Balance  Sheet  under the caption  AIntangibles.@
After further  development of this  technology,  and / or at the commencement of
sales of products using the millimeter wave  technology,  the Company will begin
to amortize a portion of the costs  associated  with this agreement  against the
related  revenues,  and may allocate some of the value of this technology to the
specific patents  acquired.  In the event that some of the value is allocated to
specific patents,  then that value would be amortized over the remaining life of
the patent. At this point, the portion of this technology investment that should
be allocated to any particular patent is not estimatable.

Amortization  expense  related to Intangibles for the fifty-two weeks ended July
31,  2005  and  August  1,  2004,  was  approximately   $928,000  and  $349,000,
respectively.

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

<TABLE>
<CAPTION>

                        <S>   <C>
                        2006  $ 1,788
                        2007    1,788
                        2008    1,782
                        2009    1,782
                        2010    1,502
</TABLE>

9.   Marketable Securities

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

10. Other Investments

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

                                      F-10
<PAGE>

11.  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.  A certain  percentage of revenues are derived
from  long-term,  fixed price  contracts.  Revenues  and  estimated  profits are
recognized on these  contracts  using the  percentage  of  completion  method of
accounting  and are based on estimated  completion  to date (the total  contract
amount  multiplied  by the  percentage  of  performance,  based on  total  costs
incurred in relation to total estimated cost at completion).  Prospective losses
on long-term  contracts are based upon the anticipated  excess of  manufacturing
costs over the selling  price of the  remaining  units to be  delivered  and are
recorded in the period when first determinable.  Actual losses could differ from
those estimated due to changes in the ultimate  manufacturing costs and contract
terms.

Contract  costs include all direct  material and labor costs and those  indirect
costs related to contract performance. Selling, general and administrative costs
are charged to expense as incurred.

12.  Product Development

The  Company's  primary  efforts are focused on  engineering  design and product
development  activities rather than pure research. The cost of these development
activities,  including employees' time and prototype development, net of amounts
paid by customers, was approximately $5,018,000,  $5,422,000,  and $3,083,000 in
fiscal 2005, 2004, and 2003, respectively,  and are included in cost of products
sold.

13.  Income Taxes

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

14.  Stock-Based Compensation

The Company has various fixed stock option plans which reserve  shares of common
stock for issuance to  executives,  key  employees  and  directors.  The Company
accounts for employee  stock options in accordance  with  Accounting  Principles
Board  Opinion No. 25,  "Accounting  for Stock  Issued to  Employees"  (APB 25).
Accordingly,  compensation  cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's  stock at the date of the grant
over the amount an employee must pay to acquire the stock.  Because the exercise
price of the  employee  stock  options  granted  equals the market  price of the
underlying stock on the date of grant, no compensation expense is recognized.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation"  (SFAS 123) provides an  alternative  to APB 25 in accounting  for
stock-based   compensation  issued  to  employees.   SFAS  123  provides  for  a
fair-value-based method of accounting for employee stock options, employee stock
purchase  plans and  similar  equity  instruments.  Companies  that  continue to
account for stock-based  compensation  arrangements under APB 25 are required by
SFAS 123 to disclose the pro forma effect on net income and net income per share
as if the  fair-value-based  method prescribed by SFAS 123 had been applied. The
Company  has  continued  to  account  for  stock-based  compensation  using  the
provisions of APB 25 and presents  below the pro forma  information  required by
SFAS 123 as amended by  Statement  of Financial  Accounting  Standards  No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure" (SFAS 148).


In April 2005,  the Company's  Board of Directors,  upon  recommendation  of the
Board's Compensation Committee, approved the accelerated vesting of all unvested
and "out-of-the-money"  stock options outstanding as of May 2, 2005. As a result
of  this  action,  options  to  purchase  approximately  307,000  shares  of the
Company's  common stock that would otherwise have vested at various times within

                                      F-11
<PAGE>

the next four years became fully vested. The decision to accelerate the vesting,
which the  Company  believes  to be in the best  interest of the Company and its
shareholders,  was made in lieu of certain  discretionary  cash bonuses,  and to
reduce  compensation  expense that might be recorded in future periods following
the Company's  adoption of SFAS 123(R).  The Board of Directors further believes
that the  acceleration  is  consistent  with  possible  changes to the Company's
overall equity compensation approach, which is expected to include a reduced use
of stock  options.  The SFAS 123 pro  forma  stock-based  compensation  costs of
approximately  $2,770,000 (net of taxes) for the year ended July 31, 2005 in the
table  below  includes a charge of  approximately  $540,000  (net of taxes) as a
result of the acceleration.


Pro forma Disclosures

Pro forma information  regarding net income and net income per share is required
by SFAS 123 as amended by SFAS 148,  and has been  determined  as if the Company
accounted  for its  employee  stock  option plans using the fair value method of
SFAS 123 as amended by SFAS 148. The fair value for these  options was estimated
at the  date of  grant  using a  Black-Scholes  option  pricing  model  with the
following assumptions:


<TABLE>
<CAPTION>
                                             2005        2004 and 2003
                                             ----        -------------
<S>                                        <C>             <C>
        Expected life from vest date       .84 years       1.51 years
        Volatility                         .44              .48
        Risk-free interest rate            3.8%             2.8%
        Dividend yield                     zero            zero
</TABLE>


For  purposes of pro forma  disclosures,  compensation  costs for stock  options
granted in fiscal  years 2005,  2004,  and 2003,  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 as follows (in thousands except per share
data):
<TABLE>
<CAPTION>
                                             2005         2004          2003
                                          -----------  -----------   -----------
<S>                                        <C>          <C>           <C>
     Net income  -  as reported            $ 10,781     $ 13,673      $ 13,937
     Deduct: total stock-based employee
      compensation expense determined
      under fair value based method for all
      awards, net of related tax effects     (2,770)        (570)       (1,896)
                                          -----------  -----------   -----------
     Net income  -  pro forma               $ 8,011     $ 13,103      $ 12,041
                                          ===========  ===========   ===========

     Earnings per share  -  as reported
          Basic                             $0.75        $0.97         $0.97
          Diluted                            0.72         0.92          0.93
     Earnings per share  - pro forma
          Basic                             $0.56        $0.93         $0.84
          Diluted                            0.54         0.88          0.80
</TABLE>

On December 16, 2004,  the FASB issued SFAS 123(R),  which is a revision of SFAS
123.  SFAS  123(R)  supersedes  APB 25 and amends  SFAS 95,  "Statement  of Cash
Flows."  Generally,  the  approach in SFAS 123(R) is similar to the  approach in
SFAS 123.  However,  SFAS 123(R) requires that the compensation cost relating to
share-based payment transactions, including grants of employee stock options, be
recognized in financial  statements  based on the estimated  fair value of those
options using an  acceptable  valuation  method.  Pro forma  disclosure  will no
longer be an alternative.

SFAS 123(R) was  originally  effective for public  companies at the beginning of
the first interim or annual period  beginning after June 15, 2005.  However,  on
April 15, 2005, the SEC amended the date for  compliance  with SFAS 123(R) to be
the first interim or annual reporting  period of the  registrant's  first fiscal
year  beginning on or after June 15, 2005.  Therefore,  the Company will prepare
its financial  statements in accordance with SFAS 123(R)  beginning on August 1,
2005.  In  accordance  with SFAS 123(R),  companies  may elect to use either the
modified- prospective or  modified-retrospective  transition method. The Company
expects to use the  modified-prospective  transition method.  Under this method,

                                      F-12
<PAGE>

compensation  cost is  recognized  for all awards  granted,  modified or settled
after the adoption date as well as for any awards that were granted prior to the
adoption date for which the requisite service has not yet been rendered.

The adoption of SFAS 123(R)'s fair value method may have a significant impact on
the  Company's  results of  operations,  although  it will have no impact on the
Company's overall financial  position.  The impact of adoption of SFAS 123(R) in
fiscal 2006 and beyond  cannot be  predicted at this time because it will depend
upon various  factors  including  levels of  share-based  awards  granted in the
future and the Company's future compensation strategy.

If the Company had adopted SFAS 123(R) in prior  periods,  the impact would have
approximated  the impact of SFAS 123 as  described  in the pro forma  disclosure
above.  SFAS 123(R) also  requires the benefits of tax  deductions  in excess of
recognized  compensation  cost to be reported as a financing  cash flow,  rather
than as an  operating  cash flow as  required  under  current  literature.  This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption.

The pro forma  compensation  costs  presented  in the  table  above and in prior
filings have been calculated using a Black-Scholes  option pricing model and may
not be indicative of amounts which should be expected in future  periods.  As of
the date of this  filing,  the Company is still  evaluating  the option  pricing
model  that it will use to  estimate  the fair  value of its  options  when SFAS
123(R) becomes effective.

15.  Foreign Currency Translation

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

16.  Derivatives

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

17. Comprehensive Income

The Company  reports  comprehensive  income in the  Consolidated  Statements  of
Shareholders'  Equity,  which  includes  net income,  unrealized  gain (loss) on
available-for-sale securities, unrealized gain (loss) on interest rate swap, and
foreign  currency   translation  gain  (loss),  net  of  related  income  taxes.
Substantially all the amount included in other  comprehensive  income relates to
the effects of foreign exchange translation gains and losses.

                                      F-13
<PAGE>

18.  New Accounting Pronouncements

     In November 2004, the Financial  Accounting Standards Board ("FASB") issued
     Statement of Financial  Accounting  Standards No. 151 "Inventory  Costs, an
     amendment of APB No. 43,  Chapter 4" ("SFAS 151.") SFAS 151 clarifies  that
     abnormal  inventory costs such as costs of idle facilities,  excess freight
     and handling  costs,  and wasted  materials  (spoilage)  are required to be
     recognized  as  current  period  charges.  The  provisions  of SFAS 151 are
     effective for fiscal years  beginning after June 15, 2005. The Company will
     adopt this  pronouncement  beginning with the first quarter of fiscal 2006,
     and does not  expect  that the  adoption  of SFAS 151 will have a  material
     impact on its consolidated financial position or result of operations.

     In December 2004,  the FASB issued SFAS No. 153,  "Exchanges of Nonmonetary
     Assets - An Amendment of APB Opinion No. 29". SFAS No. 153  eliminates  the
     exception from fair value measurement for nonmonetary  exchanges of similar
     productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for
     Nonmonetary  Transactions," and replaces it with an exception for exchanges
     that  do not  have  commercial  substance.  SFAS  No 153  specifies  that a
     nonmonetary  exchange has commercial  substance if the future cash flows of
     the  entity  are  expected  to  change  significantly  as a  result  of the
     exchange.  SFAS No. 153 is effective for the fiscal periods beginning after
     June 15,  2005,  and is  required  to be adopted by the  Company  effective
     August 1, 2005. The Company does not expect SFAS No. 153 to have a material
     impact on its consolidated financial position or results of operations.

     In  December  2004,  the FASB  issued  Statement  of  Financial  Accounting
     Standards No. 123(R),  "Share-Based  Payment,"  which is a revision of SFAS
     No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123R.") SFAS 123R
     is effective for  publicly-traded  companies for interim or annual  periods
     beginning  after June 15,  2005,  supersedes  Accounting  Principles  Board
     Opinion No. 25, "Accounting for Stock Issued to Employees," and amends SFAS
     No. 95, "Statement of Cash Flows."

     SFAS  123R  requires  the  measurement  of  all  share-based   payments  to
     employees,   including   grants  of  employee   stock   options,   using  a
     fair-value-based   method  and  the   recording  of  such  expense  in  the
     consolidated  statements  of income.  SFAS 123R will be  effective  for the
     Company beginning with the first quarter of fiscal 2006.

     The pro forma disclosures  previously  permitted under SFAS No. 123 will no
     longer be an alternative to financial statement recognition.  See Note A 14
     - Summary  of  Significant  Accounting  Policies  in Notes to  Consolidated
     Financial  Statements for the estimated impact on net income and net income
     per  diluted  share  amounts  of  recording  share-based  payments  in  the
     Consolidated  Statements of Income using a fair-value-based  method similar
     to the methods required under SFAS 123R to measure compensation expense for
     employee stock options.

     In March 2005, the FASB issued FASB  Interpretation No. 47, "Accounting for
     Conditional  Asset Retirement  Obligations - An  Interpretation of SFAS No.
     143." This Interpretation provides additional guidance as to when companies
     should  record  the  fair  value of a  liability  for a  conditional  asset
     retirement  obligation when there is uncertainty  about the timing and (or)
     method of settlement of the obligation. This Interpretation is effective no
     later than the end of fiscal  years ending  after  December  15, 2005.  The
     Company does not expect the adoption of FASB  Interpretation No. 47 to have
     a material  impact on its  consolidated  financial  position  or results of
     operations.

     In May 2005, the FASB issued  Statement of Financial  Accounting  Standards
     No. 154,  "Accounting Changes and Error Corrections" ("SFAS 154.") SFAS 154
     replaces APB Opinion No. 20  "Accounting  Changes" and FASB Statement No. 3
     "Reporting  Accounting  Changes in Interim Financial  Statements." SFAS 154
     requires  that a  voluntary  change  in  accounting  principle  be  applied
     retrospectively with all prior period financial statements presented on the
     new accounting  principle,  unless it is  impracticable  to do so. SFAS 154
     also provides that a correction  of errors in previously  issued  financial
     statements should be termed a "restatement."  The new standard is effective
     for accounting  changes and correction of errors for fiscal years beginning
     after  December 15, 2005.  The Company does not expect that the adoption of
     SFAS 154 will have a material impact on its consolidated financial position
     or results of operations.

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. for $14,914,000 in cash. The
     business operates as a wholly-owned subsidiary of the Company,  Herley-CTI,

                                      F-14
<PAGE>

     Inc.  (ACTI@).  CTI  designs,   develops  and  produces  signal  generation
     components   and  integrated   assemblies  for  digital  radio,   Satellite
     Communications,  test and instrumentation,  and datacom  applications.  CTI
     also 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.


     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 of Melbourne,  Florida for $3,725,000
     in cash, plus acquisition  costs of approximately  $28,000.  The results of
     operations  of RSS are included in the  consolidated  financial  statements
     from September 1, 2004. The Company operates the business as a wholly-owned
     subsidiary under the name  Herley-RSS,  Inc.  (ARSS@).  RSS was acquired by
     Herley in order to capitalize on its synergies  with Herley's other product
     lines,  particularly in "over the horizon" command and control (C2) systems
     for drones and targets. RSS designs,  develops and produces satellite-based
     command and control  systems for prime  defense  contractors  and  entities
     worldwide.

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

     The Company entered into an agreement as of April 1, 2005 to acquire all of
     the capital stock of Innovative Concepts,  Inc. ("ICI"),  McLean,  Virginia
     for cash payments of  $24,378,330,  the assumption of certain  liabilities,
     and a cash advance of $3,250,000  for the  repayment of debt  assumed.  The
     results of  operations  of ICI are included in the  consolidated  financial
     statements  from  April 1,  2005.  ICI was  acquired  by Herley in order to
     capitalize  on its tactical  data link  technology  for exchange of digital
     information.  ICI has a  successful  history of  developing  and  providing
     wireless   communications   technology  and  real-time   embedded  systems,
     software,  hardware  and  high-speed  processing  in support of the defense
     industry.


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


     For the four  acquisitions  outlined above, the allocation of the aggregate
     purchase price (net of cash acquired of approximately $1,463,000), based on
     a review of the fair value of the assets acquired and liabilities  assumed,
     is as follows (in thousands):

<TABLE>
<CAPTION>
       Acquisition                             CTI                  RSS                  MSI                 ICI
       Effective Date                     March 29, 2004     September 1, 2004    February 1, 2005      April 1, 2005
       --------------                     --------------     -----------------    ----------------      -------------
<S>                                         <C>                    <C>                 <C>                 <C>
       Current assets                       $ 2,861                $ 483               $1,534              $8,759
       Property, plant and equipment          1,492                   72                2,038                 681
       Other assets                               -                    -                    1                   -
       Intangible assets                      3,200                    -                4,400              10,200
       Goodwill                               8,753                3,456               15,148              17,189
       Current liabilities                   (1,392)                (258)              (2,436)             (9,860)
                                           ---------            ---------            ---------           ---------
       Aggregate purchase price            $ 14,914              $ 3,753             $ 20,685            $ 26,969
                                           =========            =========            =========           =========
</TABLE>


The Company's consolidated financial statements reflect preliminary estimates of
the fair  value of the ICI  assets  acquired  and  liabilities  assumed  and the
related  allocations of the purchase price. The final  determination of the fair
value of  liabilities  assumed and final  allocation  of the  purchase  price is
expected to be completed no later than the third quarter of fiscal 2006, and may
differ from the  amounts  included in the  accompanying  consolidated  financial
statements.

Goodwill resulting from these acquisitions is based on the excess of the amounts
paid  over the  estimated  fair  value of the net  assets  acquired,  and is tax
deductible.

                                     F-15
<PAGE>

Prior to the acquisition of MSI, MSI had leased one of its two buildings in Fort
Walton Beach Florida from MSI Investments,  a Florida General  Partnership.  MSI
Investments is owned by four individuals,  three of whom are currently employees
of MSI. This lease has an original term of 15 years,  ending  December 31, 2012.
The lease  costs  currently  are  approximately  $278,000  on an  annual  basis,
including the tenant's  obligation to pay for insurance and property taxes.  The
base lease rate is adjusted  every  January for  changes in the  consumer  price
index, using 1997 as the base year.


Unaudited pro forma financial  information for the three acquisitions  completed
by the Company in fiscal 2005 as if the  acquisitions  had occurred on August 4,
2003 is as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
                                                 2005        2004
                                                 ----        ----
<S>                                           <C>         <C>
                Net sales                     $ 173,223   $ 158,584
                Net income                       10,374      13,654
                Net Income per common share:
                    Basic                     $    0.72   $    0.97
                    Diluted                   $    0.69   $    0.92
                Weighted shares outstanding
                    Basic                        14,310      14,105
                    Diluted                      14,969      14,896
</TABLE>


NOTE C - INVENTORIES

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

<TABLE>
<CAPTION>
                                               July 31,    August 1,
                                                 2005        2004
                                                 ----        ----
<S>                                            <C>        <C>
           Purchased parts and raw materials   $ 23,838   $ 23,555
           Work in process                       32,026     22,878
           Finished products                      2,296      2,412
                                               --------   --------
                                                 58,160     48,846
           Less reserve                           4,492      3,938
                                               --------   --------
                                               $ 53,668   $ 44,909
                                               ========   ========
</TABLE>

NOTE D - OTHER INVESTMENTS

     In July 1994, the Company  invested  $1,000,000  for a limited  partnership
     interest in M.D. Sass  Municipal  Finance  Partners-I,  a Delaware  limited
     partnership.  The objectives of the  partnership are the  preservation  and
     protection of its capital and the earning of income through the purchase of
     certificates  or other  documentation  that evidence liens for unpaid local
     taxes on parcels of real property.  At July 31, 2005 and August 1, 2004 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  $109,000  and  $55,000  from the
     Partnership in fiscal 2005 and 2004, respectively.  As of July 31, 2005 the
     Company's   limited   partnership   interest   had  a  carrying   value  of
     approximately $62,000, based on the equity method of accounting.


                                      F-16

<PAGE>

NOTE E - PROPERTY, PLANT AND EQUIPMENT

     Property,   plant  and   equipment  are  comprised  of  the  following  (in
     thousands):
<TABLE>
<CAPTION>
                                                July 31,       August 1,      Estimated
                                                 2005            2004        Useful Life
                                              ----------    -----------     -------------
<S>                                             <C>           <C>
Land                                            $ 4,006       $ 3,781
Building and building improvements               12,011        10,043        10-40 years
Machinery and equipment                          48,014        43,225         5- 8 years
Furniture and fixtures                            1,581         1,347         5-10 years
Automobiles                                          18             7            3 years
Leasehold improvements                            2,418         1,526         5-10 years
                                             ----------    ----------
                                                 68,048        59,929
Less accumulated depreciation                    38,587        33,961
                                             ----------    ----------
                                               $ 29,461      $ 25,968
                                             ==========    ==========
</TABLE>

     Depreciation  charges totaled  approximately  $4,626,000,  $3,796,000,  and
     $3,944,000 in fiscal 2005, 2004, and 2003, respectively.

NOTE F - COMMITMENTS AND CONTINGENCIES

     Leases

     The  Company  leases  office,  production  and  warehouse  space as well as
     computer equipment and automobiles under  non-cancelable  operating leases.
     Rent  expense for the 52 weeks ended July 31, 2005 and August 1, 2004,  and
     the  53  weeks  ended  August  3,  2003,  was   approximately   $2,834,000,
     $1,749,000,  and  $1,393,000,  respectively.  Minimum  annual rentals under
     non-cancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>

                                                         Amount
                                                        -------
                <S>                                     <C>
                Year ending fiscal 2006                 $ 2,876
                2007                                      2,670
                2008                                      2,959
                2009                                      2,963
                2010                                        692
                Future                                    4,935
</TABLE>

     Employment Agreements

     The  Company has  employment  agreements  with  certain  executives  of the
     Company which expire December 31, 2009, 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 July 31, 2005 of $1,460,000 and provide for
     a semi-annual cost of living  adjustment based on the consumer price index.
     The  agreements  also  provide  for  incentive  compensation  at 7% in  the
     aggregate of pretax income of the Company.  Incentive  compensation  in the
     amount of $1,138,000,  and $2,214,000  (including a supplemental payment of
     $650,000  for fiscal  2003) was charged to expense in fiscal years 2005 and
     2004, 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 average of the three highest  annual  bonuses  awarded during
     the ten preceding  years) for the remainder of the  employment  term. As of
     July 31, 2005, the amount payable in the event of such termination would be
     approximately  $16,797,000.  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.


                                      F-17
<PAGE>

     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 $2,970,000 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.  Sec.  2201 et. seq.,  Herley also asserted
     claims for,  among  other  things,  fraud,  breach of  contract,  breach of
     fiduciary duty,  unfair  competition and tortious  interference with actual
     and prospective contractual relationships.

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

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

     At a proceeding on April 28, 2003, the Court decided to delay ruling on all
     of the  petitions  for fees and costs  until after  appeals are  exhausted.
     Accordingly, by Order dated May 6, 2003, the Court denied without prejudice
     all of the parties' petitions.  On May 12, 2003, Herley filed its appeal to
     the United States Court of Appeals for the Second Circuit. On May 28, 2003,
     RLI filed a notice of cross-appeal.  Robinson 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

                                      F-18
<PAGE>

     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.

     By Order dated February 8, 2005, the Superior court of Hillsborough County,
     New  Hampshire,  granted Ben Robinson=s and Frank Holt=s Motion for Summary
     Judgment in the New Hampshire action. By Order Dated February 17, 2005, the
     Court ruled upon the parties= cross-petitions for attorneys' fees, granting
     all petitions in their entirety.  Herley was awarded $2,146,882 against RLI
     under the Asset Purchase Agreement.  RLI was awarded $54,426 against Herley
     for its  successful  defense of an  indemnity  by Herley.  Ben Robinson was
     awarded $259,295 against Herley under the Lease Agreement.

     On June 10, 2005,  Herley reached an agreement with Robinson,  RLI and Holt
     under which Herley agreed to pay Robinson  $260,000 for the attorneys  fees
     awarded to him by the New York Court.  Further,  all claims,  counterclaims
     and appeals in Herley Industries, Inc. v. Benjamin Robinson and Frank Holt,
     Docket No. 04-E-0266 and Herley Industries, Inc. v. RH Laboratories,  Inc.,
     Stephen  Robinson  and Michael  Gravelese,  No.  02-11140 (D.  Mass),  were
     dismissed with prejudice. Based upon this agreement, the Company recorded a
     provision  in the  third  quarter  of  fiscal  2005  to  account  for  this
     settlement. The settlement was paid in the fourth quarter of fiscal 2005.

     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, 2007. At July 31, 2005  stand-by  letters of
     credit  aggregating  approximately  $10,703,000 were outstanding under this
     facility.

NOTE G - INCOME TAXES

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

<TABLE>
<CAPTION>

                                              52 weeks ended         53 weeks ended
                                        July 31,         August 1,      August 3,
                                         2005              2004           2003
                                     ----------------    ---------   ----------------
<S>                                    <C>               <C>             <C>
Current
                  Federal              $ 2,772           $ 5,514         $ 5,465
                  State                    344               549             533
                  Foreign                   30               431             379
                                       -------           -------         -------
                                         3,146             6,494           6,377
Deferred
                  Federal                  992              (372)           (233)
                  State                     94               (44)            (23)
                  Foreign                   13                 5             378
                                       -------           -------         -------
                                         1,099              (411)            122
                                       -------           -------         -------
                                       $ 4,245           $ 6,083         $ 6,499
                                       =======           =======         =======
</TABLE>


                                      F-19

<PAGE>

     The Company paid income taxes of approximately  $546,000,  $5,496,000,  and
     $4,164,000 in fiscal 2005, 2004, and 2003, 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 ended               53 weeks ended
                                                        July 31,            August 1,            August 3,
                                                          2005                2004                 2003
                                                        --------           ----------        ---------------
<S>                                                       <C>                 <C>                  <C>
         Statutory income tax rate                        35.0 %              35.0 %               34.0 %
         State income taxes, net of
            Federal income tax benefit                     1.9                 1.7                  1.7
         Benefit of extra territorial income              (1.1)               (1.4)                (1.0)
         Non-deductible expenses                           0.7                 0.6                  0.6
         Benefit of foreign and
            foreign-source income                         (1.0)               (3.9)                (3.4)
         Research and development credits                 (5.7)               (1.0)                 -
         Tax exempt interest                              (1.3)
         Other, net                                       (0.2)               (0.2)                (0.1)
                                                         ------              ------               ------
            Effective tax rate                            28.3 %              30.8 %               31.8 %
                                                         ======              ======               ======
</TABLE>

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

     The tax effects of significant  items comprising  deferred income taxes are
     as follows (in thousands):
<TABLE>
<CAPTION>
                                       July 31, 2005                August 1, 2004
                                 -----------------------       ------------------------
                                 Deferred      Deferred        Deferred      Deferred
                                   Tax            Tax             Tax           Tax
                                  Assets      Liabilities       Assets      Liabilities
                                 ---------    -----------      --------     ------------
<S>                               <C>          <C>              <C>           <C>
Intangibles                       $ -          $ 3,060          $  -          $ 2,186
Accrued vacation pay                 396          -                 335          -
Accrued bonus                        318          -                 583          -
Warranty costs                       279          -                 297          -
Inventory                          1,348          -               1,256          -
Depreciation                        -            3,194             -            2,662
Contract losses                       69          -                 221          -
Net operating loss
   carry-forwards                    360          -                 230          -
Other                                 16          -                 267          -
                               -------------  ------------    ------------  ------------
                                 $ 2,786       $ 6,254          $ 3,189       $ 4,848
                               =============  ============    ============  ============
</TABLE>

     As  of  July  31,  2005  the  Company  has  available  net  operating  loss
     carry-forwards  for state income tax purposes of  approximately  $3,600,000
     with expiration dates ranging from 2022 to 2024.

                                      F-20
<PAGE>

     NOTE H- LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                            July 31,       August 1,
                                             Rate             2005           2004
                                             ----          ----------     -----------
<S>                                    <C>                  <C>             <C>
Revolving loan facility (a)            4.75% and 5.29%     $   -           $   -
Mortgage note (b)                      7.43%                 2,431           2,524
Industrial Revenue Bonds (c)           4.07%                 2,700           2,805
Note for acquired business (d)         1.80%                   586           1,212
Other                                                           80             108
                                                        -------------   ------------
                                                             5,797           6,649
Less current portion                                           797             804
                                                        -------------   ------------
                                                           $ 5,000         $ 5,845
                                                        =============   ============
</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, 2007 (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 3.25% and 3.49%,  respectively,  at July 31, 2005. There is a fee of 15
     basis points per annum on the unused portion of the $45,000,000 LIBOR based
     portion of the credit facility payable  quarterly.  There are no borrowings
     under the line at July 31, 2005 and August 1, 2004.

     The agreement contains various financial covenants,  including, among other
     matters,  minimum  tangible net worth,  total  liabilities  to tangible net
     worth,  debt service coverage,  and restrictions on other  borrowings.  The
     Company is in compliance with all covenants at July 31, 2005.

(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 $1,861,000.

     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 July 31, 2005. In connection  with this loan, the Company paid
     approximately  $45,000 in financing costs. Such costs are included in Other
     Assets in the accompanying consolidated balance sheets at July 31, 2005 and
     August  1,  2004,  and are  being  amortized  over the term of the loan (10
     years).

(c)  On October 19, 2001, the Company  received  $3,000,000 in proceeds from the
     East Hempfield  Township  Industrial  Development  Authority  Variable Rate
     Demand/Fixed Rate Revenue Bonds Series of 2001 (the "Bonds"). The Bonds are
     due in varying  annual  installments  through  October 1, 2021. The initial
     installment  of $95,000 was paid  October 1, 2002 and  increases  each year
     until the final payment of $225,000 in 2021. The interest rate on the Bonds
     is reset weekly at the prevailing  market rate of the BMA Municipal  index.
     The initial rate of interest was 2.1%, which,  after giving effect to a ten
     year  interest  rate swap  agreement  (See Note O)  becomes a fixed rate of
     4.07%.  The interest  rate at July 31, 2005 was 2.48%.  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
     $1,723,000 at July 31, 2005.

                                      F-21
<PAGE>

(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 July 31,  2005 of
     1.7593  the  U.S.   Dollar   equivalent  of  the  annual   installments  is
     approximately $586,000.

     The Company paid interest in 2005, 2004 and 2003 of approximately $304,000,
     $314,000 and $355,000, respectively.

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

<TABLE>
<CAPTION>
                          Fiscal year ending during:   Amount
                         <S>                         <C>
                                2006                 $   797
                                2007                     223
                                2008                     236
                                2009                     251
                                2010                     266
                                Future                 4,024
                                                     -------
                                                     $ 5,797
</TABLE>

     NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

<TABLE>
<CAPTION>
                                                      July 31,       August 1,
                                                        2005           2004
                                                      ---------     ----------
<S>                                                  <C>            <C>
         Accounts payable                            $ 13,756       $ 10,089
         Accrued payroll costs and bonuses              5,010          4,987
         Accrued commissions                            1,643            692
         Accrued royalties                                 37              8
         Accrued legal and accounting fees                533            240
         Accrued warranty costs                           799            580
         Accrued rent expense                             996            197
         Unearned income                                   56             81
         Other accrued expenses                         1,645            640
                                                     --------       --------
                                                     $ 24,475       $ 17,514
                                                     ========       ========
</TABLE>

NOTE J - EMPLOYEE BENEFIT PLANS

     In August 1985,  the Board of Directors  approved an Employee  Savings Plan
     ("Plan")  which  qualified  as a thrift  plan under  Section  401(k) of the
     Internal Revenue Code. This Plan, as amended and restated, allows employees
     to  contribute  between 2% and 30% of their  salaries to the Plan.  For the
     Plan year beginning August 1, 2005, the Plan was amended to be considered a
     "Safe  Harbor"  plan,  where  a  contribution  will  be  make  to  eligible
     participants in an amount equal to 100% of the amount of each participant's
     elective deferral that does not exceed 3% of compensation,  plus 50% of the
     amount of the elective  deferral  that exceeds 3% of  compensation  up to a
     maximum  contribution  of  5%  of  compensation.   Under  the  Safe  Harbor
     provision,  all contributions are 100% vested when made. Additional Company
     contributions  can be made  depending  on profits.  The  aggregate  benefit
     payable to an  employee is  dependent  upon his rate of  contribution,  the
     earnings of the fund,  and the length of time such employee  continues as a
     participant.   The  Company  has  recognized   expenses  of   approximately
     $1,038,000 (including approximately $268,000 related to the acquisitions of
     MSI, ICI, and RSS),  $618,000 and $513,000  under the Plan for the 52 weeks
     ended July 31, 2005 and August 1, 2004,  and 53 weeks ended August 3, 2003,
     respectively.


                                      F-22
<PAGE>

     The  Company's   Israeli   subsidiary   provides  for  employee   severance
     liabilities pursuant to the Israeli severance pay law and labor agreements.
     The Company's liability is fully provided for by monthly payments deposited
     with  insurers  and by a reserve  established  by the  Company to cover the
     portion  of this  liability  not  covered  by the  Company's  deposits.  In
     addition  to  recognizing  an  expense  for the  funding  to the  insurance
     programs for this severance obligation, the Company also records as expense
     the net increase in its unfunded  severance  liability.  The  liability for
     this  unfunded   severance   obligation  is  carried  in  Other   Long-Term
     Liabilities  on  the  accompanying  Consolidated  Balance  Sheets  and  was
     $1,042,000 and $932,000 at July 31, 2005 and August 1, 2004,  respectively.
     The total  expense  recognized  for employee  severance  programs in Israel
     (both the funded and unfunded  portion of the  program)  was  approximately
     $110,000,  $313,000  and  $353,000  for fiscal  years 2005,  2004 and 2003,
     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.

     Prior to the acquisition of MSI, MSI had leased one of its two buildings in
     Fort  Walton  Beach  Florida  from  MSI  Investments,   a  Florida  General
     Partnership.  MSI Investments is owned by four  individuals,  three of whom
     are  currently  employees  of MSI.  This lease has an  original  term of 15
     years,   ending   December  31,  2012.   The  lease  costs   currently  are
     approximately   $278,000  on  an  annual  basis,   including  the  tenant's
     obligation to pay for insurance and property taxes.  The base lease rate is
     adjusted every January for changes in the consumer price index,  using 1997
     as the base year.

NOTE L - COMPUTATION OF PER SHARE EARNINGS

     The following  table shows the components  used in the calculation of basic
     earnings per share and earnings per share  assuming  dilution (in thousands
     except per share data):
<TABLE>
<CAPTION>
                                                                                  53 weeks
                                                          52 weeks ended           ended
                                                    July 31,      August 1,       August 3,
                                                      2005           2004          2003
                                                -------------  -------------   -------------
<S>                                                <C>            <C>             <C>
     Numerator:
Net Income                                         $10,781        $13,673         $13,673
                                                =============  =============   =============
     Denominator:
Basic weighted-average shares                       14,310         14,105          14,317
Effect of dilutive securities:
     Employee stock options                            659            791             714
                                                -------------  -------------   -------------
Diluted weighted-average shares                     14,969         14,896          15,031
                                                =============  =============   =============

Stock options not included in computation              807              4             702
                                                =============  =============   =============
</TABLE>

     The number of stock options not included in the  computation of diluted EPS
     relates to stock  options  having  exercise  prices  ranging from $18.65 to
     $20.45 which are greater than the average market price of the common shares
     during the period,  and therefore,  are anti-dilutive.  The options,  which
     were  outstanding  as of July 31,  2005,  expire at various  dates  through
     February 4, 2015.


                                      F-23
<PAGE>

NOTE M - SHAREHOLDERS' EQUITY

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

     Summary of Stock Option Plans

     In March 2003,  the Board of Directors  approved the 2003 Stock Option Plan
     which  covers  1,000,000  shares of the  Company's  common  stock.  Options
     granted under the plan are non-qualified stock options.  Under the terms of
     the plan, the exercise price for options granted under the plan will be the
     fair market value at the date of grant. The nature and terms of the options
     to be  granted  are  determined  at the time of  grant by the  compensation
     committee or the board of directors.  The options  expire no later than ten
     years from the date of grant, subject to certain restrictions.  Options for
     993,500  shares were granted  under the plan during  fiscal year ended July
     31, 2005.  No options were granted under this plan during fiscal year ended
     August 1, 2004.

     In September  2000,  the Board of Directors  approved the 2000 Stock Option
     Plan which covers 1,500,000  shares of the Company's common stock.  Options
     granted under the plan are non-qualified stock options.  Under the terms of
     the plan, the exercise price for options granted under the plan will be the
     fair market value at the date of grant. The nature and terms of the options
     to be  granted  are  determined  at the time of  grant by the  compensation
     committee or the board of directors.  The options  expire no later than ten
     years from the date of grant, subject to certain restrictions.  Options for
     53,000 shares were granted under the plan during fiscal year ended July 31,
     2005.  No options  were  granted  under this plan during  fiscal year ended
     August 1, 2004.

     In April 1998,  the Board of Directors  approved the 1998 Stock Option Plan
     which  covers  2,250,000  shares of the  Company's  common  stock.  Options
     granted  under the plan may be  incentive  stock  options  qualified  under
     Section 422 of the  Internal  Revenue Code of 1986 or  non-qualified  stock
     options.  Under the  terms of the  plan,  the  exercise  price for  options
     granted  under the plan will be the fair market value at the date of grant.
     Prices for incentive stock options granted to employees who own 10% or more
     of the Company's  stock are at least 110% of market value at date of grant.
     The nature and terms of the  options to be granted  are  determined  at the
     time of grant by the compensation committee or the board of directors.  The
     options  expire no later than ten years from the date of grant,  subject to
     certain  restrictions.  Non-qualified  stock  options for 29,500 and 40,000
     shares were granted  under this plan during the fiscal years ended July 31,
     2005 and August 1, 2004, respectively.

     In May 1997,  the Board of  Directors  approved  the 1997 Stock Option Plan
     which  covers  2,500,000  shares of the  Company's  common  stock.  Options
     granted  uFnder 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  5,000 and 7,500
     shares were granted  under this plan during the fiscal years ended July 31,
     2005 August 1, 2004, respectively.

                                      F-24
<PAGE>

     A summary of stock option  activity  under all plans for the 52 weeks ended
     July 31, 2005 and August 1, 2004,  and the 53 weeks ended August 3, 2003 is
     as follows:

<TABLE>
<CAPTION>
                                                                              Average
                                          Number           Price Range        Exercise
                                        of shares           per share         Price
                                        ---------           ---------         --------

<S>                                       <C>         <C>          <C>        <C>
      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
      Cancelled                             (77,200)      8.38  -  17.67      $ 11.91
                                     ---------------    ---------------- ---------------
      Outstanding August 1, 2004          3,020,929   $   4.06  -  19.52      $ 12.33
      Granted                             1,081,000      17.98  -  19.94      $ 18.29
      Exercised                            (329,349)     16.54  -  20.60      $ 18.55
      Canceled                              (37,050)      8.38  -  19.83      $ 17.08
                                     ---------------    ---------------- ---------------
      Outstanding July 31, 2005           3,735,530   $   4.06  -  20.45      $ 14.41
                                     ===============
</TABLE>

     Options  Outstanding  and  Exercisable  by Price Range as of July 31, 2005,
     with  expiration  dates  ranging from August 18, 2005 to May 2, 2015 are as
     follows:

<TABLE>
<CAPTION>
                                               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>
       $ 4.06 -  9.30          803,080        3.88                 $  8.39          803,080            $  8.39
         9.54 - 13.10        1,140,250        5.17                 $ 11.95        1,140,250            $ 11.95
        14.25 - 17.42           50,200        4.70                 $ 16.12           50,200            $ 16.12
        17.98 - 17.98          873,000        7.06                 $ 17.98          700,000            $ 17.98
        18.39 - 20.45          869,000        5.68                 $ 19.53          869,000            $ 19.53
                        ---------------       ----           --------------   --------------   ----------------
       $ 4.06 - 20.45        3,735,530        5.45                 $ 14.41        3,562,530            $ 14.24
                        ===============                                       ==============
</TABLE>

     In April 2005, the Company's Board of Directors, upon recommendation of the
     Board's  Compensation  Committee,  approved the accelerated  vesting of all
     unvested and  "out-of-the-money"  stock  options  outstanding  as of May 2,
     2005. See Note A-14 of Notes to Consolidated Financial Statements.

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

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

     Revenues  for fiscal  years 2005,  2004 and 2003 were as  follows:  defense
     electronics, $138,071,000, $113,172,000 and $103,746,000, respectively; and
     commercial   technologies,   $13,344,000,   $8,982,000,   and   $6,477,000,


                                      F-25
<PAGE>

     respectively.  In fiscal  2004  defense  electronics  includes  revenues of
     $1,078,000,  and  commercial  technologies  includes  revenue of $3,045,000
     attributable  to the CTI  acquisition  as of March 29, 2004. In fiscal 2005
     defense  electronics  includes  revenues  of  $6,660,000,   and  commercial
     technologies  includes  revenue  of  $8,633,000  attributable  to  the  CTI
     acquisition. (See Note B.)

     Net sales to the U.S.  Government in fiscal 2005,  2004 and 2003  accounted
     for approximately 25%, 17% and 25% of net sales, respectively. The Northrop
     Grumman  accounted  for  approximately  11% of net sales in fiscal 2005. No
     other customer accounted for shipments in excess of 11% of consolidated net
     sales during the periods presented. Foreign sales amounted to approximately
     $39,952,000   (including   $7,351,000  in  sales  for  EWST),   $39,855,000
     (including  $9,262,000 in sales for EWST),  and $39,646,000 in fiscal 2005,
     2004 and 2003, respectively.

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

<TABLE>
<CAPTION>
                                      2005             2004              2003
                                      ----             ----              ----
<S>                               <C>              <C>              <C>
      United States               $ 131,326        $  100,746       $   88,294
      Israel                         12,738            12,305           10,717
      England                         7,351             9,103           11,212
                                  ---------        ----------       ----------
                                  $ 151,415        $  122,154       $  110,223
                                  =========        ==========       ==========
</TABLE>

     Net property,  plant and  equipment by  geographic  area was as follows (in
     thousands):
<TABLE>
<CAPTION>
                                      2005             2004
`                                     ----             ----
<S>                                <C>               <C>
      United States                $ 24,318          $ 21,544
      Israel                          4,376             3,499
      England                           767               925
                                   --------          --------
                                   $ 29,461          $ 25,968
                                   ========          ========
</TABLE>

NOTE O - DERIVATIVE FINANCIAL INSTRUMENTS

     In October 2001, the Company entered into an interest rate swap with a bank
     pursuant to which it exchanged  floating rate  interest in connection  with
     the Bonds  discussed  in Note H on a notional  amount of  $3,000,000  for a
     fixed  rate of 4.07% for a 10 year  period  ending  October  1,  2011.  The
     notional  amount  reduces each year in tandem with the annual  installments
     due on the Bonds.  The fixing of the interest rate for this period  offsets
     the Company's exposure to the uncertainty of floating interest rates on the
     Bonds,  and as such has been designated as a cash flow hedge.  The hedge is
     deemed to be highly effective and any ineffectiveness will be recognized in
     interest  expense in the reporting  period.  The fair value of the interest
     rate swap was a  liability  of  $80,000 as of July 31,  2005.  There was no
     material  hedge  ineffectiveness  related  to cash flow  hedges  during the
     period to be recognized in earnings. There was no gain or loss reclassified
     from accumulated other comprehensive income into earnings during the fiscal
     year ended July 31, 2005 as a result of the  discontinuance  of a cash flow
     hedge due to the  probability of the original  forecasted  transaction  not
     occurring.

                                      F-26
<PAGE>

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):
<TABLE>
<CAPTION>

                                                    July 31, 2005
                                       ---------------------------------------
                                          Carrying Amount          Fair Value
                                       ----------------------  ---------------
<S>                                         <C>                  <C>
Cash and cash equivalents                   $   20,331           $  20,331
Long-term debt                                   5,000               5,385
</TABLE>


                                      F-27
<PAGE>

NOTE Q - QUARTERLY RESULTS (UNAUDITED)

     The following is a summary of the unaudited quarterly results of operations
     for the 52 weeks  ended  July 31,  2005 and  August 1, 2004 (in  thousands,
     except for per share data).

<TABLE>
<CAPTION>

                                                   October 31,    January 30,       May 1,         July 31,
2005                                                  2004           2005            2005            2005
----                                              ------------   -------------  --------------  ---------------
<S>                                                <C>               <C>             <C>            <C>
Net sales                                          $   33,590        33,754          41,266         42,805
Gross profit                                           10,859         9,880          13,421         11,398

Net income                                         $    3,553         2,077           3,627          1,524
                                                   ===========   ===========    ===========    ===========
Earnings per common share - Basic                  $     0.25          0.14            0.25           0.11
                                                   ===========   ===========    ===========    ===========
Basic weighted average shares                          14,252        14,335          14,313         14,340
                                                   ===========   ===========    ===========    ===========
Earnings per common share - Diluted                $     0.24          0.14            0.24           0.10
                                                   ===========   ===========    ===========    ===========
Diluted weighted average shares                        14,936        15,044          14,936         14,952
                                                   ===========   ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>

                                                   November 2,    February 1,       May 2,        August 1,
2004                                                  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                 $      0.28          0.25            0.27           0.16
                                                   ===========   ===========    ===========    ===========
Basic weighted average shares                          14,013        14,073          14,129         14,205
                                                   ===========   ===========    ===========    ===========
Earnings per common share - Diluted               $      0.27          0.24            0.26           0.15
                                                   ===========   ===========    ===========    ===========
Diluted weighted average shares                        14,782        14,880          14,932         14,962
                                                   ===========   ===========    ===========    ===========
</TABLE>

     The  fourth  quarter  has  historically  been  our  strongest  quarter  for
     shipments.  The third and fourth  quarters of fiscal 2005 includes  revenue
     attributable  to the  acquisitions  of MSI of  $5,294,000  and  $2,824,000,
     respectively, and ICI of $3,401,000 and $8,389,000, respectively. 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 margin  percentage in the fourth  quarter of 2005 was  negatively
     impacted (as compared to 2004) due to revisions in total cost  estimates on
     certain  long term  contracts  at our EWST  subsidiary  which  resulted  in
     negative  gross  profit.  In addition,  the gross profit margin also varies
     from quarter to quarter due to changes in product mix.


     Included in the  results of the third  quarter of fiscal 2005 is an accrual
     of $260,000,  which was paid in the fourth quarter of 2005, and included in
     the fourth quarter of 2004 is a payment of $1,595,000,  in connection  with
     the Robinson Labs litigation. (See Item 3. "Legal Proceedings").


                                   **********