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

                                    FORM 10-K
(Mark One)
    [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended August 1, 1999

                                       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.)

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

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

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

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

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

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

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

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

Based on the closing sale price of $14.375 as of October 11, 1999 the  aggregate
market value of the voting stock held by  non-affiliates  of the  registrant was
$53,514,761.

The number of shares  outstanding of registrant's  common stock, $ .10 par value
as of October 11, 1999 was 4,571,661.

Documents incorporated by reference:

Registrant's  definitive  proxy statement to be filed pursuant to Regulation 14A
of the Securities Exchange Act of 1934.


<PAGE>





                             HERLEY INDUSTRIES, INC.

                                TABLE OF CONTENTS


                                                                          Page
PART I                                                                    ----
   Item 1     Business                                                      1
   Item 2     Properties                                                    9
   Item 3     Legal Proceedings                                             9
   Item 4     Submission of Matters to a Vote of Security Holders           9

PART II
   Item 5     Market for Registrant's Common Equity and Related
                 Stockholder Matters                                       10
   Item 6     Selected Financial Data                                      10
   Item 7     Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                       11
   Item 7A    Quantitative and Qualitative Disclosures About Market Risk   16
   Item 8     Financial Statements and Supplementary Data                  17
   Item 9     Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure                       17
PART III
   Item 10    Directors and Executive Officers of the Registrant           17
   Item 11    Executive Compensation                                       17
   Item 12    Security Ownership of Certain Beneficial
                 Owners and Management                                     17
   Item 13    Certain Relationships and Related Transactions               17

PART IV
   Item 14    Exhibits, Financial Statement Schedules and Reports
              on Form 8K                                                   18

SIGNATURES                                                                 19

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES                  F-1

<PAGE>



PART I

Forward-Looking Statements

All statements  other than statements of historical fact included in this Annual
Report, including without limitation statements under,  "Management's Discussion
and Analysis of Financial  Condition and Results of Operations"  and "Business,"
regarding  the Company's  financial  position,  business  strategy and plans and
objectives   of   management   of  the  Company  for  future   operations,   are
forward-looking  statements.  When used in this  Annual  Report,  words  such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they  relate  to the  Company  or its  management,  identify  forward-looking
statements.  Such  forward-looking  statements  are based on the  beliefs of the
Company's  management,  as well as assumptions made by and information currently
available to the Company's  management.  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.  Such  statements  reflect the
current  views of the Company with  respect to future  events and are subject to
these and other risks, uncertainties and assumptions relating to the operations,
results of  operations,  growth  strategy  and  liquidity  of the  Company.  All
subsequent  written  and oral  forward-looking  statements  attributable  to the
Company  or  persons  acting on its  behalf  are  expressly  qualified  in their
entirety by this paragraph.

Item 1.  Business

Herley Industries, Inc., a Delaware corporation,  ("Herley" or the "Company") is
engaged in the design,  development,  and manufacture of flight  instrumentation
components  and  systems,  and  microwave  products  sold  primarily to the U.S.
government, foreign governments, and aerospace companies.

Flight   instrumentation   products   include   command  and  control   systems,
transponders,   flight  termination   receivers,   telemetry   transmitters  and
receivers,  pulse code modulator ("PCM") encoders,  and scoring systems.  Flight
instrumentation  products are used to: (i) accurately  track the flight of space
launch  vehicles,   targets,  and  unmanned  airborne  vehicles  ("UAVs"),  (ii)
communicate between ground systems and the airborne vehicle, (iii) if necessary,
destroy the vehicle if it is veering from its planned trajectory, and (iv) train
troops and test weapons.  The Company's  command and control systems are used on
training and test ranges domestically and in foreign countries.  The Company has
an installed base of  approximately  100 command and control  systems around the
world,  which are either fixed  installations,  transportable  units or portable
units.

Herley is also engaged in the design, development,  manufacture and marketing of
microwave  devices  and  electronic   systems,   equipment  and  components.   A
substantial   portion  of  the   Company's   microwave   products  are  sold  to
manufacturers  and users of microwave  systems and equipment for applications in
the defense  electronics  industry,  including in connection  with the radar and
defense electronic  systems on tactical fighter aircraft;  as well as being used
in the Company's flight  instrumentation  systems and products. The Company also
sells these components and equipment for use in the industrial sector as well as
in  commercial  telecommunications  industries.  Typical  applications  for  the
Company's  microwave products include  electronic  warfare and  countermeasures,
airborne and shipboard  navigation and  communications,  radar systems,  missile
guidance systems, automatic test equipment, and satellite communications.

The Company has grown  internally and through six strategic  acquisitions.  As a
result, the Company has evolved from a components  manufacturer to a systems and
service provider and has leveraged its technical capabilities and expertise into
domestic commercial and foreign defense markets.

Since its inception in 1965, the Company has designed and manufactured microwave
devices for use in various tactical military programs. In June 1986, the Company
acquired a small engineering company, Mission Design,

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Inc.,  engaged in the design and development of  transponders.  This acquisition
enabled the Company to enter the flight instrumentation  business beginning with
the design and manufacture of range safety transponders.  In September 1992, the
Company acquired substantially all of the assets of Micro-Dynamics, Inc. ("MDI")
of Woburn,  Massachusetts,  a microwave subsystem designer and manufacturer.  In
June 1993,  the Company  acquired Vega Precision  Laboratories,  Inc. of Vienna,
Virginia, a manufacturer of flight instrumentation  products. In March 1994, the
Company  entered  into an  exclusive  license  agreement  for  the  manufacture,
marketing  and sale of the Multiple  Aircraft GPS  Integrated  Command & Control
(MAGIC2)  systems.  In July 1995,  the Company  acquired  certain assets and the
business  of  Stewart  Warner   Electronics  Corp.  of  Chicago,   Illinois,   a
manufacturer of high frequency  radio and IFF  interrogator  systems.  In August
1997, the Company  acquired  Metraplex  Corporation  ("Metraplex") of Frederick,
Maryland,  which  has  enabled  the  Company  to enter the  airborne  PCM and FM
telemetry  and data  acquisition  systems  market.  As of January  4, 1999,  the
Company  acquired  all of the issued  and  outstanding  common  stock of General
Microwave Corporation ("GMC") expanding its offering of microwave components and
electronic systems, and its customer base in the industrial sector as well as in
the commercial telecommunications industries.

Products - Space and Communications

                Command and Control Systems (C2)

For over thirty years, the Company has been manufacturing  products in the radar
enhancement  field. The Company's  command and control systems have been used to
fly remotely a large variety of unmanned  aerial  vehicles,  typically  aircraft
used as target  drones or Remotely  Piloted  Vehicles  ("RPVs") and some surface
targets.  Operations have been conducted by users on the open ocean, remote land
masses, and instrumented test and training ranges.

The Company's  command and control  systems are currently in service  throughout
the world. The Company's  pulse-positioned-coded ("PPC") concept enables the use
of standard radar technology to track and control unmanned  vehicles.  Using the
radar beacon mode, PPC pulse groups are transmitted and received for transfer of
command and telemetry data while employing the location precision and advantages
of radar techniques.

Command and control  systems  permit a ground  operator to fly a target or a UAV
through a pre-planned mission. That mission may be for reconnaissance, where the
vehicle is equipped with high definition TV sensors and the necessary data links
to send information back to its command and control systems ground station.  The
UAV may also be used as a decoy,  since  the  operator  can  direct  the  flight
operations that will make the small drone appear to be a larger combat aircraft.

With  the 1994  licensing  of the  MAGIC2  system,  the  Company  increased  the
selection of command and control  systems.  The 6104 TTCS  (Target  Tracking and
Control  System)  unit is a  line-of-sight  command and  control  system with an
installed base of equipment worldwide. The Company's engineers and marketers are
now able to offer the MAGIC2 system as a supplement to, or replacement for, this
installed base of equipment.  The MAGIC2 system affords over-the-horizon command
and control  using GPS  guidance  and control of multiple  targets from a single
ground station.  The ability to control multiple targets at increased  distances
represents a significant product improvement. The increasing demand for enhanced
performance  by the U.S.  Navy as well as  foreign  navies in  littoral  warfare
scenarios can be satisfied by the use of the MAGIC2 system.

The new Model 6104 TTCS 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 system is designed to
operate with a large variety of vehicles. A basic TTCS configuration is normally
supplied with a standard Company command panel and the software  peculiar to one
vehicle. Telemetry display software is embedded for the specified vehicle, and a
magnetic hard drive is supplied with a mission map prepared in accordance with a
customer  supplied  detailed  map of the area.  The TTCS is used in  support  of
missile, aircraft

                                        2

<PAGE>



and other weapons systems  development and testing.  Herley continues to provide
this system to customers to support their requirement.

The MAGIC2  system  provides  control of multiple  targets from a single  ground
control system, and utilizes GPS to provide accurate position  information.  The
MAGIC2 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.

Military  surveillance  operations  typically use UAVs, RPVs, or drones to avoid
the cost and risk of manned surveillance vehicles in the event of an accident or
if the vehicle is shot down. These  inexpensive  drones are controlled in flight
by a Company command and control system,  which may be mounted in a trailer that
may be moved  from  place to place by  helicopter  or truck.  The  Company  also
manufactures  portable  command and control  systems that are mounted on tripods
that can be easily transported by an operational team. The portable units permit
ready  deployment  in rugged  terrain and may also be used on ships  during open
ocean exercises.

In recent years, teaming arrangements between prime military contractors and the
Company have increased.  Large companies bidding on major programs seek to align
themselves with parts and systems manufacturers such as the Company for economic
reasons  as well as for the  technical  expertise  afforded  by such  alliances.
Teaming  arrangements with Tracor  Corporation and Northrop Grumman  Corporation
have  resulted in awards to the  Company  for  command  and  control  systems in
Australia and  Singapore,  and the Company is presently  negotiating  additional
teaming arrangements.

                Telemetry Systems

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. The Company has developed a telemetry system
capability that can be configured to meet individual  customers' needs.  Various
components  of  the  system  include  data  encoders,  transmitters  and  flight
termination  receivers.  Each  has a  distinctive  role  and  each is key to the
success of the mission.

In 1972,  Metraplex began developing data encoding and  acquisition,  and signal
conditioning  equipment.  Metraplex is now a leading  manufacturer of PCM and FM
telemetry  and data  acquisition  systems for severe  environment  applications,
whose   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.

The  Company's  1997  acquisition  of  Metraplex  allows the  Company to offer a
complete airborne data link system.  With the digital capability of Metraplex in
data  encoding  and  acquisition  elements  combined  with the  radio  frequency
capability  of the Company in providing its  telemetry  transmitters  and flight
termination  receivers,  the  Company  offers a full line of narrow or wide band
airborne  telemetry  systems to meet a wide variety of  industrial  needs,  both
domestically and internationally.

                Transponders

The Company manufactures a variety of expendable  transponders,  including range
safety,  identification friend or foe ("IFF"),  command and control, and 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
sends back a reply on a different frequency and signal

                                        3

<PAGE>



level.  This reply will be 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),  the Herley  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 FAA 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 ("FTR") is installed in a test missile, a UAV, a
target or a 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 ("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
harmlessly.

                HF Communications and IFF Interrogators

The  Company  also  designs  and  manufactures  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.  The Company
has been a significant supplier to the Republic of Korea ("ROK") for over twenty
years and has a large,  established installed base of equipment. The Company has
been, and continues to be, a supplier to the ROK KDX destroyer program.

Products - Microwave Components

Herley   manufactures   microwave   devices   at  its   facilities   in  Woburn,
Massachusetts;  in Farmingdale,  New York; and in Jerusalem, Israel for existing
long-term  military  programs,  for new production  units,  as well as for spare
parts and repair  services.  These  microwave  devices  are used in a variety of
radar, communications and missile applications, including airborne and shipboard
navigation and missile guidance systems.

The Company  designs and  manufactures  complex  microwave  integrated  circuits
("MICs"), which consist of sophisticated assemblies that perform many functions,
primarily  involving  switching of microwave  signals.  MICs manufactured by the
Company are employed in many defense electronics military systems as well as

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missile programs. The Company also manufactures magnetrons,  which are the power
source utilized in the production of the Company's transponders.

The Company's three facilities that manufacture  microwave  devices each have an
area of  specialization  that tends to limit the competitive  pricing  pressures
generally found in the commercial  business area.  Herley seeks the more limited
production,  higher  unit  cost  microwave  subsystem  applications,  where  the
Company's engineering experience is of primary advantage to its customers.

In Woburn, Herley specializes in high power microwave devices,  generally narrow
band,  that are used in radar system  transmitters  and in long range  missiles.
While there are many  suppliers  of low power  microwave  components,  there are
relatively few companies  with the  expertise,  or facilities to design and test
high power devices.  High power devices  frequently use small amounts of nuclear
material to enhance  breakdown  of high energy  pulses and Herley is one of very
few companies with an active nuclear  license that permits the handling of these
trace amounts of nuclear materials.

The  Company has more  recently  become the  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 its  engineering  efforts in
designing  solid state  receiver  protectors for the F-16, the United States Air
Force  awarded  the  Company  cash  awards  as  part of the  government's  value
engineering program.

In  Farmingdale,  Herley produces lower power,  broad band microwave  integrated
assemblies  for the electronic  defense  business  area.  These costly,  complex
assemblies  combine  microwave  functions  such as  amplification,  attenuation,
switching  of  multiple  signals,   and  phase  and  amplitude  control.   Their
applications include Rear Warning Receivers (RWR's),  Electronics Countermeasure
(ECM) systems, and highly sensitive receiver systems.

In Farmingdale,  the Company also produces  components that are sold through its
GMC  catalog,  which for almost  forty years has been the  microwave  engineer's
handbook for attenuating devices and IQ modulation and phase shifters.

The Company sells its catalog  products to  engineering  design  facilities on a
worldwide  basis, and is considered the industry leader in attenuators and phase
shifters.

The Company's Israel division supplies microwave sources, which generate signals
that  are  used  in  microwave  oscillators.  Herley's  Israel  operation  sells
approximately  equally to various foreign  governments  and to the U.S.  defense
industry.  The Company  specializes in digitally tuned  oscillators  (DTO's),  a
critical component of many ECM systems.

With its three facilities and their diverse specialties, Herley is able to offer
its customers a more broadly based  solution in the form of complex,  integrated
microwave assemblies.  In the modular approach now common in the design of radar
and ECM  systems,  the  entire  system may  comprise  only a handful of SR (Shop
Replaceable) or LR (Line  Replaceable)  units. The Company's goal is to become a
supplier  of  this  magnitude  to  its  existing  customer  base,   through  the
combination of its microwave capabilities.

New Product Development and Applications

The Company  believes that its growth depends,  in part, on its ability to renew
and expand its technology, products, and design and manufacturing processes with
an emphasis on cost effectiveness.  The Company's primary efforts are focused on
engineering design and product development activities rather than pure research.
A substantial portion of the Company's  development  activities have been funded
by the Company's customers.

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Certain of the  Company's  officers and  engineers are involved at various times
and in varying degrees in these  activities.  The Company's  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, net of amounts
paid by customers, were approximately $1,685,000,  $1,562,000, and $1,828,000 in
fiscal 1999, 1998, and 1997, respectively.

Government Contracts

A substantial part of the Company's sales are made to U.S. government  agencies,
prime  contractors  or   subcontractors  on  military  or  aerospace   programs.
Government  contracts  are  awarded  either on a  competitive  bid basis or on a
negotiated  sole  source  procurement  basis.  Contracts  awarded on a bid basis
involve several  competitors bidding on the same program with the contract being
awarded  based  upon  price and  ability  to  perform.  Negotiated  sole  source
procurement  is  utilized  if the  Company  is  deemed by the  customer  to have
developed  proprietary equipment not available from other parties or where there
is a very stringent delivery schedule.

Substantially  all  of  the  Company's  government  contracts  are  fixed  price
contracts,  some of which  require  delivery  over time periods in excess of one
year.  With this type of contract,  the Company agrees 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.  In  the  event  of  such  a  termination,  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 the Company under the contract to the date of termination plus
a fee based on the work completed.

Business Acquisition

As of January 4, 1999,  the  Company  completed  the  acquisition  of all of the
issued and outstanding  common stock of GMC, a New York  corporation,  including
outstanding stock options,  for $18.00 per share and 966,675 three-year warrants
to purchase one share of the Company's  common stock,  at an aggregate  purchase
price of approximately $24,556,000. The purchase price includes shares of common
stock of GMC purchased in the open market,  acquisition of the remaining  shares
of  common  stock  outstanding,  an  estimate  of the fair  market  value of the
warrants based on the trading price of similar warrants currently on the market,
and  transaction  expenses.  The warrants are exercisable at $15.60 per share of
common stock of the Company and expire in January 2002.

GMC designs,  manufactures and markets microwave components and subsystems,  and
related electronic test and measurement equipment.  The company is headquartered
in Farmingdale,  New York, and operates two other facilities,  one in Billerica,
Massachusetts,  and one in Israel.  The transaction has been accounted for under
the purchase method.

Marketing and Distribution
The Company's  marketing approach is to determine  customer  requirements in the
developmental  stages of a program.  Marketing and  engineering  personnel  work
directly   with   the   customer's   engineering   group  to   develop   product
specifications.  The Company  receives its awards based upon an  evaluation of a
number of factors,  including technical ranking,  price,  overall capability and
past performance.  Follow-up  contracts  (including options) on the same program
are  normally   negotiated  with  customers  rather  than  being  subject  to  a
competitive bidding process.


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Backlog

The Company's backlog of firm orders was approximately  $49,230,000 on August 1,
1999  ($30,533,000  in domestic  orders and  $18,697,000  in foreign  orders) as
compared to approximately $38,724,000 on August 2, 1998 ($25,727,000 in domestic
orders  and  $12,997,000  in  foreign  orders).   Management   anticipates  that
approximately  $42,585,000 of the backlog will be shipped during the fiscal year
ending July 30, 2000. There can be no assurance that the Company's  backlog will
result  in sales in any  particular  period,  or at all,  or that the  contracts
included in backlog that result in sales will be profitable.

Manufacturing, Assembly and Testing

Flight  instrumentation  devices  manufactured  by the Company for  military and
space launch  applications are subject to testing procedures based upon customer
requests. All of such testing is performed by the Company at its facilities.

All  electronic  parts are  procured in  controlled  lots that are  subjected to
physical  inspection and screening at Herley  facilities before use in products.
Physical  inspection  may  require the use of high power  microscopes  and laser
scanned optical  comparators,  which match the characteristics of the part under
inspection to previously stored images.

The testing of high reliability space equipment is performed by complex computer
controlled  consoles that  continuously  monitor,  analyze and measure operating
parameters. Flight instrumentation products are tested over their full operating
temperature  range,  after  which the  equipment  is  evaluated  under  combined
vibration  and  temperature  cycling.  For initial  design  qualification,  this
testing may extend for several months and include  evaluation of electromagnetic
interference behavior ("EMI"),  ability to survive pyrotechnic shock (simulating
explosive charge detonation for space vehicle stage separation) and the combined
effects of external vacuum with heating and cooling.

Electronic components and other raw materials used in the Company's products are
purchased  by the  Company  from a large  number  of  suppliers  and all of such
materials are readily  available from alternate  sources,  with the exception of
one component part which, if unavailable, can be manufactured by the Company.

The  Company  does not  maintain  any  significant  level of  finished  products
inventory.  Raw  materials are  generally  purchased for specific  contracts and
common  components  are purchased  for stock based on the  Company's  firm fixed
backlog.

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

Competition

The flight  instrumentation and microwave products that the Company manufactures
are subject to varied  competition  depending on the product and market  served.
Competition  is  generally  based  upon  technology,   design,  price  and  past
performance.  The Company's ability to compete for defense contracts depends, in
part, on its ability to offer better design and performance than its competitors
and its  readiness  in  facilities,  equipment  and  personnel  to  undertake to
complete the programs. In certain products or programs,  the Company believes it
is sole source,  which means that all work is directed to a single manufacturer.
In other cases, there may be other suppliers that have the capability to compete
for the programs involved,  but they can only enter or reenter the market if the
government  should  choose to reopen  the  particular  program  to  competition.
Competition  in follow-on  procurements  is generally  limited  after an initial
award  unless  the  original  supplier  has had  performance  problems.  Many of
Herley's competitors are larger and may have greater financial

                                        7

<PAGE>



resources  than  the  Company.   Competitors  include  Signal  Technology,   L-3
Communications Corporation, Microsystems, Inc., AMP, Inc. and Remec, Inc.

Employees

As of October 10, 1999, the Company employed 511 full-time  persons.  A total of
386 employees were engaged in manufacturing, 63 in engineering, 26 in marketing,
contract  administration  and field  services  and the  balance in  general  and
administrative  functions.  None  of the  Company's  employees  are  covered  by
collective   bargaining  agreements  and  the  Company  considers  its  employee
relations to be satisfactory.  The Company believes that its future success will
depend,  in part, on its continued  ability to recruit and retain highly skilled
technical,  managerial  and marketing  personnel.  To assist in  recruiting  and
retaining  such  personnel,  the Company has  established  competitive  benefits
programs, including a 401k employee savings plan and stock option plans.

Intellectual Property

The Company does not presently hold a significant  number of patents  applicable
to its  products.  In order to protect its  intellectual  property  rights,  the
Company  relies on a combination  of trade secret,  copyright and trademark laws
and  certain  employee  and  third-party  nondisclosure  agreements,  as well as
limiting access to and distribution of proprietary information.  There can be no
assurance  that the steps  taken by the  Company  to  protect  its  intellectual
property  rights will be adequate to prevent  misappropriation  of the Company's
technology  or  to  preclude  competitors  from  independently  developing  such
technology.   Trade  secret  and  copyright  laws  afford  the  Company  limited
protection.


                                        8

<PAGE>




Item 2.  Properties

The Company's properties are as follows:
<TABLE>
<CAPTION>

                                                                                           Owned
                                                                                             or
Location                                Purpose of Property                   Area         Leased
------------------------    ------------------------------------------    --------------   ------
<S>                         <C>                                           <C>              <C>
Lancaster, PA (1)           Production, engineering, administrative       71,200 sq. ft.   Owned
   and executive offices
Woburn, MA                  Production, engineering and administration    60,000 sq. ft.   Owned

Farmingdale, NY (2)         Production, engineering and administration    46,000 sq. ft.   Leased

Jerusalem, Israel           Production, engineering and administration    12,000 sq. ft.   Owned

Billerica, MA (3)           Production, and engineering                    8,000 sq. ft.   Leased

Chicago, IL                 Engineering and administration                 3,000 sq. ft.   Leased

Lancaster, PA               Land held for expansion                        20.4 Acres      Owned
--------------
<FN>
     (1) The Company's  executive offices occupy  approximately 4,000 sq. ft. of
space at this facility with  engineering and  administrative  offices  occupying
10,000 sq. ft. each.
     (2) On September 23, 1999 the Company closed on the sale of its prior owned
facility in  Amityville,  NY and relocated the plant to this leased  facility in
Farmingdale,  NY. The  Company  entered  into 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 $312,390,  subject to escalation of
approximately 4% annually throughout the 10 year term.
     (3) The Company intends to move all production and  engineering  activities
from Billerica,  MA to its facilities in Woburn,  MA during the first quarter of
fiscal 2000. The Company will look for a tenant to sublease the facility.
</FN>
</TABLE>

The  Company  believes  that its  facilities  are  adequate  for its current and
presently anticipated future needs.

Item 3.  Legal Proceedings

The Company is not involved in any material legal proceedings.

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

     Not Applicable.


                                        9

<PAGE>



PART II

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

     (a)   The Company's  Common Stock is traded in the NASDAQ  National  Market
           under the symbol HRLY.  The  following  table sets forth the high and
           low sales  price as reported  by the NASDAQ  National  Market for the
           Company's Common Stock for the periods  indicated and gives effect to
           the  four-for-three  stock split of the Common Stock on September 30,
           1997.
                                                       Common Stock
                                                      --------------
                                                       High     Low
                                                      -----    -----
     Fiscal Year 1998
         First Quarter............................... 15.00    10.13
         Second Quarter.............................. 14.75    10.50
         Third Quarter............................... 14.69    10.88
         Fourth Quarter.............................. 14.25     8.63
     Fiscal Year 1999
         First Quarter............................... 10.50     7.63
         Second Quarter.............................. 15.31     9.56
         Third Quarter............................... 15.13    11.13
         Fourth Quarter.............................. 16.19    11.50
     Fiscal Year 2000
         First Quarter (through October 11, 1999).... 15.00    12.94

     The closing price on October 11, 1999 was $14.375.

     (b)   As of October 11, 1999, there were approximately 1,000 record holders
           of the Company's Common Stock.
     (c)   There have been no cash dividends  declared or paid by the Company on
           its Common Stock during the past two fiscal years.

     Item 6.  Selected Financial Data
<TABLE>
<CAPTION>
                                                                       53 Weeks
                                                  52 Weeks ended         Ended         52 Weeks ended
                                             August 1,     August 2,   August 3,    July 28,    July 30,
                                             1999 (2)      1998 (3)      1997         1996      1995 (4)
                                             --------      --------    ---------    --------    --------
<S>                                       <C>            <C>          <C>          <C>         <C>
Net sales                                 $ 61,035,722   40,797,991   32,195,168   29,001,404  24,450,267
                                            ==========   ==========   ==========   ==========  ===========

Net income (loss)                         $  7,734,877    5,496,608    4,803,659    3,668,956  (4,890,166)
                                            ==========   ==========   ==========   ==========  ===========

Earnings (loss) per common share (1)
     Basic                                    $ 1.48         1.11         1.18          .97       (.98)
                                                ====         ====         ====          ===       =====
     Assuming Dilution                        $ 1.37         1.02         1.01          .86       (.98)
                                                ====         ====         ====          ===       =====

Total Assets                              $ 74,056,237   57,552,529   39,257,186   42,508,942   42,229,282
Total Current Liabilities                 $ 10,513,340    9,843,041    9,813,376    7,559,306    9,973,866
Long-Term Debt net of current portion     $ 15,437,390    4,110,885    2,890,000   11,021,000   10,525,000
------------------
<FN>

     (1) As adjusted to give effect to a 4-for-3 stock split effective September
     30, 1997.

     (2) On January 4, 1999, the Company acquired General Microwave Corporation.
     See Note B of the financial statements.

     (3) On August 4, 1997, the Company acquired Metraplex Corporation. See Note
     B of the financial  statements.  (4) Fiscal 1995 includes settlement costs,
     legal fees, and related expenses in the amount of approximately  $5,447,000
     in connection with the settlement of certain legal claims.

</FN>
</TABLE>

                                       10

<PAGE>





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

Overview

The  Company  is  engaged  in  the  design,   manufacture  and  sale  of  flight
instrumentation components and systems, and microwave products, primarily to the
U.S.   government,   foreign  governments,   and  aerospace  companies.   Flight
instrumentation  products  include  command and control  systems,  transponders,
flight  termination  receivers,   telemetry  transmitters  and  receivers,   PCM
encoders, and scoring systems. Flight instrumentation  products are used to: (i)
accurately  track the flight of space launch vehicles,  targets,  and UAVs, (ii)
communicate between ground systems and the airborne vehicle, (iii) if necessary,
destroy the vehicle if it is veering from its planned trajectory, and (iv) train
troops and test weapons.

The  Company  is  also  engaged  in the  design,  development,  manufacture  and
marketing of microwave devices and electronic systems, equipment and components.
A  substantial   portion  of  the  Company's  microwave  products  are  sold  to
manufacturers  and users of microwave  systems and equipment for applications in
the defense  electronics  industry,  including in connection  with the radar and
defense  electronic  systems on  tactical  fighter  aircraft,  as well as in the
Company's flight  instrumentation  systems and products.  The Company also sells
these  components and equipment for use in the  industrial  sector as well as in
commercial telecommunications industries. Typical applications for the Company's
microwave products include electronic warfare and countermeasures,  airborne and
shipboard  navigation  and  communications,   radar  systems,  missile  guidance
systems, automatic test equipment, and satellite communications.

Of the Company's total backlog of $49,230,000 at August 1, 1999,  $30,533,000 is
attributable  to domestic  orders and  $18,697,000  is  attributable  to foreign
orders.  Management  anticipates that  approximately  $42,585,000 of its backlog
will be  shipped  during the fiscal  year  ending  July 30,  2000.  The  Company
includes  in its backlog  only firm  orders for which it has  accepted a written
purchase  order.  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.  In the  event  of such a
termination, 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 the Company  under the  contract to the
date of termination plus a fee based upon work completed.

Substantially all of the Company's contracts are fixed price contracts,  wherein
sales and related costs are generally  recorded as deliveries are made.  Many of
these  contracts  include  options  exercisable  by the customer for  additional
products or systems at a fixed price.  Certain costs under long-term fixed price
contracts,  principally directly or indirectly with the U.S.  Government,  which
include   non-recurring   engineering,   are  deferred  until  these  costs  are
contractually  billable. The failure to anticipate technical problems,  estimate
costs accurately or control costs during a fixed price contract,  including with
respect  to any  option  for  additional  products  or  systems,  may reduce the
Company's  profitability  or cause a loss  under  the  contract.  Revenue  under
certain  long-term,  fixed  price  contracts,  principally  command  and control
shelters, is recognized using the percentage of completion method of accounting.
Revenue recognized on these contracts is based on estimated  completion to date,
which is the total contract amount  multiplied by percent of performance,  based
on total costs incurred in relation to total estimated cost at completion. As of
August 2, 1998,  costs  incurred and income  recognized in excess of billings on
uncompleted contracts was $1,665,008.  There were no long-term contracts of this
nature as of August 1, 1999.  Losses,  if any, on contracts  are  recorded  when
first reasonably determined.

The Company  believes that its growth depends on its ability to renew and expand
its  technology,  products,  and  design  and  manufacturing  processes  with an
emphasis on cost  effectiveness.  The Company's  primary  efforts are focused on
engineering  design  and  product  development  activities,   rather  than  pure
research. The cost of

                                       11

<PAGE>



these   development   activities,   including   employees'  time  and  prototype
development,   net   of   amounts   paid   by   customers,   was   approximately
$1,685,000,$1,562,000,  and  $1,828,000  in fiscal  years  1999,  1998 and 1997,
respectively.  Costs of the  Company's  internally  funded  product  development
efforts are  included in the  Company's  operating  expenses as cost of products
sold. Revenue from customer funded product  development is included in net sales
and the related product  development costs also are included in cost of products
sold.

The  Company's  effective tax rate for fiscal 1999 and 1998 was 34.3% and 34.8%,
respectively.  The lower effective rate of 9.1% in 1997 reflects the utilization
of prior year net operating loss  carryforwards  and the reversal of a valuation
allowance  established in 1995. The valuation allowance was established based on
management's  uncertainty  that past  performance  would be indicative of future
earnings. In August 1997, the Company established a foreign sales corporation as
part of an overall  domestic  tax  strategy to reduce its  effective  income tax
rate.

Results of Operations

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

<TABLE>
<CAPTION>
                                                                                  53 weeks
                                                           52 weeks ended          ended
                                                        August 1,    August 2,    August 3,
                                                          1999         1998         1997
                                                          ----         ----         ----
<S>                                                      <C>          <C>          <C>
Net sales                                                100.0 %      100.0 %      100.0 %

Cost of products sold                                     60.2 %       59.2 %       64.5 %
                                                          ------       ------       ------
Gross profit                                              39.8 %       40.8 %       35.5 %
Selling and administrative expenses                       19.5 %       20.4 %       19.5 %
                                                          ------       ------       ------

Operating income                                          20.3 %       20.3 %       16.0 %
                                                          ------       ------       ------

Other income, net:
        Investment income                                  0.5 %        1.4 %        2.1 %
        Interest expense                                  (1.2)%       (1.1)%       (1.7)%
                                                          (0.7)%        0.3 %        0.4 %
                                                          ------       ------       ------

Income before income taxes and extraordinary item         19.6 %       20.7 %       16.4 %
Provision for income taxes                                 6.7 %        7.2 %        1.5 %
                                                          ------       ------       ------
Income before extraordinary item                          12.9 %       13.5 %       14.9 %
Extraordinary item                                        (0.2)%       -            -
                                                          ------       ------       ------
Net income                                                12.7 %       13.5 %       14.9 %
                                                          ------       ------       ------

</TABLE>



                                       12

<PAGE>



    Fiscal 1999 Compared to Fiscal 1998

Net sales for the 52 weeks ended August 1, 1999 were  approximately  $61,036,000
compared to  $40,798,000  for fiscal  1998.  The sales  increase of  $20,238,000
(49.6%) is primarily  attributable  to the  acquisition  of GMC as of January 4,
1999 which  contributed  $14,374,000  in revenues in fiscal  1999,as  well as an
increase  in net sales of  approximately  $3,508,000  in flight  instrumentation
products, and approximately $2,356,000 in microwave components.

Gross  profit  of 39.8% for the 52 weeks  ended  August 1, 1999 is less than the
prior  year of 40.8%.  The  decline  in margin of 1% is due  primarily  to lower
margins on microwave components, as well as the lower margins generated from the
added GMC revenues.

Selling and  administrative  expenses for the 52 weeks ended August 1, 1999 were
$11,877,000  compared to $8,339,000  for fiscal 1998, an increase of $3,538,000.
The acquisition of GMC added $3,222,000 in selling and  administrative  expenses
in fiscal 1999.  As a percentage  of revenues,  expenses  declined from 20.4% in
1998 to 19.5% in 1999.

Investment  income  declined  $288,000  from the prior year due to a decrease in
investments,  the proceeds of which were used to partially fund the  acquisition
of GMC. In addition,  bank borrowings of approximately  $11,400,000 used to fund
the balance of the acquisition price resulted in additional  interest expense of
approximately $302,000.

In February 1999, the Company  refinanced the existing  mortgage on its property
located in  Lancaster,  Pa. The proceeds of the new  mortgage  loan were used to
prepay the existing  mortgage note having an  outstanding  principal  balance of
$2,890,000 plus a prepayment  premium of $115,600.  Unamortized debt expenses of
$79,226 and the $115,600 prepayment premium related to the early  extinguishment
of the existing mortgage debt were charged to expense as an extraordinary  loss,
net of an income tax benefit of $68,000.

    Fiscal 1998 Compared to Fiscal 1997

Net sales for the 52 weeks ended August 2, 1998 were  approximately  $40,798,000
compared to  $32,195,000  for fiscal  1997.  The sales  increase  of  $8,603,000
(26.7%) is primarily attributable to the acquisition of Metraplex Corporation as
of August 4, 1997 which  contributed  $4,015,000  in revenues in fiscal 1998, an
increase of approximately $3,542,000 in flight instrumentation  products, and an
increase of approximately $1,046,000 in microwave components.

Gross profit of 40.8% for the 52 weeks ended  August 2, 1998  exceeded the prior
year of 35.5% due to an increase of $2,545,000  in higher  margin  foreign sales
from  $9,398,000  in 1997 to  $11,943,000  in  1998,  and  improved  margins  in
microwave components, as well as an increase in absorption of fixed costs due to
the higher sales volume.

Selling and  administrative  expenses for the 52 weeks ended August 2, 1998 were
$8,339,000  compared to $6,293,000  for fiscal 1997, an increase of  $2,046,000.
The  addition  of  Metraplex   Corporation   added  $1,195,000  in  selling  and
administrative  expenses in fiscal 1998. In addition,  $304,000 of the change is
attributable to increased  representative fees on foreign sales, $415,000 is due
to  increased  personnel  and  related  expenses,  including  additional  travel
expenses,  and  $350,000  relates to increased  consulting  fees  primarily  for
software  changes  addressing  the year  2000  computer  software  issues.  Such
increases  were offset by cost  savings of $243,000  related to the  transfer of
substantially  all of the  production  from the  Stewart  Warner  facilities  in
Chicago to the Company's facilities in Lancaster,  Pennsylvania. As a percentage
of net sales,  selling and administrative  expenses increased from 19.5% in 1997
to 20.4% in 1998.

Other income, net, for the 52 weeks ended August 2, 1998 was consistent with the
prior year.

                                       13

<PAGE>



The effective tax rate in 1998 was 34.8% as compared to 9.1% in fiscal 1997. The
1997 tax provision  reflects the  utilization  of prior year net operating  loss
carryforwards.  In 1995 a  valuation  allowance  had  been  provided  to  reduce
deferred  tax  assets  to  their  net  realizable   value   primarily  based  on
management's  uncertainty  that past  performance  would be indicative of future
earnings.  In 1997 the valuation allowance was reversed through the deferred tax
provision.  A  determining  factor in  assessing  the change was the  cumulative
income in recent years.

Liquidity and Capital Resources

As of August 1, 1999 and  August 2,  1998,  working  capital  was  approximately
$25,703,000 and  $26,593,000,  respectively,  and the ratio of current assets to
current  liabilities  was 3.44 to 1 and 3.70 to 1,  respectively.  At  August 1,
1999, the Company had cash and cash equivalents of approximately $2,741,000.

As of January 4, 1999,  the  Company  completed  the  acquisition  of all of the
issued and outstanding  common stock of GMC, a New York  corporation,  including
outstanding stock options,  for $18.00 per share and 966,675 three-year warrants
to purchase one share of the Company's  common stock,  at an aggregate  purchase
price of approximately $24,556,000. The purchase price includes shares of common
stock of General  Microwave  purchased  in the open market,  acquisition  of the
remaining  shares of common  stock  outstanding,  an estimate of the fair market
value of the warrants based on the trading price of similar  warrants  currently
on the market, and transaction expenses.  The warrants are exercisable at $15.60
per share of common stock of the Company and expire in January 2002.

On  August  4,  1997,  the  Company   completed  the  acquisition  of  Metraplex
Corporation,  a Maryland  corporation for 313,139 (as adjusted) shares of common
stock of the Company,  with a fair market value of  $3,170,471,  in exchange for
all of the issued and outstanding common stock of Metraplex.

As is customary  in the defense  industry,  inventory  is partially  financed by
advance  payments.  The  unliquidated  balance  of these  advance  payments  was
approximately  $439,000 in 1999,  and  $1,825,000  in 1998.  The decrease in the
current  fiscal year is directly  attributable  to  shipments  under the related
contracts.

Net cash provided by operations was approximately  $12,723,000,  and $4,571,000,
in 1999, and 1998 respectively.

Net cash  used in  investing  activities  in 1999 of  approximately  $21,757,000
relates  primarily to the  acquisition of GMC, net of cash  acquired,  which was
funded by available cash balances and borrowings under the bank line of credit.

Net cash  flows from  financing  activities  in fiscal  1999  included:  (1) net
borrowings  under the bank line of credit of  $11,000,000  the proceeds of which
were used to  partially  fund the  acquisition  of GMC; (2)  refinancing  of the
existing mortgage on the property in Lancaster,  Pa., which reduced the interest
rate from 10.4% to 7.43% and extended the  repayment  schedule to 10 years;  and
(3) the  acquisition  of treasury  stock in the  aggregate  amount of $7,688,000
(which was funded through operations).

Net cash  provided  by  financing  activities  in fiscal  1998  consists  of net
proceeds of  $7,452,000  from the sale of 700,000  shares of common  stock,  and
1,265,000 Common Stock Purchase  Warrants to the public.  Net borrowings under a
bank line of credit  provided  $1,500,000 in financing.  The Company  received a
partial distribution of $592,824 from its M.D. Sass Municipal Finance Partners-I
limited  partnership  investment.  Cash was  used in  financing  activities  for
payments of long-term  debt of $2,257,000  and the purchase of treasury stock of
$1,084,000.  Cash provided by investing  activities  in 1997 resulted  primarily
from the liquidation of all the available-for-sale  securities,  and the sale of
the  Company's  interest  in  the  M.D.  Sass  Re/Enterprise-II,  L.P.,  limited
partnership.  The  Company  used  approximately  $9,715,000  of  these  funds in
financing activities

                                       14

<PAGE>



primarily for the net payment of outstanding  bank debt of  $7,250,000,  and the
purchase of treasury stock for $2,783,000.

The Company  maintains a revolving  credit facility with a bank for an aggregate
of $20,000,000,  which expires January 31, 2001. As of August 1, 1999 and August
2,  1998,  the  Company  had  borrowings  outstanding  under  this  facility  of
$12,500,000 and $1,500,000, respectively.

During the fiscal year ended August 1, 1999 the Company  acquired 561,050 shares
of its outstanding  common stock for $7,688,134  through open market  purchases,
pursuant to a stock  repurchase plan to acquire up to 1,250,000 shares of Common
Stock. In January 1998, the Company  purchased  89,888 shares of its outstanding
common stock for  $1,084,326  from certain  officers of the Company based on the
fair  market  value of the stock on the date  acquired.  During the fiscal  year
ended  August 3, 1997 the Company  acquired  244,519  shares of its  outstanding
common stock for $2,782,686  through open market purchases,  pursuant to a stock
purchase plan to acquire up to 300,000  pre-split shares of Common Stock,  which
was terminated in June 1997.

The Company also acquired 410,593,  42,016 and 463,639 shares of common stock in
fiscal 1999,  1998 and 1997,  respectively,  valued at $5,989,335,  $538,376 and
$6,429,124, respectively, in connection with certain "stock-for-stock" exercises
of stock options by which certain employees elected to surrender "mature" shares
owned in  settlement  of the option  price.  Such  exercises  are  treated as an
exercise  of a stock  option  and the  acquisition  of  treasury  shares  by the
Company. See "Management - Stock Plans."

The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities.

Subsequent Event

On  September  23,  1999 the  Company  closed on the sale of GMC's  property  in
Amityville,   New  York  and  relocated  the  plant  to  a  leased  facility  in
Farmingdale,  New  York.  The  Company  used the net  proceeds  from the sale of
approximately  $4,159,000,  which  approximates  the net  carrying  value of the
property, to partially fund the buy back of its common stock through open market
purchases in September 1999.

Year 2000 Readiness

The  "Year  2000"  problem  relates  to  computer  systems  that  have  time and
date-sensitive  programs that were designed to read years  beginning  with "19",
but may not properly  recognize the year 2000. If a computer  system or software
application  used by the Company or a third party dealing with the Company fails
because of the inability of the system or  application to properly read the year
2000 the results could have a material adverse effect on the Company.

A substantial  part of the Company's  revenues are derived from firm fixed price
contracts with U.S. government agencies,  prime contractors or subcontractors on
military or aerospace programs, and many foreign governments.  If the Company is
unable to perform under these contracts due to a Year 2000 problem, the customer
could terminate the contract for default. While lost revenues from such an event
are a concern for the Company,  the greater risks are the consequential  damages
for  which  the  Company  could be  liable  for  failure  to  perform  under the
contracts.  Such damages could have a material  adverse  impact on the Company's
results of operations and financial position.

The most likely  reason for a customer to terminate a contract for default would
be due to the Company's  inability to manufacture  and deliver product under the
contract.  Breakdowns  in any  number  of the  Company's  computer  systems  and
applications  could prevent the Company from being able to manufacture  and ship
its products.  Examples are failures in the Company's manufacturing  application
software,  computer chips embedded in engineering test equipment, lack of supply
of materials from its suppliers, or lack of power, heat,

                                       15

<PAGE>



or water from utilities servicing its facilities.  The Company's products do not
contain   computer   devices  that  require   remediation   to  meet  Year  2000
requirements.  A review of the Company's  status with respect to remediating its
computer systems for Year 2000 compliance is presented below.

For its information technology  requirements at its facilities in Lancaster,  PA
and Woburn,  MA, the Company currently  utilizes a Hewlett Packard  HP3000-based
computing  environment.  The HP3000  hardware  is in  compliance  with Year 2000
requirements.  The  Company's  financial,   manufacturing,  and  other  software
applications  related  to the  HP3000  were  updated  to  comply  with Year 2000
requirements  during  the  fiscal  year  ended  August  2,  1998  at a  cost  of
approximately $350,000. All modules have been fully tested and are compliant. In
addition,  the  Company  utilizes a wide area  network  ("WAN")  to connect  its
operating facilities to the HP3000. The WAN has been updated to comply with Year
2000 requirements. A local area network ("LAN") is used to supplement the HP3000
environment  and has also been  upgraded and is fully Year 2000  compliant.  The
financial  and  operational  systems  of GMC in  Farmingdale,  NY have also been
reviewed and tested and are in compliance with Year 2000 requirements.

The Company has also reviewed its utility systems (heat, light,  phones,  liquid
nitrogen, etc.) for the impact of Year 2000, as well as determining the state of
readiness  of its  material  suppliers  and test  equipment  manufacturers.  The
Company has received responses to its questionnaire from its major suppliers and
test equipment manufacturers regarding their compliance and attempts to identify
any problem areas with respect to their systems and equipment. No major problems
have been  identified.  However,  the Company  cannot control the conduct of its
suppliers.  Therefore,  there  can  be no  guarantee  that  Year  2000  problems
originating with a supplier will not occur.  The Company has developed  multiple
sources  for a  substantial  portion of its raw  material  requirements  and has
obtained  Year 2000  compliance  statements  from its  critical  suppliers,  and
therefore, does not believe there would be a significant disruption in supply.

The information set forth above identifies the key steps taken by the Company to
address the Year 2000  problem.  There can be no absolute  assurance  that third
parties will convert their systems in a timely manner. The Company believes that
its actions will minimize these risks and that any additional  cost of Year 2000
compliance for its  information  and production  systems will not be material to
its consolidated results of operations and financial position.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to market risk  associated with changes in interest rates
and stock  prices.  The Company has not entered  into any  derivative  financial
instruments  to manage the above risks and the Company has not entered  into any
market risk  sensitive  instruments  for trading  purposes.  The Company's  debt
consists of a working capital line of credit with a bank having an interest rate
that is set  biweekly at 1.65% over the FOMC Target Rate (an  aggregate of 6.65%
as of August 1, 1999),  and a mortgage on its facilities in Lancaster,  Pa. at a
fixed rate of 7.43% The credit line is reviewed  on an annual  basis.  Since the
acquisition of GMC, the Company is subject to movements in foreign currency rate
changes related to GMC's Israel operations.  The Company does not anticipate any
other material changes in its primary market risk exposures in fiscal 2000.

As of August 1, 1999,  the Company  holds an investment in the common stock of a
public company that is exposed to price risk with a cost basis and a fair market
value basis of $143,330.


                                       16

<PAGE>



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

         Fiscal year ending during:           Mortgage      Line of Credit
         --------------------------           --------      --------------
                    2000                    $   68,000        $
                    2001                        73,000         12,500,000
                    2002                        78,000
                    2003                        84,000
                    2004                        91,000
                    2005 and later           2,509,000
                                             ---------         ----------
                                            $2,903,000        $12,500,000
                                             =========         ==========
                    Fair value              $2,903,000        $12,500,000
                                             =========         ==========

Item 8.  Financial Statements and Supplementary Data

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

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

Not applicable

PART III

The  information  required  by Part  III is  incorporated  by  reference  to the
Company's  definitive  proxy  statement in connection with its Annual Meeting of
Stockholders  scheduled  to be  held in  January  2000,  to be  filed  with  the
Securities  and Exchange  Commission  within 120 days  following  the end of the
Company's fiscal year ended August 1, 1999.

                                       17

<PAGE>



PART IV

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

(a)  Exhibits

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

      3.2 By-Laws,  as amended (Exhibit 3(b) of Form S-1 Registration  Statement
          No. 2-87160).

     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.

     10.4 Amendments  dated  January  26,  1999 and July 30,  1999to  Employment
          Agreement between Herley Industries, Inc. and Lee N. Blatt dated as of
          October 1, 1998.

     10.5 Amendments  dated  January 26,  1999 and July 30,  1999 to  Employment
          Agreement between Herley  Industries,  Inc. and Myron Levy dated as of
          October 1, 1998.

     10.6 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).

     10.7 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).

     10.8 Lease  Agreement  dated  September 1, 1999 between  Registrant and RSK
          Realty LTD.

     10.9 Loan  Agreement  dated  February 16, 1999 between  Registrant  and The
          First National Bank of Maryland, a division of FMB Bank.

     23.1 Consent of Arthur Andersen LLP.

     23.2 Consent of Brightman, BarLeva, Friedman & Co.

     27.  Financial Data Schedule (for electronic submission only).

(b)  Financial Statements

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

(c)  Reports on Form 8-K

         None

                                       18

<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 the 26th day of October, 1999.

                                         HERLEY  INDUSTRIES,  INC.


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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been  signed  below on  October  26,  1999 by the  following  persons in the
capacities indicated:


By:    /S/  Lee N. Blatt               Chairman of the Board
      ------------------               (Principal Executive Officer)
      Lee N. Blatt

By:    /S/  Myron Levy                 President and Director
      ----------------
      Myron Levy

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

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

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

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

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

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


                                       19

<PAGE>


Item 8.  Financial Statements and Supplementary Data


                             HERLEY INDUSTRIES, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                           Page
                                                                           ----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................    F-2

FINANCIAL STATEMENTS:

    Consolidated Balance Sheets, August 1, 1999 and  August 2, 1998.....    F-3

    Consolidated Statements of Income for the 52 weeks ended
       August 1, 1999, and August 2, 1998, and the 53 weeks
       ended August 3, 1997.............................................    F-4

    Consolidated Statements of Shareholders' Equity for the 52 weeks
       ended August 1, 1999, and August 2, 1998, and the 53 weeks
       ended August 3, 1997.............................................    F-5

    Consolidated Statements of Cash Flows for the 52 Weeks Ended
       August 1, 1999, and August 2, 1998, and the 53 weeks
       ended August 3, 1997.............................................    F-6

    Notes to Consolidated Financial Statements..........................    F-7



Schedules have been omitted as not applicable.


















                                       F-1


<PAGE>





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors of
Herley Industries, Inc.:


We  have  audited  the  accompanying   consolidated  balance  sheets  of  Herley
Industries,  Inc. and  Subsidiaries as of August 1, 1999 and August 2, 1998, and
the related  consolidated  statements of income,  shareholders'  equity and cash
flows for the 52 weeks ended August 1, 1999 and August 2, 1998, and the 53 weeks
ended August 3, 1997. These financial  statements are the  responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial  statements  based  on our  audits.  We did not  audit  the  financial
statements of General  Microwave  (Israel)  Corporation  and  Subsidiary,  which
statements represent total assets and total revenues of 7% and 4%, respectively,
in 1999 of the related  consolidated  totals.  Those  statements were audited by
other auditors whose report was furnished to us, and our opinion,  insofar as it
relates to the  amounts  included  for those  entities,  is based  solely on the
report of the other auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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 and the report of other auditors provide a reasonable
basis for our opinion.

In our  opinion,  based on our  audits  and the  report of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Herley Industries,  Inc. and Subsidiaries
as of August 1, 1999 and August 2, 1998, and the  consolidated  results of their
operations and their cash flows for the 52 weeks ended August 1, 1999 and August
2, 1998,  and the 53 weeks ended  August 3, 1997 in  conformity  with  generally
accepted accounting principles.


                                                     ARTHUR ANDERSEN LLP


Lancaster, PA
 September 17, 1999


                                       F-2

<PAGE>


                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                         August 1,    August 2,
                                                           1999         1998
                                                        ----------   ----------
                         ASSETS
Current Assets:
        Cash and cash equivalents                     $  2,741,163 $ 10,689,193
        Accounts receivable                             10,678,638    6,193,947
        Costs incurred and income recognized in
           excess of billings on uncompleted
           contracts                                        -         1,665,008
        Other receivables                                  212,515      248,298
        Prepaid income taxes                                -           377,448
        Inventories                                     19,880,370   15,068,618
        Deferred taxes and other                         2,703,179    2,194,004
                                                        ----------   ----------
                Total Current Assets                    36,215,865   36,436,516

Property, Plant and Equipment, net                      21,888,553   12,549,343
Intangibles, net of amortization of $2,137,459
         in 1999 and $1,524,393 in 1998                 13,573,653    6,080,218
Available-for-sale Securities                              148,105      143,330
Other Investments                                          947,983      849,324
Other Assets                                             1,282,078    1,493,798
                                                        ==========   ==========
                                                      $ 74,056,237 $ 57,552,529
                                                        ==========   ==========
         LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
        Current portion of long-term debt             $    258,383 $    404,984
        Accounts payable and accrued expenses            8,035,211    6,468,183
        Income taxes payable                               276,160       -
        Reserve for contract losses                      1,505,048    1,145,128
        Advance payments on contracts                      438,538    1,824,746
                                                        ----------   ----------
                Total Current Liabilities               10,513,340    9,843,041
Long-term Debt                                          15,437,390    4,110,885
Deferred Income Taxes                                    5,143,837    3,158,353
Minority Interest                                           62,062       -
                                                        ----------   ----------
                                                        31,156,629   17,112,279
                                                        ----------   ----------
Commitments and Contingencies
Shareholders' Equity:
        Common stock, $.10 par value; authorized
          20,000,000 shares; issued and outstanding
          5,030,283 in 1999 and 5,266,159 in 1998          503,028      526,616
        Additional paid-in capital                      15,071,964   20,323,895
        Retained earnings                               27,324,616   19,589,739
                                                        ----------   ----------
                Total Shareholders' Equity              42,899,608   40,440,250

                                                        ==========   ==========
                                                      $ 74,056,237 $ 57,552,529
                                                        ==========   ==========

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

                                       F-3

<PAGE>

                                 HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                                       53 weeks
                                                             52 weeks ended              ended
                                                         August 1,      August 2,      August 3,
                                                           1999           1998           1997
                                                        -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Net sales                                             $ 61,035,722   $ 40,797,991   $ 32,195,168
                                                        -----------    -----------    -----------

Cost and expenses:
     Cost of products sold                              36,748,901     24,169,034     20,753,707
     Selling and administrative expenses                11,877,371      8,338,789      6,293,199
                                                        -----------    -----------    -----------
                                                        48,626,272     32,507,823     27,046,906
                                                        -----------    -----------    -----------
          Operating income                              12,409,450      8,290,168      5,148,262
                                                        -----------    -----------    -----------
Other income (expense), net:
     Investment income                                     298,099        586,549        667,075
     Interest expense                                     (747,846)      (446,109)      (531,678)
                                                        -----------    -----------    -----------
                                                          (449,747)       140,440        135,397
                                                        -----------    -----------    -----------
          Income before income taxes and
             extraordinary item                         11,959,703      8,430,608      5,283,659
Provision for income taxes                               4,098,000      2,934,000        480,000
                                                        -----------    -----------    -----------
          Income before extraordinary item               7,861,703      5,496,608      4,803,659
Extraordinary item - loss on extinguishment
     of debt (net of income tax benefit
     of $ 68,000)                                          126,826        -             -
                                                        -----------    -----------    -----------
          Net income                                  $  7,734,877   $  5,496,608   $  4,803,659
                                                        ===========    ===========    ===========
Earnings per common share - Basic
     Earnings before extraordinary item                  $ 1.50         $ 1.11         $ 1.18
     Extraordinary loss on extinguishment
          of debt                                           .02             -              -
                                                           ----           ----           ----
     Net earnings per common share - Basic               $ 1.48         $ 1.11         $ 1.18
                                                           ====           ====           ====

     Basic weighted average shares                       5,232,807      4,969,248      4,063,505
                                                         =========      =========      =========
Earnings per common share - Diluted
     Earnings before extraordinary item                    1.39         $ 1.02         $ 1.01
     Extraordinary loss on extinguishment
          of debt                                           .02             -              -
                                                           ----           ----           ----
     Net earnings per common share - Diluted             $ 1.37         $ 1.02         $ 1.01
                                                           ====           ====           ====

     Diluted weighted average shares                     5,660,096      5,407,283      4,733,682
                                                         =========      =========      =========

</TABLE>


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



                                       F-4


<PAGE>
<TABLE>
<CAPTION>

                    HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 52 weeks ended August 1, 1999 and August 2, 1998, and 53 weeks ended August 3, 1997


                                                                      Additional
                                                      Common Stock    Paid-in        Retained       Treasury
                                         Shares          Amount       Capital        Earnings        Stock          Total
                                        ---------     ------------   ----------      ---------     ----------     ----------
<S>                                   <C>            <C>            <C>            <C>            <C>            <C>
Balance at July 28, 1996                2,936,122    $   293,612     11,448,827      9,289,472         --        $21,031,911

Net income                              4,803,659      4,803,659
Exercise of stock options
  and warrants                            929,060         92,906      6,653,917     (6,429,124)       317,699
Four-for-three stock split              1,052,341        105,234       (105,234)
Purchase of 244,519 shares
  of treasury stock                    (2,782,686)    (2,782,686)
Retirement of treasury shares            (708,158)       (70,816)    (9,140,994)     9,211,810

                                      -----------    -----------    -----------    -----------    -----------    -----------
Balance at August 3, 1997               4,209,365    $   420,936      8,856,516     14,093,131         --        $23,370,583

Net income                              5,496,608      5,496,608
Net proceeds from public offering
  of 700,000 shares of common stock
  and 1,265,000 warrants                  700,000         70,000      7,381,579      7,451,579
Issuance of common stock in
  connection with business acquired       313,139         31,314      3,139,157      3,170,471
Exercise of stock options
  and warrants                            175,559         17,556        885,289       (538,376)       364,469
Tax benefit upon exercise of stock
  options                               1,670,866      1,670,866
Purchase of 89,888 shares
  of treasury stock                    (1,084,326)    (1,084,326)
Retirement of treasury shares            (131,904)       (13,190)    (1,609,512)     1,622,702

                                      -----------    -----------    -----------    -----------    -----------    -----------
Balance at August 2, 1998               5,266,159    $   526,616     20,323,895     19,589,739         --        $40,440,250

Net income                              7,734,877      7,734,877
Issuance of warrants in
  connection with business acquired     1,450,000      1,450,000
Exercise of stock options
  and warrants                            735,767         73,576      4,751,301     (5,989,335)    (1,164,458)
Tax benefit upon exercise of stock
  options                               2,127,073      2,127,073
Purchase of 561,050 shares
  of treasury stock                    (7,688,134)    (7,688,134)
Retirement of treasury shares            (971,643)       (97,164)   (13,580,305)    13,677,469

                                      -----------    -----------    -----------    -----------    -----------    -----------
Balance at August 1, 1999               5,030,283    $   503,028     15,071,964     27,324,616         --        $42,899,608
                                      ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>

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




                                       F-5


<PAGE>

                                   HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                     53 weeks
                                                                         52 weeks ended               ended
                                                                     August 1,        August 2,     August 3,
                                                                      1999             1998            1997
                                                                  --------------   -------------   -------------
<S>                                                             <C>              <C>             <C>
Cash flows from operating activities:
     Net Income                                                 $     7,734,877  $    5,496,608  $    4,803,659
                                                                  --------------   -------------   -------------
     Adjustments to reconcile net income
        to net cash provided by operations:
        Depreciation and amortization                                 3,289,303       1,869,459       1,538,283
        Gain on sale of available-for-sale
           securities and other investments                             -               -              (409,572)
        Extraordinary loss on extinguishment
           of debt, net of income taxes                                 126,826         -               -
        Equity in income of limited partnership                         (98,659)       (128,646)        -
        Decrease in deferred tax assets                                 483,117       1,207,090         -
        (Decrease) increase in deferred tax liabilities                (141,082)        173,245         773,336
        Changes in operating assets and liabilities:
           (Increase) in accounts receivable                           (361,117)       (767,997)     (1,927,298)
           Decrease (increase) in notes receivable-officers             -             2,100,913         (17,370)
           Decrease (increase) in costs incurred
               and income recognized in excess of
               billings on uncompleted contracts                      1,665,008      (1,665,008)        -
           Decrease (increase) in other receivables                      35,783         (23,132)        (27,156)
           Decrease (increase) in prepaid income taxes                  377,448        (377,448)        -
           Decrease (increase) in inventories                           729,327      (3,757,660)     (1,779,695)
           Decrease (increase) in prepaid expenses and other            198,729         (55,200)       (371,078)
           (Decrease) increase in accounts payable and
               accrued expenses                                      (2,119,359)        773,399        (137,128)
           Increase (decrease) in income taxes payable                2,019,126         468,847         (89,660)
           Increase (decrease) in reserve for contract losses           359,920         667,128         (11,110)
           (Decrease) increase in advance payments
               on contracts                                          (1,620,106)     (1,363,870)      1,610,968
           Other, net                                                    44,149         (46,509)       (309,500)
                                                                  --------------   -------------   -------------
               Total adjustments                                      4,988,413        (925,389)     (1,156,980)
                                                                  --------------   -------------   -------------
        Net cash provided by operations                              12,723,290       4,571,219       3,646,679
                                                                  --------------   -------------   -------------
Cash flows from investing activities:
     Acquisition of business, net of cash acquired                  (20,101,475)        -               -
     Purchase of available-for-sale securities
        and other investments                                           -               -              (159,364)
     Proceeds from sale of fixed assets                                   6,700           1,100          15,468
     Partial distribution from limited partnership                      -               592,824         -
     Proceeds from sale of available-for-sale securities
        and other investments                                           -               -             7,164,538
     Capital expenditures                                            (1,662,246)     (1,645,204)       (862,129)
                                                                  --------------   -------------   -------------
        Net cash (used in) provided by investing activities         (21,757,021)     (1,051,280)      6,158,513
                                                                  --------------   -------------   -------------
Cash flows from financing activities:
     Net proceeds from public offering of common stock                  -             7,451,579         -
     Borrowings under bank line of credit                            29,500,000       4,050,000       2,825,000
     Proceeds from refinance of mortgage note                         2,915,000         -               -
     Proceeds from exercise of stock options and warrants, net       (1,164,248)        364,469         317,699
     Payments under bank line of credit                             (18,500,000)     (2,550,000)     (9,775,000)
     Payments of long-term debt                                        (971,107)     (2,257,118)       (300,000)
     Extinguishment of debt                                          (3,005,600)        -               -
     Purchase of treasury stock                                      (7,688,344)     (1,084,326)     (2,782,686)
                                                                  --------------   -------------   -------------
        Net cash provided by (used in) financing activities           1,085,701       5,974,604      (9,714,987)
                                                                  --------------   -------------   -------------
        Net (decrease) increase in cash and cash equivalents         (7,948,030)      9,494,543          90,205
Cash and cash equivalents at beginning of period                     10,689,193       1,194,650       1,104,445
                                                                  --------------   -------------   -------------
Cash and cash equivalents at end of period                      $     2,741,163  $   10,689,193  $    1,194,650
                                                                  ==============   =============   =============
Supplemental cash flow information:
     Cashless exercise of stock options                         $     5,989,335  $      538,376  $    6,429,124
                                                                  ==============   =============   =============
     Stock issued for business acquired                         $       -             3,170,471         -
                                                                  ==============   =============   =============
     Warrants issued for business acquired                      $     1,450,000         -               -
                                                                  ==============   =============   =============
     Tax benefit related to stock options                       $     2,127,073       1,670,866         -
                                                                  ==============   =============   =============
</TABLE>


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

                                       F-6


<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.     Nature of Operations

       The  Company,  a  Delaware   corporation,   is  engaged  in  the  design,
       development,  manufacture and sale of flight  instrumentation  components
       and systems,  and microwave products,  primarily to aerospace  companies,
       the U.S. government, and several foreign governments.  The Company's main
       products  include a variety  of  transponders  which are used to  enhance
       radar signals to accurately track the flight of space launch vehicles and
       aircraft, as well as microwave devices and command and control systems.

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  years  1999  and 1998
       consisted of 52 weeks, and fiscal year 1997 consisted of 53 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 generally accepted accounting principles 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
       aerospace  and  defense  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.

                                       F-7

<PAGE>



       Inventory costs relating to long-term  contracts and programs are reduced
       by any  amounts  in  excess  of  estimated  realizable  value.  The costs
       attributed to units delivered under long-term  contracts and programs are
       based on the average costs of all units produced.

7.     Property, Plant and Equipment

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

8.     Intangibles

       Intangibles  are comprised of customer  lists,  installed  products base,
       drawings,   patents,  licenses,  certain  government  qualifications  and
       technology and goodwill in connection  with the  acquisitions  of General
       Microwave  Corporation in 1999,  Metraplex  Corporation in 1997, and Vega
       Precision  Laboratories,  Inc. in 1993.  Intangibles  are being amortized
       over twenty years. Amortization charges totaled $754,358,  ($70,795), and
       ($182,667) in fiscal 1999,  1998,  and 1997,  respectively.  The negative
       amortization in 1998 and 1997 is attributable to the negative goodwill in
       connection with the acquisition of Stewart Warner Electronics in 1995.

       The carrying  amount of  intangibles  is evaluated on a recurring  basis.
       Current  and  future   profitability   as  well  as  current  and  future
       undiscounted cash flows of the acquired businesses are primary indicators
       of recoverability. For the three fiscal years ended August 1, 1999, there
       were no adjustments  to the carrying  amount of the cost in excess of net
       assets acquired resulting from these evaluations.

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 value.  Realized gains
       and losses and  declines in value judged to be  other-than-temporary  are
       included in other income , net. The cost of  securities  sold is based on
       the specific  identification method. Interest and dividends on securities
       are included in other income, net.

10.    Other Investments

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

11.    Revenue and Cost Recognition

       Under  fixed-price  contracts,  revenue  and related  costs are  recorded
       primarily  as  deliveries  are  made.   Certain  costs  under  long-term,
       fixed-price contracts (principally either directly or indirectly with the
       U.S. Government),  which include non-recurring billable engineering,  are
       deferred until these costs are

                                       F-8

<PAGE>



       contractually  billable.  Revenue  under certain  long-term,  fixed price
       contracts,  principally command and control shelters, is recognized using
       the percentage of completion method of accounting.  Revenue recognized on
       these  contracts  is based on  estimated  completion  to date (the  total
       contract  amount  multiplied  by percent of  performance,  based on total
       costs  incurred  in  relation  to total  estimated  cost at  completion).
       Prospective losses on long-term  contracts are based upon the anticipated
       excess of inventoriable manufacturing costs over the selling price of the
       remaining  units to be delivered and are recorded  when first  reasonably
       determinable.  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.    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.

13.    Stock-Based Compensation

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

14.    Earnings Per Common Share

       In 1997, the Financial  Accounting  Standards  Board issued  Statement of
       Financial  Accounting  Standards  No. 128,  "Earnings  Per Share"  ("SFAS
       128"),  which  replaced  APB No. 15 to  conform  earnings  per share with
       international  standards  as well as to simplify  the  complexity  of the
       computation  under APB No. 15. The  previous  primary  earnings per share
       ("EPS")  calculation is replaced with a basic EPS calculation.  The basic
       EPS differs from the primary EPS  calculation  in that the basic EPS does
       not include any potentially  dilutive  securities.  Fully dilutive EPS is
       replaced with diluted EPS and should be disclosed  regardless of dilutive
       impact to basic EPS. In accordance  with SFAS 128, all earnings per share
       amounts for all periods  presented  have been restated  (reflective  of a
       4-for-3 stock split on September 30, 1997).

15.    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
       $1,685,000,  $1,562,000,  and $1,828,000 in fiscal 1999,  1998, and 1997,
       respectively.


                                       F-9

<PAGE>



16.    New Accounting Standards

       In February  1998,  the FASB issued  Statement  of  Financial  Accounting
       Standards  No. 132,  "Employers'  Disclosures  about  Pensions  and Other
       Postretirement  Benefits,"  ("SFAS 132"),  which was effective for fiscal
       years beginning after December 15, 1997. This statement revises financial
       statement  disclosure  requirements for pension and other  postretirement
       benefit  plans,  but does not change the  measurement  or  recognition of
       those plans. Adoption of SFAS 132 did not impact the financial results of
       the Company and the required  disclosures  have been provided in Note K -
       Employee Benefit Plans.

       The  Company  has  adopted  SFAS 131,  "Disclosure  About  Segments of an
       Enterprise and Related  Information"  ("SFAS 131").  SFAS 131 establishes
       standards for reporting  information  about operating  segments in annual
       financial  statements  and requires that segments be determined  based on
       how management measures  performance and makes decisions about allocating
       resources.  The required new disclosures  have been provided in Note O to
       the Consolidated Financial Statements.

NOTE B - ACQUISITIONS

       As of January 4, 1999,  the Company  completed the  acquisition of all of
       the issued and outstanding common stock of General Microwave  Corporation
       ("GMC"), a New York corporation, including outstanding stock options, for
       $18.00 per share and 966,675 three-year warrants to purchase one share of
       the  Company's   common  stock,   at  an  aggregate   purchase  price  of
       approximately  $24,556,000.  This transaction was accounted for under the
       purchase  method.  The purchase price includes  shares of common stock of
       GMC purchased in the open market,  acquisition of the remaining shares of
       common  stock  outstanding,  an estimate of the fair market  value of the
       warrants based on the trading price of similar warrants  currently on the
       market, and transaction expenses.  The warrants are exercisable at $15.60
       per share of common stock of the Company and expire in January 2002.

       The aggregate  purchase  price is  calculated  as follows (in  thousands,
       except share and per share data):

          365,600 shares previously acquired in the open market    $   6,273
          848,675 shares at $18.00 per share                          15,276
          118,000 stock options at $18.00 per share,
             net of exercise price                                     1,279
          966,675 warrants at $1.50                                    1,450
          Transaction expenses                                           278
                                                                      ------
          Purchase price                                            $ 24,556
                                                                      ======

       The cash portions of the acquisition were financed through available cash
       equivalents and borrowings under the Company's line of credit.

       GMC  designs,   manufactures   and  markets   microwave   components  and
       subsystems,  and related electronic test and measurement  equipment.  The
       company is headquartered in Amityville,  New York, and operates two other
       facilities,  one in  Billerica,  Massachusetts,  and one in  Israel.  The
       transaction   has  been   accounted   for  under  the  purchase   method.
       Accordingly,  the  consolidated  balance  sheet  includes  the assets and
       liabilities of GMC at August 1, 1999, and the consolidated  statements of
       income include the results of General  Microwave  operations from January
       4, 1999. The  acquisition  resulted in excess cost over fair value of net
       assets acquired of $7,538,501 which is being amortized over 20 years.

       As part of the Company's  GMC  acquisition  plans,  the Company is moving
       GMC's Billerica,  MA operations into the Company's  existing  Woburn,  MA
       location. The Company had also decided to terminate GMC's defined benefit
       pension  plan.  Both of these actions are to be completed in fiscal 2000.
       In  connection  with  these  actions,  the  Company  accrued,  as part of
       purchase accounting, $180,000 of

                                      F-10

<PAGE>



       lease  termination costs related to the Billerica  facility,  $250,000 of
       severance  costs,  and $463,  834 related to the  termination  of the GMC
       pension  plan.  Through  August 1, 1999,  no amounts  were paid under the
       lease termination or pension  termination and  approximately  $150,000 of
       severance was paid.

       On the basis of a pro forma consolidation of the results of operations as
       if the  acquisition  had taken  place at the  beginning  of fiscal  1998,
       unaudited  consolidated net sales, net income,  basic earnings per share,
       and diluted  earnings per share for the  fifty-two  weeks ended August 2,
       1998 would have been approximately  $63,477,000,  $6,606,000,  $1.33, and
       $1.22,  and for the fifty-two  weeks ended August 1, 1999 would have been
       approximately  $70,349,000,  $7,481,000,  $1.43, and $1.32, respectively.
       The  pro  forma   information   includes   adjustments   for   additional
       depreciation  based on the  estimated  fair market value of the property,
       plant,  and  equipment  acquired,  and the  amortization  of  intangibles
       arising from the transaction.  The pro forma financial information is not
       necessarily  indicative  of the results of  operations as they would have
       been had the transaction been effected at the beginning of fiscal 1998.

       On August 4, 1997,  the Company  completed the  acquisition  of Metraplex
       Corporation, a Delaware corporation,  for 313,139 (as adjusted) shares of
       common stock of the Company,  with a fair market value of $3,170,471,  in
       exchange for all of the issued and outstanding common stock of Metraplex.
       Metraplex  is  a  leading  manufacturer  of  pulse  code  modulation  and
       frequency  modulation,  telemetry and data acquisition systems for severe
       environment  applications.  The transaction has been accounted for by the
       purchase method. Accordingly, the consolidated balance sheet includes the
       assets  and   liabilities  of  Metraplex  at  August  2,  1998,  and  the
       consolidated  statements  of income  include  the  results  of  Metraplex
       operations  from August 4, 1997.  The  acquisition  resulted in excess of
       cost over fair value of net assets acquired of $2,162,725  which is being
       amortized over twenty years.

       On the basis of a pro forma consolidation of the results of operations as
       if the Metraplex  acquisition  had taken place at the beginning of fiscal
       1997,  unaudited  consolidated net sales, net income,  basic earnings per
       share,  and diluted  earnings per share for the year ended August 3, 1997
       would have been approximately $36,589,333,  $4,686,236,  $1.07, and $.93,
       respectively.   The  pro  forma  information   includes  adjustments  for
       additional  depreciation  based on the fair market  value of the property
       and equipment acquired,  and the amortization of intangibles arising from
       the transaction.  The pro forma financial  information is not necessarily
       indicative  of the results of  operations as they would have been had the
       transaction been effected at the beginning of fiscal 1997.

NOTE C - NOTES  RECEIVABLE-OFFICERS

       In fiscal 1996 the Company  loaned an aggregate of  $2,000,000 to certain
       officers, as authorized by the Board of Directors,  pursuant to the terms
       of  nonnegotiable  promissory  notes.  The  loans  were paid in full with
       accrued interest as of December 19, 1997.

NOTE D - INVENTORIES

       The major components of inventories are as follows:

                                                   August 1       August 2,
                                                     1999           1998
                                                     ----           ----
         Purchased parts and raw materials       $ 9,862,727    $ 7,377,882
         Work in process                           8,780,767      7,303,533
         Finished products                         1,236,876        387,203
                                                  ----------     ----------
                                                 $19,880,370    $15,068,618
                                                  ==========     ==========


                                      F-11

<PAGE>



NOTE E - OTHER INVESTMENTS

       In April 1996,  the Company  acquired a limited  partnership  interest in
       M.D. Sass  Re/Enterprise-II,  L.P., a Delaware  limited  partnership  for
       $2,000,000.  The  objective  of the  partnership  is to achieve  superior
       long-term capital appreciation  through investments  consisting primarily
       of securities of companies that are experiencing significant financial or
       business difficulties. In April 1997, the Company sold its investment and
       terminated its limited  partnership  interest for $2,080,630  realizing a
       gain of $80,630.

       In July 1994, the Company invested  $1,000,000 for a limited  partnership
       interest in M.D. Sass Municipal  Finance  Partners-I,  a Delaware limited
       partnership.  The objectives of the partnership are the  preservation and
       protection of its capital and the earning of income  through the purchase
       of  certificates  or other  documentation  that evidence liens for unpaid
       local taxes on parcels of real property.  At August 1, 1999 and August 2,
       1998 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.
       In July 1998,  the Company  received a partial  distribution  of $592,824
       from  the  Partnership.  As of  August  1,  1999  the  Company's  limited
       partnership interest had an estimated fair value of $947,983.

NOTE F - PROPERTY, PLANT AND EQUIPMENT

       Property, plant and equipment are comprised of the following:

                                        August 1,      August 2,    Estimated
                                         1999           1998        Useful Life
                                         ----           ----        -----------
       Land                           $  1,160,895  $    880,270
       Building and building
            improvements                11,731,575     5,486,900    10-40 years
       Machinery and equipment          24,994,829    20,104,794     5- 8 years
       Furniture and fixtures              788,919       624,576     5-10 years
       Automobiles                         131,000       -              3 years
       Tools                                34,495        34,495        5 years
       Leasehold improvements              454,706       292,894     5-10 years
                                        ----------    ----------
                                        39,296,419    27,423,929
       Less accumulated depreciation    17,407,866    14,874,586
                                        ----------    ----------
                                      $ 21,888,553  $ 12,549,343
                                        ==========    ==========

       Depreciation  charges totaled $2,534,945,  $1,940,254,  and $1,720,950 in
       fiscal 1999, 1998, and 1997, respectively.

NOTE G - COMMITMENTS AND CONTINGENCIES

       Leases

       The Company  leases  office,  production  and warehouse  space as well as
       computer equipment and automobiles under noncancellable operating leases.

       Rent expense for the 52 weeks ended  August 1, 1999,  and August 2, 1998,
       and the 53  weeks  ended  August  3,  1997  was  approximately  $519,000,
       $546,000, and $230,000, respectively.


                                      F-12

<PAGE>



       Minimum  annual  rentals  under  noncancellable  operating  leases are as
       follows:

                                                      Amount
                                                      ------
                 Year ending fiscal 2000            $  760,000
                                    2001               638,000
                                    2002               612,000
                                    2003               567,000
                                    2004               429,000
                                  Future             2,356,000

       Employment Agreements

       The  Company  has  employment  agreements  with  various  executives  and
       employees  of the Company,  which,  as amended,  expire at various  dates
       through December 31, 2002,  subject to extension each January 1 for three
       years, commencing January 1, 2000. These agreements provide for aggregate
       annual salaries for fiscal 2000 of $1,022,000. Certain agreements provide
       for an  annual  cost of living  adjustment  based on the  consumer  price
       index, and also provide for incentive compensation based on pretax income
       of the Company in excess of  $2,000,000.  Incentive  compensation  in the
       amount of $968,627,  $727,659,  and $665,352 was expensed in fiscal years
       1999, 1998, and 1997, respectively.

       Certain  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 of approximately
       three times their annual salary. As of August 1, 1999, the amount payable
       in the event of such termination would be approximately $3,066,000.

       One of the  employment  contracts  provides  for a  consulting  agreement
       commencing  at the end of the  employment  period which became  effective
       October 1, 1998, and terminating  December 31, 2010 at the annual rate of
       $100,000.  Another one of the employment contracts, as amended October 1,
       1998,  provides  for a  consulting  period  commencing  at the end of the
       period of active  employment and continuing for a period of five years at
       the annual rate of $100,000.  Two officers of the Company have  severance
       agreements  providing for a lump-sum  payment of $345,000  through fiscal
       2000,  adjusted to $240,000  through  fiscal 2002, and $105,000 in fiscal
       2003.

       Litigation

       The Company is involved in various  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,  2001.  At August 1, 1999
       stand-by letters of credit  aggregating  $996,965 were outstanding  under
       this facility.


                                      F-13

<PAGE>



NOTE H - INCOME TAXES

       Income tax provision consisted of the following:

                                      52 Weeks ended
                                      --------------             53 Weeks ended
                                August 1,        August 2,          August 3,
                                  1999             1998               1997
                                  ----             ----               ----
       Current
                  Federal     $ 3,328,378(1)   $ 1,468,665         $ (52,000)
                  State           399,070           85,000            89,000
                  Foreign          28,517            -                 -
                                ---------        ---------           -------
                                3,755,965        1,553,665            37,000
                                ---------        ---------           -------
       Deferred
                  Federal         540,288        1,307,970          (142,000)
                  State          (198,253)          72,365           585,000
                                ---------        ---------           -------
                                  342,035        1,380,335           443,000
                                ---------        ---------           -------

                              $ 4,098,000      $ 2,934,000         $ 480,000
                                =========        =========           =======

       (1)        Excludes benefit of $68,000 from  extraordinary  loss incurred
                  as a result  of early  extinguishment  of long  term debt (See
                  Note I).

         The Company paid income taxes of approximately $1,324,000,  $1,486,000,
         and  $178,000  in  fiscal  1999,  1998,  and  1997,  respectively.  The
         following is a  reconciliation  of the U. S. statutory  income tax rate
         and the effective tax rate on pretax income:

                                            52 Weeks ended
                                            --------------    53 Weeks ended
                                          August 1, August 2,    August 3,
                                            1999      1998         1997
                                            ----      ----         ----
         U.S. Federal statutory rate        34.0 %    34.0 %       34.0 %
         State taxes, net of
            federal tax benefit              1.4       1.5         12.2
         Benefit of foreign sales
            corporation                     (3.2)     (1.8)          -
         Benefit of net operating loss
            carryforward                      -         -         (30.8)
         Non-deductible expenses             1.4        .8           .3
         Decrease in valuation allowance      -         -          (9.4)
         Benefit of foreign and
            foreign-source income           (1.2)       -            -
         Other, net                          1.9        .3          2.8
                                            ----      ----         ----
            Effective tax rate              34.3 %    34.8 %        9.1 %
                                            ====      ====         ====

       The  1997 tax  provision  reflects  the  utilization  of  prior  year net
       operating  loss  carryforwards.  In 1995 a valuation  allowance  had been
       provided  to reduce  deferred  tax assets to their net  realizable  value
       primarily based on management's  uncertainty that past performance  would
       be indicative  of future  earnings.  In 1997 the valuation  allowance was
       reversed  through the deferred tax  provision.  A  determining  factor in
       assessing the change was the cumulative income in recent years.

       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
       unremitted   earnings  of   subsidiaries   outside   the  United   States
       permanently.


                                      F-14

<PAGE>



       Deferred income taxes reflect the impact of temporary differences between
       the amount of assets and liabilities  recognized for financial  reporting
       purposes and such amounts recognized for tax purposes.

       Components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>

                                             August 1, 1999             August 2, 1998
                                             --------------             --------------
                                        Deferred    Deferred       Deferred      Deferred
                                           Tax         Tax           Tax           Tax
                                         Assets    Liabilities      Assets      Liabilities
                                         ------    -----------      ------      -----------
<S>                                  <C>           <C>           <C>            <C>
         Intangibles                 $      -      $ 1,789,834   $     -        $ 1,775,858
         Alternative minimum tax         642,485         -           952,426          -
         Accrued vacation pay            242,305         -           133,962          -
         Accrued bonus                   414,565         -           438,976          -
         Accrued pension                 199,211         -             -              -
         Warranty costs                  122,631         -            88,000          -
         Inventory                     1,176,384         -           971,825          -
         Depreciation                      -         4,415,090         -          2,334,917
         Contract losses                 389,861         -           503,856          -
         Net operating loss
            carryforwards                219,392         -             -              -
         Other                           266,141       209,648        60,689        202,364
                                       ---------     ---------     ---------      ---------
                                     $ 3,672,975   $ 6,414,572   $ 3,149,734    $ 4,313,139
                                       =========     =========     =========      =========
</TABLE>

         As of August 1, 1999 the Company has  available a $642,485  alternative
         minimum tax credit to carry forward for an  indefinite  period of time,
         and net operating loss  carryforwards  for state income tax purposes of
         approximately $219,392 which expire from fiscal 2000 through 2009.

NOTE I- LONG-TERM DEBT

       Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
                                                            August 1,     August 2,
                                              Rate            1999          1998
                                       ---------------        ----          ----
<S>                                    <C>               <C>             <C>
       Revolving loan facility (a)     6.65% and 7.15%   $ 12,500,000    $ 1,500,000
       Note payable bank (b)           5.00%                  114,722          -
       Mortgage note (c)               7.43% and 10.4%      2,902,726      2,890,000
       Capital lease obligations (d)              -            90,868        125,869
       Other                                      -            87,457          -
                                                           ----------      ---------
                                                           15,695,773      4,515,869
       Less current portion                                   258,383        404,984
                                                           ----------      ---------
                                                         $ 15,437,390    $ 4,110,885
                                                           ==========      =========
<FN>

       (a) In February  1999,  the Company  entered  into a new  revolving  loan
           agreement  with a bank that  provides for the  extension of credit in
           the aggregate  principal  amount of  $20,000,000  and may be used for
           general corporate  purposes,  including  business  acquisitions.  The
           facility requires the payment of interest only on a monthly basis and
           payment of the  outstanding  principal  balance on January 31,  2001.
           Interest is set biweekly at 1.65% over the FOMC Target Rate.

           The agreement contains various financial covenants,  including, among
           other  matters,  minimum  tangible  net worth,  debt to tangible  net
           worth, debt service coverage, and restrictions on other borrowings.

                                      F-15

<PAGE>



       (b) The note  payable to a bank  relates to certain  equipment  financing
           having an original  term of five years with monthly  installments  of
           $2,642,  including  interest  at a fixed rate of 5.00%.  The note was
           paid in full subsequent to August 1, 1999 in connection with the sale
           of the Amityville property of GMC (See Note Q - Subsequent Events).

       (c) The  mortgage  loan is for a term of ten  years  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 $1,899,000. The
           proceeds  of the  mortgage  loan  were used to  prepay  the  existing
           mortgage  note having an  outstanding  balance of  $2,890,000  plus a
           prepayment premium of $115,600.

           The mortgage note agreement  contains  various  financial  covenants,
           including,  among other matters,  the maintenance of specific amounts
           of tangible  net worth,  debt to  tangible  net worth,  debt  service
           coverage,  and restrictions on other  borrowings.  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 sheet at August 1, 1999 and are being amortized
           over the term of the loan (10 years).  Unamortized  debt  expenses of
           $79,226  related to the prior  mortgage and the  $115,600  prepayment
           premium  were  charged  to  expense  as  an  extraordinary   loss  in
           connection with the prepayment of this mortgage note.

       (d) Certain  noncancellable  leases are  classified as capital leases and
           the leased  assets are  included  as part of  "Property,  Plant,  and
           Equipment" at $119,172, net of depreciation of $47,669.
</FN>
</TABLE>

       The Company paid interest of approximately  $730,000 in 1999, $441,000 in
       1998, and $567,000 in 1997.

       Future payments required on long-term debt are as follows:

                    Fiscal year ending during:
                                                     Amount
                                                     ------
                              2000              $   258,383
                              2001               12,650,867
                              2002                  102,523
                              2003                   84,396
                              2004                   90,885
                              Future              2,508,719
                                                 ----------
                                               $ 15,695,773


                                      F-16

<PAGE>



NOTE J - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

       Accounts payable and accrued expenses include the following:

                                                 August 1,         August 2,
                                                   1999              1998
                                                   ----              ----
         Accounts payable                      $ 2,668,285       $ 3,064,596
         Accrued payroll and bonuses             2,635,816         1,865,426
         Accrued commissions                       488,249           615,022
         Accrued interest                           83,939            56,491
         Accrued legal expenses                    122,873            37,487
         Accrued warranty costs                    284,573           200,000
         Accrued pension cost                      498,775           -
         Accrued severance                         537,845           -
         Lease termination cost                    180,000           -
         Accrued expenses                          534,856           629,161
                                                 ---------         ---------
                                               $ 8,035,211       $ 6,468,183
                                                 =========         =========

NOTE K - EMPLOYEE BENEFIT PLANS

       In August 1985, the Board of Directors  approved an Employee Savings Plan
       which  qualified  as a thrift plan under  Section  401(k) of the Internal
       Revenue Code.  This Plan, as amended and  restated,  allows  employees to
       contribute between 2% and 15% of their salaries to the Plan. The Company,
       at its discretion  can contribute  100% of the first 2% of the employees'
       contribution and 25% of the next 4%. Additional Company contributions can
       be made  depending  on  profits.  The  aggregate  benefit  payable  to an
       employee is dependent upon his rate of contribution,  the earnings of the
       fund, and the length of time such employee continues as a participant.

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

       The Company has recognized expenses of approximately  $266,000 for the 52
       weeks ended August 1, 1999,  and $197,000,  and $181,000 for the 52 weeks
       ended August 2, 1998 and the 53 weeks ended August 3, 1997, respectively.

       At the time of the acquisition,  GMC also had a  noncontributory  defined
       benefit pension plan covering all eligible  employees of the company.  As
       part of the  acquisition  plan,  the Company froze all benefits under the
       plan effective  April 30, 1999 and elected to terminate the plan. As part
       of the allocation of the purchase price, the Company recorded a liability
       at the date of acquisition of $463,834.

       Net pension  expense from the date of  acquisition to April 30, 1999, the
       date benefits were frozen, includes the following components:

          Service cost - benefits earned during the period    $  21,550
          Interest cost                                         136,651
          Actual return on assets                              (123,260)
                                                                -------
               Net pension expense                            $  34,941
                                                                =======


                                      F-17

<PAGE>



       The  following  table  sets  forth the  plan's  funded  status and amount
       recognized in the consolidated balance sheet at August 1, 1999:

       Projected benefit obligation at date of acquisition     $ 4,793,104
              Service costs                                         21,550
              Interest cost                                        136,651
              Benefit payments                                    (110,376)
                                                                 ---------
       Projected benefit obligation, end of year               $ 4,840,929
                                                                 ---------

       Change in fair value of plan assets:
       Fair value at date of acquisition                       $ 4,329,270
              Return on assets                                     123,260
              Benefit payments                                    (110,376)
                                                                 ---------
       Fair value at end of year                                 4,342,154
                                                                 ---------

       Funded status and accrued pension cost                  $   498,775
                                                                 =========

       Assumptions used were:
              Discount rate                                        5.00%
              Expected return on plan assets                       5.00%

       Assets held by the trust are  comprised  primarily of  marketable  equity
       securities.

NOTE L - RELATED PARTY TRANSACTIONS

       In  connection  with the move of the  Amityville  facilities of GMC, (See
       Note Q -  Subsequent  Events),  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
       $312,390,  subject to escalation of approximately 4% annually  throughout
       the 10 year term.

NOTE M - COMPUTATION OF PER SHARE EARNINGS

       The following table shows the calculation of basic earnings per share and
       earnings per share assuming dilution:

<TABLE>
<CAPTION>
                                                             52 Weeks ended
                                                     ------------------------------    53 Weeks ended
                                                   August 1, 1999     August 2, 1998   August 3, 1997
                                                   --------------     --------------   --------------
       <S>                                          <C>                <C>              <C>
       Numerator:
         Income before extraordinary item           $ 7,861,703        $ 5,496,608      $ 4,803,659
         Extraordinary loss                             126,826              -                -
                                                     ----------          ---------        ---------
       Net Income                                   $ 7,734,877        $ 5,496,608      $ 4,803,659
                                                      =========          =========        =========
       Denominator:
         Basic weighted-average shares                5,232,807          4,969,248        4,063,505
           Effect of dilutive securities:
            Employee stock options and warrants         427,289            438,035          670,177
                                                     ----------          ---------        ---------
       Diluted weighted-average shares                5,660,096          5,407,283        4,733,682
                                                      =========          =========        =========
</TABLE>

       Options and warrants to purchase  3,047,133 shares of common stock,  with
       exercise  prices  ranging from $12.00 to $16.46 were  outstanding  during
       fiscal year 1999 but were not included in the  computation of diluted EPS
       because the exercise  prices are greater than the average market price of
       the common  shares  during the period.  The options and  warrants,  which
       expire at various dates through June 17, 2009, were still  outstanding as
       of August 1, 1999.  Options and warrants to purchase  1,423,958 shares of
       common  stock,  with exercise  prices  ranging from $13.69 to $14.40 were
       outstanding  during  fiscal  year  1998  but  were  not  included  in the
       computation  of diluted EPS because the exercise  prices are greater than
       the average market price of the common shares during the period.

                                      F-18

<PAGE>





NOTE N - SHAREHOLDERS' EQUITY

       At the annual  meeting of  stockholders  held on February 18,  1998,  the
       stockholders of the Company  approved a proposal to amend the Certificate
       of Incorporation  to increase the authorized  shares of Common Stock from
       10,000,000 to 20,000,000 shares.

       In December 1997, the Company  completed the sale of 1,100,000  shares of
       common  stock to the  public,  of which  700,000  shares were sold by the
       Company and 400,000 shares were sold by certain selling stockholders.  In
       addition , the Company also sold 1,265,000 Common Stock Purchase Warrants
       ("Warrant(s)").  The Company  received net proceeds of  $7,451,579  after
       underwriting   discounts  and  commissions  and  other  expenses  of  the
       offering.  Each  Warrant  entitles  the holder to  purchase  one share of
       common stock at $15.60 per share  (subject to  adjustment  under  certain
       conditions)  until they  expire in January  2000.  The  Company  has also
       issued  to  the   underwriters,   for  their   own   accounts,   Managing
       Underwriters'  Warrants  which  entitle  the holder to  purchase  110,000
       shares  of common  stock of the  Company  (subject  to  adjustment  under
       certain  circumstances),  at a price of $14.40 per share through December
       2002, and the right to purchase  110,000 Warrants (as described above) at
       a price of $.12 per Warrant through January 2000.

       On  September  4, 1997 the Board of  Directors  declared a 4-for-3  stock
       split effected as a stock dividend payable  September 30, 1997 to holders
       of record on September 15, 1997.  The amount of $105,234 was  transferred
       from  additional  paid-in  capital to the common stock  account to record
       this distribution.  All share and per share data, including stock options
       and warrants,  included in the financial statements have been restated to
       reflect the stock split.

       The Company has various fixed option plans which reserve shares of common
       stock for  issuance to  executives,  key  employees  and  directors.  The
       Company  applies  APB  Opinion  No.  25 and  related  Interpretations  in
       accounting for these plans.  Statement of Financial  Accounting Standards
       No.123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued
       by the FASB in 1995 and , if  fully  adopted,  changes  the  methods  for
       recognition of cost on plans similar to those of the Company. The Company
       has adopted the disclosure-only  provisions of SFAS 123. Accordingly,  no
       compensation  cost has been  recognized  for the stock option plans.  Pro
       forma information regarding net income and earnings per share is required
       by Statement 123, and has been determined as if the Company had accounted
       for its  employee  stock  options  under  the fair  value  method of that
       Statement.  The fair value for these options was estimated at the date of
       grant  using a  Black-Scholes  option  pricing  model with the  following
       weighted-average assumptions: risk-free interest rate of 5.1%; volatility
       factor of the expected market price of the Company's common stock of .58;
       and a  weighted-average  expected  life of the option,  after the vesting
       period, of .65 years.

       The  Black-Scholes  option  valuation  model  was  developed  for  use in
       estimating  the fair  value  of  traded  options  which  have no  vesting
       restrictions and are fully  transferable.  In addition,  option valuation
       models require the input of highly subjective  assumptions  including the
       expected  stock price  volatility.  Because the Company's  employee stock
       options have characteristics significantly different from those of traded
       options,  and because  changes in the subjective  input  assumptions  can
       materially affect the fair value estimate,  in management' s opinion, the
       existing models do not  necessarily  provide a reliable single measure of
       the fair value of its employee stock options.


                                      F-19

<PAGE>



       Had  compensation  cost for stock  options  granted in fiscal years 1999,
       1998 and 1997 been  determined  based on the fair value at the grant date
       consistent  with the  provisions  of SFAS 123, the Company's net earnings
       and earnings  per share would have been reduced to the pro forma  amounts
       indicated below using the statutory income tax rate of 34%:

<TABLE>
<CAPTION>

                                                   1999             1998              1997
                                                ----------       ----------        ----------
<S>                                             <C>              <C>               <C>
         Net earnings  -  as reported           $7,734,877       $5,496,608        $4,803,659
         Net earnings  -  pro forma             $5,939,519       $4,925,488        $3,911,486
         Earnings per share  -  as reported
              Basic                                  $1.48            $1.11             $1.18
              Diluted                                 1.37             1.02              1.01
         Earnings per share  - pro forma
              Basic                                  $1.14             $.99              $.96
              Diluted                                 1.05              .91               .83
</TABLE>

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

       In April 1998, the Board of Directors approved the 1998 Stock Option Plan
       which covers  1,500,000  shares of the Company's  common  stock.  Options
       granted  under the plan may be incentive  stock options  qualified  under
       Section 422 of the Internal Revenue Code of 1986 or  non-qualified  stock
       options.  Under the terms of the Plan,  the  exercise  price for  options
       granted  under  the  plan  will be the fair  market  value at the date of
       grant.  Prices for incentive  stock options  granted to employees who own
       10% or more of the  Company's  stock are at least 110% of market value at
       date of grant.  The  nature  and terms of the  options  to be  granted is
       determined  at the time of grant by the Board of  Directors.  The options
       expire ten years from the date of grant, subject to certain restrictions.
       Options for  375,000  shares  were  granted  during the fiscal year ended
       August 1, 1999.

       In May 1997,  the Board of Directors  approved the 1997 Stock Option Plan
       which covers  1,666,666  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 is
       determined  at the time of grant by the Board of  Directors.  The options
       expire ten years from the date of grant, subject to certain restrictions.
       Options for 875,500,  88,333 and 801,660  shares were granted  during the
       fiscal  years ended August 1, 1999,  August 2, 1998,  and August 3, 1997,
       respectively.

       In October  1995,  the Board of Directors  approved the 1996 Stock Option
       Plan which covers 666,666 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 is
       determined  at the  time of  grant  by the  Board  of  Directors.  If not
       specified, 100% of the shares can be exercised one year after the date of
       grant.  The options expire ten years from the date of grant.  Options for
       663,989 shares were granted during the fiscal year ended August 3, 1997.

       In December 1992, the Board of Directors  approved the 1992 Non-Qualified
       Stock  Option Plan which  covers  1,333,333  shares,  as amended,  of the
       Company's  common stock.  Under the terms of the Plan, the purchase price
       of the shares, subject to each option granted, is 100% of the fair market
       value at the

                                      F-20

<PAGE>



       date of grant. The date of exercise is determined at the time of grant by
       the Board of Directors;  however, if not specified, 50% of the shares can
       be exercised  each year  beginning one year after the date of grant.  The
       options  expire ten years  from the date of grant.  Options  for  339,986
       shares were  granted  during the fiscal year ended July 30,  1995.  These
       options  may be  exercised  cumulatively  at the  rate  of 25%  per  year
       beginning one year after the date of grant.  This plan was  terminated in
       December 1995, except for outstanding options thereunder.

       In October 1987, the Board of Directors  approved the 1988  Non-Qualified
       Stock Option Plan which covers  666,666  shares of the  Company's  common
       stock.  Under the terms of the Plan,  the  purchase  price of the shares,
       subject  to each  option  granted,  will not be less than 85% of the fair
       market value at the date of grant. The date of exercise may be determined
       at the  time  of  grant  by  the  Board  of  Directors;  however,  if not
       specified,  20% of the shares can be exercised  each year  beginning  one
       year  after the date of grant and  generally  expire  five years from the
       date of grant.  This plan was  terminated  in December  1995,  except for
       outstanding options thereunder.

       A summary of stock option activity under all plans for the 52 weeks ended
       August 1, 1999 and August 2, 1998,  and the 53 weeks ended August 3, 1997
       follows:

<TABLE>
<CAPTION>

                                              Non-Qualified Stock Options
                                              ---------------------------
                                                                     Weighted      Warrant Agreements
                                                                      Average      ------------------
                                          Number      Price Range    Exercise    Number     Price Range
                                         of shares     per share      Price     of shares    per share
                                         ---------     ---------      -----     ---------    ---------
<S>                                    <C>          <C>              <C>         <C>      <C>
Outstanding July 28, 1996............     683,394   $ 2.54 -  9.01   $ 3.89      333,333  $ 4.64 - 5.35
   Granted ..........................   1,465,649     6.10 - 10.41     6.48
   Exercised.........................  (1,225,384)    2.54 -  6.94     5.46      (13,333)          4.64
   Canceled..........................      (7,332)    5.25 -  9.01     8.67
                                        ---------    -------------   ------      -------    -----------
Outstanding August 3, 1997...........     916,327   $ 2.54 - 10.41   $ 5.87      320,000  $ 4.64 - 5.35
   Granted ..........................      88,333    10.31 - 13.88    12.04
   Exercised.........................    (135,594)    2.54 -  6.94     5.08      (40,000)          5.35
   Canceled..........................      (8,222)    2.54 -  6.47     5.31
                                        ---------    -------------   ------      -------    -----------
Outstanding August 2, 1998...........     860,844   $ 2.54 - 13.88   $ 6.65      280,000         $ 4.64
   Granted ..........................   1,250,500     9.25 - 16.46    11.44
   Exercised.........................    (669,100)    2.54 -  9.94     6.56      (66,667)          4.64
   Canceled..........................     (47,631)    6.47 - 16.46    11.16
                                        ---------    -------------   ------      -------    -----------
Outstanding August 1, 1999...........   1,394,613   $ 2.54 - 16.46   $10.74      213,333         $ 4.64
                                        =========                                =======
</TABLE>

       Options to purchase 783,889 shares of common stock were exercisable under
       all  plans at  August 1, 1999 at a  weighted  average  exercise  price of
       $11.15 with a weighted average remaining contractual life of 8.8 years as
       follows:

       Options Outstanding and Exercisable by Price Range as of August 1, 1999

<TABLE>
<CAPTION>

                                          Options Outstanding                   Options Exercisable
                             ---------------------------------------------  ---------------------------
                                           Weighted
                                            Average           Weighted                     Weighted
        Range of Exercise       Number     Remaining           Average        Number        Average
             Prices          Outstanding  Contractual Life  Exercise Price  Exercisable  Exercise Price
        -----------------    -----------  ----------------  --------------  -----------  --------------
       <S>                   <C>                <C>             <C>           <C>           <C>
       $ 2.54  -  $ 9.25       602,613          8.2             $ 7.92        211,489       $  6.21
        10.41  -   12.13       389,250          9.3              11.86        285,150         12.03
        12.19  -   13.94       364,750          9.3              13.71        280,250         13.87
        14.31  -   16.46        38,000          9.5              15.34          7,000         15.39
                             ---------          ---             ------        -------        ------
        $2.54  -  $16.46     1,394,613          8.8             $10.74        783,889        $11.15
                             =========                                        =======
</TABLE>

       In April 1993,  common stock warrants were issued to certain officers and
       directors for the right to acquire  573,333 shares of common stock of the
       Company at the fair market value of $5.35 per share at

                                      F-21

<PAGE>



       date of  issue.  In  December  1995  warrants  for  533,333  shares  were
       canceled,  and the remaining  40,000  warrants  were  exercised in fiscal
       1998.  In December  1995,  common stock  warrants  were issued to certain
       officers for the right to acquire  293,333  shares of common stock of the
       Company at the fair market value of $4.64 per share at date of issue. The
       warrants  vest  immediately  and expire  December 13, 2005.  Warrants for
       66,667  and  13,333  shares  were  exercised  in  fiscal  1999 and  1997,
       respectively.

NOTE O - SIGNIFICANT SEGMENTS, MAJOR CUSTOMERS, AND EXPORT SALES

       The  Company's  chief  operating  decision  maker is considered to be the
       Chairman and Chief Executive  Officer (CEO).  The Company's CEO evaluates
       both consolidated and disaggregated  financial information  consisting of
       revenue  information  in deciding  how to allocate  resources  and assess
       performance. The CEO uses certain disaggregated financial information for
       the Company's two product groups:  Space and Communications and Microwave
       Components.  The Company does not determine a measure of operating income
       or loss by product  group.  The Company's two 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 is in a single  reportable  segment as a provider  of flight
       instrumentation  components  and systems and  microwave  products for the
       U.S. government, foreign governments, and aerospace companies. All of the
       Company's revenues result from sales of its products. Revenues by product
       group (as defined by the Company)  for fiscal  years 1999,  1998 and 1997
       were as follows: Space and Communications,  $33,846,000,  $30,338,000 and
       $22,781,000, respectively; Microwave Components,  $27,190,000,$10,460,000
       and $9,414,000, respectively.

       Net sales to the U.S.  Government in 1999,  1998,  and 1997 accounted for
       approximately  17%,  26%, and 34% of net sales,  respectively.  One other
       customer  accounted for 12% of net sales in 1999.  Foreign sales amounted
       to approximately $17,680,000,  $11,943,000, and $9,398000 in fiscal 1999,
       1998, and 1997, respectively.

       Included in accounts  receivable  as of August 1, 1999 and August 2, 1998
       are amounts due from the U.S. Government of approximately  $2,470,000 and
       $933,000, respectively.

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 was estimated using
         discounted  cash  flow  analysis,   based  on  the  Company's   current
         incremental borrowing rate for similar types of borrowing arrangements.

       Off balance sheet financial instruments:

         Stand-by   letters  of  credit:   These  letters  of  credit  primarily
         collateralize  the  Company's  obligations  to  customers  for advanced
         payments received under contracts.  The contract amounts of the letters
         of credit approximate their fair value.


                                      F-22

<PAGE>


       The  carrying  amounts  and  fair  values  of  the  Company's   financial
       instruments are presented below:

                                                August 1, 1999
                                                --------------
                                        Carrying Amount     Fair Value
                                        ---------------     ----------
           Cash and cash equivalents      $ 2,741,163      $ 2,741,163
           Long-term debt                  15,437,390       15,437,390
           Stand-by letters of credit           -              996,965

NOTE Q - SUBSEQUENT EVENTS

       On September 23, 1999,  the Company  closed on the sale of GMC's property
       in Amityville,  New York and relocated the plant to a leased  facility in
       Farmingdale, New York. The Company used the net proceeds from the sale of
       approximately  $4,159,000,  which  approximates the net carrying value of
       the property,  to partially fund the buy back of its common stock through
       open market purchases in September 1999.

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