Document:

AGREEMENT BETWEEN HERLEY INDUSTRIES, INC.
                         AND THE DEPARTMENT OF THE NAVY

1. This  Agreement is entered into between the Department of the Navy, on behalf
of the Department of Defense,  and Herley. The sole purpose of this Agreement is
to evince  that Herley is  presently  responsible  to contract  with the Federal
Government by ensuring that Herley has and will continue a program of acceptable
contracting  practices and procedures,  and by establishing  and  implementing a
program  of  compliance  reviews,  audits,  and  reports.  For  purpose  of this
Agreement,  Herley  shall mean  Herley as a body  corporate,  its  predecessors,
successors,   affiliates,   subsidiaries,   and/or  divisions  and  all  owners,
directors,  officers,  employees  and/or  consultants  of any  of the  aforesaid
entities.

2. This Agreement  affects only those causes for  suspension  that are stated in
the Navy's Notice of Suspension  dated June 9, 2006,  attached hereto as Annex A
(hereinafter "the Notice").  Except as provided in paragraph 16, or as otherwise
authorized  in writing  by the  Suspending  Official,  or an  appointee  thereof
(hereinafter collectively "the Navy Suspension Authority"), this Agreement shall
not  be  used  for  any  purpose  with  regard  to  any  criminal,   civil,   or
administrative  charge,  claim,  or action by or  against  Herley  related to or
arising out of any criminal or civil investigation conducted by any component of
the Department of Justice or the Department of Defense.

3. By this Agreement,  Herley recognizes its corporate  responsibility to ensure
that Herley fully  complies with all federal  procurement  laws and  regulations
when contracting,  directly or indirectly, with the United States Government. In
this regard, all aspects of Herley's corporate and business  operations shall be
conducted  according  to  the  highest  code  of  corporate  ethics,   generally
prevailing lawful and honest behavior,  and the guidelines set by the letter and
spirit of this Agreement.

4. To fulfill its  corporate  responsibilities,  Herley has begun and shall,  in
accordance  with the schedule  set forth in this  Agreement,  fully  implement a
Compliance  Program by which  Herley can and will  adhere to lawful and  ethical
procedures  and practices in all areas of and relating to its provision of goods
and services as a Government  contractor and/or  subcontractor.  This Compliance
Program shall have the following components:

     A. A WRITTEN CODE OF CONDUCT:  Herley has  established a written  Corporate
     Code of Business  Ethics which  provides  notice to all employees  that the
     highest  standard of business  ethics is mandated.  A copy of the Corporate
     Code of Business  Ethics is attached as Annex B. The  signature of the Navy
     Suspending  Official on this  Agreement  shall  signify  acceptance  of the
     current Corporate Code of Business Ethics.

          1. The Corporate Code of Business Ethics shall be maintained, reviewed
          on an annual basis by Herley's Vice President (VP)  Administration and
          Governance and duly appointed  legal counsel,  and updated as required
          for compliance with statutory and/or regulatory changes.
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          2. All Herley directors, officers, employees, and consultants shall be
          required  to sign a  certificate  stating  that  they  have  read  the
          Corporate Code of Business Ethics and agree to abide by its provisions
          on a yearly basis.

     B. AN ETHICS AND COMPLIANCE OFFICER:  Herley has established and shall, for
     at  least  the  duration  of this  Agreement,  maintain  a  position  of VP
     Administration  and  Governance,  designated  as the Ethics and  Compliance
     Officer.

          1. The Ethics and Compliance  Officer reports to and is responsible to
          the CEO and Board of Directors of Herley.

          2. The  identification  and  qualifications  of the current Ethics and
          Compliance Officer are set forth in Annex C. The signature of the Navy
          Suspending  Official on this Agreement shall signify acceptance of the
          current Ethics and Compliance Officer.

          3.  Should  the  current  or any  subsequently  appointed  Ethics  and
          Compliance Officer leave the position,  that fact shall be reported to
          the Navy  Suspension  Authority,  in  writing,  within 10 days of said
          leaving. A replacement shall be selected by Herley and reported to the
          Navy  Suspension  Authority  within  forty-five  calendar days of said
          leaving.  Appointment of a replacement  Ethics and Compliance  Officer
          shall be subject to approval by the Navy Suspension  Authority,  which
          approval shall be solely within the discretion of the Navy  Suspension
          Authority.  Denial by the Navy Suspension Authority of approval of any
          replacement  Ethics and  Compliance  Officer  shall be a  "Failure  by
          Herley" as the phrase is used in paragraph 12 of this Agreement.

          4. The Ethics  and  Compliance  Officer  shall  assist  Herley and the
          Governance  and  Ethics   Committee  of  the  Board  of  Directors  in
          identifying and reporting violations of its Corporate Code of Business
          Ethics.

          5. The Governance and Ethics  Committee of the Board of Directors,  in
          conjunction with the Ethics and Compliance Officer,  shall investigate
          all instances of suspected  misconduct and shall report in writing the
          findings  to the Board of  Directors  for  management  response.  Said
          management  response  shall be in writing and shall be provided to the
          Ethics and  Compliance  Officer  within  thirty days of the receipt by
          management of the Ethics and  Compliance  Officer's  report.  Both the
          Governance  and Ethics  Committee of the Board of Directors and Ethics
          and Compliance  Officer's  report and  management's  response shall be
          provided  to the  Navy  Suspension  Authority  in time to be  received
          within ten working days of when said response was created.

          6. The Ethics and  Compliance  Officer  shall,  within 10 working days
          after the end of each  fiscal  quarter  (July,  October,  January  and
          April),  prepare  and  deliver  to the  Navy  Suspension  Authority  a
          Quarterly  Report,  which shall include a synopsis of each instance of
          suspected and/or confirmed misconduct which became known to the Ethics
          and Compliance  Officer or the Governance and Ethics  Committee of the

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          Board of Directors  during the fiscal quarter.  This synopsis shall be
          made without  regard to the degree to which the Ethics and  Compliance
          Officer  has  been  able,  as of  the  due  date  of  the  report,  to
          investigate the misconduct.  This synopsis shall include disclosure of
          any remedial action taken to date.

          7. The  Quarterly  Report  shall also  include:  (1) All  instances of
          disciplinary  action for  violations of the Corporate Code of Business
          Ethics,  Government  Contracts Overview,  or Truth In Negotiations Act
          Policy; (2) all known, ongoing criminal investigations;  (3) all known
          qui tam suits; (4) all known or suspected defective pricing cases; (5)
          all  hotline  reports  received by the Ethics and  Compliance  Officer
          including a description of the complaint and any remedial action taken
          or planned;  (6) a summary of audit  findings as required by paragraph
          4.E.5.c.;  (7)  reports  of  new  employee  training  as  required  by
          paragraph  4.F.4; and (8) any other matter which might affect Herley's
          present responsibility status,  including but not limited to actual or
          potential  suspension and/or debarment actions by other Government and
          quasi-governmental agencies.

     C. A HOT LINE:  Herley has established and shall, for at least the duration
     of this  Agreement,  maintain a "hot line" to  facilitate  the reporting of
     misconduct  by or  within  Herley.  The  policies  and  procedures  of this
     component are fully  presented in Annex D.  Execution of this  Agreement by
     the Navy Suspending  Official shall evidence  approval of this component by
     the Navy Suspension Authority.

     D. WRITTEN  CONTRACTING  POLICIES AND  PROCEDURES:  Herley has  established
     written   contracting   policies  and  procedures  through  its  Government
     Contracts Overview and Truth In Negotiations Act Policy. These policies and
     procedures  contain the regulatory  standards and acceptable  practices for
     doing business with the Government and/or Government prime contractors, and
     shall be applied to all of Herley's business dealings involving  Government
     contracts or subcontracts.  Copies of the Government Contracts Overview and
     Truth  In  Negotiations  Act  Policy  are  attached  as  Annexes  E  and  F
     respectively.  The  signature  of the  Navy  Suspending  Official  on  this
     Agreement  shall  signify  acceptance of the current  Government  Contracts
     Overview and Truth In Negotiations Act Policy.

          1. The Navy Suspension Authority may, at its sole discretion,  approve
          or disapprove of any subsequent  revisions to the Government Contracts
          Overview and Truth In Negotiations Act Policy.

          2. The Navy  Suspension  Authority  approval  shall be deemed given if
          written  notice of denial has not been mailed,  by USPS Return Receipt
          Requested  service,  to Herley by close of  business  on the  fortieth
          calendar day  following  receipt by the Navy  Suspension  Authority of
          Herley's Audit and Governance Compliance Review Procedures. Failure to
          gain Navy  Suspension  Authority  approval of the Audit and Governance
          Compliance Review Procedures  Procedure within the time stated in this
          paragraph  shall be a  "Failure  by  Herley"  as the phrase is used in
          paragraph 12.

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     E. WRITTEN AUDIT AND COMPLIANCE REVIEW  PROCEDURES.  Herley shall establish
     and,  for at least  the  duration  of this  Agreement,  maintain  Audit and
     Compliance Review Procedures.

          1. An outline of Herley's  Audit and Compliance  Review  Procedures is
          set forth in the attached Annex G.

          2. The full version of Herley's  revised Audit and  Compliance  Review
          Procedures  shall be  submitted  in time to reach  the Navy  Debarring
          Authority  not later than December 31, 2006,  and shall,  if approved,
          replace the outline as Annex G.

          3. The Navy Suspension Authority may, at its sole discretion,  approve
          or disapprove of Herley's Audit and Compliance Review Procedures.

          4. The Navy  Suspension  Authority  approval  shall be deemed given if
          written  notice of denial has not been mailed,  by USPS Return Receipt
          Requested  service,  to Herley by close of  business  on the  fortieth
          calendar day  following  receipt by the Navy  Suspension  Authority of
          Herley's Audit and Compliance Review Procedures.  Failure to gain Navy
          Suspension  Authority  approval  of the  Audit and  Compliance  Review
          Procedures  within  the  time  stated  in this  paragraph  shall  be a
          "Failure  by  Herley" as the  phrase is used in  paragraph  12 of this
          Agreement.

          5. In addition to any other  provision  that the Audit and  Compliance
          Review Procedures may have, the Audit and Compliance Review Procedures
          shall provide for yearly audits of each  procedure that is a component
          of this Compliance Program.

               a) The audits  shall be  conducted  by the Ethics and  Compliance
               Officer in conjunction  with the  appropriate  Herley  management
               personnel.

               b) The audits shall begin no earlier  than  December 1, and shall
               be  completed  no later than  December 31 of each  calendar  year
               during  the  term of this  Agreement.  The  2006  audit  shall be
               completed by December 31, 2006,  or within 30 days of approval of
               Herley's   Audit  and  Compliance   Review   Procedures  if  such
               procedures are submitted on or after December 2, 2006.

               c) A report,  which  describes  and  discusses  the findings made
               during the  audits,  shall be part of the  Ethics and  Compliance
               Officer's  Quarterly  Report  for the  quarter  during  which the
               audits are conducted.

     F. IMPLEMENT RECURRING,  CLASSROOM STYLE TRAINING:  Herley shall create and
     implement a curriculum of classroom style training  designed to familiarize
     each of its  directors,  officers,  employees,  and  consultants  with  the
     concepts and precepts of each component of this  Compliance  Program.  This
     training  shall begin  immediately  and shall be  ongoing,  pursuant to the
     published training schedule.

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          1. The outline of the  curriculum  to be used for training with regard
          to each of the components of the Compliance Program is attached hereto
          as Annex H. The full version of the  curriculum  shall be submitted in
          time to reach the Navy  Suspension  Authority  not later than December
          31,  2006,  and shall if  approved,  replace the outline as Annex H of
          this Agreement.

          2. The Navy  Suspension  Authority  may approve or  disapprove  of the
          curriculum, in whole or in part, at its sole discretion.

          3. The Navy  Suspension  Authority  approval  shall be deemed given if
          written  notice of denial has not been mailed,  by USPS Return Receipt
          Requested  service,  to Herley by close of  business  on the  fortieth
          calendar day  following  receipt by the Navy  Suspension  Authority of
          Herley's Audit and Compliance Review Procedures.  Failure to gain Navy
          Suspension  Authority  approval of the training  curriculum within the
          time  stated in this  paragraph  shall be a "Failure by Herley" as the
          phrase is used in paragraph 12 of this Agreement.

          4. In addition to any other training they may receive,  each director,
          officer,  employee, and/or consultant who misses the training given on
          the  dates  indicated  on the  Schedule,  and any  director,  officer,
          employee,  and/or consultant who joins, is hired by, or contracts with
          Herley  after said  training is completed  shall be  required,  within
          thirty  days of their  association  with  Herley,  to read the  course
          syllabus and pass a written test on its salient contents.  Each person
          who  completes  the reading  required by this  paragraph  shall sign a
          certification   that  the  reading  has  been  completed.   Each  such
          certification  and the completed  test taken by each such person shall
          be  maintained  in  a  clearly  identified  file  by  the  Ethics  and
          Compliance  Officer.  In addition,  the Ethics and Compliance  Officer
          shall,  as part of each Quarterly  Report,  identify each such person,
          state the date when the person  joined  Herley,  and state whether the
          person has successfully met the training  requirements  stated in this
          paragraph.

          5. In addition to any other training,  each Herley director,  officer,
          employee,  and  consultant  shall be  informed  of any  change  to any
          component of this Compliance Program,  which took place since the next
          previous training session.

          6.  Herley  has  contracted  with  Professor  Ralph Nash to review the
          Ethics and Training  Programs and make a report of his Conclusions and
          Recommendations.  This Report will be  submitted  directly to the Navy
          Suspension  Authority  with  a  copy  to  the  VP  Administration  and
          Governance not later than December 31, 2006.  Herley will  incorporate
          any suggested  changes or improvements made by Professor Nash into its
          Programs.

5. Herley further agrees to:

     A.  Complete all  compliance  actions  identified  by this  Agreement on or
     before the date stated in this Agreement.

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     B. Act in good faith and adhere to the policies and procedures described in
     paragraph 4 of this Agreement in all of its dealings with the Government.

     C. Hire an outside entity to survey/interview  Herley's employees about the
     organizational  culture related to ethics,  specifically  the atmosphere on
     reporting  misconduct  within Herley on or before December 31, 2006. Herley
     will  provide  a  report  of  the  survey/interview  results  to  the  Navy
     Suspension Authority on or before January 31, 2007.

     D. Include an ethics and compliance component in the performance evaluation
     criteria of management  level  employees.  Herley's  Executive  Performance
     Appraisal - Ethics, is attached as Annex I.

     E. Herley's management shall, within ten (10) working days after the end of
     each fiscal  quarter  prepare  and provide a report to the Navy  Suspending
     Official,  or his  designee,  describing  Herley's  implementation  of this
     Agreement.

     F. Allow  designated  representatives  of the Navy Suspension  Authority to
     interview  Herley  personnel  and  to  examine  Herley's  financial  books,
     records, and other company documents for the purpose of evaluating Herley's
     compliance with the terms of this Agreement. Such materials described above
     shall be made available by Herley after  reasonable  notice for inspection,
     audit and/or reproduction, provided, however, the Navy Suspension Authority
     shall  not  be  entitled  to  examine  documents  properly  subject  to the
     attorney-client  or attorney  work  product  privileges,  nor to copy:  (1)
     Documents  containing  technical  data  or  computer  software,  except  in
     accordance  with  government  contract  data  rights  provisions,   or  (2)
     Documents containing trade secrets, or (3) Financial records.

     G. In addition to the reports made  pursuant to  paragraphs  4.B. and 5.E.,
     disclose,  within  30  calendar  days  of its  alleged  occurrence,  to the
     Department of Defense and to the prime Government customer if such customer
     is not a DoD component, all instances in which there are reasonable grounds
     to suspect that Herley, its directors,  officers,  employees,  consultants,
     suppliers  and/or  Government  personnel  have  violated  Federal  laws  or
     regulations relating to U.S. Government procurements. Further, Herley shall
     take immediate  corrective measures to remedy the matter disclosed,  and to
     notify the Department of Defense, and the prime Government customer, if the
     matter relates to a non-DoD  contract,  of the corrective  action taken and
     Herley's  opinion   regarding  any  impact  the  matter  may  have  on  the
     Government.

     H. Cooperate fully with any  investigation  by the Department of Justice or
     the Department of Defense in connection  with any matter not subject of the
     Indictment of which Herley knows or learns in the future.

     I. Upon a  conviction  or civil  judgment  of Herley for  violation  of any
     Federal criminal statute, take appropriate  disciplinary action against all
     responsible individuals.

     J. Upon an indictment  of, or the entering of a guilty plea or plea of nolo
     contendere by any director,  officer,  employee or consultant of Herley for
     violation of any criminal statute,  which violation  occurred in connection

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     with the  individual's  performance  of duties  for or on behalf of Herley,
     immediately  remove the  director,  officer,  employee or  consultant  from
     active  status with the  Company  relating  to any  dealings  with the U.S.
     Government.

     K. Upon an unappealed conviction of, or after an unsuccessful appeal by any
     director,  officer,  employee or  consultant of Herley for violation of any
     criminal  statute,   which  violation   occurred  in  connection  with  the
     individual's  performance of duties for or on behalf of Herley, take prompt
     action to terminate the employment of such officer, employee or consultant,
     or as  appropriate  to  remove  such  director  from  the  Herley  Board of
     Directors in recognition of Title 10, U.S.C. ss. 2408.

     L.  Treat all  costs  associated  with the  termination,  severance  and/or
     removal of any  director,  officer,  employee or consultant of Herley under
     paragraph  K,  above,  as  unallowable  for  Federal  Government   Contract
     purposes.

6. During the term of this Agreement,  Herley shall not knowingly employ, engage
or accept the  services of an  individual  who is listed by a Federal  Agency as
debarred, suspended, or otherwise ineligible for Federal contracting. Reasonable
inquiry  shall be made into the  suspension/debarment  status  of any  potential
employee  or  consultant  prior to the  offer of  employment  or  engagement  of
services. Further, Herley shall promptly terminate the employment of or contract
for  services  with any  individual  who was  suspended  or  debarred  as of the
effective  date  of  their  association  with  Herley.  Moreover,  Herley  shall
immediately  remove such individual from  responsibility for or involvement with
Government  contract matters until the resolution of any question there might be
regarding  their  suspension  or  debarment  status  as of  the  time  of  their
association with Herley.

7. During the term of this Agreement,  Herley shall not knowingly enter into any
subcontract  or other  business  relationship  relating  to  Federal  Government
contracts with any individual or business entity listed as debarred,  suspended,
or otherwise ineligible for contracting by a Federal Agency (hereinafter "listed
contractor") without prior approval by the Navy Suspension Authority.

     A. Herley shall make reasonable  inquiry into the listed  contractor status
     of each prospective business associate.

     B.  Whenever the inquiry  required by the  preceding  paragraph 7.A reveals
     that the  prospective  business  associate is a listed  contractor,  Herley
     shall submit a notice to the Navy Suspension  Authority in form and content
     as specified in FAR 9.405-2(b).

     C. Herley shall also give  written  notice of the  prohibition  effected by
     paragraph 7 to each prospective business associate.

8. Herley  expressly  agrees and represents that Lee N. Blatt is not a director,
officer,  employee or  consultant of Herley and that Herley will not conduct any
business  with Mr.  Blatt  during  the term of this  Agreement  except as may be
required to defend itself  against the  Indictment,  to fulfill the terms of its
Indemnification  Agreement  with Mr. Blatt dated May 21, 2003, or to fulfill the
terms of its Agreement with Mr. Blatt dated September 27, 2006. Further,  Herley

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expressly  agrees  and  represents  that Mr.  Blatt will not  beneficially  own,
directly or  indirectly,  any Herley  stock  during the term of this  Agreement,
unless such shares are placed in a voting trust  approved in advance by the Navy
Suspension Authority.  Failure by Herley to implement and enforce the provisions
of this paragraph throughout the term of this Agreement to the sole satisfaction
of the Navy Suspension Authority shall be a "Failure by Herley" as the phrase is
used in paragraph 12 of this Agreement

9. In addition to those costs stated in  paragraphs  5.L and 10,  Herley  agrees
that the costs described below shall be unallowable for United States Government
contract  purposes and shall not be charged  directly or  indirectly to any such
contract or subcontract:

     A.  All  costs of  performing  the  actions  set  forth  in this  Agreement
     accomplished by Herley subsequent to its learning of the investigation that
     resulted in the suspension.

     B. All costs of legal  services  whether  performed  by in-house or private
     counsel,  administrative and clerical services, services of accountants and
     consultants,  salaries and wages of  employees,  officers,  and  directors,
     travel,  and any costs directly  related to the aforesaid,  incurred in the
     implementation  of  and/or  continued  compliance  with  the  terms of this
     Agreement.

     C. The Navy agrees that if its policy with respect to cost  allowability is
     changed in the future, the Navy Suspension Authority will consider amending
     this Agreement to incorporate the revised policy.

10.  Within  thirty days of the effective  date of this  Agreement,  Herley will
remit the sum of $5,000,  made payable to the Treasury of the United States,  as
and for final payment of those investigative and administrative  costs incurred,
or to be incurred,  by the Government  because of the costs of investigating the
charges  made  in the  Indictment  to the  extent  necessary  to  determine  the
administrative remedies necessary for the protection of the Government under FAR
9.4, and of monitoring, reviewing, enforcing, and administering this Agreement.

11. Except as provided in paragraph  16, the execution of this  Agreement by the
Navy in no way waives any criminal, civil, contractual, or administrative remedy
or right that the Government  may have for the acts described in the Notice,  or
for any other conduct that would give rise to such remedies.

12. Failure by Herley to meet any of its  obligations  under the terms or spirit
of  this  Agreement,  not  cured  to the  reasonable  satisfaction  of the  Navy
Suspension  Authority  within 20 working days, or as otherwise  permitted by the
Navy  Suspension  Authority  after  receipt by Herley of written  notice of such
failure,  shall  constitute  a cause for  debarment  subject  to the  procedures
established  by the  Federal  Acquisition  Regulation  and any other  applicable
statute or regulation.

13. By execution of this  Agreement,  Herley  releases  the United  States,  its
employees,   agents,  and   instrumentalities,   in  both  official  and  person
capacities, of any and all liability arising out of or otherwise related to this
Agreement.  Further,  Herley  agrees  not to file any claim  against  the United
States,  its  employees,  agents,  and  instrumentalities,  in both official and
personal  capacities,  in any forum or  jurisdiction,  with regard to any matter
arising out of or otherwise related to this Agreement.

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14. By execution of this  Agreement,  Herley avers that any adverse action taken
or to be taken against any Herley director,  officer,  employee,  consultant, or
agent,  with  regard to any  matter  arising  out of or related to the facts and
circumstances  set  forth in the  Notice,  are the  result  solely  of  Herley's
initiatives and decisions,  and are not the result of any action by or on behalf
of the United States, its employees, agents or instrumentalities.

15. Herley agrees to indemnify the Government  against,  and hold the Government
harmless  from,  any and all  claims,  liabilities,  obligations,  and causes of
action of whatsoever kind or nature for injury to, or death of, any person,  and
for any injury or damage to or destruction of any property, arising out of or as
a result of the facts  which  form the  basis  for this  Agreement,  even if the
Government's  liability to any person arises out of the acts or omissions of the
Government,  its employees,  agents,  invitees,  or representatives of any other
description whatsoever.

16. In  recognition  of the actions by and covenants of Herley set forth herein,
the Navy,  on behalf of the  Department  of  Defense,  will  terminate  Herley's
suspension  and will not debar  Herley based upon the facts and for those causes
set forth in the Notice;  provided,  however, the Navy retains the right to take
appropriate  administrative  action, if necessary,  1) upon learning  additional
facts  relating  to the  Indictment  that  have  not been  released  by the U.S.
Attorney as of the date of this Agreement or are currently  subject to Rule 6(e)
of  the  Federal  Rules  of  Criminal  Procedure,  or 2) in  the  event  of  any
conviction,  guilty plea, or plea of nolo contendere  resulting from the pending
Indictment.

17. This  Agreement  is a public  document  and may be  distributed  by the Navy
throughout  the  Executive  Branch  of the  Government  and to other  interested
parties in accordance  with the  requirements of the Privacy Act and the Freedom
of Information Act.

18.  Modification  to this  Agreement may be made but shall have no effect until
the terms of the Modification are expressly incorporated in a writing, which has
been executed by both parties. Neither party shall seek or accept the benefit of
a judicial or  quasi-judicial  order  directing  the other to execute a writing,
which would, if executed, modify this Agreement.

19. For purposes of  interpretation  of this Agreement or any part hereof by any
court of competent  jurisdiction (or any other judicial or quasi-judicial body),
this  Agreement  shall be deemed to have been  drafted  equally  by all  parties
hereto.

20. This  Agreement  shall become  effective  on the date of the last  signature
hereto  and shall  continue  hereafter  for a period of three (3) years or until
settlement  or  adjudication  of the  Indictment,  whichever  is  later,  unless
shortened or extended by written Agreement of the parties.  In addition,  should
Herley for any reason cease to be in full  compliance with the letter and spirit
of this Agreement,  this Agreement shall be extended for a period of three years
following   reestablishment  of  full  compliance  as  determined  by  the  Navy
Suspension Authority.

                                       9
<PAGE>

21. This  Agreement  constitutes  the entire  agreement  between the parties and
supersedes  all prior  agreements  and  understandings,  oral or  written,  with
respect to the subject matter hereof.  This Agreement shall inure to the benefit
of, and be  binding  upon,  the  parties  and their  respective  successors  and
assigns.

October 11, 2006                /s/ Myron Levy
-------------------        -----------------------------------------------------
Date                       Myron Levy
                           Chairman and Chief Executive Officer
                           Herley Industries, Inc.

October 11, 1006                /s/ John M. Kelley
-------------------        -----------------------------------------------------
Date                       John M. Kelley
                           President
                           Herley Industries, Inc.

October 11, 2006                /s/ K. J. Purcell
-------------------        -----------------------------------------------------
Date                       Kevin J. Purcell, CPA
                           Vice President, Chief Financial Officer
                           Herley Industries, Inc.

October 11, 2006                /s/ Charles L. Pourciau, Jr.
-------------------       ------------------------------------------------------
Date                      Charles L. Pourciau, Jr.
                          Vice President Administration and Governance
                          Herley Industries, Inc.

October 12, 2006                /s/ Mark O. Wilkoff
-------------------       ------------------------------------------------------
Date                      Mark O. Wilkoff
                          Suspending and Debarring Official
                          Department of the NavyAGREEMENT

     AGREEMENT  made as of this 27 day of September,  2006 by and between HERLEY
INDUSTRIES,  INC., a Delaware corporation,  with its principal office located at
101 North Pointe Boulevard,  Lancaster,  Pennsylvania  17601 (the "Company") and
LEE N.  BLATT,  residing  at 734 Yokum Pond Road,  Becket,  Massachusetts  01223
("Blatt").

     WHEREAS,  Blatt,  a  founder  of the  Company,  has been its  Chairman  for
approximately 41 years; and

     WHEREAS,  the Company and Blatt entered into an employment  agreement dated
as of  July  29,  2002,  as  modified  on  December  3,  2003  (the  "Employment
Agreement")  which  amended and restated in its  entirety  his prior  employment
agreements; and

     WHEREAS,  on June 6, 2006 the Company  and Blatt were  indicted on multiple
charges in connection with three government  contracts completed in October 2002
aggregating revenue of approximately $3.9 million (the "Indictment"); and

     WHEREAS, on June 8, 2006, as a result of the Indictment,  Blatt voluntarily
resigned his positions as Chairman and director of the Company; and

     WHEREAS,  on June 9,  2006  the U.S.  Government  as a  consequence  of the
Indictment,  suspended  the Company from  engaging in any new business  with the
U.S. Government in its principal manufacturing  facilities located in Lancaster,
Pennsylvania,  Farmingdale, New York and Woburn,  Massachusetts  ("Manufacturing
Facilities"); and

     WHEREAS,  the Company has been  negotiating  with the U.S.  Government  for
purposes of entering into an  administrative  order removing  these  suspensions
("Administrative  Order") in order to enable  the  Manufacturing  Facilities  to
enter into new contracts with the U.S. Government; and

     WHEREAS, as a condition to entering into the Administrative Order, the U.S.
Government  has mandated that the Company  terminate  its employee  relationship
with Blatt; and

     WHEREAS, under the Employment Agreement,  the only basis for termination by
the Company would be "without cause" which would result in an immediate lump sum
payment to Blatt of $9,461,528 in addition to other substantial benefits; and

     WHEREAS,  after negotiations between the Company's  Compensation  Committee
and Blatt, Blatt has agreed to terminate the Employment  Agreement on terms more
beneficial to the Company than otherwise  mandated under its terms,  including a
long-term payout without interest.

<PAGE>

     WHEREAS,  this agreement shall be effective only upon the effective date of
the Administrative Order ("Effective Date").

     NOW,  THEREFORE,  based upon the mutual covenants  contained herein and for
other  good and  valuable  consideration,  the  sufficiency  of which is  hereby
acknowledged, the Company and Blatt agree as follows:

     1. In full  satisfaction  of all prior,  current and future  obligations to
Blatt under the Employment Agreement or otherwise,  whether accrued or otherwise
(except for rights of, or obligations  to, Blatt or his affiliates in connection
with  his or their  ownership  of the  Company's  equity  securities  "Ownership
Rights") the parties hereby agree as follows:

     (a) On the  Effective  Date,  Blatt shall receive a lump sum payment in the
sum of $3,000,000.00 and shall thereafter receive the monthly sum of $100,000.00
commencing on January 1, 2007 and continuing thereafter on the first day of each
month for sixty-four (64)  consecutive  months through April 1, 2012 and the sum
of  $61,528.00  on May 1,  2012,,  as more  fully set forth in the  non-interest
bearing  promissory  note  annexed  hereto as  "Exhibit A" and  incorporated  by
reference herein ("Promissory Note").

     (b) Blatt shall receive his annual bonus for the fiscal year ended July 31,
2006 in accordance with the terms of paragraph 4 of the Employment Agreement.

     (c)  Blatt  shall  continue  to  receive  medical  care  reimbursement  and
insurance,  including life insurance  payments,  in accordance with the terms of
paragraphs 9(b) and 10(f)(ii)(C) of the Employment Agreement.

     (d) With respect to any outstanding  options previously issued to Blatt, it
is  hereby  acknowledged  that all of such  options  are  currently  vested  and
exercisable  and that such options shall  continue to be  exercisable by him or,
following  his  death,  by  his  designated  beneficiaries,  on  or  before  the
expiration date of the specific option, i.e., all five (5) year options shall be
exercisable  on or before  five  years  from date of grant and all ten (10) year
options shall be exercisable on or before ten years from date of grant.

     2. In the event of a "change  of  control"  of the  Company  as  defined in
paragraph 1(d) of the  Employment  Agreement,  all remaining  payments under the
Promissory Note shall immediately become due and payable.

     3. (a) Blatt  covenants,  represents  and  agrees  that the  provisions  of
paragraph  14 of the  Employment  Agreement  shall  survive this  agreement  and
continue in full force and effect.

     (b) Blatt  covenants,  represents  and  agrees  that  during  the period he
receives  payments  hereunder  and for a  period  of one  year  thereafter,  and
provided the Company is not in breach of this  agreement,  he shall abide by and
fully comply with the  provisions of paragraph 15 of the  Employment  Agreement,
which is hereby modified by deleting subsection (c)(i) thereof.

                                       2
<PAGE>

     (c)   The   provisions   of   Paragraphs   16   (Remedies/Sanctions),    17
(Beneficiaries/References),  19 (Indemnification and Liability Insurance) and 21
(Assignability;  Binding Nature) of the Employment  Agreement shall survive this
agreement and are fully  incorporated by reference herein and made applicable to
the provisions therein.

     (d) The provisions of Paragraph 12 (Parachutes) of the Employment Agreement
shall survive this agreement and are fully  incorporated by reference herein and
made  applicable to all or any portion of the payments to be made to Blatt under
this agreement  and/or any other payments and benefits that Blatt receives or is
entitled to receive from the Company.

     (e) The provisions of the Indemnification Agreement between the Company and
Blatt made and entered  into on May 21, 2003 (the  "Indemnification  Agreement")
shall survive this  agreement and shall apply to Blatt after  termination of his
employment with the Company, and are fully incorporated by reference herein.

     4. (a) Subject only to the  performance  of and  compliance  by the Company
with the provisions of this agreement,  and except for the Company's  continuing
indemnification  obligations under applicable law, the Employment  Agreement and
the Indemnification Agreement, Blatt hereby waives, remits, releases and forever
discharges the Company,  its past,  present and future Board members,  officers,
directors, stockholders,  employees, agents, attorneys, subsidiaries,  servants,
successors,  insurers,  affiliates and their successors and assignees,  from any
and all manner of action, claims, liens, demands, liabilities, causes of action,
charges, complaints, suits (judicial,  administrative,  or otherwise),  damages,
debts,  demands,  obligations  of any other  nature,  past or present,  known or
unknown,  whether in law or in equity,  whether founded upon contract (expressed
or  implied),  tort  (including,  but not  limited to,  defamation),  statute or
regulation  (State,  Federal  or local),  common law and/or any other  theory or
basis,  from the beginning of the world to the date hereof,  including,  but not
limited  to,  any claim  that  Blatt has  asserted,  now  asserts  or could have
asserted.  This  includes,  but is not limited to,  claims for  compensation  or
benefits, tortious claims arising out of the consulting relationship,  claims of
an  expressed  or implied  contract of  employment,  claims under the Family and
Medical Leave Act, claims arising under Federal, State or local laws prohibiting
employment  or  other   discrimination  or  claims  growing  out  of  any  legal
restrictions  on the  Company's  rights to terminate  its  employees,  including
without limitation any claims arising under Title VII of the United States Code,
and the Age  Discrimination  in  Employment  Act. It is expressly  understood by
Blatt that among the  various  rights  and  claims  being  waived by him in this
release are those arising under the Age Discrimination in Employment Act of 1967
(29 U.S.C. Sec. 621, et seq.).

     (b) Subject only to the performance of, and compliance with, the provisions
of this agreement,  and except as prohibited  under applicable law, the Company,
hereby waives, remits,  releases and forever discharges Blatt and his successors
and  assignees,  from any and all  manner of  action,  claims,  liens,  demands,
liabilities,   causes  of  action,   charges,   complaints,   suits   (judicial,
administrative, or otherwise), damages, debts, demands, obligations of any other

                                       3
<PAGE>

nature, past or present, known or unknown,  whether in law or in equity, whether
founded upon contract (expressed or implied),  tort (including,  but not limited
to,  defamation),  statute or regulation (State,  Federal or local),  common law
and/or any other  theory or basis,  from the  beginning of the world to the date
hereof.

     5. The Company and Blatt  respectively  represent  and warrant that each is
fully  authorized  and  empowered  to enter  into  this  agreement  and that the
performance of its or his obligations,  as the case may be, under this agreement
will not violate any agreement between such party and any other person,  firm or
organization.  The Company  represents and warrants that this agreement has been
duly  authorized by all  necessary  corporate  action and is valid,  binding and
enforceable in accordance with its terms.

     6. Except to the extent otherwise provided herein,  this agreement contains
the entire  understanding and agreement between the Company and Blatt concerning
the subject matter hereof and supersedes any prior  agreements,  whether written
or oral,  between the parties  concerning the subject  matter hereof,  including
without limitation the Employment Agreement.

     7. No provision in this  agreement may be amended  unless such amendment is
agreed to in writing and signed by both Blatt and an  authorized  officer of the
Company.  No  waiver  by either  party of any  breach by the other  party of any
condition or provision contained in this agreement to be performed by such other
party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent  time.  Any waiver must be in writing and
signed by the party to be charged  with the waiver.  No delay by either party in
exercising  any right,  power or privilege  hereunder  shall operate as a waiver
thereof.

     8. In the event that any  provision or portion of this  agreement  shall be
determined to be invalid or unenforceable  for any reason,  in whole or in part,
the remaining provisions of this agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.

     9. This  agreement  shall be governed by and construed and  interpreted  in
accordance with the laws of New York, without regard to its governing  conflicts
of law principles.

     10. Any notice given to either party including  notice under the Promissory
Note,  shall be in writing and shall be deemed to have been given when delivered
either  personally,  by overnight  delivery service (such as Federal Express) or
sent by certified or registered mail postage prepaid,  return receipt requested,
duly addressed to the party concerned at the address  indicated below or to such
changed address as the party may subsequently give notice of.

                                       4
<PAGE>

If to Herley or the Board:
Herley Industries, Inc.
101 North Pointe Boulevard
Lancaster, Pennsylvania  17601-4133
Fax No.  717-297-9503
Attn:  Mr. Myron Levy, Chairman and Chief Executive Officer

With a copy to:
Beckman, Lieberman & Barandes, LLP
116 John Street, Suite 1313
New York, New York  10038
Attn:  David H. Lieberman, Esq.
Fax No. 212-608-9687

If to Blatt:
734 Yokum Pond Road
Becket, Massachusetts  01223

And to:
741 North Arrowhead Trail
Vero Beach, FL 32963

     11. The  headings  of the  sections  contained  in this  agreement  are for
convenience  only and shall not be deemed to control  or affect  the  meaning or
construction of any provision of this agreement.

     12. This agreement may be executed in  counterparts,  each of which when so
executed and delivered shall be an original,  but all such counterparts together
shall constitute one and the same instrument.

     IN WITNESS  WHEREOF,  the  undersigned  have executed this  agreement as of
September 27, 2006.

                                        HERLEY INDUSTRIES, INC.

                                        By: /s/ John Kelley
                                            ---------------------------------
                                            John Kelley, President

                                            /s/ Lee N. Blatt
                                            ---------------------------------
                                            Lee N. Blatt

<PAGE>
                                                Exhibit "A"

                                PROMISSORY NOTE

$6,461,528.00                                         Lancaster, Pennsylvania
                                                      September ___, 2006

     FOR  VALUE  RECEIVED,  the  undersigned,   HERLEY  INDUSTRIES,   INC.  (the
"Company")  promises to pay to LEE N. BLATT,  or his assigns  ("Blatt"),  at 734
Yokum Pond Road,  Becket,  Massachusetts  01223,  or at such other  place as the
holder of this Note may  designate in writing from time to time,  the  principal
sum of SIX MILLION,  FOUR HUNDRED  SIXTY ONE  THOUSAND,  FIVE HUNDRED AND TWENTY
EIGHT DOLLARS ($6,461,528.00).

     1.  The  Company  shall  pay  this  Note,  without  interest,   in  monthly
installments of ONE HUNDRED THOUSAND DOLLARS ($100,000.00) commencing on January
1, 2007 and  continuing  thereafter on the 1st day of each month for  sixty-four
(64)  consecutive  months  through April 1, 2012 and one monthly  installment of
SIXTY ONE THOUSAND, FIVE HUNDRED AND TWENTY EIGHT DOLLARS ($61,528.00) on May 1,
2012.  Notwithstanding the foregoing, this Note shall immediately become due and
payable, without notice, in the event of a "change in control" of the Company as
defined under paragraph 1(d) of the Employment Agreement between the Company and
Blatt dated as of July 29, 2002, as modified on December 3, 2003.

     2.  Under  this  Note,  failure  of the  Company  to pay any amount due and
payable within thirty days after written demand is received by the Company shall
constitute a default. Upon default,  Blatt (a) may declare this Note immediately
due and payable in full; and (b) be entitled to exercise against the Company any
and all rights and remedies that may otherwise be available to him hereunder and
at law or in equity.

     3. By his acceptance of this Note, Blatt represents and warrants that he is
acquiring this Note for investment,  and not with a view to the  distribution of
the Note.

     4. This Note shall be governed by and construed in accordance with the laws
of the State of New York,  excluding  therefrom  any  principles of conflicts of
law;  this Note may not be  amended or  modified  except  pursuant  to a written
instrument  executed  by each of Blatt (or his  assigns  upon his death) and the
Company.

     5. The Company shall have the right to prepay this Note at any time or from
time to time, in whole or in part, without penalty.

<PAGE>

     6. This Note is subject to and governed by the terms and  conditions of the
Agreement by and between the Company and Blatt dated as of September ___, 2006.

                                                HERLEY INDUSTRIES, INC.

                                                By: ----------------------
                                                    John Kelley, President

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