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

FORM 10-K/A
Amendment 1

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

For the fiscal year ended July 31, 2005

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

For the transition period from ________________to ____________________

Commission File No. 0-5411

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act: None

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

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

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

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

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

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

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

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

Documents incorporated by reference:

None

EXPLANATORY NOTE

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

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

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

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

HERLEY INDUSTRIES, INC.

TABLE OF CONTENTS

Page
PART I

Item 1. Business. 4

Item 2. Properties. 12

Item 3. Legal Proceedings. 13

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

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities. 14

Item 6. Selected Financial Data. 15

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16

Item 7A.Quantitative and Qualitative Disclosures about Market Risk. 23

Item 8. Financial Statements and Supplementary Data. 24

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

Item 9A.Controls and Procedures. 24

Item 9B.Other Information 27

PART III

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

Item 11.Executive Compensation. 29

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

Item 13.Certain Relationships and Related Transactions. 35

Item 14.Principal Accounting Fees and Services 35

PART IV

Item 15.Exhibits and Financial Statement Schedules. 36

SIGNATURES 38

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

PART I

Item 1. Business

FORWARD-LOOKING STATEMENTS

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

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

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

GENERAL

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

BACKGROUND

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

ACQUISITIONS

We have grown internally and through strategic acquisitions and have evolved
from a component manufacturer to a systems and service provider. We have
successfully integrated these acquisitions by targeting microwave technology
companies and focusing their strengths into our existing operations. Over the
last ten years, our acquisitions have included the following:

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

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

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

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

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

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

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

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

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

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

BUSINESS STRATEGY

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

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

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

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

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

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

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

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

COMPETITIVE STRENGTHS

Our competitive strengths include:

- - TECHNICAL EXPERTISE. We have developed a leading position in the field of
microwave technology through our 40 year focus on research and development
and our state-of-the-art design and production capabilities. In fiscal 2002
we completed the expansion of our facilities in Lancaster, Pennsylvania,
including state-of-the-art manufacturing capacity, where we now have a full
range of capabilities including long and short run production, hardware
assembly and full- service engineering. In addition, we have highly capable
manufacturing facilities located in Woburn, Massachusetts; Farmingdale, New
York; Whippany, New Jersey; Melbourne, Florida; Fort Walton Beach FL;
Farnborough, England; and Jerusalem, Israel. We continue to develop and
reward our engineers in order to maintain our expertise in-house.

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

- - DIVERSE PRODUCT AND CUSTOMER BASE. We have a diverse product and customer
base, with only the U.S. Government at approximately 25%, and Northrop
Grumman at approximately 11%, representing 11% or more of our fiscal 2005
revenues. We are a first-tier supplier to all of the prime defense
contractors, as well as a direct supplier to all of the service branches of
the U.S. military, including products found on over 120 individual
platforms. Foreign customers accounted for approximately 26% of our
revenues in fiscal 2005.

- - LONG-STANDING INDUSTRY RELATIONSHIPS. We have established long-standing
relationships with the U.S. Government and other key organizations in the
aerospace and defense industry after 40 years in the defense electronic
industry. Over this period, we have become recognized for our ability to
develop new technologies and meet stringent program requirements.

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

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

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

PRODUCTS AND SERVICES

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

The following are descriptions of our major systems and products:

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

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

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

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

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

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

Transponders. We manufacture a variety of expendable transponders, including
range safety, IFF, command and control, and range scoring systems. Transponders
are small, expendable, electronic systems consisting of a transmitter, sensitive
receiver and internal signal processing equipment comprised of active and
passive components, including microwave subassemblies such as amplifiers,
oscillators and circulators. The transponder receives signals from radars,
changes and amplifies the frequency of the signals, and transmits back a reply
on a different frequency and signal level. This reply is a strong, noise-free
signal upon which the tracking radar can "lock," and one which is far superior
to skin reflection tracking, particularly under adverse weather conditions after
the launch.

In range safety applications, transponders enable accurate tracking of space
launch and unmanned aerial vehicles, missiles, and target drones so that
position and direction are known throughout its flight. In the case of several
defense and commercial space launch vehicles (i.e., Delta, Atlas, Titan and
Pegasus), our transponder is tracked by the ground launch team all the way to
space orbit, and in certain instances through several orbits, as a reference
location point in space to assure that the launch payload has been properly
placed in orbit.

IFF transponders, which are used in conjunction with the Federal Aviation
Authority Air Traffic Control System, enable ground controllers to identify the
unmanned targets, drones and cruise missiles on which these units fly and to
vector other manned aircraft safely away from the flight path of the unmanned
aerial vehicle.

Command and control transponders provide the link through the telemetry system
for relaying ground signals to direct the vehicle's flight. The uplink from the
ground control station, a series of coded pulse groups, carries the signals that
command the flight control guidance system of the vehicle. The downlink to the
ground provides both tracking signals for range safety, as well as
acknowledgment and status of the uplink commands and their implementation in the
vehicle. The transponder is therefore the means to fly the vehicle. Scoring
systems are mounted on both airborne and sea targets. Scoring systems enable
test and evaluation engineers to determine the "miss-distance" between a
projectile and the target at which it has been launched.

Flight Termination Receiver. A flight termination receiver, or FTR, is installed
in a test missile, UAV, target or space launch vehicle as a safety device. The
FTR has a built-in decoder that enables it to receive a complex series of audio
tones which, when appropriate, will set off an explosive charge that will
destroy the vehicle. A Range Safety Officer, or RSO, using the range safety
transponder will track the vehicle in flight to determine if it is performing as
required. If the RSO detects a malfunction in the test or launch vehicle that
causes it to veer from a planned trajectory in a manner that may endanger
personnel or facilities, the RSO will transmit a coded signal to the onboard FTR
to explode the vehicle.
7

HF Communications and IFF Interrogators. We design and manufacture high
frequency radio and IFF interrogators. This high frequency communications
equipment is used by the U.S. Navy and foreign navies that conduct joint
military exercises with the U.S. Navy. The IFF interrogators are used as part of
shipboard equipment and are also placed on coastlines, where they are employed
as silent sentries. We have been a significant supplier to the Republic of Korea
for over twenty years and have a large, established installed base of equipment.
We have been, and continue to be, a supplier to the Republic of Korea KDX
destroyer program.

High Power Amplifier. We design and manufacture high power amplifier systems
with frequencies ranging from 1.5 Megahertz ("MHz") to 12 GHz with power levels
from multi-kilowatts up to 15W, depending on the frequency. Our high power
amplifier applications include but are not limited to defense communication,
electronic warfare, radar and avionics.

Microwave Integrated Circuits. We design and manufacture complex microwave
integrated circuits, or MICs, which consist of sophisticated assemblies that
perform many functions, primarily involving switching of microwave signals. Our
MICs are employed in many defense electronics systems and missile programs.

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

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

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

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

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

The RSS8000 Series Radar Threat Simulator generates real-time user programmable
radar threats and provides output configurations in digital (On-board
trainer-OBT) and RF (RSS series) formats. The system can be used for EW system
test and evaluation as well as for EW operator training in laboratory and more
rugged environments. The RSS8000 equipment covers the 100MHz to 40 GHz range and
can be configured to suit any application from a portable single RF source unit
to a multiple RF source and multiple port DF system. The DF systems are
available in amplitude, DTOA and/or phase formats with the ports being capable
of angular rotation.

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

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

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

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

CUSTOMERS

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

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

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

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

SALES AND MARKETING

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

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

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

MANUFACTURING

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

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

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

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

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

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

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

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

BACKLOG

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

All of the orders included in backlog are covered by signed contracts or
purchase orders. Backlog is not directly indicative of future sales.
Accordingly, we do not believe that our backlog as of any particular date is
representative of actual sales for any succeeding period.

Approximately 90% of our contracts are fixed price contracts, some of which
require delivery over time periods in excess of one year. With this type of
contract, we agree to deliver products at a fixed price except for costs
incurred because of change orders issued by the customer.

In accordance with Department of Defense procedures, all contracts involving
government programs may be terminated by the government, in whole or in part, at
the government's discretion for cause or convenience. In the event of a
termination for convenience, prime contractors on such contracts are required to
terminate their subcontracts on the program, and the government or the prime
contractor is obligated to pay the costs incurred by us under the contract to
the date of termination plus a fee based on the work completed.

PRODUCT DEVELOPMENT

We believe that our growth depends, in part, on our ability to renew and expand
our technology, products, and design and manufacturing processes with an
emphasis on cost effectiveness. We focus our primary efforts on engineering
design and product development activities rather than pure research. Our policy
is to assign the required engineering and support people, on an ad hoc basis, to
new product development as needs require and budgets permit. The cost of these
development activities, including employees' time and prototype development, was
approximately $10.3 million in fiscal 2005, $11.1 million in fiscal 2004 and
$6.3 million in fiscal 2003. The portion of these costs not reimbursed by
customers was approximately $5.0 million in fiscal 2005, $5.4 million in fiscal
2004 and $3.1 million in 2003. These increases in development spending were
undertaken to continue to provide future business opportunities for the Company.
Future product development costs will depend on the availability of appropriate
development opportunities within the markets served by the Company.

COMPETITION

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

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

GOVERNMENT REGULATION

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

INTELLECTUAL PROPERTY

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

EMPLOYEES

As of July 31, 2005 we had 1,026 employees. We believe that our employee
relations are satisfactory. None of our approximately 889 U.S. based employees
are represented by a labor union. Employment by functional area as of July 31,
2005 is as follows:
Executive 15
Administration 55
Manufacturing 638
Engineering 260
Sales and Marketing 58
------
Total 1,026
======
We believe that our future success will depend, in part, on our continued
ability to recruit and retain highly skilled technical, managerial and marketing
personnel, including microwave engineers. To assist in recruiting and retaining
such personnel, we have established competitive benefits programs, including a
401(k) employee savings plan for our U.S. employees, and stock option plans.

OFFICERS OF THE REGISTRANT

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

Lee N. Blatt 77 1965 Chairman of the Board
Myron Levy 64 1988 Vice Chairman, Chief
Executive Officer, and
Director
John M. Kelley 52 1998 President
William Wilson 57 2002 Vice President and
Chief Operating Officer
Rozalie Schachter 59 2000 Vice President - Business
Development
Anello C. Garefino 58 1993 Vice President - Finance
John A. Carroll 54 2003 Vice President - Human
Resources
Richard Poirier 40 2003 Vice President

Item 2. Properties

Our facilities are as follows:

Owned
or
Location Purpose of Property Area Leased
- -------- ------------------- ---- ------

Lancaster, PA Corporate headquarters 3,300 sq. ft. Leased
Lancaster, PA Production, engineering and administration 86,200 sq. ft. Owned
Woburn, MA Production, engineering and administration 60,000 sq. ft. Owned
Farmingdale, NY (1) Production, engineering and administration 46,000 sq. ft. Leased
14,000 sq. ft. Leased
Whippany, NJ (2) Production, engineering and administration 23,000 sq. ft. Leased
Melbourne, FL (3) Production, engineering and administration 12,000 sq. ft. Leased
Fort Walton Beach, FL (5) Production, engineering and administration 31,500 sq. ft. Leased
McLean, VA (6) Production, engineering and administration 43,260 sq. ft. Leased
Jerusalem, Israel Production, engineering and administration 29,580 sq. ft. Leased
Farnborough, England (4) Production, engineering and administration 7,570 sq. ft. Leased
Chicago, IL Engineering and administration 3,000 sq. ft. Leased
Lancaster, PA Land held for expansion 37 Acres Owned
______________
<FN>
(1) On September 23, 1999 we closed on the sale of its prior owned facility in
Amityville, NY and relocated the plant to this leased facility in
Farmingdale, NY. The Company entered into two 10 year lease agreements with
a partnership owned by the children of Messrs Blatt and Levy. The leases
provide for initial minimum annual rent of approximately $312,000 and
$92,000, respectively, in each case subject to escalation of approximately
4% annually throughout the 10 year term.
(2) We entered into an agreement as of March 29, 2004 to acquire certain assets
and the business of Communication Techniques, Inc. as discussed in Note B
of the financial statements.
(3) As of September 1, 2004, we entered into an agreement to acquire certain
assets and the business of Reliable System Services Corporation as
discussed in Note B of the financial statements.
(4) As of September 1, 2002, we entered into an agreement to acquire all of the
issued and outstanding common stock of EW Simulation Technology, Limited as
discussed in Note B of the financial statements.
(5) As of February 1, 2005, we entered into an agreement to acquire all of the
issued and outstanding common stock of Micro Systems, Inc. as discussed in
Note B of the financial statements. Prior to the acquisition of MSI, MSI
had leased one of its two buildings in Fort Walton Beach, Florida from MSI
Investments, a Florida General Partnership. MSI Investments is owned by
four individuals, three of whom are currently employees of MSI. This lease
has an original term of 15 years, ending December 31, 2012. The lease costs
currently are approximately $278,000 on an annual basis, including the
tenant's obligation to pay for insurance and property taxes. The base lease
rate is adjusted every January for changes in the consumer price index,
using 1997 as the base year.
(6) As of April 1, 2005, we entered into an agreement to acquire all of the
issued and outstanding common stock of Innovative Concepts, Inc., including
its wholly owned subsidiary Stapor in Chantilly, VA as discussed in Note B
of the financial statements.
</FN>

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

Item 3. Legal Proceedings

On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson
("Robinson") filed an Amended Complaint against Herley Industries, Inc.
("Herley"). Although the Amended Complaint sets forth fifteen counts, the core
allegations are (i) that Herley failed to issue 97,841 shares of common stock in
connection with certain earn out requirements contained in an Asset Purchase
Agreement dated February 1, 2000; (ii) that Herley breached an Employment
Agreement with Robinson by terminating his employment on August 5, 2001; and
(iii) that Herley breached a Stock Option Agreement dated January 31, 2000, with
Robinson. RLI and Robinson asserted (i) violations of state and federal
securities laws; (ii) fraud claims; (iii) breach of contract claims; and (iv)
other equitable claims arising from the above core factual allegations.

On September 17, 2001, Herley filed an Answer, Affirmative Defenses and
Counterclaims in this matter. In the Answer and Affirmative Defenses, Herley
denied the material allegations of the Amended Complaint. Herley also filed
Counterclaims against both RLI and Robinson. In these counterclaims, Herley's
core allegations concern Robinson's misconduct (i) in connection with the manner
he attempted to satisfy RLI's earn out requirements; (ii) misrepresentations
made in connection with the Asset Purchase Agreement; (iii) wrongdoing as a
Herley employee leading to his termination and (iv) post-Herley employment
wrongdoing in connection with a new company known as RH Laboratories. In
addition to seeking a Declaratory Judgment pursuant to 28 U.S.C. Sec. 2201 et.
seq., Herley also asserted claims for, among other things, fraud, breach of
contract, breach of fiduciary duty, unfair competition and tortious interference
with actual and prospective contractual relationships.

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

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

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

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

requested relief. On July 27, 2004, Herley paid $1,594,621 (including interest)
to Ben Robinson, an amount calculated by deducting Herley's award against
Robinson from the amounts awarded to Robinson on his claims under the Employment
Agreement and the Lease Agreement. On July 28, 2004, the parties filed a Notice
of Partial Satisfaction of Judgment.

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

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

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

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

Not Applicable.

PART II

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

(a) Our Common Stock is traded in the NASDAQ National Market under the symbol
HRLY. The following table sets forth the high and low closing sales price
as reported by the NASDAQ National Market for our Common Stock for the
periods indicated.

Common Stock
High Low
---- ---

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

Fiscal Year 2005
First Quarter 19.77 17.32
Second Quarter 20.60 18.04
Third Quarter 20.27 16.40
Fourth Quarter 19.82 17.38

Fiscal Year 2006
First Quarter (through October 17, 2005) 21.54 17.29

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

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

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

(b) Not applicable.

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

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

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

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

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

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

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

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

Total Assets 244,101 220,971 197,564 190,202 114,597
Total Current Liabilities 34,168 23,846 18,125 14,557 17,976
Long-Term Debt net of current portion 5,000 5,845 6,403 5,684 2,740
Other Long-Term Liabilities 1,042 932 849 706 756
<FN>

(1) Earnings per share from continuing operations are presented and calculated
before discontinued operations in 2002 and 2001, and before cumulative
effect of accounting change in 2002.
(2) No cash dividends have been distributed in any of the years presented.
(3) See "Acquisitions" under Item 1. "Business".
</FN>

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

Results of Operations

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

52 weeks ended 53 weeks
----------------------- ended
July 31, August 1, August 3,
2005 2004 2003
---- ---- ----

Net sales 100.0% 100.0% 100.0%
Cost of products sold 70.3% 65.1% 66.4%
------ ------ ------

Gross profit 29.7% 34.9% 33.6%

Selling and administrative expenses 20.0% 18.9% 15.8%

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

Fiscal 2005 Compared to Fiscal 2004

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

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

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

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

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

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

offset by

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

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

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

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

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

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

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

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

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

Fiscal 2004 Compared to Fiscal 2003

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

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

Selling and administrative expenses for the fifty-two weeks ended August 1, 2004
were 19% of net sales as compared to 16% in fiscal 2003. There was a net
increase in expenses of $5,713,000 which includes:

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

- -- an increase of litigation costs of $777,000 directly related to the
Robinson Labs litigation and include a payment of the jury award to Ben
Robinson of approximately $1,595,000 in July 2004. (See Item 3. "Legal
Proceedings");

- -- an increase in incentive compensation under employment contracts and
discretionary bonuses of $320,000; and

- -- additional administrative and business development personnel and related
costs of $2,019,000;

The Company reorganized and expanded its business development group to focus and
capitalize on worldwide market opportunities for all of its products. Other
increases include amortization of acquired intangibles of $90,000, sales
representative fees and commissions of $623,000, and $303,000 in consulting fees
primarily in connection with our Sarbanes-Oxley, Section 404 preparation which
will continue in fiscal 2005.

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

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

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

The effective income tax rate for fiscal 2004 was 31% as compared to 32% in
fiscal 2003. The overall effective tax rate is lower than the statutory income
tax rate of 35% in fiscal 2004 due to various favorable tax benefits including a
lower effective tax rate on foreign-source income, the tax benefit attributable
to extra territorial income, and research and development credits.

Quarterly Results (Unaudited)

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

October 31, January 30, May 1, July 31,
2005 2004 2005 2005 2005
- ---- --------------- ------------- -------- -----------

Net sales $ 33,590 33,754 41,266 42,805
Gross profit 10,859 9,880 13,421 11,398

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

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

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

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

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

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

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

Earnings per common share - Basic $ 0.28 0.25 0.27 0.16
=============== ============= ======== ===========

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

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

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

The fourth quarter has historically been our strongest quarter for shipments.
The third and fourth quarters of fiscal 2005 includes revenue attributable to
the acquisitions of MSI of $5,294,000 and $2,824,000, respectively, and ICI of
$3,401,000 and $8,389,000, respectively. The third and fourth quarter of fiscal
2004 includes revenue attributable to the acquisition of CTI of $1,116,000 and
$3,007,000, respectively.

The gross margin percentage in the fourth quarter of 2005 was negatively
impacted (as compared to 2004) due to revisions in total cost estimates on
certain long term contracts at our EWST subsidiary which resulted in negative
gross profit. In addition, the gross profit margin also varies from quarter to
quarter due to changes in product mix.

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

Liquidity and Capital Resources

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

As is customary in the defense industry, inventory is partially financed by
progress payments. In addition, it is customary for us to receive advanced

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

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

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

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

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

4. other net sources of cash

offset by

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

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

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

Net cash used in investing activities includes:

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

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

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

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

In June 2002, we entered into a new $50,000,000 Revolving Credit Loan Agreement
with two banks on an unsecured basis which may be used for general corporate
purposes, including business acquisitions. The revolving credit facility
requires the payment of interest only on a monthly basis and payment of the
outstanding principal balance on January 31, 2007 (as amended). We may elect to
borrow up to a maximum of $5,000,000 with interest based on the Federal Funds
Target Rate plus a margin of 1.50% to 1.80%, or up to a maximum of $45,000,000
with interest based on LIBOR plus a margin of 1.35% to 1.65%. The applicable
incremental margin is based on the ratio of total liabilities to tangible net
worth, as those terms are defined in the agreement. The Federal Funds Target
Rate and the LIBOR rate was 3.25% and 3.49%, respectively, at July 31, 2005.
There is a fee of 15 basis points per annum on the unused portion of the
$45,000,000 LIBOR based portion of the credit facility payable quarterly. There
were no borrowings under the line at July 31, 2005 and August 1, 2004. Stand-by
letters of credit were outstanding in the amount of $10,703,000 under the credit
facility at July 31, 2005.

We believe that presently anticipated future cash requirements will be provided
by internally generated funds, our existing unsecured credit facility, and
existing cash reserves. A significant portion of our revenue for fiscal 2005
will be generated from our existing backlog of sales orders. The backlog of
orders at July 31, 2005 was approximately $145 million. All orders included in
backlog are covered by signed contracts or purchase orders. Nevertheless,
contracts involving government programs may be terminated at the discretion of
the government. In the event of the cancellation of a significant amount of
government contracts included in our backlog, we will be required to rely more
heavily on cash reserves and our existing credit facility to fund our
operations. We are not aware of any events which are reasonably likely to result
in any cancellation of our government contracts. We have approximately
$39,297,000 available under our bank credit facility, net of outstanding
stand-by letters of credit of approximately $10,703,000, and cash reserves at
July 31, 2005 of approximately $20,331,000.

Contractual Obligations and Commitments

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

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

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

Within 2-3 4-5 After 5
Obligations Total 1 Year Years Years Years
----------- ----- ------ ----- ----- -------

Mortgage Note $ 2,571 $ 124 $ 270 $ 308 $ 1,869
Industrial Revenue Bonds 3,811 220 442 442 2,707
EWST Note 606 606 - - -
Operating Lease Obligations 17,095 2,876 5,629 3,655 4,935
Purchase Obligations 22,038 17,739 3,106 1,063 130
------ ------ ------ ------ ------
46,121 21,565 9,447 5,468 9,641
Standby Letters of Credit 10,703 2,327 7,989 325 62
------ ------ ------ ------ ------
Total Contractual Obligations $ 56,824 $ 23,892 $ 17,436 $ 5,793 $ 9,703
====== ====== ====== ====== ======

In addition, we have employment agreements with certain executives of the
Company which expire December 31, 2008, subject to extension for additional
one-year periods annually each January 1 with a final expiration date of
December 31, 2015. The agreements provide for aggregate annual salaries as of
July 31, 2005 of $1,460,000 and provide for a semi- annual cost of living
adjustment based on the consumer price index. The agreements also provide for
incentive compensation at 7% in the aggregate of pretax income of the Company.

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

The agreements also provide for consulting periods, one for five years and one
for ten years, at the end of the employment period at an annual compensation
equivalent to one-half of the executive's annual salary at the end of the
employment period, subject to annual cost of living adjustments.

Recent Accounting Pronouncements

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

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - An Amendment of APB Opinion No. 29". SFAS No. 153 eliminates the exception
from fair value measurement for nonmonetary exchanges of similar productive
assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that do not have
21

commercial substance. SFAS No 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
the fiscal periods beginning after June 15, 2005, and is required to be adopted
by the Company effective August 1, 2006. We do not expect SFAS No. 153 to have a
material impact on the Company's consolidated financial position or results of
operations.

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

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

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

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

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

Critical Accounting Policies and Estimates

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

We generally recognize revenue when products are shipped and the customer takes
ownership and assumes risk of loss, collection of the relevant receivable is
probable, persuasive evidence of an arrangement exists and the sales price is
fixed or determinable. Payments received from customers in advance of products
delivered are recorded as customer advance payments until earned. Approximately
90% of our customer contracts are firm, fixed price contracts, providing for a
predetermined fixed price for the products sold, regardless of the costs
incurred. Approximately 14% to 16% of revenues over the last three fiscal years
were derived from long-term, fixed price contracts for which revenues and
estimated profits are recognized using the percentage of completion method of
accounting based on estimated completion to date (the total contract amount
multiplied by the percentage of performance, based on total costs incurred in
relation to total estimated cost at completion). Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance. Selling, general and administrative costs are charged to expense as
incurred. Risks and uncertainties inherent in the estimation process could
affect the amounts reported in our financial statements. The key assumptions
used in the estimate of costs to complete relate to labor costs and indirect
costs required to complete the contract. The estimate of rates and hours as well
as the application of overhead costs is reviewed on a regular basis. If our
business conditions were different, or if we used different assumptions in the
application of this and other accounting policies, it is likely that materially
different amounts would be reported on our financial statements.
22

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

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

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

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

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

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

Based on our historical results and expected future results, EWST accounts for
approximately 7% to 10% of our total revenues, based in part on the rate at
which EWST's Sterling denominated financial statements have been or will be
converted into U.S. dollars. Since its acquisition in fiscal year 2003, EWST has
contributed approximately 2.2% to our consolidated operating income. Having a
portion of our future revenue and income denominated in Sterling exposes us to
market risk with respect to fluctuations in the U.S. dollar value of future
Sterling denominated revenue and earnings.

We have a foreign denominated liability as of July 31, 2005 of approximately
667,000 Pounds Sterling in connection with the acquisition of EWST that is
subject to foreign exchange rate fluctuations. Based on the spot rate of
exchange at July 31, 2005 of 1.7593, the U.S. Dollar equivalent of the liability
is approximately $586,000.

We have made inter-company advances to EWST in the aggregate amount of
approximately $6 million at July 31, 2005 that were previously considered
long-term advances. However, since the advances are denominated in U.S. Dollars
and EWST anticipates reducing the amount of advances during fiscal year 2006,
the amount outstanding is subject to foreign exchange rate fluctuations.

In October 2001, we entered into an interest rate swap with a bank pursuant to
which it exchanged floating rate interest in connection with the Bonds discussed
in Note H of the financial statements on a notional amount of $3,000,000 for a
fixed rate of 4.07% for a 10 year period ending October 1, 2011. The notional
amount reduces each year in tandem with the annual installments due on the
Bonds. The fixing of the interest rate for this period offsets our exposure to
the uncertainty of floating interest rates on the Bonds, and as such has been
designated as a cash flow hedge. The hedge is deemed to be highly effective and
any ineffectiveness will be recognized in interest expense in the reporting
period. The fair value of the interest rate swap was a liability of
approximately $80,000 as of July 31, 2005. There was no material hedge
ineffectiveness related to cash flow hedges during the fiscal years presented to
be recognized in earnings.

We also have a $50,000,000 Revolving Credit Loan Agreement with two banks on an
unsecured basis which may be used for general corporate purposes, including
business acquisitions. The revolving credit facility requires the payment of
interest only on a monthly basis and payment of the outstanding principal

balance on January 31, 2007. We may elect to borrow up to a maximum of
$5,000,000 with interest based on the Federal Funds Target Rate plus a margin of
1.50% to 1.80%, or up to a maximum of $45,000,000 with interest based on LIBOR
plus a margin of 1.35% to 1.65%. The applicable incremental margin is based on
the ratio of total liabilities to tangible net worth, as those terms are defined
in the Agreement. The Federal Funds Target Rate and the LIBOR rate was 3.25% and
3.49%, respectively, at July 31, 2005. The credit line is reviewed on an annual
basis.

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

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

Fiscal year ending: Bonds
------------------ -----

2006 $ 110
2007 115
2008 120
2009 125
2010 130
2011 and later 2,100
-------
$ 2,700
=======
Fair value $ 2,780
=======

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

Item 8. Financial Statements and Supplementary Data

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

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

Not applicable

Item 9A. Controls and Procedures

I. Evaluation of Disclosure Controls and Procedures.

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

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

II. Changes in Internal Control over Financial Reporting.

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

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

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

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

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

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

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

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

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

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

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

Important Considerations

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

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

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

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

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

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

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

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

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

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

/s/ BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
October 7, 2005
26

Item 9B. Other Information

Not applicable

PART III

Item 10. Directors and Executive Officers of the Registrant

Directors of the Registrant

Director
Name of Director Age Principal Occupation Since
---------------- --- -------------------- ---------

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

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

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

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

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

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

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

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

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

Executive Officers of the Registrant

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

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

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

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

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

Committees of the Board of Directors

Audit Committee and Audit Committee Financial Expert

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

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

Compensation Committee

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

Nominating Committee

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

Corporate Governance Committee

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

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

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

Corporate Governance - Code of Ethics

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

Item 11. Executive Compensation

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

Summary Compensation Table

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

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

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

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

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

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

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

Option Grants in Last Fiscal Year

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

Individual Grants
--------------------------------------------------------
Number of Potential Realized Value at
Securities % of Total Assumed Annual Rates of
Underlying Options Issued Exercise Stock Price Appreciation
Options to Employees in Price Expiration Option Term (3)
Name Granted(1) Fiscal Year(2) ($/Sh) Date 0% 5% 10%
- ---- ---------- -------------- ----------- ---------- --- --- ---

Lee N. Blatt 200,000 20 $ 17.98 5/02/15 $ 0.00 $2,261,505 $5,731,098

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

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

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

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

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

The following table sets forth stock options exercised during fiscal 2005
and all unexercised stock options held by the named executive officers as of
July 31, 2005.

Value of Unexercised
Number of Unexercised In the-Money
Shares Options at Fiscal Options at Fiscal
Acquired on Value Year-End Year-End (2)
Name Exercise(#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------- -------------- ------------ ------------- ------------ -------------

Lee N. Blatt - - 1,301,000 - $ 8,006,868 -
Myron Levy - - 1,075,000 - 5,644,998 -
John M. Kelley - - 99,000 - 366,181 -
William R. Wilson - - 45,000 - 52,600 -
Thomas V. Gilboy - - 23,000 - 23,000 -
- -------
<FN>
(1) Values are calculated by subtracting the exercise price from the trading
price of the common stock as of the exercise date.
(2) Based upon the closing price of the common stock of $19.54 on July 31,
2005.
</FN>

Employment Agreements

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

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

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

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

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

Directors' Compensation

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

Board of Directors Interlocks and Insider Participation

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

Indemnification Agreements

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

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

Common Stock % of Outstanding
Name of Beneficial Owner Beneficially Owned (1) (2) Shares
- ------------------------ -------------------------- -----------------

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

* Indicates ownership of less than one percent.

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

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

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

</FN>

Equity Compensation Plan Information

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

(c)
Number of securities
(a) Remaining available
Number of securities (b) for future issuance
to be issued upon Weighted-average under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
- ------------- ---------------------- -------------------- -------------------------

Equity compensation
Plans approved by
security holders 2,735,023 13.03 12,958

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

Total 3,735,530 14.41 21,458

The following information is provided about our stock option plans:

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

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

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

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

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

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

Employee Savings Plan

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

Item 13. Certain Relationships and Related Transactions.

Not applicable.

Item 14. Principal Accountant Fees and Services.

BDO SEIDMAN, LLP is our independent registered public accounting firm and
performed the audit of our consolidated financial statements for fiscal year
2005. Our consolidated financial statements for fiscal year 2004 were audited by
the independent registered public accounting firm of Deloitte & Touche LLP. The
following table sets forth all fees for the fiscal years ended July 31, 2005 and
August 1, 2004:

2005 2004
---- ----

Audit Fees (1) $ 309,000 $ 346,000
Tax Fees (2) 27,000 52,000
- --------------
<FN>
(1) Audit Fees includes fees for professional services provided in connection
with the audits of our financial statements, the review of our quarterly
financial statements, Sarbanes-Oxley 404 related services, consents, and
audit services provided in connection with other statutory or regulatory
filings. All such services were pre- approved by the Audit Committee.

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

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

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

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Exhibits

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

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

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

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

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

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

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

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

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

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

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

10.10Lease Agreement dated September 1, 1999 between Registrant and RSK Realty
LTD. (Exhibit 10.8 of Annual Report on Form 10-K for the fiscal year ended
August 1, 1999).

10.11Loan Agreement dated June 19, 2002 among the Registrant, Allfirst Bank and
Fulton Bank. (Exhibit 10.10 of Annual Report on Form 10-K for the fiscal
year ended July 28, 2002).

10.12Amendment (dated May 2, 2003) to Loan Agreement dated June 19, 2002 among
the Registrant, Manufacturers and Traders Trust Company, successor in
interest to Allfirst Bank, and Fulton Bank. (Exhibit 10.12 of Annual Report
on Form 10-K for the fiscal year ended August 3, 2003).

10.13Asset Purchase Agreement dated as of February 1, 2000 between Registrant
and Robinson Laboratories, Inc. (Exhibit 10.2 of Form 10-Q dated March 13,
2000).

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

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

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

10.17Common Stock Purchase Agreement dated as of September 20, 2002 between
Registrant and EW Simulation Technology, Limited. (Exhibit 10.17 of Annual
Report on Form 10-K for the fiscal year ended July 28, 2002).

10.18Trust Indenture dated as of October 19, 2001 between Registrant, and East
Hempfield Township Industrial Development Authority and Allfirst Bank, as
Trustee. (Exhibit 10.18 of Annual Report on Form 10-K for the fiscal year
ended July 28, 2002).

10.19Amendment (dated April 2, 2004) to Loan Agreement dated June 19, 2002
among the Registrant, Manufacturers and Traders Trust Company, successor in
interest to Allfirst Bank, and Fulton Bank. (Exhibit 10.19 of Annual Report
on Form 10-K for the fiscal year ended August 1, 2004).

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

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

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

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

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

10.25Amendment (dated June 9, 2005) to Loan Agreement dated June 19, 2002 among
the Registrant, Manufacturers and Traders Trust Company, successor in
interest to AllFirst Bank, and Fulton Bank. (Exhibit 10.1 of Form 10-Q
dated June 10, 2005).

23.1 Consent of BDO Seidman, LLP.

23.2 Consent of Deloitte & Touche LLP.

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

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

(b) Financial Statements

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

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on November 28, 2005.

HERLEY INDUSTRIES, INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on November 28, 2005 by the following persons in
the capacities indicated:

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

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

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

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

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

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

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

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

Schedule II - Valuation and Qualifying Accounts (in thousands)

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

Valuation accounts deducted
from assets to which they
apply:

July 31, 2005:
Inventory $ 3,938 $ 804 $ - $ 250 $ 4,492

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

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

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

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

Item 8. Financial Statements and Supplementary Data

HERLEY INDUSTRIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS F-2

FINANCIAL STATEMENTS:

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

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

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

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

Notes to Consolidated Financial Statements F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

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

/s/ BDO SEIDMAN, LLP

Philadelphia, Pennsylvania
October 7, 2005

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Corporation's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Herley Industries, Inc. and
subsidiaries at August 1, 2004, and the results of their operations and their
cash flows for each of the two years in the period ended August 1, 2004, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule for the years
ended August 1, 2004 and August 3, 2003, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Baltimore, Maryland
October 14, 2004

F-3

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

July 31, August 1,
2005 2004
------------ -----------

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

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

F-4

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

Fifty-three
Fifty-two weeks ended weeks ended
July 31, August 1, August 3,
2005 2004 2003
--------------- ---------------- ----------------

Net sales $ 151,415 $ 122,154 $ 110,223
--------------- ---------------- ----------------

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

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

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

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

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

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

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

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

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

F-5

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

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

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

Exercise of stock options 227,799 23 1,971 1,994
Tax benefit upon exercise of stock
options 575 575
Purchase of 939,608 shares of treasury stock (14,668) (14,668)
Retirement of treasury shares (939,608) (94) (14,574) 14,668 -
----------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal 13,969,151 1,397 104,551 47,541 - (230) 153,259
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net income 13,937 13,937
Other comprehensive income (loss) net of tax:
Unrealized gain on
available-for-sale securities 18 18
Unrealized gain on interest rate swap 47 47
Foreign currency translation (loss) (19) (19)
----------
Comprehensive income 13,983
----------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at August 3, 2003 13,969,151 $ 1,397 104,551 61,478 - (184)$ 167,242
Exercise of stock options 251,357 25 2,433 2,458
Tax benefit upon exercise of stock options 687 687
----------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal 14,220,508 1,422 107,671 61,478 - (184) 170,387
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net income 13,673 13,673
Other comprehensive income (loss) net of tax:
Unrealized gain on
available-for-sale securities 49 49
Unrealized (loss) on interest rate swap (23) (23)
Foreign currency translation gain 1,414 1,414
----------
Comprehensive income 15,113
----------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at August 1, 2004 14,220,508 $ 1,422 107,671 75,151 - 1,256 $ 185,500
Exercise of stock options 329,349 33 3,501 3,534
Tax benefit upon exercise of stock options 658 658
Purchase of 160,232 shares of treasury stock (2,728) (2,728)
Retirement of treasury shares (160,232) (16) (2,712) 2,728 -
----------- ---------- ---------- ---------- ---------- ---------- ----------
Subtotal 14,389,625 1,439 109,118 75,151 - 1,256 186,964
----------- ---------- ---------- ---------- ---------- ---------- ----------
Net income 10,781 10,781
Other comprehensive income (loss) net of tax:
Unrealized loss on
available-for-sale securities (1) (1)
Unrealized gain on interest rate swap 18 18
Foreign currency translation (loss) (125) (125)
----------
Comprehensive income 10,673
----------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at July 31, 2005 14,389,625 $ 1,439 109,118 85,932 - 1,148 $ 197,637
=========== ========== ========== ========== ========== ========== ==========

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

F-6

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Fifty-three
Fifty-two weeks ended weeks ended
July 31, August 1, August 3,
2005 2004 2003
-------- ---------- ----------

Cash flows from operating activities:
Income from continuing operations $ 10,781 $ 13,673 $ 13,937
--------- --------- ----------

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

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

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

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

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

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

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

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

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Nature of Operations

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

2. Fiscal Year

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

3. Basis of Financial Statement Presentation

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

4. Cash and Cash Equivalents

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

5. Concentration of Credit Risk

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

6. Inventories

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

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

F-8

7. Property, Plant and Equipment

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

8. Goodwill and Other Intangible Assets

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

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

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

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

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

Intangibles consist of the following (in thousands):

July 31, August 1, Estimated
2005 2004 useful life
-------- -------- ------------

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

F-9

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

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

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

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

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

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

2006 $ 1,788
2007 1,788
2008 1,782
2009 1,782
2010 1,502

9. Marketable Securities

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

10. Other Investments

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

F-10

11. Revenue and Cost Recognition

The Company generally recognizes revenue when products are shipped and the
customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the
sales price is fixed or determinable. Payments received from customers in
advance of products delivered are recorded as customer advance payments until
earned. Substantially all of our customer contracts are firm, fixed price
contracts, providing for a predetermined fixed price for the products sold,
regardless of the costs incurred. A certain percentage of revenues are derived
from long-term, fixed price contracts. Revenues and estimated profits are
recognized on these contracts using the percentage of completion method of
accounting and are based on estimated completion to date (the total contract
amount multiplied by the percentage of performance, based on total costs
incurred in relation to total estimated cost at completion). Prospective losses
on long-term contracts are based upon the anticipated excess of manufacturing
costs over the selling price of the remaining units to be delivered and are
recorded in the period when first determinable. Actual losses could differ from
those estimated due to changes in the ultimate manufacturing costs and contract
terms.

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

12. Product Development

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

13. Income Taxes

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

14. Stock-Based Compensation

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

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

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

F-11

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

Pro forma Disclosures

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

2005 2004 and 2003
---- -------------

Expected life from vest date .84 years 1.51 years
Volatility .44 .48
Risk-free interest rate 3.8% 2.8%
Dividend yield zero zero

For purposes of pro forma disclosures, compensation costs for stock options
granted in fiscal years 2005, 2004, and 2003, based on the fair value at the
grant date consistent with the provisions of SFAS 123, the Company's net income
and earnings per share would have been as follows (in thousands except per share
data):

2005 2004 2003
----------- ----------- -----------

Net income - as reported $ 10,781 $ 13,673 $ 13,937
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (2,770) (570) (1,896)
----------- ----------- -----------
Net income - pro forma $ 8,011 $ 13,103 $ 12,041
=========== =========== ===========

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

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

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

F-12

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

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

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

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

15. Foreign Currency Translation

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

16. Derivatives

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

17. Comprehensive Income

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

F-13

18. New Accounting Pronouncements

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

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

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

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

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

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

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

NOTE B - ACQUISITIONS

The Company entered into an agreement as of March 29, 2004 to acquire
certain assets and the business, subject to the assumption of certain
liabilities, of Communication Techniques, Inc. for $14,914,000 in cash. The
business operates as a wholly-owned subsidiary of the Company, Herley-CTI,

F-14

Inc. (ACTI@). CTI designs, develops and produces signal generation
components and integrated assemblies for digital radio, Satellite
Communications, test and instrumentation, and datacom applications. CTI
also recently developed a fast frequency changing direct synthesizer which,
when combined with the capabilities of Herley-Israel, puts the Company at
the forefront of producing broadband microwave sources for radar,
communication, electronic warfare, and microwave test systems.

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

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

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

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

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

Acquisition CTI RSS MSI ICI
Effective Date March 29, 2004 September 1, 2004 February 1, 2005 April 1, 2005
-------------- -------------- ----------------- ---------------- -------------

Current assets $ 2,861 $ 483 $1,534 $8,759
Property, plant and equipment 1,492 72 2,038 681
Other assets - - 1 -
Intangible assets 3,200 - 4,400 10,200
Goodwill 8,753 3,456 15,148 17,189
Current liabilities (1,392) (258) (2,436) (9,860)
--------- --------- --------- ---------
Aggregate purchase price $ 14,914 $ 3,753 $ 20,685 $ 26,969
========= ========= ========= =========

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

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

F-15

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

Unaudited pro forma financial information for the three acquisitions completed
by the Company in fiscal 2005 as if the acquisitions had occurred on August 4,
2003 is as follows (in thousands except per share amounts):

2005 2004
---- ----

Net sales $ 173,223 $ 158,584
Net income 10,374 13,654
Net Income per common share:
Basic $ 0.72 $ 0.97
Diluted $ 0.69 $ 0.92
Weighted shares outstanding
Basic 14,310 14,105
Diluted 14,969 14,896

NOTE C - INVENTORIES

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

July 31, August 1,
2005 2004
---- ----

Purchased parts and raw materials $ 23,838 $ 23,555
Work in process 32,026 22,878
Finished products 2,296 2,412
-------- --------
58,160 48,846
Less reserve 4,492 3,938
-------- --------
$ 53,668 $ 44,909
======== ========

NOTE D - OTHER INVESTMENTS

In July 1994, the Company invested $1,000,000 for a limited partnership
interest in M.D. Sass Municipal Finance Partners-I, a Delaware limited
partnership. The objectives of the partnership are the preservation and
protection of its capital and the earning of income through the purchase of
certificates or other documentation that evidence liens for unpaid local
taxes on parcels of real property. At July 31, 2005 and August 1, 2004 the
percentage of ownership was approximately 10%. The Company's interest in
the partnership may be transferred to a substitute limited partner, upon
written notice to the managing general partners, only with the unanimous
consent of both general partners at their sole discretion. The partnership
is in the process of being liquidated and accordingly the Company received
partial distributions of approximately $109,000 and $55,000 from the
Partnership in fiscal 2005 and 2004, respectively. As of July 31, 2005 the
Company's limited partnership interest had a carrying value of
approximately $62,000, based on the equity method of accounting.

F-16

NOTE E - PROPERTY, PLANT AND EQUIPMENT

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

July 31, August 1, Estimated
2005 2004 Useful Life
---------- ----------- -------------

Land $ 4,006 $ 3,781
Building and building improvements 12,011 10,043 10-40 years
Machinery and equipment 48,014 43,225 5- 8 years
Furniture and fixtures 1,581 1,347 5-10 years
Automobiles 18 7 3 years
Leasehold improvements 2,418 1,526 5-10 years
---------- ----------
68,048 59,929
Less accumulated depreciation 38,587 33,961
---------- ----------
$ 29,461 $ 25,968
========== ==========

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

NOTE F - COMMITMENTS AND CONTINGENCIES

Leases

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

Amount
-------

Year ending fiscal 2006 $ 2,876
2007 2,670
2008 2,959
2009 2,963
2010 692
Future 4,935

Employment Agreements

The Company has employment agreements with certain executives of the
Company which expire December 31, 2009, subject to extension for additional
one-year periods annually each January 1 with a final expiration date of
December 31, 2015 (as amended December 9, 2003). The agreements provide for
aggregate annual salaries as of July 31, 2005 of $1,460,000 and provide for
a semi-annual cost of living adjustment based on the consumer price index.
The agreements also provide for incentive compensation at 7% in the
aggregate of pretax income of the Company. Incentive compensation in the
amount of $1,138,000, and $2,214,000 (including a supplemental payment of
$650,000 for fiscal 2003) was charged to expense in fiscal years 2005 and
2004, respectively.

The agreements also provide that, in the event there is a change in control
of the Company, as defined, the executives have the option to terminate the
agreements and receive a lump-sum payment equal to the sum of the salary
payable for the remainder of the employment term, plus the annual bonuses
(based on the average of the three highest annual bonuses awarded during
the ten preceding years) for the remainder of the employment term. As of
July 31, 2005, the amount payable in the event of such termination would be
approximately $16,797,000. The agreements also provide for consulting
periods, one for five and one for ten years, at the end of the employment
period at an annual compensation equivalent to one-half of the executive's
annual salary at the end of the employment period, subject to annual cost
of living adjustments.

F-17

An employment contract of a retired executive provides for a consulting
period which became effective October 1, 1998, and terminates December 31,
2010 at the annual rate of compensation of $100,000.

Eight officers of the Company have severance agreements providing for an
aggregate lump-sum payment of $2,970,000 through September 30, 2006 in the
event of a change of control of the Company as defined in the agreements.

Litigation

On August 14, 2001, Robinson Laboratories, Inc. ("RLI") and Ben Robinson
("Robinson") filed an Amended Complaint against Herley Industries, Inc.
("Herley"). Although the Amended Complaint sets forth fifteen counts, the
core allegations are (i) that Herley failed to issue 97,841 shares of
common stock in connection with certain earn out requirements contained in
an Asset Purchase Agreement dated February 1, 2000; (ii) that Herley
breached an Employment Agreement with Robinson by terminating his
employment on August 5, 2001; and (iii) that Herley breached a Stock Option
Agreement dated January 31, 2000, with Robinson. RLI and Robinson asserted
(i) violations of state and federal securities laws; (ii) fraud claims;
(iii) breach of contract claims; and (iv) other equitable claims arising
from the above core factual allegations.

On September 17, 2001, Herley filed an Answer, Affirmative Defenses and
Counterclaims in this matter. In the Answer and Affirmative Defenses,
Herley denied the material allegations of the Amended Complaint. Herley
also filed Counterclaims against both RLI and Robinson. In these
counterclaims, Herley's core allegations concern Robinson's misconduct (i)
in connection with the manner he attempted to satisfy RLI's earn out
requirements; (ii) `misrepresentations made in connection with the Asset
Purchase Agreement; (iii) wrongdoing as a Herley employee leading to his
termination and (iv) post-Herley employment wrongdoing in connection with a
new company known as RH Laboratories. In addition to seeking a Declaratory
Judgment pursuant to 28 U.S.C. Sec. 2201 et. seq., Herley also asserted
claims for, among other things, fraud, breach of contract, breach of
fiduciary duty, unfair competition and tortious interference with actual
and prospective contractual relationships.

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

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

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

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

F-18

also denied Herley's request that it exercise its general equitable power
to hold Ben Robinson personally liable for any fees Herley might recover
against RLI.

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

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

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

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

Stand-by Letters of Credit

The Company maintains a letter of credit facility with a bank that provides
for the issuance of stand-by letters of credit and requires the payment of
a fee of 1.0% per annum of the amounts outstanding under the facility. The
facility expires January 31, 2007. At July 31, 2005 stand-by letters of
credit aggregating approximately $10,703,000 were outstanding under this
facility.

NOTE G - INCOME TAXES

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

52 weeks ended 53 weeks ended
July 31, August 1, August 3,
2005 2004 2003
---------------- --------- ----------------

Current
Federal $ 2,772 $ 5,514 $ 5,465
State 344 549 533
Foreign 30 431 379
------- ------- -------
3,146 6,494 6,377
Deferred
Federal 992 (372) (233)
State 94 (44) (23)
Foreign 13 5 378
------- ------- -------
1,099 (411) 122
------- ------- -------
$ 4,245 $ 6,083 $ 6,499
======= ======= =======

F-19

The Company paid income taxes of approximately $546,000, $5,496,000, and
$4,164,000 in fiscal 2005, 2004, and 2003, respectively. The following is a
reconciliation of the U. S. statutory income tax rate and the effective tax
rate on pretax income:

52 weeks ended 53 weeks ended
July 31, August 1, August 3,
2005 2004 2003
-------- ---------- ---------------

Statutory income tax rate 35.0 % 35.0 % 34.0 %
State income taxes, net of
Federal income tax benefit 1.9 1.7 1.7
Benefit of extra territorial income (1.1) (1.4) (1.0)
Non-deductible expenses 0.7 0.6 0.6
Benefit of foreign and
foreign-source income (1.0) (3.9) (3.4)
Research and development credits (5.7) (1.0) -
Tax exempt interest (1.3)
Other, net (0.2) (0.2) (0.1)
------ ------ ------
Effective tax rate 28.3 % 30.8 % 31.8 %
====== ====== ======

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

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

July 31, 2005 August 1, 2004
----------------------- ------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
--------- ----------- -------- ------------

Intangibles $ - $ 3,060 $ - $ 2,186
Accrued vacation pay 396 - 335 -
Accrued bonus 318 - 583 -
Warranty costs 279 - 297 -
Inventory 1,348 - 1,256 -
Depreciation - 3,194 - 2,662
Contract losses 69 - 221 -
Net operating loss
carry-forwards 360 - 230 -
Other 16 - 267 -
------------- ------------ ------------ ------------
$ 2,786 $ 6,254 $ 3,189 $ 4,848
============= ============ ============ ============

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

F-20

NOTE H- LONG-TERM DEBT

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

July 31, August 1,
Rate 2005 2004
---- ---------- -----------

Revolving loan facility (a) 4.75% and 5.29% $ - $ -
Mortgage note (b) 7.43% 2,431 2,524
Industrial Revenue Bonds (c) 4.07% 2,700 2,805
Note for acquired business (d) 1.80% 586 1,212
Other 80 108
------------- ------------
5,797 6,649
Less current portion 797 804
------------- ------------
$ 5,000 $ 5,845
============= ============

(a) In June 2002, the Company entered into a new $50,000,000 Revolving Credit
Loan Agreement with two banks on an unsecured basis which may be used for
general corporate purposes, including business acquisitions. The revolving
credit facility requires the payment of interest only on a monthly basis
and payment of the outstanding principal balance on January 31, 2007 (as
amended). The Company may elect to borrow up to a maximum of $5,000,000
with interest based on the Federal Funds Target Rate plus a margin of 1.50%
to 1.80%, or up to a maximum of $45,000,000 with interest based on LIBOR
plus a margin of 1.35% to 1.65%. The applicable incremental margin is based
on the ratio of total liabilities to tangible net worth, as those terms are
defined in the agreement. The Federal Funds Target Rate and the LIBOR rate
was 3.25% and 3.49%, respectively, at July 31, 2005. There is a fee of 15
basis points per annum on the unused portion of the $45,000,000 LIBOR based
portion of the credit facility payable quarterly. There are no borrowings
under the line at July 31, 2005 and August 1, 2004.

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

(b) The mortgage loan is for a term of ten years commencing February 16, 1999
with fixed monthly principal and interest installments of $23,359,
including interest at a fixed rate of 7.43%, and is based upon a twenty
year amortization. The loan is secured by a mortgage on the Company's land
and building in Lancaster, Pennsylvania having a net book value of
approximately $1,861,000.

The mortgage note agreement contains various financial covenants,
including, among other matters, the maintenance of specific amounts of
tangible net worth, debt to tangible net worth, debt service coverage, and
restrictions on other borrowings. The Company is in compliance with all
covenants at July 31, 2005. In connection with this loan, the Company paid
approximately $45,000 in financing costs. Such costs are included in Other
Assets in the accompanying consolidated balance sheets at July 31, 2005 and
August 1, 2004, and are being amortized over the term of the loan (10
years).

(c) On October 19, 2001, the Company received $3,000,000 in proceeds from the
East Hempfield Township Industrial Development Authority Variable Rate
Demand/Fixed Rate Revenue Bonds Series of 2001 (the "Bonds"). The Bonds are
due in varying annual installments through October 1, 2021. The initial
installment of $95,000 was paid October 1, 2002 and increases each year
until the final payment of $225,000 in 2021. The interest rate on the Bonds
is reset weekly at the prevailing market rate of the BMA Municipal index.
The initial rate of interest was 2.1%, which, after giving effect to a ten
year interest rate swap agreement (See Note O) becomes a fixed rate of
4.07%. The interest rate at July 31, 2005 was 2.48%. The bond agreement
requires a sinking fund payment on a monthly basis to fund the annual Bonds
redemption installment. Proceeds from the Bonds were used for the
construction of a 15,000 square foot expansion of the Company's facilities
in Lancaster Pennsylvania, and for manufacturing equipment.

The Bonds are secured by a letter of credit expiring October 18, 2006 and a
mortgage on the related properties pledged as collateral. The net book
value of the land and building covered by the mortgage is approximately
$1,723,000 at July 31, 2005.

F-21

(d) In connection with the acquisition of EWST as of September 1, 2002, the
Company issued a note for 1,000,000 Pounds Sterling, including interest at
1.8%, payable in annual installments of 333,334 Pounds Sterling beginning
October 1, 2003. Based on the spot rate of exchange at July 31, 2005 of
1.7593 the U.S. Dollar equivalent of the annual installments is
approximately $586,000.

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

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

Fiscal year ending during: Amount

2006 $ 797
2007 223
2008 236
2009 251
2010 266
Future 4,024
-------
$ 5,797

NOTE I - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

July 31, August 1,
2005 2004
--------- ----------

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

NOTE J - EMPLOYEE BENEFIT PLANS

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

F-22

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

NOTE K - RELATED PARTY TRANSACTIONS

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

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

NOTE L - COMPUTATION OF PER SHARE EARNINGS

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

53 weeks
52 weeks ended ended
July 31, August 1, August 3,
2005 2004 2003
------------- ------------- -------------

Numerator:
Net Income $10,781 $13,673 $13,673
============= ============= =============
Denominator:
Basic weighted-average shares 14,310 14,105 14,317
Effect of dilutive securities:
Employee stock options 659 791 714
------------- ------------- -------------
Diluted weighted-average shares 14,969 14,896 15,031
============= ============= =============

Stock options not included in computation 807 4 702
============= ============= =============

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

F-23

NOTE M - SHAREHOLDERS' EQUITY

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

Summary of Stock Option Plans

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

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

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

In May 1997, the Board of Directors approved the 1997 Stock Option Plan
which covers 2,500,000 shares of the Company's common stock. Options
granted uFnder the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the plan, the exercise price for options
granted under the plan will be the fair market value at the date of grant.
Prices for incentive stock options granted to employees who own 10% or more
of the Company's stock are at least 110% of market value at date of grant.
The nature and terms of the options to be granted are determined at the
time of grant by the compensation committee or the board of directors. The
options expire no later than ten years from the date of grant, subject to
certain restrictions. Non-qualified stock options for 5,000 and 7,500
shares were granted under this plan during the fiscal years ended July 31,
2005 August 1, 2004, respectively.

F-24

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

Average
Number Price Range Exercise
of shares per share Price
--------- --------- --------

Outstanding July 28, 2002 3,427,176 $ 4.06 - 19.52 $ 11.92
Granted 108,500 14.50 - 19.03 $ 17.68
Exercised (227,799) 4.06 - 13.10 $ 8.80
Cancelled (9,650) 8.38 - 13.10 $ 11.36
--------------- ---------------- ---------------
Outstanding August 3, 2003 3,298,227 $ 4.06 - 19.52 $ 12.33
Granted 53,500 17.32 - 20.45 $ 19.38
Exercised (253,598) 4.06 - 19.52 $ 9.88
Cancelled (77,200) 8.38 - 17.67 $ 11.91
--------------- ---------------- ---------------
Outstanding August 1, 2004 3,020,929 $ 4.06 - 19.52 $ 12.33
Granted 1,081,000 17.98 - 19.94 $ 18.29
Exercised (329,349) 16.54 - 20.60 $ 18.55
Canceled (37,050) 8.38 - 19.83 $ 17.08
--------------- ---------------- ---------------
Outstanding July 31, 2005 3,735,530 $ 4.06 - 20.45 $ 14.41
===============

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

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

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

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

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

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

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

F-25

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

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

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

2005 2004 2003
---- ---- ----

United States $ 131,326 $ 100,746 $ 88,294
Israel 12,738 12,305 10,717
England 7,351 9,103 11,212
--------- ---------- ----------
$ 151,415 $ 122,154 $ 110,223
========= ========== ==========

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

2005 2004
` ---- ----

United States $ 24,318 $ 21,544
Israel 4,376 3,499
England 767 925
-------- --------
$ 29,461 $ 25,968
======== ========

NOTE O - DERIVATIVE FINANCIAL INSTRUMENTS

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

F-26

NOTE P - FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximated its fair value.

Available-for-sale securities: The fair value of available-for-sale
securities was based on quoted market prices.

Long-term debt: The fair value of the mortgage note and industrial
revenue bonds (including the related interest rate swap) were
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rate for similar types of borrowing
arrangements.

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

July 31, 2005
---------------------------------------
Carrying Amount Fair Value
---------------------- ---------------

Cash and cash equivalents $ 20,331 $ 20,331
Long-term debt 5,000 5,385

F-27

NOTE Q - QUARTERLY RESULTS (UNAUDITED)

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

October 31, January 30, May 1, July 31,
2005 2004 2005 2005 2005
- ---- ------------ ------------- -------------- ---------------

Net sales $ 33,590 33,754 41,266 42,805
Gross profit 10,859 9,880 13,421 11,398

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

November 2, February 1, May 2, August 1,
2004 2003 2004 2004 2004
- ---- ------------ ------------- -------------- ---------------

Net sales $ 28,267 29,408 30,233 34,246
Gross profit 10,642 10,363 10,768 10,876

Net income $ 3,941 3,546 3,876 2,310
=========== =========== =========== ===========
Earnings per common share - Basic $ 0.28 0.25 0.27 0.16
=========== =========== =========== ===========
Basic weighted average shares 14,013 14,073 14,129 14,205
=========== =========== =========== ===========
Earnings per common share - Diluted $ 0.27 0.24 0.26 0.15
=========== =========== =========== ===========
Diluted weighted average shares 14,782 14,880 14,932 14,962
=========== =========== =========== ===========

The fourth quarter has historically been our strongest quarter for
shipments. The third and fourth quarters of fiscal 2005 includes revenue
attributable to the acquisitions of MSI of $5,294,000 and $2,824,000,
respectively, and ICI of $3,401,000 and $8,389,000, respectively. The third
and fourth quarter of fiscal 2004 includes revenue attributable to the
acquisition of CTI of $1,116,000 and $3,007,000, respectively.

The gross margin percentage in the fourth quarter of 2005 was negatively
impacted (as compared to 2004) due to revisions in total cost estimates on
certain long term contracts at our EWST subsidiary which resulted in
negative gross profit. In addition, the gross profit margin also varies
from quarter to quarter due to changes in product mix.

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

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