HERLEY INDUSTRIES INC /NEW - 10-K Annual Report

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

FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 2, 1998

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...............to ...............

Commission File No. 0-5411

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

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

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

Registrant's telephone number, including area code: (717) 397-2777
--------------
Securities registered pursuant to Section 12(b) of the Act:

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

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

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

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

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

Based on the closing sale price of $8.8125 as of October 6, 1998 the aggregate
market value of the voting stock held by non-affiliates of the registrant was
$36,892,994.

The number of shares outstanding of registrant's common stock, $ .10 par value
as of October 6, 1998 was 5,313,040.

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

HERLEY INDUSTRIES, INC.

TABLE OF CONTENTS

Page
PART I
Item 1 Business 1
Item 2 Properties 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8

PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A Quantitative and Qualitative Disclosures About Market Risk 15
Item 8 Financial Statements and Supplementary Data 15
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 10 Directors and Executive Officers of the Registrant 15
Item 11 Executive Compensation 15
Item 12 Security Ownership of Certain Beneficial
Owners and Management 15
Item 13 Certain Relationships and Related Transactions 15

PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8K 16

SIGNATURES 17

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES F-1

PART I

Forward-Looking Statements

All statements other than statements of historical fact included in this Annual
Report, including without limitation statements under, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations, are
forward-looking statements. When used in this Annual Report, words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
as they relate to the Company or its management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of the
Company's management, as well as assumptions made by and information currently
available to the Company's management. Actual results could differ materially
from those contemplated by the forward-looking statements as a result of certain
factors including but not limited to, competitive factors and pricing pressures,
changes in legal and regulatory requirements, technological change or
difficulties, product development risks, commercialization and trade
difficulties and general economic conditions. Such statements reflect the
current views of the Company with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to the operations,
results of operations, growth strategy and liquidity of the Company. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.

Item 1. Business

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

The Company's command and control systems are used on training and test ranges
domestically and in foreign countries. The Company has an installed base of
approximately 100 command and control systems around the world, which are either
fixed installations, transportable units or portable units. Herley also
manufactures microwave devices used in its flight instrumentation systems and
products and in connection with the radar and defense electronic systems on
tactical fighter aircraft.

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

Since its inception in 1965, the Company has designed and manufactured microwave
devices for use in various tactical military programs. In June 1986, the Company
acquired a small engineering company, Mission Design, Inc., engaged in the
design and development of transponders. This acquisition enabled the Company to
enter the flight instrumentation business beginning with the design and
manufacture of range safety transponders. In September 1992, the Company
acquired substantially all of the assets of Micro-Dynamics, Inc. ("MDI") of
Woburn, Massachusetts, a microwave subsystem designer and manufacturer. In June
1993, the Company acquired Vega Precision Laboratories, Inc. ("Vega") of Vienna,
Virginia, a manufacturer of flight instrumentation products. In March 1994, the
Company entered into an exclusive license agreement for the manufacture,
marketing and sale of the Multiple Aircraft GPS Integrated Command & Control
(MAGIC2) systems. In July 1995, the Company acquired certain assets and the
business of Stewart Warner Electronics Corp. of Chicago, Illinois, a
manufacturer of high frequency radio and IFF interrogator systems. In August

1

1997, the Company acquired Metraplex Corporation ("Metraplex") of Frederick,
Maryland, which has enabled the Company to enter the airborne PCM and FM
telemetry and data acquisition systems market.

Products

Command and Control Systems (C2)

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

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

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

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

The new Model 6104 TTCS is a highly flexible, multiple processor design with
high resolution graphics, which can be field configured within minutes to fly or
control any selected vehicle for which it is equipped. The system is designed to
operate with a large variety of vehicles. A basic TTCS configuration is normally
supplied with a standard Company command panel and the software peculiar to one
vehicle. Telemetry display software is embedded for the specified vehicle, and a
magnetic hard drive is supplied with a mission map prepared in accordance with a
customer supplied detailed map of the area. The TTCS is used in support of
missile, aircraft and other weapons systems development and testing. Herley
continues to provide this system to customers to support their requirement.

The MAGIC2 system provides control of multiple targets from a single ground
control system, and utilizes GPS to provide accurate position information. The
MAGIC2 system meets a growing requirement to test against multiple threats with
the automated defense capabilities of ships like the AEGIS cruiser and the E-2C
aircraft.

Military surveillance operations typically use UAVs, RPVs, or drones to avoid
the cost and risk of manned surveillance vehicles in the event of an accident or
if the vehicle is shot down. These inexpensive drones are controlled in flight
by a Company command and control system, which may be mounted in a trailer that
may be moved from place to place by helicopter or truck. The Company also
manufactures portable command and control systems that are mounted on tripods

2

that can be easily transported by an operational team. The portable units permit
ready deployment in rugged terrain and may also be used on ships during open
ocean exercises.

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

Telemetry Systems

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

In 1972, Metraplex began developing data encoding and acquisition, and signal
conditioning equipment. Metraplex is now a leading manufacturer of PCM and FM
telemetry and data acquisition systems for severe environment applications,
whose products are used worldwide for testing space launch vehicle
instrumentation, aircraft flight testing, and amphibian, industrial and
automotive vehicle testing. The product portfolio ranges in size and complexity
from miniature encoders to completely programmable data acquisition systems.

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

Transponders

The Company manufactures a variety of expendable transponders, including range
safety, identification friend or foe ("IFF"), command and control, and scoring
systems.

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

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

3

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

Command and control transponders provide the link through the telemetry system
for relaying ground signals to direct the vehicle's flight. The uplink from the
ground control station, a series of coded pulse groups, carries the signals that
command the flight control guidance system of the vehicle. The downlink to the
ground provides both tracking signals for range safety, as well as
acknowledgment and status of the uplink commands and their implementation in the
vehicle. The transponder is therefore the means to fly the vehicle.

Scoring systems are mounted on both airborne and sea targets. Scoring systems
enable test and evaluation engineers to determine the "miss-distance" between a
projectile and the target at which it has been launched.

Flight Termination Receiver

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

Microwave Devices

Herley manufactures solid state microwave devices in both Lancaster,
Pennsylvania and at its MDI facility in Woburn, Massachusetts for use in its
transponders and existing long-term military programs, both as part of new
production and for spare parts and repair services. These microwave devices are
used in a variety of radar, communications and missile applications, including
airborne and shipboard navigation and missile guidance systems.

In Woburn, the Company designs and manufactures complex microwave integrated
circuits ("MICs"), which consist of sophisticated assemblies that perform many
functions, primarily involving switching of microwave signals. MICs manufactured
by the Company are employed in many defense electronics military systems as well
as missile programs. The Company also manufactures magnetrons, which are the
power source utilized in the production of the Company's transponders.

The Company produces receiver protector devices. 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. With the
contraction of the defense business, the Company has only one significant
competitor in this market.

The Company also designs and manufactures high frequency radio and IFF
interrogators. This high frequency communications equipment is used by the U.S.
Navy and foreign navies that conduct joint military exercises with the U.S.
Navy. The IFF interrogators are used as part of shipboard equipment and are also
placed on coastlines, where they are employed as silent sentries.

New Product Development and Applications

The Company believes that its growth depends, in part, on its ability to renew
and expand its technology, products, and design and manufacturing processes with
an emphasis on cost effectiveness. The Company's primary efforts are focused on
engineering design and product development activities rather than pure research.
A substantial portion of the Company's development activities have been funded
by the
4

Company's customers. Certain of the Company's officers and engineers are
involved at various times and in varying degrees in these activities. The
Company's policy is to assign the required engineering and support people, on an
ad hoc basis, to new product development as needs require and budgets permit.
The cost of these development activities, including employees' time and
prototype development, net of amounts paid by customers, were approximately
$1,562,000, $1,828,000, and $1,453,000 in fiscal 1998, 1997, and 1996,
respectively.

The new products and systems that the Company plans to design, manufacture and
sell are data link systems, which include telemetry data encoders. Data link
systems and data encoders are currently being sold by others to the Company's
existing customers. With its acquisition of Metraplex in August 1997, the
Company now offers data link systems to its customers, either directly or
through teaming arrangements. Upon receipt of an order, the Company will
customize the design of a system for its customer for delivery typically nine
months after receipt of such order.

Data Link Systems

Data link systems contain transmitters, amplifiers, receivers and other
components, and provide the means of communication between the control tower,
the ground station and the test or launch vehicle. Data link systems are the
equivalent of telephone links between the air and ground portions of launch
vehicles or test and training ranges. The uplink communication to the airborne
vehicle is transmitted via a telemetry signal from the ground to the vehicle.
The telemetry signals are used to command the airborne vehicle through its
command control transponder. The transponder will then change the flight control
guidance system as directed. The downlink signals from the airborne telemetry
transmitter to the ground telemetry receiver provide tracking signals for range
safety, confirmation of the uplink command and their implementation by the
vehicle and compilation of the data from on-board sensors gathered by the
telemetry data encoder.

Through the application of technology acquired from Metraplex, the Company
manufactures data encoders. Airborne targets and flight test missiles must have
many critical parameters simultaneously monitored from the ground to gain the
data required for verification of satisfactory performance or for identification
of details of hardware requiring design improvements. On-board sensors may
measure temperature, strain levels, vibration level and frequency, acoustic
noise levels, air pressure, air velocity, humidity and other parameters of
interest. The function of the encoder system is to convert the output of each of
these sensors to a signal form that may be sequentially sampled by an electronic
switch (multiplexer) produced by the Company in a known sequence and rate so as
to create a data stream that may be transmitted to the ground by the telemetry
system.

Commercial Lighting

Over the past three years, the Company has been seeking commercial applications
for the magnetron tubes produced by the Company's MDI division. In 1995, the
Company signed agreements with a large lighting company to develop miniature
cost-effective magnetron tubes, using electrode-less high density ("EHD")
techniques, for medical and industrial lighting applications. Based on initial
engineering results, prototype tubes were designed, manufactured and tested
satisfactorily to the specifications required. The Company and this other
company are currently planning limited production of magnetron tubes to be used
in an EHD industrial lighting application.

Government Contracts

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

5

All of the Company's government contracts are fixed price contracts, some of
which require delivery over time periods in excess of one year. With this type
of contract, the Company agrees to deliver products at a fixed price except for
costs incurred because of change orders issued by the customer.

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

Recent Developments

As of August 21, 1998, the Company entered into an agreement to acquire all of
the issued and outstanding common stock of General Microwave Corp., a New York
corporation, for $18.00 per share and a three-year warrant to purchase one share
of the Company's common stock at an aggregate purchase price of approximately
$23,000,000. The warrant is exercisable at $14.40 per share through January 11,
1999, and thereafter at $15.60 per share, until expiration. General Microwave
designs, manufactures and markets microwave components and subsystems, and
related electronic test and measurement equipment. The company is headquartered
in Amityville, New York, and operates two other facilities, one in Billerica,
Massachusetts, and one in Israel. The transaction is subject to the approval of
the stockholders of General Microwave Corp. The transaction will be accounted
for under the purchase method.

Marketing and Distribution

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

Backlog

The Company's backlog of firm orders was approximately $38,724,000 on August 2,
1998 ($25,727,000 in domestic orders and $12,997,000 in foreign orders) as
compared to approximately $36,911,000 on August 3, 1997 ($26,135,000 in domestic
orders and $10,776,000 in foreign orders). Management anticipates that
approximately $32,093,000 of the backlog will be shipped during the fiscal year
ending August 1, 1999. There can be no assurance that the Company's backlog will
result in sales in any particular period or at all, or that the contracts
included in backlog that result in sales will be profitable.

Manufacturing, Assembly and Testing

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

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

The testing of high reliability space equipment is performed by complex computer
controlled consoles that continuously monitor, analyze and measure operating
parameters. Flight instrumentation products are tested over their full operating
temperature range, after which the equipment is evaluated under combined
vibration and temperature cycling. For initial design qualification, this

6

testing may extend for several months and include evaluation of electromagnetic
interference behavior ("EMI"), ability to survive pyrotechnic shock (simulating
explosive charge detonation for space vehicle stage separation) and the combined
effects of external vacuum with heating and cooling.

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

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

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

Competition

The flight instrumentation and microwave products that the Company manufactures
are subject to varied competition depending on the product and market served.
Competition is generally based upon technology, design, price and past
performance. The Company's ability to compete for defense contracts depends, in
part, on its ability to offer better design and performance than its competitors
and its readiness in facilities, equipment and personnel to undertake to
complete the programs. In certain products or programs, the Company believes it
is sole source, which means that all work is directed to a single manufacturer.
In other cases, there may be other suppliers that have the capability to compete
for the programs involved, but they can only enter or reenter the market if the
government should choose to reopen the particular program to competition.
Competition in follow-on procurements is generally limited after an initial
award unless the original supplier has had performance problems. Many of
Herley's competitors are larger and may have greater financial resources than
the Company. Competitors include Aydin Corporation, L-3 Communications
Corporation, Microsystems, Inc., AMP, Inc. and Remec, Inc.

Employees

As of October 4, 1998, the Company employed 306 full-time persons. A total of
228 employees were engaged in manufacturing, 38 in engineering, 19 in marketing,
contract administration and field services and the balance in general and
administrative functions. None of the Company's employees are covered by
collective bargaining agreements and the Company considers its employee
relations to be satisfactory. The Company believes that its future success will
depend, in part, on its continued ability to recruit and retain highly skilled
technical, managerial and marketing personnel. To assist in recruiting and
retaining such personnel, the Company has established competitive benefits
programs, including a 401k employee savings plan, and stock option plans.

Intellectual Property

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

7

Item 2. Properties

The Company's properties are as follows:

Area Owned
Occupied or
Location Purpose of Property (Sq. ft.) Leased
- ----------------- ------------------------------------------ --------- ------

Lancaster, PA (1) Production, engineering, administrative 71,200 Owned
and executive offices
Woburn, MA Production, engineering and administration 60,000 Owned

Chicago, IL Production, engineering and administration 9,700 Leased

Frederick, MD Production, engineering and administration 11,000 Leased

Lancaster, PA Land held for expansion 26 Acres Owned
- --------------

(1) The Company's executive offices occupy approximately 4,000 sq. ft. of
space at this facility with engineering and administrative offices occupying
10,000 sq. ft. each.

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

Item 3. Legal Proceedings

The Company is not involved in any material legal proceedings.

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

Not Applicable.

8

PART II

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

(a) The Company's Common Stock is traded in the Nasdaq National Market under
the symbol HRLY. The following table sets forth the high and low sales
price as reported by the Nasdaq National Market for the Company's Common
Stock for the periods indicated and gives effect to the four-for-three
stock split of the Common Stock on September 30, 1997.

Common Stock
---------------
High Low
---- ---

Fiscal Year 1997
First Quarter.............................. 7.97 6.19
Second Quarter............................. 10.69 7.31
Third Quarter.............................. 8.91 6.09
Fourth Quarter............................. 10.69 6.19
Fiscal Year 1998
First Quarter.............................. 15.00 10.13
Second Quarter............................. 14.75 10.50
Third Quarter.............................. 14.69 10.88
Fourth Quarter............................. 14.25 8.63
Fiscal Year 1999
First Quarter (through October 20, 1998)... 10.38 7.63

The closing price on October 20, 1998 was $8.375.

(b) As of October 1, 1998, there were approximately 1,000 record holders of the
Company's Common Stock.
(c) There have been no cash dividends declared or paid by the Company on its
Common Stock during the past two fiscal years.

Item 6. Selected Financial Data

52 Weeks 53 Weeks 52 Weeks ended
Ended Ended -----------------------------------
August 2, August 3, July 28, July 30, July 31,
1998 (2) 1997 1996 1995 (3) 1994
---------- ---------- ---------- ---------- ----------

Net sales $ 40,797,991 32,195,168 29,001,404 24,450,267 30,508,211
========== ========== ========== ========== ==========
Net income (loss) $ 5,496,608 4,803,659 3,668,956 (4,890,166) 1,861,429
========= ========= ========= ========= =========
Earnings (loss) per common share (1)
Basic $ 1.11 1.18 .97 (.98) .33
==== ==== === === ===
Assuming Dilution $ 1.02 1.01 .86 (.98) .33
==== ==== === === ===

Total Assets $ 57,552,529 39,257,186 42,508,942 42,229,282 53,752,454
Total Current Liabilities $ 9,843,041 9,813,376 7,559,306 9,973,866 10,217,598
Long-Term Debt net of current portion $ 4,110,885 2,890,000 11,021,000 10,525,000 14,822,834
- ------------------

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

(2) On August 4, 1997, the Company acquired Metraplex Corporation. See Note B
of the financial statements.

(3) Fiscal 1995 includes settlement costs, legal fees, and related expenses in
the amount of approximately $5,447,000 in connection with the settlement of
certain legal claims.

9

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

Overview

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

Of the Company's total backlog of $38,724,000 at August 2, 1998, $25,727,000 is
attributable to domestic orders and $12,997,000 is attributable to foreign
orders. Management anticipates that approximately $32,093,000 of its backlog
will be shipped during the fiscal year ending August 1, 1999. The Company
includes in its backlog only firm orders for which it has accepted a written
purchase order. In accordance with Department of Defense procedures, all
contracts involving government programs may be terminated by the government, in
whole or in part, at the government's discretion. In the event of such a
termination, prime contractors on such contracts are required to terminate their
subcontracts on the program and the government or the prime contractor is
obligated to pay the costs incurred by the Company under the contract to the
date of termination plus a fee based upon work completed.

Substantially all of the Company's contracts are fixed price contracts, wherein
sales and related costs are generally recorded as deliveries are made. Many of
these contracts include options exercisable by the customer for additional
products or systems at a fixed price. Certain costs under long-term fixed price
contracts, principally directly or indirectly with the U.S. Government, which
include non-recurring engineering, are deferred until these costs are
contractually billable. The failure to anticipate technical problems, estimate
costs accurately or control costs during a fixed price contract, including with
respect to any option for additional products or systems, may reduce the
Company's profitability or cause a loss under the contract. Revenue under
certain long-term, fixed price contracts, principally command and control
shelters, is recognized using the percentage of completion method of accounting.
Revenue recognized on these contracts is based on estimated completion to date,
which is the total contract amount multiplied by percent of performance, based
on total costs incurred in relation to total estimated cost at completion. As of
August 2, 1998, costs incurred and income recognized in excess of billings on
uncompleted contracts was $1,665,008. There were no long-term contracts of this
nature as of August 3, 1997. Losses, if any, on contracts are recorded when
first reasonably determined.

The Company believes that its growth depends on its ability to renew and expand
its technology, products, and design and manufacturing processes with an
emphasis on cost effectiveness. The Company's primary efforts are focused on
engineering design and product development activities, rather than pure
research. The cost of these development activities, including employees' time
and prototype development, net of amounts paid by customers, was approximately
$1,562,000,$1,828,000, and $1,453,000 in fiscal years 1998, 1997 and 1996,
respectively. Costs of the Company's internally funded product development
efforts are included in the Company's operating expenses as cost of products
sold. Revenue from customer funded product development is included in net sales
and the related product development costs also are included in cost of products
sold.

The Company's effective tax rate for fiscal 1998 and 1997 was 34.8% and 9.1%,
respectively. The low effective rate in 1997 reflects the utilization of prior
year net operating loss carryforwards and the reversal of a valuation allowance
established in 1995. The valuation allowance was established based on
management's uncertainty that past performance would be indicative of future

10

earnings. In August 1997, the Company established a foreign sales corporation as
part of an overall domestic tax strategy to reduce its effective income tax
rate.

Results of Operations

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

52 weeks 53 weeks 52 weeks
ended ended ended
August 2, August 3, July 28,
1998 1997 1996
---- ---- ----

Net sales 100.0% 100.0% 100.0%

Cost of products sold 59.2% 64.5% 68.3%
----- ----- -----
Gross profit 40.8% 35.5% 31.7%

Selling and administrative expenses 20.4% 19.5% 20.1%
----- ----- -----
Operating income 20.3% 16.0% 11.6%
----- ----- -----
Other income, net:
Net gain on available-for-sale
securities and other investments 0.3% 1.3% 3.1%
Dividend and interest income 1.1% 0.8% 1.3%
Interest expense (1.1)% (1.7)% (3.0)%
----- ----- -----
0.3% 0.4% 1.4%
----- ----- -----
Income before income taxes 20.7% 16.4% 13.0%
Provision for income taxes 7.2% 1.5% 0.4%
----- ----- -----
Net income 13.5% 14.9% 12.7%
===== ===== =====

Fiscal 1998 Compared to Fiscal 1997

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

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

11

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

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

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

Fiscal 1997 Compared to Fiscal 1996

Net sales for the 53 weeks ended August 3, 1997 were approximately $32,195,000
compared to $29,001,000 for fiscal 1996. The sales increase of $3,194,000 (11%)
is primarily attributable to an increase in the sales of flight instrumentation
products, including a Target Tracking Control System for the Republic of Korea.

Gross profit of 35.5% for the 53 weeks ended August 3, 1997 exceeded the prior
year of 31.7% due to an increase of $2,842,000 in higher margin foreign sales
from $6,556,000 in 1996 to $9,398,000 in 1997, as well as an increase in
absorption of fixed costs due to the higher sales volume.

Selling and administrative expenses for the 53 weeks ended August 3, 1997 were
$6,293,000 compared to $5,832,000 for fiscal 1996, an increase of $461,000 of
which $360,000 was attributable to settlement and litigation costs involving two
class action law suits, $325,000 to performance incentives, and $52,000 to
additional travel costs. These increases were offset by a reduction in
representative fees on foreign sales of $205,000 (partially due to a negotiated
decrease in the rate paid), and a reduction of $75,000 in personnel and related
expenses. As a percentage of net sales, selling and administrative expenses
decreased from 20.1% in 1996 to 19.5% in 1997.

Other income, net, for the 53 weeks ended August 3, 1997 decreased $265,000 from
the prior year due to decreases in gains on the sale of investments and dividend
and interest income of $488,000 and $118,000, respectively, offset by a decrease
in interest expense of $341,000.

The effective tax rate in 1997 was 9.1%. The 1997 and 1996 tax provisions
reflect the utilization of prior year net operating loss carryforwards. In 1995
a valuation allowance had been provided to reduce deferred tax assets to their
net realizable value primarily based on management's uncertainty that past
performance would be indicative of future earnings. In 1997 the valuation
allowance was reversed through the deferred tax provision. A determining factor
in assessing the change was the cumulative income in recent years. See Note I
entitled "Income Taxes" to the Consolidated Financial Statements.

Subsequent Event

As of August 21, 1998, the Company entered into an agreement to acquire all of
the issued and outstanding common stock of General Microwave Corp., a New York
corporation , for $18.00 per share and a three-year warrant to purchase one
share of the Company's common stock at an aggregate purchase price of

12

approximately $23,000,000. The warrant is exercisable at $14.40 per share
through January 11, 1999, and thereafter at $15.60 per share, until expiration.
General Microwave designs, manufactures and markets microwave components and
subsystems, and related electronic test and measurement equipment. The company
is headquartered in Amityville, New York, and operates two other facilities, one
in Billerica, Massachusetts, and one in Israel. The transaction is subject to
the approval of the stockholders of General Microwave Corp. at a meeting to be
held in December 1998. The transaction will be accounted for under the purchase
method. As of October 20, 1998, the Company has acquired 362,400 shares of
General Microwave in the open market for approximately $6,217,000.

Liquidity and Capital Resources

As of August 2, 1998 and August 3, 1997, working capital was approximately
$26,593,000 and $10,662,000, respectively, and the ratio of current assets to
current liabilities was 3.70 to 1 and 2.09 to 1, respectively. At August 2,
1998, the Company had cash and cash equivalents of approximately $10,689,000,
primarily from the proceeds received from the public stock offering discussed
below.

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

As is customary in the defense industry, inventory is partially financed by
advance payments. The unliquidated balance of these advance payments was
approximately $1,825,000 in 1998, and $3,091,000 in 1997. The decrease in the
current fiscal year is directly attributable to shipments under the related
contracts.

Net cash provided by (used in) operations and investing activities was
approximately $3,647,000, and $6,159,000,respectively in 1997, and approximately
$4,571,000 and ($1,051,000) , respectively in 1998.

Net cash provided by financing activities in fiscal 1998 consists of net
proceeds of $7,452,000 from the sale of 700,000 shares of common stock, and
1,265,000 Common Stock Purchase Warrants to the public. Net borrowings under a
bank line of credit provided $1,500,000 in financing. The Company received a
partial distribution of $592,824 from its M.D. Sass Municipal Finance Partners-I
limited partnership investment. Cash was used in financing activities for
payments of long-term debt of $2,257,000 and the purchase of treasury stock of
$1,084,000 Cash provided by investing activities in 1997 resulted primarily from
the liquidation of all the available-for-sale securities, and the sale of the
Company's interest in the M.D. Sass Re/Enterprise-II, L.P., limited partnership.
The Company used approximately $9,715,000 of these funds in financing activities
primarily for the net payment of outstanding bank debt of $7,250,000, and the
purchase of treasury stock for $2,783,000.

The Company maintains a revolving credit facility with a bank for an aggregate
of $21,000,000, which expires January 31, 2000. As of August 2, 1998, the
Company had borrowings outstanding of $1,500,000. No borrowings were outstanding
on this line at August 3, 1997.

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

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

The Company believes that presently anticipated future cash requirements will be
provided by internally generated funds and existing credit facilities, as well
as the proceeds received from the public stock offering.
13

Year 2000 Readiness

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

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

The most likely reason for a customer to terminate a contract for default would
be due to the Company's inability to manufacture and deliver product under the
contract. Breakdowns in any number of the Company's computer systems and
applications could prevent the Company from being able to manufacture and ship
its products. Examples are failures in the Company's manufacturing application
software, computer chips embedded in engineering test equipment, lack of supply
of materials from its suppliers, or lack of power, heat, or water from utilities
servicing its facilities. The Company's products do not contain computer devices
that require remediation to meet Year 2000 requirements. A review of the
Company's status with respect to remediating its computer systems for Year 2000
compliance is presented below.

For its information technology, the Company currently utilizes a Hewlett Packard
HP3000-based computing environment. The HP3000 hardware is in compliance with
Year 2000 requirements. The Company's financial, manufacturing, and other
software applications related to the HP3000 have been updated to comply with
Year 2000 requirements at a cost of approximately $350,000. Certain modules have
been fully tested, with the remaining modules to be tested by the end of fiscal
1999. In addition, the Company utilizes a wide area network ("WAN") to connect
its operating facilities to the HP3000. The WAN has been updated to comply with
Year 2000 requirements. A local area network ("LAN") is used to supplement the
HP3000 environment and has also been upgraded and is fully Year 2000 compliant.

The Company is also reviewing its utility systems (heat, light, phones, liquid
nitrogen, etc.) for the impact of Year 2000, as well as determining the state of
readiness of its material suppliers. The Company will develop a questionnaire to
be sent to its significant suppliers, and to its test equipment manufacturers
concerning embedded technology, regarding their compliance and attempt to
identify any problem areas with respect to them. This process will be ongoing
and the Company's efforts with respect to specific problems identified, and
future costs associated with them, will depend in part upon its assessment of
the risk that any such problems may cause a disruption in manufacturing or other
problem which the Company believes would have a material adverse impact on its
operations. However, the Company cannot control the conduct of its suppliers.
Therefore, there can be no guarantee that Year 2000 problems originating with a
supplier will not occur. The Company has not yet developed contingency plans in
the event of a Year 2000 failure caused by a supplier or third party, but would
intend to do so if a specific problem is identified through the process
described above. The Company has developed multiple sources for a substantial
portion of its raw material requirements and, therefore, does not believe there
would be a significant disruption in supply.

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

14

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to market risk associated with changes in interest rates
and stock prices. The Company has not entered into any derivative financial
instruments to manage the above risks and the Company has not entered into any
market risk sensitive instruments for trading purposes. The Company's debt
consists of a working capital line of credit with a bank having an interest rate
that floats with the FMOC Target Rate (7.15% as of August 2, 1998), and a
mortgage on its facilities in Lancaster, Pa. at a fixed rate of 10.4% The credit
line is reviewed on an annual basis. After the proposed acquisition of General
Microwave Corp. the Company will be subject to potentially adverse movements in
foreign currency rate changes. The Company does not anticipate any other
material changes in its primary market risk exposures in fiscal 1999.

As of August 2, 1998, the Company holds an investment in the common stock of a
public company that is exposed to price risk with a cost basis and a fair market
value basis of $143,330.

The table below provides information about the Company's debt that is sensitive
to changes in interest rates. The table presents principal cash flows by
maturity date.

Future principal payments required under the mortgage and line of credit, and
corresponding fair values are as follows:

Fiscal year ending during: Mortgage Line of Credit
------------------------- --------- --------------

1999 $ 370,000 $
2000 410,000 1,500,000
2001 450,000
2002 500,000
2003 550,000
2004 610,000
--------- ---------
$2,890,000 $1,500,000
========= =========
Fair value $2,908,000 $1,500,000
========= =========

Item 8. Financial Statements and Supplementary Data

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

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

Not applicable

PART III

The information required by Part III is incorporated by reference to the
Company's definitive proxy statement in connection with its Annual Meeting of
Stockholders scheduled to be held in January 1999, to be filed with the
Securities and Exchange Commission within 120 days following the end of the
Company's fiscal year ended August 2, 1998.

15

PART IV

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

(a) Exhibits

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

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

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

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

10.3 Employment Agreement between Herley Industries, Inc. and Lee N. Blatt
dated as of October 1, 1998.

10.4 Employment Agreement between Herley Industries, Inc. and Myron Levy
dated as of October 1, 1998.

10.6 (a) Revised Non-Negotiable Promissory Note of Lee N. Blatt dated June
2, 1997 (Exhibit 10.4 of Report on Form 10-Q dated June 10, 1997).

(b) Revised Non-Negotiable Promissory Note of Gerald I Klein dated
June 2, 1997 (Exhibit 10.5 of Report on Form 10-Q dated June 10,
1997).

(c) Revised Non-Negotiable Promissory Note of Myron Levy dated June
2, 1997 (Exhibit 10.6 of Report on Form 10-Q dated June 10,
1997).

10.7 Loan Agreement between Registrant and Allstate Municipal Income
Opportunities Trust (Exhibit 10.6 of Annual Report on Form 10-K for
the fiscal year ended July 31, 1989).

10.8 Asset Purchase Agreement dated as of September 1, 1992 between
Micro-Dynamics, Inc. and Herley Industries, Inc. (Exhibit 7(c) of
Report on Form 8-K dated October 22, 1992).

10.9 Stock Purchase Agreement dated as of June 1, 1993 between Herley
Industries, Inc., Herley Interim Corp., Milton C. Barnard, Edward M.
Webber, Marvin Adler and Carlton Industries, Inc. (Exhibit 7(c) of
Report on Form 8-K dated June 18, 1993).

10.10 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).

10.11 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).

23. Consent of Independent Public Accountants.

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

(b) Financial Statements

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

(c) Reports on Form 8-K

None

16

SIGNATURES:

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 26th day of October, 1998.

HERLEY INDUSTRIES, INC.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on October 26, 1998 by the following persons in the
capacities indicated:

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

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

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

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

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

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

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

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

17

Item 8. Financial Statements and Supplementary Data

HERLEY INDUSTRIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS. F-2

FINANCIAL STATEMENTS:

Consolidated Balance Sheets, August 2, 1998
and August 3, 1997. F-3

Consolidated Statements of Income for the 52 Weeks Ended
August 2, 1998, 53 Weeks Ended August 3, 1997
and 52 Weeks Ended July 28, 1996. F-4

Consolidated Statements of Shareholders' Equity
for the 52 Weeks Ended August 2, 1998, 53 Weeks Ended
August 3, 1997 and 52 Weeks Ended July 28, 1996. F-5

Consolidated Statements of Cash Flows for the 52 Weeks Ended
August 2, 1998, 53 Weeks Ended August 3, 1997
and 52 Weeks Ended July 28, 1996. F-6

Notes to Consolidated Financial Statements. F-7

Schedules have been omitted as not applicable.

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Herley
Industries, Inc. and Subsidiaries as of August 2, 1998, and August 3, 1997, and
the related consolidated statements of income, shareholders' equity and cash
flows for the 52 weeks ended August 2, 1998, the 53 weeks ended August 3, 1997,
and the 52 weeks ended July 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Herley Industries,
Inc. and Subsidiaries as of August 2, 1998, and August 3, 1997, and the
consolidated results of their operations and cash flows for the 52 weeks ended
August 2, 1998, the 53 weeks ended August 3, 1997, and the 52 weeks ended July
28, 1996 in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP

Lancaster, PA
September 17, 1998

F-2

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

August 2, August 3,
1998 1997
--------------- --------------

ASSETS
Current Assets:
Cash and cash equivalents $ 10,689,193 $ 1,194,650
Accounts receivable 6,193,947 5,176,523
Notes receivable-officers - 2,100,913
Costs incurred and income recognized in excess
of billings on uncompleted contracts 1,665,008 -
Other receivables 248,298 152,148
Prepaid income taxes 377,448 -
Inventories 15,068,618 9,790,382
Deferred taxes and other 2,194,004 2,061,066
--------------- --------------
Total Current Assets 36,436,516 20,475,682
Property, Plant and Equipment, net 12,549,343 11,704,755
Intangibles, net of amortization of $1,524,393 in 1998
and $1,133,750 in 1997 6,080,218 4,308,136
Available-for-sale Securities 143,330 -
Other Investments 849,324 1,313,502
Other Assets 1,493,798 1,455,111
=============== ==============
$ 57,552,529 $ 39,257,186
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 404,984 $ 335,000
Note payable to related party - 846,000
Accounts payable and accrued expenses 6,468,183 4,986,740
Income taxes payable - 76,635
Reserve for contract losses 1,145,128 478,000
Advance payments on contracts 1,824,746 3,091,001
--------------- --------------
Total Current Liabilities 9,843,041 9,813,376
Long-term Debt 4,110,885 2,890,000
Deferred Income Taxes 3,158,353 2,696,394
Excess of fair value of net assets of business
acquired over cost, net of accumulated
amortization of $973,667 in 1997 - 486,833
--------------- --------------
17,112,279 15,886,603
--------------- --------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.10 par value; authorized
20,000,000 shares; issued and outstanding
5,266,159 in 1998 and 4,209,365 in 1997 526,616 420,936
Additional paid-in capital 20,323,895 8,856,516
Retained earnings 19,589,739 14,093,131
--------------- --------------
Total Shareholders' Equity 40,440,250 23,370,583

=============== ==============
$ 57,552,529 $ 39,257,186
=============== ==============

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

F-3

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

52 weeks 53 weeks 52 weeks
ended ended ended
August 2, August 3, July 28,
1998 1997 1996
------------------ ------------------ -----------------

Net sales $ 40,797,991 $ 32,195,168 $ 29,001,404
------------------ ------------------ -----------------

Cost and expenses:
Cost of products sold 24,169,034 20,753,707 19,798,692
Selling and administrative expenses 8,338,789 6,293,199 5,831,830
------------------ ------------------ -----------------
32,507,823 27,046,906 25,630,522
------------------ ------------------ -----------------

Operating income 8,290,168 5,148,262 3,370,882
------------------ ------------------ -----------------

Other income, net:
Net gain on available-for-sale
securities and other investments 133,147 409,399 897,919
Dividend and interest income 453,402 257,676 376,007
Interest expense (446,109) (531,678) (873,452)
------------------ ------------------ -----------------
140,440 135,397 400,474
------------------ ------------------ -----------------

Income before income taxes 8,430,608 5,283,659 3,771,356
Provision for income taxes 2,934,000 480,000 102,400
------------------ ------------------ -----------------

Net income $ 5,496,608 $ 4,803,659 $ 3,668,956
================== ================== =================

Earnings per common share - Basic $ 1.11 $ 1.18 $ .97
================== ================== =================

Weighted average shares outstanding 4,969,248 4,063,505 3,786,176
================== ================== =================

Earnings per common share - Diluted $ 1.02 $ 1.01 $ .86
================== ================== =================

Weighted average shares outstanding -
Assuming Dilution 5,407,283 4,733,682 4,253,785
================== ================== =================

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

F-4

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
52 weeks ended August 2, 1998, 53 weeks ended August 3, 1997 and 52 weeks ended
July 28, 1996

Unrealized Gain
Additional (Loss) on Available-
Common Stock Paid-in Retained for-sale Treasury
Shares Amount Capital Earnings Securities Stock Total

Balance at July 30, 1995 3,015,988 $ 301,599 13,040,622 5,620,516 25,000 - $ 18,987,737

Net income 3,668,956 3,668,956
Exercise of stock options 406,432 40,643 2,577,360 (2,483,552) 134,451
Unrealized loss on
available-for-sale
securities (25,000) (25,000)
Purchase of 270,339 shares
of treasury stock (1,734,233) (1,734,233)
Retirement of treasury shares (486,298) (48,630) (4,169,155) 4,217,785 -

------------ ---------- ------------ ----------- ----------- ------------ ------------
Balance at July 28, 1996 2,936,122 $ 293,612 11,448,827 9,289,472 - - $ 21,031,911

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

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

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

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

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

F-5

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

52 weeks 53 weeks 52 weeks
ended ended ended
August 2, August 3, July 28,
1998 1997 1996
-------------- -------------- --------------

Cash flows from operating activities:
Net Income $ 5,496,608 $ 4,803,659 $ 3,668,956
-------------- -------------- --------------
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 1,869,459 1,538,283 1,563,354
(Gain) on sale of available-for-sale
securities and other investments - (409,572) (1,018,643)
Equity in income of limited partnership (128,646) - -
Decrease (increase) in deferred tax assets 1,207,090 - (393,389)
Increase in deferred tax liabilities 173,245 773,336 376,723
Unrealized loss on available-for-sale securities - - 121,550
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (767,997) (1,927,298) 1,430,692
Decrease (increase) in notes receivable-officers 2,100,913 (17,370) (2,083,543)
(Increase) in costs incurred and income recognized
in excess of billings on uncompleted contracts (1,665,008) - -
(Increase) decrease in other receivables (23,132) (27,156) 38,410
(Increase) in prepaid income taxes (377,448) - -
(Increase) decrease in inventories (3,757,660) (1,779,695) 1,319,366
(Increase) in prepaid expenses and other (55,200) (371,078) (25,940)
Increase (decrease) in accounts payable and
accrued expenses 773,399 (137,128) (513,649)
Increase (decrease) in income taxes payable 468,847 (89,660) 166,295
Increase (decrease) in reserve for contract losses 667,128 (11,110) (6,890)
(Decrease) increase in advance payments
on contracts (1,363,870) 1,610,968 3,393
Other, net (46,509) (309,500) 40,000
-------------- -------------- --------------
Total adjustments (925,389) (1,156,980) 1,017,729
-------------- -------------- --------------
Net cash provided by operations 4,571,219 3,646,679 4,686,685
-------------- -------------- --------------

Cash flows from investing activities:
Purchase of available-for-sale securities
and other investments - (159,364) (11,077,331)
Proceeds from sale of fixed assets 1,100 15,468 -
Partial distribution from limited partnership 592,824 - -
Proceeds from sale of available-for-sale securities
and other investments - 7,164,538 11,879,157
Capital expenditures (1,645,204) (862,129) (643,330)
-------------- -------------- --------------
Net cash (used in) provided by investing activities (1,051,280) 6,158,513 158,496
-------------- -------------- --------------
Cash flows from financing activities:
Net proceeds from public offering of common stock 7,451,579 - -
Borrowings under bank line of credit 4,050,000 2,825,000 9,875,000
Proceeds from exercise of stock options 364,469 317,699 134,451
Payments under lines of credit (2,550,000) (9,775,000) (9,925,000)
Payments under litigation settlement - - (2,000,000)
Payments of long-term debt (2,257,118) (300,000) (363,709)
Purchase of treasury stock (1,084,326) (2,782,686) (1,734,233)
-------------- -------------- --------------
Net cash provided by (used in) financing activities 5,974,604 (9,714,987) (4,013,491)
-------------- -------------- --------------
Net increase in cash and cash equivalents 9,494,543 90,205 831,690
Cash and cash equivalents at beginning of period 1,194,650 1,104,445 272,755
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 10,689,193 $ 1,194,650 $ 1,104,445
============== ============== ==============
Supplemental cash flow information:
Cashless exercise of stock options $ 538,376 $ 6,429,124 $ 2,483,552
============== ============== ==============
Stock issued for business acquired $ 3,170,471 - -
============== ============== ==============
Tax benefit related to stock options $ 1,670,866 - -
============== ============== ==============

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

F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Nature of Operations

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

2. Fiscal Year

The Company's fiscal year ends on the Sunday closest to July 31. Normally
each fiscal year consists of 52 weeks, but every five or six years the
fiscal year will consist of 53 weeks. Fiscal years 1998 and 1996
consisted of 52 weeks, and fiscal year 1997 consisted of 53 weeks.

3. Basis of Financial Statement Presentation

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

4. Cash and Cash Equivalents

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

5. Concentration of Credit Risk

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

6. Inventories

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

F-7

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

7. Property, Plant and Equipment

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

8. Intangibles

Intangibles are comprised of customer lists, installed products base,
drawings, patents, licenses, certain government qualifications and
technology and goodwill in connection with the acquisitions of Metraplex
Corporation in 1997, and Vega Precision Laboratories, Inc. in 1993.
Intangibles are being amortized over twenty years.

The carrying amount of intangibles is evaluated on a recurring basis.
Current and future profitability as well as current and future
undiscounted cash flows of the acquired businesses are primary indicators
of recoverability. For the three fiscal years ended August 2, 1998, there
were no adjustments to the carrying amount of the cost in excess of net
assets acquired resulting from these evaluations.

9. Marketable Securities

The Company accounts for its investments in marketable securities in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."

Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the
securities to maturity. Marketable equity securities and debt securities
not classified as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component
of shareholders' equity. Realized gains and losses and declines in value
judged to be other-than-temporary are included in other income , net. The
cost of securities sold is based on the specific identification method.
Interest and dividends on securities are included in other income, net.

10. Other Investments

The Company is a limited partner in a nonmarketable limited partnership
in which it owns approximately a 10% interest. Beginning in 1997 other
investments are accounted for under the equity method. Previously, the
cost method was utilized as the amount was not significantly different
from the equity method.

11. Revenue and Cost Recognition

Under fixed-price contracts, revenue and related costs are recorded
primarily as deliveries are made. Certain costs under long-term,
fixed-price contracts (principally either directly or indirectly with the
U.S. Government), which include non-recurring billable engineering, are
deferred until these costs are contractually billable. Revenue under
certain long-term, fixed price contracts, principally command and control
shelters, is recognized using the percentage of completion method of
accounting. Revenue recognized on these contracts is based on estimated
completion to date (the total contract amount multiplied by percent of
performance, based on total costs incurred in relation to total estimated
cost at completion). Prospective losses on long-term contracts are based

F-8

upon the anticipated excess of inventoriable manufacturing costs over the
selling price of the remaining units to be delivered and are recorded when
first reasonably determined. Actual losses could differ from those
estimated due to changes in the ultimate manufacturing costs and contract
terms.

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

12. Income Taxes

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

13. Stock-Based Compensation

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

14. Earnings Per Common Share

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

15. Product Development

The Company's primary efforts are focused on engineering design and product
development activities rather than pure research. The cost of these
development activities, including employees' time and prototype
development, net of amounts paid by customers, was approximately
$1,562,000, $1,828,000, and $1,453,000 in fiscal 1998, 1997, and 1996,
respectively.

16. New Accounting Standards

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Segment Information", which is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 amends the requirements for public
enterprises to report financial and descriptive information about its
reportable operating segments. Operating segments, as defined in SFAS No.
131, are components of an enterprise for which separate financial
information is required to be reported on the basis that is used internally

F-9

for evaluating the segment performance. The Company believes it operates in
one business segment, and as this standard relates entirely to disclosure,
the adoption of this standard will not have a material impact on the
Company's financial statements.

NOTE B - ACQUISITIONS

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

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

In July 1995, the Company entered into an agreement effective as of the
close of business June 30, 1995, to acquire certain assets and the
business (consisting principally of inventories and trade receivables) of
Stewart Warner Electronics Corporation, a Delaware corporation. The
transaction, which closed on July 28, 1995, provided for the payment of
$250,000 in cash and the assumption of approximately $915,000 in
liabilities and has been accounted for by the purchase method. The
acquisition resulted in excess of fair value over cost of net assets
acquired of $1,460,500 which is being amortized over a three-year period.

NOTE C - NOTES RECEIVABLE-OFFICERS

In fiscal 1996 the Company loaned $1,400,000, $300,000, and $300,000 to
certain officers, as authorized by the Board of Directors, pursuant to
the terms of nonnegotiable promissory notes. The notes were initially due
November 1996, November 1996 and March 1997, respectively. The notes were
extended by the Company in fiscal 1997 and were due April 30, 1998,
January 31, 1998, and January 31, 1998, respectively. The loans were paid
in full with accrued interest as of December 19, 1997.

NOTE D - INVENTORIES

The major components of inventories are as follows:

August 2, August 3,
1998 1997
----------- ----------

Purchased parts and raw materials $ 7,377,882 $ 4,780,336
Work in process 7,303,533 4,899,551
Finished products 387,203 110,495
---------- ----------
$ 15,068,618 $ 9,790,382
========== ==========

F-10

NOTE E - AVAILABLE-FOR-SALE SECURITIES

In September 1996, the Company liquidated all of its available-for-sale
securities for approximately $4,912,000 and used the proceeds to reduce
its long-term bank debt. A provision for unrealized losses of $121,550 is
included in the statement of operations for fiscal year 1996. The fair
value of available-for-sale securities at July 28, 1996 was $4,912,387.

NOTE F - OTHER INVESTMENTS

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

In July 1994, the Company invested $1,000,000 for a limited partnership
interest in M.D. Sass Municipal Finance Partners-I, a Delaware limited
partnership. The objectives of the partnership are the preservation and
protection of its capital and the earning of income through the purchase
of certificates or other documentation that evidence liens for unpaid
local taxes on parcels of real property. At August 2, 1998 and August 3,
1997 the percentage of ownership was approximately 10%. The Company's
interest in the partnership may be transferred to a substitute limited
partner, upon written notice to the managing general partners, only with
the unanimous consent of both general partners at their sole discretion.

In July 1998 the Company received a partial distribution of $592,824 from
the Partnership. As of August 2, 1998 the Company's limited partnership
interest had an estimated fair value of $849,324.

NOTE G - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following:

August 2, August 3, Estimated
1998 1997 Useful Life
---------- ---------- -----------

Land $ 880,270 $ 880,270
Building and building
improvements 5,486,900 5,438,663 10-40 years
Machinery and equipment 20,104,794 17,515,954 5- 8 years
Furniture and fixtures 624,576 494,056 5-10 years
Tools 34,495 24,869 5 years
Leasehold improvements 292,894 288,757 5-10 years
---------- ----------
27,423,929 24,642,569
Less accumulated depreciation 14,874,586 12,937,814
---------- ----------
$ 12,549,343 $ 11,704,755
========== ==========

NOTE H - COMMITMENTS AND CONTINGENCIES

Leases

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

Rent expense for the 52 weeks ended August 2, 1998, 53 weeks ended August
3, 1997 and 52 weeks ended July 28, 1996 was approximately $546,000,
$229,900, and $284,600, respectively.

F-11

Minimum annual rentals under noncancellable leases are as follows:

Year ending fiscal Amount
------------------ ------

1999 $394,000
2000 318,000
2001 188,000
2002 165,000

Employment Agreements

The Company has employment agreements with various executives and
employees of the Company, which, as amended, expire at various dates
through October 31, 2002, subject to extension each January 1 for three
years from that date. These agreements provide for aggregate annual
salaries for fiscal 1999 of $800,000. Certain agreements provide for an
annual cost of living adjustment based on the consumer price index, and
also provide for incentive compensation based on pretax income of the
Company in excess of 10% of the Company's stockholders' equity for
specific periods, as adjusted for stock issuances and repurchases.
Incentive compensation in the amount of $727,659, $665,352, and $446,750
was expensed in fiscal years 1998, 1997, and 1996, respectively.

Certain agreements also provide that, in the event there is a change in
control of the Company, as defined, the executives have the option to
terminate the agreements and receive a lump-sum payment of approximately
three times their annual salary. As of August 2, 1998, the amount payable
in the event of such termination would be approximately $2,400,000.

One of the employment contracts provides for a consulting agreement
commencing at the end of the employment period which will be effective
October 1, 1998, and terminating December 31, 2010 at the annual rate of
$100,000. Another one of the employment contracts, as amended October 1,
1998, provides for a consulting period commencing at the end of the
period of active employment and continuing for a period of five years at
the annual rate of $100,000. Two officers of the Company have severance
agreements providing for a lump-sum payment of $430,000 through fiscal
1999, adjusted to $320,000 in fiscal 2000, $215,000 through fiscal 2002,
and $105,000 in fiscal 2003.

Litigation

In November 1996, the Company settled all claims in connection with two
class action complaints, related to the Company's acquisition of Carlton
Industries, Inc. and its subsidiary, Vega Precision Laboratories, Inc.
for $450,000.

In August 1997, the Company settled all claims in connection with a class
action complaint filed in 1995 for $170,000. The claim related to the
Company's settlement of the Litton Action in the Essex Superior Court of
Massachusetts which alleged, inter alia, that there was insufficient
disclosure by the Company of its true potential exposure in that claim.

In July 1996, the Company was notified by the American Arbitration
Association of the decision of the arbitrators in an action commenced in
March 1994 by the principal selling shareholders of Carlton Industries,
Inc. and its subsidiary, Vega Precision Laboratories, Inc. According to
the award, the Company was to pay to the claimants the sum of $1,052,900,
inclusive of interest. Correspondingly, the claimants were to pay the
Company the sum of $277,719, inclusive of interest. The Company paid
$775,181 to claimants, representing the difference between the award to
the claimants and the award to the Company, in August, 1996. The award to
the claimants was offset by $593,162 otherwise payable to one of the
selling shareholders.

The Company is also involved in 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.

F-12

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, 2000. At August 2, 1998
stand-by letters of credit aggregating $1,505,285 were outstanding under
this facility.

NOTE I - INCOME TAXES

Income tax provision consisted of the following:

52 Weeks ended 53 Weeks ended 52 Weeks ended
August 2, August 3, July 28,
1998 1997 1996
-------------- -------------- --------------

Current
Federal $ 1,468,665 $ (52,000) $ 90,000
State 85,000 89,000 12,400
--------- ------- -------
1,553,665 37,000 102,400
--------- ------- -------
Deferred
Federal 1,307,970 (142,000) -
State 72,365 585,000 -
--------- ------- -------
1,380,335 443,000 -
--------- ------- -------
$ 2,934,000 $ 480,000 $ 102,400
========= ======= =======

The Company paid income taxes of approximately $1,486,000 in 1998, $178,000
in 1997, and $19,000 in 1996. The following is a reconciliation of the
U.S. statutory income tax rate and the effective tax rate on pretax income:

52 Weeks 53 Weeks 52 Weeks
ended ended ended
August 2, August 3, July 28,
1998 1997 1996
---- ---- ----

U.S. Federal statutory rate 34.0 % 34.0 % 34.0 %
State taxes, net of
federal tax benefit 1.5 12.2 0.2
Alternative minimum tax - - 2.4
Benefit of foreign sales corporation (1.8) - -
Benefit of net operating loss
carryforward - (30.8) (35.2)
Non-deductible expenses .8 .3 1.3
Decrease in valuation allowance - (9.4) -
Other, net .3 2.8 -
---- ---- ----
Effective tax rate 34.8 % 9.1 % 2.7 %
==== ==== ====

The 1997 and 1996 tax provisions reflect the utilization of prior year
net operating loss carryforwards. In 1995 a valuation allowance had been
provided to reduce deferred tax assets to their net realizable value
primarily based on management's uncertainty that past performance would
be indicative of future earnings. In 1997 the valuation allowance was
reversed through the deferred tax provision. A determining factor in
assessing the change was the cumulative income in recent years.

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

F-13

Components of deferred tax assets and liabilities are as follows:

August 2, 1998 August 3, 1997
------------------------------ ---------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
---------- ------------ -------- -----------

Intangibles $ - $ 1,775,858 $ - $ 1,681,375
Alternative minimum tax 952,426 - 265,906 -
Accrued vacation pay 133,962 - 123,644 -
Accrued bonus 438,976 - 343,398 -
Warranty costs 88,000 - 220,000 -
Inventory 971,825 - 985,703 -
Depreciation - 2,334,917 - 2,006,038
Net operating loss carryforwards - - 725,113 -
Contract losses 503,856 - 275,635 -
Other 60,689 202,364 71,917 78,967
--------- --------- --------- ---------
$ 3,149,734 $ 4,313,139 $ 3,011,316 $ 3,766,380
========= ========= ========= =========

The Company has available a $952,426 alternative minimum tax credit to
carry forward for an indefinite period of time.

NOTE J- LONG-TERM DEBT

Long-term debt is summarized as follows:

August 2, August 3,
Rate 1998 1997
---- --------- ----------

Note payable bank (a) 7.15% $ 1,500,000 $ -
Mortgage note (b) 10.4 % 2,890,000 3,225,000
Capital lease obligations (c) - 125,869 -
--------- ---------
4,515,869 3,225,000
Less current portion 404,984 335,000
--------- ---------
$ 4,110,885 $ 2,890,000
========= =========

(a) In July 1998, the Company renewed the revolving credit agreement with
a bank that provides for the extension of credit in the aggregate
principal amount of $21,000,000 and may be used for general corporate
purposes, including business acquisitions. The facility requires the
payment of interest only on a monthly basis and payment of the
outstanding principal balance on January 31, 2000.
Interest is set biweekly at 1.65% over the FOMC Target Rate.

The agreement contains various financial covenants, including, among
other matters, the maintenance of working capital, tangible net
worth, and restrictions on other borrowings.

(b) The mortgage note provides for annual principal payments at varying
amounts through 2004 plus semiannual interest payments. Land and
buildings in Lancaster, Pa. having a net book value of $1,904,000 are
pledged as collateral.

The mortgage note agreement contains various financial covenants,
including, among other matters, the maintenance of specific amounts
of working capital and tangible net worth. In connection with this
loan, the Company paid approximately $220,000 in financing costs.
Such costs are included in Other Assets in the accompanying
consolidated balance sheets at August 2, 1998 and August 3, 1997 and
are being amortized over the term of the loan (15 years).

(c) Certain noncancellable leases are classified as capital leases and
the leased assets are included as part of "Property, Plant, and
Equipment" at $143,006, net of depreciation of $23,834.

F-14

The Company paid interest of approximately $441,000 in 1998, $567,000 in
1997, and $854,000 in 1996.

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

Fiscal year ending during: Amount
------------------------- ----------

1999 $ 404,984
2000 1,950,220
2001 497,583
2002 503,082
2003 550,000
2004 610,000
---------
$ 4,515,869
=========

NOTE K - RELATED PARTY TRANSACTIONS

On March 6, 1996, the Board of Directors approved the purchase of an
industrial parcel of land from the Chairman of the Company for $940,000.
A deposit of $94,000 was paid on execution of the contract, and the
balance of $846,000 was paid at settlement in April, 1998. The Company
intends to use this land, which is included in other assets in the
consolidated balance sheet, for possible future expansion.

NOTE L - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses include the following:

August 2, August 3,
1998 1997

Accounts payable $ 3,064,596 $ 1,841,468
Accrued payroll and bonuses 1,865,426 1,483,915
Accrued commissions 615,022 205,692
Accrued interest 56,491 55,900
Accrued litigation expenses 37,487 297,538
Accrued expenses 829,161 1,102,227
--------- ---------
$ 6,468,183 $ 4,986,740
========= =========

NOTE M - EMPLOYEE BENEFIT PLANS

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

The Company has accrued approximately $197,000 for the 52 weeks ended
August 2, 1998, and contributed approximately $181,000, and $159,000 to
this plan for the 53 weeks ended August 3, 1997 and the 52 weeks ended
July 28, 1996, respectively.

F-15

NOTE N - COMPUTATION OF PER SHARE EARNINGS

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

52 Weeks ended 53 Weeks ended 52 Weeks ended
August 2, 1998 August 3, 1997 July 28,1996
-------------- -------------- --------------

Numerator:
Net Income $ 5,496,608 $ 4,803,659 $ 3,668,956
========= ========= =========
Denominator:
Basic weighted-average shares 4,969,248 4,063,505 3,786,176
Effect of dilutive securities:
Employee stock options and warrants 438,035 670,177 467,609
--------- --------- ---------
Diluted weighted-average shares 5,407,283 4,733,682 4,253,785
========= ========= =========
Earnings per common share - Basic $1.11 $1.18 $ .97
==== ==== ====
Earnings per common share - Diluted $1.02 $1.01 $ .86
==== ==== ====

NOTE O - SHAREHOLDERS' EQUITY

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

In December 1997, the Company completed the sale of 1,100,000 shares of
common stock to the public, of which 700,000 shares were sold by the
Company and 400,000 shares were sold by certain selling stockholders. In
addition , the Company also sold 1,265,000 Common Stock Purchase Warrants.
The Company received net proceeds of $7,451,579 after underwriting
discounts and commissions and other expenses of the offering. Each Warrant
entitles the holder to purchase one share of common stock at $14.40 per
share (subject to adjustment under certain conditions) through January
1999 and thereafter at $15.60 per share until they expire in January 2000.
The Company has also issued to the underwriters, for their own accounts,
warrants to purchase 110,000 shares of common stock of the Company
(subject to adjustment under certain circumstances), exercisable for a
period of twenty-five months at a price of $14.40 per share through
January 1999, and at a price of $15.60 per share through their expiration
in January 2000.

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

The Company has two fixed option plans which reserve shares of common
stock for issuance to executives, key employees and directors. The Company
applies APB Opinion No, 25 and related Interpretations in accounting for
these plans. Statement of Financial Accounting Standards No.123,
"Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the
FASB in 1995 and , if fully adopted, changes the methods for recognition
of cost on plans similar to those of the Company. The Company has adopted
the disclosure-only provisions of SFAS 123. Accordingly, no compensation
cost has been recognized for the stock option plans. Pro forma information
regarding net income and earnings per share is required by Statement 123,
and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rate of 4.9%; volatility factor of the
expected market
F-16

price of the Company's common stock of .59; and a weighted-average
expected life of the option, after the vesting period, of .4 years.

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

Had compensation cost for stock options granted in fiscal 1998 and 1997
been determined based on the fair value at the grant date consistent with
the provisions of SFAS No. 123, the Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated below
using the statutory income tax rate of 34%:

1998 1997
---- ----

Net earnings - as reported $5,496,608 $4,803,659
Net earnings - pro forma $4,925,488 $3,911,486
Earnings per share - as reported
Basic $1.11 $1.18
Diluted 1.02 1.01
Earnings per share - pro forma
Basic $.99 $.96
Diluted .91 .83

No options were granted in fiscal 1996.

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

In May 1997, the Board of Directors approved the 1997 Stock Option Plan
which covers 1,666,666 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the Plan, the exercise price for options
granted under the plan will be the fair market value at the date of
grant. Prices for incentive stock options granted to employees who own
10% or more of the Company's stock are at least 110% of market value at
date of grant. The nature and terms of the options to be granted is
determined at the time of grant by the Board of Directors. The options
expire ten years from the date of grant, subject to certain restrictions.
Options for 88,333 and 801,660 shares were granted during the fiscal
years ended August 2, 1998, and August 3, 1997, respectively.

In October 1995, the Board of Directors approved the 1996 Stock Option
Plan which covers 666,666 shares of the Company's common stock. Options
granted under the plan may be incentive stock options qualified under
Section 422 of the Internal Revenue Code of 1986 or non-qualified stock
options. Under the terms of the Plan, the exercise price for options
granted under the plan will be the fair market value at the date of
grant. Prices for incentive stock options granted to employees who own
10% or more of the Company's stock are at least 110% of market value at
date of grant. The nature and terms of the options to be granted is
determined at the time of grant by the Board of Directors. If not
specified, 100% of the shares can be exercised one year after the date of
grant. The options expire ten years from the date of grant. Options for
663,989 shares were granted during the fiscal year ended August 3, 1997.

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

F-17

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

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

A summary of stock option activity under all plans for the 52 weeks ended
August 2, 1998, the 53 weeks ended August 3, 1997, and the 52 weeks ended
July 28, 1996 follows:

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

Outstanding July 30, 1995............ 1,256,624 $ 2.54 - 9.01 $ 4.33 573,333 $ $5.35
Granted .......................... - 293,333 4.64
Exercised......................... (541,900) 2.54 - 5.72 4.87
Canceled.......................... (31,330) 2.54 - 5.25 4.83 (533,333) 5.35
--------- ------------- ----- ------- -----------
Outstanding July 28, 1996............ 683,394 $ 2.54 - 9.01 $ 3.89 333,333 $4.64 - 5.35
Granted .......................... 1,465,649 6.10 -10.41 6.48
Exercised......................... (1,225,384) 2.54 - 6.94 5.46 (13,333) 4.64
Canceled.......................... (7,332) 5.25 - 9.01 8.67 -
--------- ------------- ----- ------- -----------
Outstanding August 3, 1997........... 916,327 $ 2.54 -10.41 $ 5.87 320,000 $4.64 - 5.35
Granted .......................... 88,333 10.31 -13.88 12.04
Exercised......................... (135,594) 2.54 - 6.94 5.08 (40,000) 5.35
Canceled.......................... (8,222) 2.54 - 6.47 5.31 -
--------- ------------- ----- ------- -----------
Outstanding August 2, 1998........... 860,844 $ 2.54 -13.88 $ 6.65 280,000 $ 4.64
========= =======

Options to purchase 582,389 shares of common stock were exercisable under
all plans at August 2, 1998 at a weighted average exercise price of $5.87
with a weighted average remaining contractual life of 8.2 years as
follows:

Options Outstanding and Exercisable by Price Range as of August 2, 1998

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

$ 2.5350 -$ 6.0938 301,117 7.43 $ 5.0302 301,117 $ 5.0302
6.4688 - 6.4688 300,062 8.75 6.4688 113,140 6.4688
6.9375 - 12.8750 224,665 8.44 7.9716 168,132 6.9540
13.0000 - 13.8750 35,000 9.36 13.5673 - -
------- ---- ------- ------- ------
$2.5350 -$13.8750 860,844 8.23 $ 6.6464 582,389 $ 5.8651
======= =======

F-18

In April 1993, common stock warrants were issued to certain officers and
directors for the right to acquire 573,333 shares of common stock of the
Company at the fair market value of $5.35 per share at date of issue. In
December 1995 warrants for 533,333 shares were canceled, and the
remaining 40,000 warrants were exercised in fiscal 1998. In December
1995, common stock warrants were issued to certain officers for the right
to acquire 293,333 shares of common stock of the Company at the fair
market value of $4.64 per share at date of issue. The warrants vest
immediately and expire December 13, 2005. Warrants for 13,333 shares were
exercised in fiscal 1997.

NOTE P - MAJOR CUSTOMERS

Net sales to the U.S. Government in 1998, 1997, and 1996 accounted for
approximately 26%, 34%, and 33% of net sales, respectively. Foreign sales
amounted to approximately $11,943,000, $9,398,000, and $6,556,000 in
fiscal 1998, 1997, and 1996, respectively.

Included in accounts receivable as of August 2, 1998 and August 3, 1997
are amounts due from the U.S. Government of approximately $933,000 and
$1,454,000, respectively.

NOTE Q - 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.

Notes receivable-officers: The carrying amount reported in the balance
sheet for notes receivable from officers approximated its fair value.

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

Long-term debt: The fair value of the mortgage note was estimated using
discounted cash flow analysis, based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements.

Off balance sheet financial instruments:

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

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

August 2, 1998
------------------------------
Carrying Amount Fair Value
--------------- ----------

Cash and cash equivalents $ 10,689,193 $ 10,689,193
Long-term debt 4,110,885 4,499,000
Stand-by letters of credit - 1,505,285

NOTE R - SUBSEQUENT EVENTS

As of August 21, 1998, the Company entered into an agreement to acquire
all of the issued and outstanding common stock of General Microwave
Corp., a New York corporation , for $18.00 per share and a three-year
warrant to purchase one share of the Company's common stock at an
aggregate purchase
F-19

price of approximately $23,000,000. The warrant is exercisable at $14.40
per share through January 11, 1999, and thereafter at $15.60 per share,
until expiration. General Microwave designs, manufactures and markets
microwave components and subsystems, and related electronic test and
measurement equipment. The company is headquartered in Amityville, New
York, and operates two other facilities, one in Billerica, Massachusetts,
and one in Israel. The transaction is subject to the approval of the
stockholders of General Microwave Corp. at a meeting to be held in
December 1998. The transaction will be accounted for under the purchase
method. As of October 20, 1998, the Company has acquired 362,400 shares
(27%) of General Microwave in the open market for approximately
$6,217,000.

F-20