GENERAL MICROWAVE CORP, DEFM14A, 1998-12-11

GENERAL MICROWAVE CORP
DEFM14A, 1998-12-11
ELECTRONIC COMPONENTS, NEC

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SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14a-6(3)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>

GENERAL MICROWAVE CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

Payment of Filing Fee (Check the appropriate box):

[ ] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies: common
stock

(2) Aggregate number of securities to which transaction applies: 1,332,275

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): Based on
the average of the high and low sales prices of the common stock of
$17.6875 on the American Stock Exchange on November 23, 1998.

(4) Proposed maximum aggregate value of transaction: $23,561,284

(5) Total fee paid: $4,713

[X] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid: $4,713

(2) Form, Schedule or Registration Statement No.: Schedule 14A

(3) Filing Party: General Microwave Corporation

(4) Date Filed: November 25, 1998

Notes:
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GENERAL MICROWAVE CORPORATION
5500 NEW HORIZONS BOULEVARD
AMITYVILLE, NY 11701

December 11, 1998

Dear General Microwave Shareholder:

You are cordially invited to attend a Special Meeting of the Shareholders of
General Microwave Corporation, to be held at the headquarters of General
Microwave, 5500 New Horizons Boulevard, Amityville, NY 11701 on January 6, 1999
at 10:00 a.m. local time.

At this meeting, you will be asked to approve and adopt an Agreement and Plan of
Merger, as amended, among General Microwave, certain shareholders of General
Microwave, Herley Industries, Inc. and GMC Acquisition Corporation, a
wholly-owned subsidiary of Herley.

In the merger, for each share of General Microwave common stock you own, you
will receive $18.00 in cash and a Warrant to purchase one share of Herley common
stock at a price of $14.40 per share if the Warrant is exercised on or before
January 11, 1999, and $15.60 per share if the Warrant is exercised after January
11, 1999. The $18.00 per share price, without taking into account the value of
the Warrant, represents a 69% premium over the $10.625 per share closing market
price of General Microwave common stock on August 21, 1998, which was the last
full trading day before the announcement of the proposed merger between Herley
and General Microwave. After the merger, General Microwave will be a subsidiary
of Herley.

The Board of Directors of General Microwave has unanimously approved the merger
agreement with Herley. The entire Board of Directors believes that the proposed
merger is in the best interests of General Microwave's shareholders and,
together with three other General Microwave shareholders, has granted proxies to
Herley to vote their shares (approximately 30% in the aggregate) in favor of the
merger agreement. The Board of Directors unanimously recommends that you vote in
favor of the merger agreement.

The attached notice of meeting and proxy statement explain the proposed merger
and provide specific information concerning the Special Meeting. Please read
these materials carefully.

Whether or not you plan to attend the Special Meeting, I urge you to complete,
sign and promptly return the enclosed proxy card to ensure that your shares will
be voted at the meeting. The merger is an important decision for General
Microwave and its shareholders. The merger cannot be completed unless
shareholders holding two-thirds of the outstanding shares of General Microwave
common stock approve the merger agreement.

On behalf of the Board of Directors, I thank you for your support and urge you
to vote FOR adoption of the merger agreement.

Sincerely,

Sherman A. Rinkel
Chairman of the Board
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GENERAL MICROWAVE CORPORATION
5500 NEW HORIZONS BOULEVARD
AMITYVILLE, NEW YORK 11701-1156

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, JANUARY 6, 1999

A Special Meeting of Shareholders of General Microwave Corporation, will be held
at 5500 New Horizons Boulevard, Amityville, New York on Wednesday, January 6,
1999, at 10:00 a.m., local time, to consider and act on the following matters:

1. The approval and adoption of the Agreement and Plan of Merger, dated as of
August 21, 1998, by and among GMC, eleven GMC shareholders, Herley
Industries, Inc., and GMC Acquisition Corporation, as amended. GMC
Acquisition is a wholly-owned subsidiary of Herley that was formed solely to
implement the merger. If the Agreement and Plan of Merger, as amended, is
adopted by the shareholders and the other conditions to the merger are
satisfied or waived, (x) GMC Acquisition will be merged with and into GMC
and (y) each share of GMC common stock will be converted into the right to
receive $18.00 in cash and a Warrant to purchase one share of Herley common
stock.

2. To transact such other matters as may properly come before the meeting or
any adjournment or postponement of the meeting.

Any shareholder who does not wish to accept the merger consideration of $18.00
per share and a Herley common stock warrant and who properly dissents from the
proposed merger and complies with the requirements of Sections 623 and 910 of
the New York Business Corporation Law will have the right to receive payment in
cash of the fair value of their shares of GMC common stock. The appraisal right
is subject to a number of restrictions and technical requirements described in
the attached proxy statement.

The close of business on November 17, 1998 has been fixed as the record date for
determination of the shareholders entitled to notice of and to vote at the
meeting or any adjournment of the meeting. Any shareholder will be able to
examine a list of holders of record, for any purpose related to the Special
Meeting, during the 10-day period before the meeting. The list will be available
at the offices of Howard Cohen at General Microwave Corporation, 5500 New
Horizons Boulevard, Amityville, NY 11701-1156; telephone: (516) 226-8900
extension 218.

Shareholders may vote in person or by proxy. The proxy statement, which explains
the merger in detail, and the accompanying proxy card are attached to this
notice. Holders of record of common stock at the close of business on November
17, 1998 will be entitled to vote at the meeting or any adjournment thereof with
respect to all matters described
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above. PLEASE SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY USING THE ENCLOSED
POSTAGE-PAID ENVELOPE.

By Order of the Board of Directors

Michael I. Stolzar
Secretary

Amityville, New York
December 11, 1998

WHETHER OR NOT YOU EXPECT TO ATTEND THE GMC MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN
ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED IF THE
PROXY CARD IS MAILED IN THE UNITED STATES.
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PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS OF
GENERAL MICROWAVE CORPORATION

PROSPECTUS OF HERLEY INDUSTRIES, INC.

The Boards of Directors of Herley Industries, Inc. and General Microwave
Corporation have approved a merger agreement that would result in GMC becoming a
wholly-owned subsidiary of Herley.

If the merger is completed, GMC shareholders will receive, for each GMC share,
$18.00 in cash and one Warrant to purchase one share of Herley common stock at a
purchase price of $14.40 if exercised on or before January 11, 1999 and $15.60
if exercised after January 11, 1999. Each outstanding option to purchase GMC
shares under the GMC 1990 Stock Option Plan and the GMC 1997 Non-Employee
Director Stock Option Plan will be cancelled in exchange for a Warrant to
purchase one share of Herley common stock and cash equal to $18.00 minus the per
share exercise price of the option, minus any amounts required for Federal and
State withholding taxes. Herley stockholders will continue to own their existing
shares of Herley stock after the merger.

The shares of Herley common stock that will be owned by GMC shareholders,
assuming the exercise of the Warrants, will represent approximately 15% of the
outstanding Herley common stock after the merger. The shares of Herley common
stock owned by Herley stockholders, assuming the exercise of the Warrants, will
represent approximately 85% of the outstanding Herley common stock after the
merger.

Shareholders of GMC are being asked, at the GMC special meeting of shareholders
being held on January 6, 1999, to approve the merger agreement, as amended, and
the merger. The merger cannot be completed unless the shareholders of GMC
approve it.

This document gives you detailed information about the proposed merger. Herley
has provided the information about Herley and GMC has provided the information
about GMC. Please see "Where You Can Find More Information" on page 91 for
additional information about Herley and GMC which is on file with the Securities
and Exchange Commission.

This Proxy Statement/Prospectus and proxy are being mailed to shareholders of
GMC beginning about December 11, 1998.
------------------------

SEE "RISK FACTORS" AT PAGE 14 FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED
BY HOLDERS OF GMC COMMON STOCK IN EVALUATING THE PROPOSALS TO BE VOTED ON AT THE
GMC MEETING AND THE ACQUISITION OF THE SECURITIES OFFERED HEREBY.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Proxy Statement/Prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.

THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS DECEMBER 11, 1998.
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TABLE OF CONTENTS

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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY................................................... 2
The Companies............................................. 2
GMC's Reasons for the Merger.............................. 3
The GMC Special Meeting................................... 3
The Merger................................................ 4
Fairness Opinion.......................................... 8
Income Tax Treatment...................................... 8
Regulatory Matters........................................ 8
Accounting Treatment...................................... 8
Risk Factors.............................................. 8
Selected Historical and Selected Pro Forma Combined
Financial Data......................................... 9
GENERAL INFORMATION......................................... 13
RISK FACTORS................................................ 14
Risks Relating to Integration of Operations............... 14
No Adjustments to Consideration........................... 14
Effects of Merger on Customers............................ 15
Risks Associated with Expansion into New Markets.......... 15
Fluctuations in Quarterly Results; Future Operating
Results Uncertain...................................... 15
Technological Change...................................... 16
Dependence Upon Key Personnel............................. 16
International Sales; Currency Fluctuations................ 16
Dependence on Proprietary Technology; Risk of Third Party
Claims for Infringement................................ 17
Potential Anti-Takeover Provisions........................ 17
Year 2000 Risk............................................ 18
Additional Issuances of Stock Without Stockholder
Approval............................................... 18
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 19
GENERAL MICROWAVE CORPORATION SPECIAL MEETING............... 19
Date, Time and Place of GMC Meeting....................... 19
Purpose................................................... 19
Record Date and Outstanding Shares........................ 19
Vote Required............................................. 19
Herley's Irrevocable Proxies and Stock Ownership.......... 20
Proxies................................................... 20
Solicitation of Proxies; Expenses......................... 20
Appraisal Rights.......................................... 21
Recommendation of GMC Board of Directors.................. 21
</TABLE>

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<TABLE>
<S> <C>
THE MERGER.................................................. 22
Background of the Merger.................................. 22
GMC's Reasons for the Merger.............................. 23
Herley's Reasons For the Merger........................... 24
Opinion of Franco, Lewis & Company, Inc................... 24
Interests of Certain Persons.............................. 27
Stock Ownership Following the Merger...................... 28
Appraisal Rights.......................................... 28
Certain U.S. Federal Income Tax Consequences of the
Merger................................................. 29
Accounting Treatment...................................... 32
Governmental and Regulatory Approvals..................... 32
CERTAIN PROVISIONS OF THE MERGER AGREEMENT.................. 33
Effective Time............................................ 33
Conversion of Shares and Options.......................... 33
Stock Exchange Listing.................................... 34
Representations and Warranties............................ 34
Conduct of GMC's Business Prior to Merger................. 34
Expenses.................................................. 36
Conditions to The Merger.................................. 36
Termination............................................... 37
Indemnification........................................... 37
COMPARATIVE PER SHARE DATA.................................. 39
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS................................................ 40
HERLEY...................................................... 46
General................................................... 46
Products.................................................. 46
New Product Development and Applications.................. 50
Government Contracts...................................... 51
Marketing and Distribution................................ 51
Backlog................................................... 51
Manufacturing, Assembly and Testing....................... 51
Competition............................................... 52
Employees................................................. 52
Intellectual Property..................................... 53
Properties................................................ 53
Legal Proceedings......................................... 53
HERLEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 54
HERLEY MANAGEMENT AND EXECUTIVE COMPENSATION................ 60
Officers and Directors of Herley.......................... 60
</TABLE>

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Executive Compensation.................................................................................... 62
Option/SAR Grants in Last Fiscal Year..................................................................... 63
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values.................. 64
Employment Agreements..................................................................................... 64
Indemnification Agreements................................................................................ 65
Stock Plans............................................................................................... 65
Employee Savings Plan..................................................................................... 66
HERLEY STOCK INFORMATION.................................................................................... 67
Herley Security Ownership................................................................................. 67
Herley Stock Price and Dividend Information............................................................... 68
GMC......................................................................................................... 68
General................................................................................................... 68
Marketing................................................................................................. 69
Research and Development.................................................................................. 69
Raw Materials............................................................................................. 70
Patents and Trademarks.................................................................................... 70
Customers................................................................................................. 70
Competition............................................................................................... 71
Backlog................................................................................................... 71
Segments and Other Financial Data......................................................................... 71
Other Information......................................................................................... 72
Properties................................................................................................ 72
Legal Proceedings......................................................................................... 72
GMC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 73
GMC MANAGEMENT AND EXECUTIVE COMPENSATION................................................................... 78
Directors and Management of GMC........................................................................... 78
Executive Compensation.................................................................................... 80
Stock Option Grants and Exercises......................................................................... 81
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values.................. 81
GMC STOCK INFORMATION....................................................................................... 82
GMC Security Ownership.................................................................................... 82
GMC Stock Price and Dividend Information.................................................................. 85
DESCRIPTION OF HERLEY CAPITAL STOCK......................................................................... 86
Capital Stock............................................................................................. 86
Common Stock.............................................................................................. 86
Description of Warrants................................................................................... 87
Certain Provisions of the Certificate of Incorporation.................................................... 88
COMPARISON OF CAPITAL STOCK................................................................................. 89
</TABLE>

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LEGAL MATTERS............................................... 90
EXPERTS..................................................... 91
WHERE YOU CAN FIND MORE INFORMATION......................... 91
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
ANNEX A -- AGREEMENT AND PLAN OF MERGER..................... A-1
ANNEX B -- AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF
MERGER........................................... B-1
ANNEX C -- FAIRNESS OPINION OF FRANCO, LEWIS & COMPANY,
INC.............................................. C-1
ANNEX D -- NEW YORK BUSINESS CORPORATION LAW -- SECTIONS 623
AND 910.......................................... D-1
</TABLE>

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QUESTIONS AND ANSWERS ABOUT THE MERGER

Q: WHAT WILL I RECEIVE IN THE MERGER?

A: GMC shareholders will receive $18.00 in cash and a Warrant to purchase one
share of Herley common stock for each share of GMC common stock. The Warrant has
a three year term and is exercisable at a price of $14.40 on or before January
11, 1999 and $15.60 thereafter.

Q: WHY IS THE BOARD OF DIRECTORS RECOMMENDING THAT I VOTE FOR THE MERGER
AGREEMENT?

A: In the opinion of your board, the merger is in the best interests of GMC and
its shareholders and the merger consideration of $18.00 per share plus a Herley
common stock warrant is fair from a financial point of view to GMC's
shareholders. For the merger to occur, shareholders holding two-thirds of the
outstanding shares of GMC common stock must approve the merger. To review the
background and the reasons for the merger in greater detail, see page
.

Q: WHAT DO I NEED TO DO NOW?

A: Please mail your signed proxy card in the enclosed return envelope as soon
as possible, so that your shares may be represented at the Special Meeting.

Q: SHOULD I SEND IN MY SHARE CERTIFICATES NOW?

A: No. After the merger is complete, we will send you written instructions for
exchanging your share certificates.

Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?

A: Your broker will vote your shares only if you provide instructions on how to
vote. You should follow the directions provided by your broker regarding how to
instruct your broker to vote your shares.

Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?

A: Yes. Just send in a later dated, signed proxy card before the Special
Meeting or attend the Special Meeting and vote.

Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?

A: We are working toward completing the merger as quickly as possible. We
expect to complete the merger by January 8, 1999.

Q: WILL I RECOGNIZE GAIN OR LOSS ON THE TRANSACTION?

A: Yes. If the merger is completed, you will recognize gain or loss for federal
income tax purposes. You are urged to consult your own tax advisor to determine
your particular tax consequences.

Q: WHAT OTHER MATTERS WILL BE VOTED ON AT THE SPECIAL MEETING?

A: We do not expect to ask you to vote on any other matters at the Special
Meeting.

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SUMMARY

The following is a summary of certain information contained elsewhere in this
Prospectus/ Proxy Statement. This summary does not contain a complete statement
of all material elements of the proposals to be voted on and is qualified in its
entirety by the more detailed information appearing elsewhere in this
Prospectus/Proxy Statement and in the information and documents annexed hereto.

THE COMPANIES

HERLEY INDUSTRIES, INC.
10 Industry Drive
Lancaster, Pennsylvania 17603
(717) 397-2777

Herley mainly designs, develops, manufactures and sells 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 encoders and scoring
systems. Flight instrumentation products are used to:

- accurately track the flight of space launch vehicles, targets, and
unmanned airborne vehicles,

- communicate between ground systems and the airborne vehicle

- if necessary, destroy the vehicle if it is veering from its planned
trajectory, and

- train troops and test weapons.

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. Herley has grown internally and through
five strategic acquisitions. As a result, Herley has experienced a compound
annual growth rate of 45% in its operating income before unusual items for the
five fiscal years ended August 2, 1998. With these acquisitions, Herley has
evolved from a components manufacturer to a systems and service provider and has
used its technical capabilities and expertise to expand into domestic commercial
and foreign defense markets.

GMC ACQUISITION CORPORATION
10 Industry Drive
Lancaster, Pennsylvania 17603
(717) 397-2777

GMC Acquisition Corporation is a corporation recently organized by Herley for
the purpose of effecting the Merger. Acquisition has no material assets and has
not engaged in any activities except in connection with the Merger.

GENERAL MICROWAVE CORPORATION
5500 New Horizons Boulevard
Amityville, New York 11701
(516) 226-8900

GMC is engaged primarily in the design, development, manufacture and marketing
of microwave and electronic systems, equipment and components. GMC is organized
into
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three operating divisions in three locations with strong inter-divisional ties.
GMC's largest division, its microwave division, is located in Amityville, New
York. A substantial portion of GMC's microwave products is sold to manufacturers
and users of microwave systems and equipment for applications in the defense
electronics industry. GMC also sells these components and equipment for use in
the industrial sector as well as in commercial telecommunications industries.

The General Microwave Israel Corporation and General Microwave Israel (1987)
Ltd., subsidiaries in Jerusalem, Israel, conduct research and development and
manufacturing operations largely devoted to the production of microwave
oscillators. The General Microcircuits Corporation subsidiary in Billerica,
Massachusetts, engages in the design, manufacture and sale of hybrid
microcircuits largely intended for military applications.

GMC'S REASONS FOR THE MERGER

In reaching its decision to approve the Agreement and to recommend that GMC's
shareholders vote to adopt the Agreement, the GMC Board of Directors considered
a number of factors, including GMC's financial condition, strategic alternatives
to the proposed merger, the relationship between the value of the merger
consideration and the recent trading prices of GMC common stock, the strategic
fit between GMC and Herley, and the terms and conditions of the Agreement. The
Agreement was later amended to provide that GMC, rather than Acquisition, would
be the surviving corporation in the Merger. Any references to the Agreement are
to the Agreement as amended.

THE GMC SPECIAL MEETING

TIME, DATE, PLACE AND PURPOSE

A Special Meeting of Shareholders of GMC will be held at GMC's offices at 5500
New Horizons Boulevard, Amityville, New York on Wednesday, January 6, 1999 at
10:00 a.m., local time. The purpose of the GMC Meeting is to approve and adopt
the Agreement and to transact any other business as may properly come before the
GMC Meeting or any postponements or adjournments thereof. See "General Microwave
Corporation Special Meeting -- Date, Time and Place of GMC Meeting" and
"-- Purpose."

RECORD DATE AND VOTE REQUIRED

Only GMC shareholders of record at the close of business on November 17, 1998
are entitled to notice of and to vote at the GMC Meeting. Pursuant to New York
Business Corporation Law, the affirmative vote of the holders of two-thirds of
the GMC common stock outstanding as of the GMC Record Date is required to
approve and adopt the Agreement. See "General Microwave Corporation Special
Meeting -- Vote Required."

As of November 17, 1998, there were 154 shareholders of record of GMC common
stock and 1,214,275 shares of GMC common stock outstanding, each of which will
be entitled to cast one vote per share on each matter to be acted upon at the
GMC Meeting.

HERLEY IRREVOCABLE PROXIES AND STOCK OWNERSHIP

Each of the nine members of the Board of Directors of GMC, two officers of GMC,
and Mr. Frederick Zissu, a large shareholder and former Chairman of GMC, have
granted irrevocable proxies to Herley to vote their shares (approximately 30% in
the aggregate of the outstanding GMC common stock) in favor of the Agreement. In
addition, as of
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November 17, 1998, Herley owned an additional approximately 30% of the
outstanding GMC common stock.

RECOMMENDATION OF GMC BOARD OF DIRECTORS

GMC's Board of Directors has unanimously approved the Agreement and the
transactions contemplated thereby and has determined that the Merger is fair and
in the best interests of GMC and its shareholders. After careful consideration,
the GMC Board unanimously recommends a vote in favor of approval and adoption of
the Agreement. GMC Shareholders should read this Proxy Statement/Prospectus
carefully prior to voting. See "The Merger -- GMC's Reasons for the Merger,"
"-- Herley's Reasons for the Merger," and "General Microwave Corporation Special
Meeting -- Recommendation of GMC Board of Directors."

THE MERGER

TERMS OF THE MERGER

The Merger will be effective at the time the Certificate of Merger is filed with
the Secretary of State of the State of New York or any later time which is
agreed to in writing by Herley, GMC and Acquisition and specified in the
Certificate of Merger. At such Effective Time, Acquisition will merge with and
into GMC and GMC will become a wholly-owned subsidiary of Herley. Herley
currently intends to combine its operations with GMC's operations as soon as
practicable following the closing of the Merger. In the Merger, each outstanding
share of GMC common stock will be converted into the right to receive $18.00 in
cash and a Warrant to purchase one share of Herley common stock at a price of
$14.40 per share, if exercised on or before January 11, 1999 and $15.60 per
share if exercised after January 11, 1999. See "Description of Herley Capital
Stock -- Description of Warrants." Shares of GMC common stock owned by holders
who have exercised appraisal rights under New York law and shares held in the
treasury of GMC or owned by Acquisition, Herley or any wholly-owned subsidiary
of Herley or GMC will not be converted in the Merger. Each outstanding option or
right to purchase GMC common stock under the GMC Stock Option Plans will be
cancelled in exchange for the right to receive cash equal to $18.00 minus the
per share exercise price of such option and minus any amounts required for
Federal and State withholding taxes, and a Warrant to purchase one share of
Herley common stock. See "Certain Provisions of the Merger Agreement --
Conversion of Shares and Options."

EFFECTIVE TIME OF THE MERGER

The Merger is expected to close and the Effective Time is expected to be on or
about January 8, 1999, assuming all of the conditions to the Merger are met or
waived prior to that date. See "Certain Provisions of the Merger
Agreement -- Effective Time."

EXCHANGE OF GMC STOCK CERTIFICATES

Promptly after the Effective Time, American Stock Transfer and Trust Company, as
Herley's paying agent, will deliver to each GMC shareholder of record a letter
of transmittal with instructions regarding how to surrender GMC share
certificates. YOU SHOULD NOT SURRENDER YOUR GMC COMMON STOCK UNTIL YOU RECEIVE
THE LETTER OF TRANSMITTAL FROM THE PAYING AGENT. Each outstanding option or
right to purchase GMC common stock under the GMC Stock Option Plans will be
converted into the right to receive for each share of GMC stock
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subject to the option an amount in cash equal to $18.00 minus the per share
exercise price and a Warrant to purchase one share of Herley common stock.
Holders of options to purchase GMC stock will also receive instructions
regarding how to surrender their options. YOU MUST SURRENDER OPTION AGREEMENTS
TO THE SECRETARY OF HERLEY OR OTHERWISE CONFIRM TO HERLEY IN WRITING WHAT YOUR
OPTION HOLDINGS ARE. See "Certain Provisions of the Merger
Agreement -- Conversion of Shares and Options."

STOCK OWNERSHIP FOLLOWING THE MERGER

Based on the number of shares of GMC common stock and the number of shares of
Herley common stock outstanding on November 17, 1998, assuming the exercise of
the Warrants and that no GMC shareholders exercise appraisal rights (i) the
shares of Herley common stock that will be owned by GMC shareholders will
represent approximately 15% of the outstanding Herley common stock after the
merger and (ii) the shares of Herley common stock owned by Herley stockholders
will represent approximately 85% of the outstanding Herley common stock after
the merger. See "The Merger -- Stock Ownership Following the Merger."

NO SOLICITATION BY GMC

Until the earlier of the Effective Time of the Merger or termination of the
Agreement pursuant to its terms, GMC and the GMC shareholders who are parties to
the Agreement have agreed not to, and GMC has agreed to instruct its directors,
officers, affiliates and advisors not to, directly or indirectly, solicit,
initiate or encourage inquiries or proposals with respect to, furnish any
information relating to, or participate in, continue or enter into any
negotiations or discussions concerning, any business combination with or the
purchase of all or a portion of the assets of, or any equity interest in GMC or
its subsidiaries. GMC and those GMC shareholders have also agreed to immediately
notify Acquisition if any person inquires or makes a proposal regarding any
acquisition and to as promptly as practicable notify Acquisition of the
significant terms and conditions of any such acquisition proposal. See "Certain
Provisions of the Merger Agreement -- Conduct of GMC's Business Prior to The
Merger" and " -- Termination."

MARKET PRICE DATA

The Herley common stock is traded on the Nasdaq National Market under the symbol
"HRLY." On August 21, 1998, the last day before the announcement of the
Agreement, the closing price of Herley common stock as reported on Nasdaq was
$9.75 per share. On December 3, 1998, the closing price of Herley common stock
as reported on Nasdaq was $11.875. There can be no assurance as to the actual
price of Herley common stock prior to, at or at any time following the Effective
Time of the Merger, or in the event the Merger is not consummated. See "Risk
Factors," and "Herley Stock Information."

GMC common stock is traded on the American Stock Exchange under the symbol
"GMW." On August 21, 1998, the last day before the execution of the Agreement,
the closing price of GMC common stock as reported on the Amex was $10.625 per
share. On December 3, 1998, the closing price of GMC common stock as reported on
the Amex was $18.00. Following the Merger, GMC common stock will no longer be
traded. There can be no assurance as to the actual price of GMC common stock
prior to, or at the Effective Time of the Merger, or in the event the Merger is
not consummated. See "Risk Factors," and "GMC Stock Information."
5
<PAGE> 15

TERMINATION

The Agreement may be terminated under certain circumstances, including:

- by mutual written consent of Acquisition and GMC authorized by their
respective Boards of Directors;

- by any party not in breach if certain conditions contained in the
Agreement are not satisfied within the time contemplated by the
Agreement; or

- by either Herley or GMC if the other party breaches certain
representations, warranties or covenants contained in the Agreement.

CONDITIONS TO THE MERGER

Various conditions must be satisfied prior to the consummation of the Merger,
including:

- the Agreement must be approved by the holders of two-thirds of the GMC
common stock;

- the Registration Statement filed with the Commission relating to the
issuance of Warrants and the underlying shares of Herley common stock in
connection with the Merger shall be effective;

- the shares underlying the Warrants shall be authorized for listing on
Nasdaq;

- there shall be no injunction, court order, or other legal restraint
trying to prevent the Merger; and

- all applicable filings shall have been made and all applicable regulatory
approvals shall have been obtained, including securities or "blue sky"
commissions.

In addition, GMC does not have to consummate the Merger unless the following
conditions are met or waived:

- the representations and warranties of Herley and Acquisition in the
Agreement are accurate,

- GMC has received a legal opinion from counsel representing Herley;

- Acquisition deposits with American Stock Transfer & Trust Company, as
paying agent, funds and Warrants sufficient to enable the Merger to be
consummated pursuant to its terms; and

- the Merger shall be completed no later than January 8, 1999.

Similarly, Acquisition does not have to consummate the Merger unless the
following conditions are met or waived:

- the representations and warranties of GMC contained in the Agreement are
accurate;

- GMC has performed in all material respects the covenants required by the
Agreement;

- there has been no material adverse effect with respect to GMC;

- Herley has received a legal opinion from counsel representing GMC;
6
<PAGE> 16

- holders of not more than 15% of the outstanding GMC common stock have
exercised dissenter's rights under Sections 623 and 910 of the New York
Business Corporation Law;

- the Board of Directors of GMC have terminated the GMC Stock Option Plan
as of the Effective Time of the Merger;

- GMC has received a satisfactory fairness opinion;

- Acquisition has finished its due diligence investigation of GMC and
determined that the representations and warranties of GMC in the
Agreement are materially true and correct. This due diligence condition
has been satisfied; and

- the Merger shall be completed no later than January 8, 1999.

See "Certain Provisions of the Merger Agreement -- Conditions to the Merger."

INTERESTS OF CERTAIN PERSONS IN THE MERGER

In considering the recommendation of the GMC Board with respect to the
Agreement, holders of GMC common stock should be aware that certain members of
the GMC Board and certain executive officers of GMC have certain interests in
the Merger that are in addition to the interests of holders of GMC common stock
generally. See "The Merger -- Interests of Certain Persons."

APPRAISAL RIGHTS

Holders of GMC common stock will be entitled to appraisal rights under the New
York Business Corporation Law in connection with the Merger. A holder of GMC
common stock who desires to pursue appraisal rights must (i) file a written
objection to the Agreement with GMC before the taking of the shareholders' vote
on the Agreement, (ii) refrain from voting in favor of the Agreement, and (iii)
make written demand from the surviving corporation for payment for the
shareholder's shares, all in accordance with the New York Business Corporation
Law. Such appraisal rights are conditioned upon not voting for the Agreement.
See "The Merger -- Appraisal Rights."

ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND HERLEY'S CHARTER DOCUMENTS

Certain provisions of Delaware law and Herley's Certificate of Incorporation and
By-laws could make it more difficult for a third party to acquire control of
Herley without the approval of its Board of Directors, even if the change in
control could be beneficial to the interests of Herley's stockholders. Herley is
and will be subject to the provisions of Section 203 of the Delaware General
Corporation Law. Section 203 restricts a corporation from entering into certain
"business combinations" with an "interested person" for a period of three years.
An interested person is generally defined to mean a person or entity that has
acquired in excess of 15% of a company's voting stock. Herley's Board of
Directors will continue to be classified into three classes, so a person who
wishes to propose an alternative slate of nominees to Herley's Board of
Directors can propose nominees for only one-third of the Board per year.
Herley's Certificate of Incorporation will continue to require that certain
transactions, including mergers and sales or transfers of all or substantially
all of the assets to "interested persons"as defined in Section 203 of the
Delaware General Corporation Law, be approved by holders of 80% of the stock.
See "Comparison of Capital Stock."
7
<PAGE> 17

FAIRNESS OPINION

Franco, Lewis & Company, Inc. has delivered to the GMC Board its written
opinion, dated November 12, 1998, to the effect that, as of November 12, 1998,
the consideration to be received by the holders of GMC common stock in the
Merger was fair from a financial point of view. The full text of the opinion of
Franco, Lewis & Company, Inc., which sets forth assumptions made and matters
considered, is attached hereto as Annex C to this Proxy Statement/Prospectus,
and is incorporated herein by reference. HOLDERS OF GMC COMMON STOCK ARE URGED
TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "The Merger -- Fairness
Opinion of Franco, Lewis & Company, Inc." and Annex C attached hereto.

INCOME TAX TREATMENT

Assuming that a holder of GMC common stock holds his or her shares as a capital
asset, the holder will recognize capital gain or loss equal to the difference
between (i) the cash and the fair market value of the Warrant received and (ii)
the holder's basis in the GMC common stock given up in the exchange. Under the
federal income tax backup withholding rules, the Paying Agent will generally be
required to withhold 31% of all payments to a payee, unless the payee provides a
tax identification number (social security number, in the case of an individual,
or employer identification number in the case of other GMC shareholders) and
certifies that the tax identification number is correct. Any amounts withheld
will be allowed as a credit against the holder's Federal income tax liability.

ALL GMC SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS. See "The
Merger -- Certain U. S. Federal Income Tax Consequences of the Merger."

REGULATORY MATTERS

Herley and GMC are not aware of any material governmental or regulatory
approvals which are required for consummation of the Merger, other than
compliance with the federal securities laws and applicable state securities and
"blue sky" laws. See "The Merger -- Governmental and Regulatory Approvals."

ACCOUNTING TREATMENT

It is anticipated that the Merger will be accounted for as a "purchase"
transaction. Under the purchase method of accounting, the value of the assets
and liabilities of GMC will be recorded at their estimated fair market value at
the Effective Time of the Merger and goodwill will be recorded to the extent
that the purchase price exceeds the fair market value of the net assets
acquired. The consolidated results of operations of GMC will be included in the
consolidated results of operations of Herley from the Effective Time of the
Merger and not for the entire fiscal year ending August 1, 1999. See "The
Merger -- Accounting Treatment."

RISK FACTORS

For a discussion of the risks of an investment in Herley common stock, see "Risk
Factors."
8
<PAGE> 18

SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA

The following selected historical financial information of Herley and GMC,
except for the GMC data as of and for the six months ended August 30, 1997 and
August 29, 1998, has been derived from their respective historical audited
consolidated financial statements, and should be read in conjunction with such
consolidated financial statements and the notes thereto, included elsewhere in
this Proxy Statement/ Prospectus. The statement of operations data of GMC
presented below for the six month periods ended August 30, 1997 and August 29,
1998 and the balance sheet data as of August 30, 1997 and August 29, 1998 were
derived from unaudited consolidated financial statements of GMC included
elsewhere in this Proxy Statement/Prospectus. Such unaudited consolidated
financial statements, in the opinion of GMC's management, contain all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the consolidated financial position and results of operations
for these periods. The selected pro forma financial information is derived from
the unaudited pro forma combined condensed financial statements, which give
effect to the Merger as a purchase, and should be read in conjunction with such
unaudited pro forma combined condensed statements and the notes thereto included
in this Proxy Statement/Prospectus. For purposes of the pro forma operating
data, Herley's consolidated financial statements for the 52 weeks ended August
2, 1998 have been combined with the GMC financial statements for the
twelve-month period ended August 29, 1998. No cash dividends have been declared
or paid on Herley common stock for the past five years. GMC paid a special cash
dividend of $0.25 per share on February 9, 1994. The pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results or financial position that would have occurred if the
Merger had been consummated at the beginning of the periods indicated, nor is it
necessarily indicative of future operating results or financial position.

HERLEY SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

<TABLE>
<CAPTION>
52 WEEKS ENDED 53 WEEKS 52 WEEKS
--------------------------------- ENDED ENDED
JULY 31, JULY 30, JULY 28, AUGUST 3, AUGUST 2, PRO FORMA
1994 1995 1996 1997 1998 COMBINED
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales(1).................. $30,508 $24,450 $29,001 $32,195 $40,798 $63,477
Costs and expenses............ 27,368 23,189 25,630 27,047 32,508 53,562
--------- --------- --------- --------- --------- ---------
Income before unusual items... 3,140 1,261 3,371 5,148 8,290 9,915
Unusual items(2).............. (746) (5,447) -- -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) from
operations.................. 2,394 (4,186) 3,371 5,148 8,290 9,915
Other income (expense)(3)..... 143 (700) 400 136 140 (815)
--------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes....................... 2,537 (4,886) 3,771 5,284 8,430 9,100
Provision for income
taxes(4)(7)................. 676 4 102 480 2,934 2,602
--------- --------- --------- --------- --------- ---------
Net Income (loss)............. $ 1,861 $(4,890) $ 3,669 $ 4,804 $ 5,496 $ 6,498
========= ========= ========= ========= ========= =========
Earnings (loss) per common
share -- Basic.............. $0.33 $(0.98) $0.97 $1.18 $1.11 $1.31
========= ========= ========= ========= ========= =========
</TABLE>

9
<PAGE> 19

<TABLE>
<CAPTION>
52 WEEKS ENDED 53 WEEKS 52 WEEKS
--------------------------------- ENDED ENDED
JULY 31, JULY 30, JULY 28, AUGUST 3, AUGUST 2, PRO FORMA
1994 1995 1996 1997 1998 COMBINED
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic weighted
average shares
outstanding(5)(6)........... 5,701,896 4,978,868 3,786,176 4,063,505 4,969,248 4,969,248
========= ========= ========= ========= ========= =========
Earnings (loss) per common
share-Diluted............... $0.33 $(0.98) $0.86 $1.01 $1.02 $1.20
========= ========= ========= ========= ========= =========
Diluted weighted
average shares
outstanding(5)(6)........... 5,701,896 4,978,868 4,253,785 4,733,682 5,407,283 5,407,283
========= ========= ========= ========= ========= =========
BALANCE SHEET DATA:
Current assets................ $15,971 $15,453 $16,263 $20,476 $36,437 $37,266
Current liabilities........... 10,218 9,974 7,559 9,813 9,843 14,271
Working capital............... 5,753 5,479 8,704 10,663 26,594 22,995
Total assets.................. 53,852 42,229 42,509 39,257 57,553 76,255
Long-term debt, less current
portion..................... 14,823 10,525 11,021 2,890 4,111 14,338
Total shareholders'
equity(6)................... $28,281 $18,988 $21,032 $23,371 $40,441 $41,047
</TABLE>

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

(1) On August 4, 1997, Herley acquired Metraplex Corporation and accordingly the
52 week period ended August 2, 1998 includes the results of operations of
Metraplex.

(2) Represents settlement costs, legal fees, and related expenses in connection
with the settlement of certain legal claims in 1995; and charges in excess
of reserves for warranty claims in connection with an acquisition in 1994.

(3) Consists principally of interest expense offset by investment income as
detailed in the Company's consolidated statements of income.

(4) The 1996 and 1997 tax provisions reflect the utilization of a net operating
loss carryforward generated in 1995.

(5) As adjusted to give effect to a four-for-three stock split on September 30,
1997.

(6) In December 1997, Herley completed the sale of 700,000 shares of common
stock and 1,265,000 shares of common stock purchase warrants to the public.
The net proceeds received were $7,451,579.

(7) The pro forma effective tax rate is lower than the statutory tax rate due to
the reversal of a valuation allowance of $698,000 during the twelve months
presented that was previously provided against deferred tax assets of GMC.
10
<PAGE> 20

GMC SELECTED HISTORICAL FINANCIAL INFORMATION

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------------------------------------ ------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, AUGUST 30, AUGUST 29,
1994 1995 1996 1997 1998 1997 1998
------------ ------------ ------------ ------------ ------------ ---------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales.............. $18,694 $19,069 $17,428 $20,061 $21,318 $10,475 $11,836
Costs and expenses..... 17,224 18,644 18,608 19,611 19,470 9,892 10,673
------- ------- ------- ------- ------- ------- -------
Operating earnings
(loss)............... 1,470 425 (1,180) 450 1,848 583 1,163
Other income
(expense)............ (31) (224) (184) (208) (82) (50) 25
------- ------- ------- ------- ------- ------- -------
Earnings (loss) from
continuing operations
before income
taxes................ 1,439 201 (1,364) 242 1,766 533 1,188
Income taxes benefit
(expense)............ (445) 266 222 (40) 151 (48) (390)
------- ------- ------- ------- ------- ------- -------
Earnings (loss) from
continuing
operations........... 994 467 (1,142) 202 1,917 485 798
Net earnings (loss)
from discontinued
operations(1)........ 49 (292) (635) (3,288) 953 953 --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).... $ 1,043 $ 175 $(1,777) $(3,086) $ 2,870 $ 1,438 $ 798
======= ======= ======= ======= ======= ======= =======
BASIC PER SHARE DATA:
Net earnings (loss)
from continuing
operations........... $ 0.73 $ 0.38 $ (0.95) $ 0.17 $ 1.59 $ 0.40 $ 0.66
Net earnings (loss)
from discontinued
operations(1)........ 0.03 (0.24) (0.53) (2.73) 0.79 0.79 --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).... $ 0.76 $ 0.14 $ (1.48) $ (2.56) $ 2.38 $ 1.19 $ 0.66
======= ======= ======= ======= ======= ======= =======
Basic weighted average
common shares
outstanding.......... 1,358,985 1,228,838 1,196,682 1,203,592 1,207,704 1,205,776 1,210,787
DILUTED PER SHARE DATA:
Net earnings (loss)
from continuing
operations........... $ 0.73 $ 0.38 $ (0.95) $ 0.17 $ 1.56 $ 0.40 $ 0.64
------- ------- ------- ------- ------- ------- -------
Net earnings (loss)
from discontinued
operations(1)........ 0.03 (0.24) (0.53) (2.73) 0.78 0.78 --
------- ------- ------- ------- ------- ------- -------
Net earnings (loss).... $ 0.76 $ 0.14 $ (1.48) $ (2.56) $ 2.34 $ 1.18 $ 0.64
======= ======= ======= ======= ======= ======= =======
Diluted weighted
average common shares
outstanding.......... 1,366,258 1,234,596 1,196,682 1,206,277 1,229,098 1,216,942 1,247,389
</TABLE>

11
<PAGE> 21

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

(1) See Note 2 to the GMC Consolidated Financial Statements.
12
<PAGE> 22

GENERAL INFORMATION

This Proxy Statement/Prospectus is furnished by GMC in connection with the
solicitation of proxies to be used at the GMC Meeting. This Proxy
Statement/Prospectus is also furnished by Herley to GMC shareholders in
connection with the issuance of Warrants to purchase shares of Herley common
stock in connection with the Merger described herein.

Herley has provided the information concerning Herley Acquisition and the pro
forma financial information regarding the Combined Company, and GMC has provided
the information concerning GMC. As used herein, the term "Combined Company"
means Herley and GMC and their respective subsidiaries as a consolidated entity
following the Merger, and references to the products, business, results of
operations or financial condition of the Combined Company should be considered
to refer to Herley and GMC, unless the context otherwise requires.

13
<PAGE> 23

RISK FACTORS

IN EVALUATING THE PROPOSALS TO BE VOTED ON THE GMC MEETING AND THE ACQUISITION
OF THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS YOU SHOULD CONSIDER
CAREFULLY THE FOLLOWING FACTORS.

RISKS RELATING TO INTEGRATION OF OPERATIONS

Herley has entered into the Agreement because it expects that the proposed
Merger will result in long-term strategic benefits. Achieving these benefits
will depend in part on whether Herley and GMC's operations can be integrated
efficiently and effectively. There can be no assurance that this will occur. The
combination of the companies will require, among other things, integration of
the companies' respective product offerings and coordination of their sales,
marketing and research and development efforts.

The successful expansion of Herley's business will require communication and
cooperation in product development and marketing among the senior executives and
key technical personnel of Herley and GMC. Given the inherent difficulties
involved in completing a major business combination there can be no assurance
that:

- cooperation among Herley and GMC's senior executives and key technical
personnel will occur;

- Herley will retain its and GMC's key technical and management personnel;

- the business combination will not result in disruptions in the Combined
Company's business;

- the integration of the businesses of Herley and GMC will be successful;
or

- the Combined Company will realize any of the anticipated benefits of the
Merger.

The integration of operations following the Merger will require the dedication
of management resources, which may distract attention from day-to-day
operations. The inability of management to successfully integrate the operations
of the companies could have a material adverse effect upon the business,
operating results and financial condition of the Combined Company.

Herley also believes that the Combined Company will benefit from the combination
of Herley and GMC's marketing efforts, but there can be no assurance that the
Combined Company will be able to take full advantage of such combination or that
channel conflicts will not develop due to the attempt to integrate Herley and
GMC's separate distribution channels.

NO ADJUSTMENTS TO CONSIDERATION

Under the terms of the Agreement, each share of GMC common stock issued and
outstanding at the Effective Time of the Merger will be converted into the right
to $18.00 in cash and a Warrant to purchase one share of Herley common stock.
The Agreement does not provide for adjustment of the consideration based on
fluctuations in the price of Herley common stock or GMC common stock.
Accordingly, some of the value of the consideration to be received by
shareholders of GMC upon the Merger will depend on the market price of the
Herley common stock at the Effective Time . There can be no assurance that the
market price of the Herley common stock after the Effective Time will not be
lower than the exercise price of the Warrant.

14
<PAGE> 24

EFFECTS OF MERGER ON CUSTOMERS

There can be no assurance that the present and potential customers of GMC and
Herley will continue their current buying patterns without regard to the
proposed Merger. Any significant delay or reduction in orders could have an
adverse effect on the near-term business and results of operations of the
Combined Company.

RISKS ASSOCIATED WITH EXPANSION INTO NEW MARKETS

The Combined Company can be expected to introduce new products and expand its
product offerings in the existing markets of Herley and GMC. Broad market
acceptance of the Combined Company's new products is critical to the Combined
Company's future success. Herley believes that factors affecting the ability of
the Combined Company's products to achieve broad market acceptance include:

- product performance,

- price,

- adaptation to rapid technological change, and

- competitive product offerings.

There can be no assurance that the Combined Company will be able to respond
promptly and effectively to the challenges of technological change and its
competitors' innovations, or that the Combined Company will be able to achieve
the necessary market acceptance, or compete effectively, in its product markets.

FLUCTUATIONS IN QUARTERLY RESULTS; FUTURE OPERATING RESULTS UNCERTAIN

Herley's and GMC's quarterly operating results have in the past, and the
Combined Company's results may in the future, fluctuate significantly depending
on factors such as:

- demand for its products,

- the size and timing of orders,

- the number, timing and significance of new product announcements by it
and its competitors,

- its ability to develop, introduce and market new and enhanced versions on
a timely basis,

- the level of product and price competition,

- changes in operating expenses,

- changes in average selling prices and product mix,

- product returns,

- changes in technology, and

- general economic factors.

As a result, because product revenues in any quarter may be substantially
dependent on orders booked and shipped in that quarter, revenues for any future
quarter may not be predictable with any significant degree of accuracy. If
revenue levels are below expectations, operating results are likely to be
adversely affected and may be below the

15
<PAGE> 25

expectations of public market analysts and investors. In such event, the price
of the Herley common stock would likely decrease.

TECHNOLOGICAL CHANGE

The flight instrumentation industry is characterized by technological change.
Herley's future success will depend upon its ability to continually enhance its
current products and systems and develop and introduce new products and systems
that keep pace with the increasingly sophisticated needs of its customers and
the technological advancements of its competitors. There can be no assurance
that Herley will be successful in developing and marketing product enhancements,
new products or totally new systems that will adequately meet the requirements
of the marketplace. As a result, Herley has expended substantial resources for
system and product development and intends to continue to expend such resources
in the future. The development of new or enhanced systems or products results in
expenditures and costs that Herley may not recover if the system or product is
unsuccessful. See "The Companies -- Business of Herley."

DEPENDENCE UPON KEY PERSONNEL

The success of Herley depends upon the efforts of its executive officers and
other key personnel, including Lee N. Blatt, Chairman of the Board and Chief
Executive Officer and Myron Levy, President, and in the event of an acquisition,
its ability to attract and retain other highly qualified management and
technical personnel. Although Herley has existing employment agreements with
Messrs. Blatt and Levy the loss of the services of Mr. Blatt and Mr. Levy could
have an adverse effect on the Combined Company's business and prospects. Herley
does not maintain key-man life insurance. There can be no assurance that Herley
will be successful in the event it needs to hire and retain additional key
personnel. See "Management."

INTERNATIONAL SALES; CURRENCY FLUCTUATIONS

International sales represented approximately 29% of Herley's total revenues for
the 52 weeks ended August 2, 1998 and the 53 weeks ended August 3, 1997.
International sales represented approximately 34% of GMC's total revenues for
the fiscal years ended February 28, 1998 and the six months ended August 29,
1998. Herley believes that continued profitability requires additional expansion
of sales in foreign markets. This expansion will continue to require significant
management attention and financial resources and could adversely affect the
Combined Company's operating margins. In order to increase international sales
in the future, the Combined Company may be required to establish additional
foreign operations, hire additional personnel and recruit additional
international resellers. To the extent that the Combined Company is unable to
expand international sales in a timely and cost-effective manner, its business,
operating results and financial condition could be materially adversely
affected. In addition, there can be no assurance that the Combined Company will
be able to maintain or increase international market demand for its products.

All of Herley's and GMC's international sales are currently denominated in U.S.
dollars. Consequently, Herley and GMC do not currently engage in any hedging
activities. To date, exposure to currency fluctuations has not been significant
but there can be no guarantee that future fluctuations in the currency exchange
rates will not have a material adverse effect on the Combined Company's
business, operating results and financial condition.

16
<PAGE> 26

Additional risks inherent in the Combined Company's international business
activities include:

- unexpected changes in regulatory requirements;

- tariffs and other trade barriers;

- costs of localizing products for foreign countries;

- lack of acceptance of localized products in foreign countries;

- longer accounts receivable payment cycles;

- difficulties in collecting payment;

- difficulties in managing international operations;

- potentially adverse tax consequences, including repatriation of earnings;

- reduced protection for intellectual property;

- the burdens of complying with a wide variety of foreign laws; and

- the effects of high local wage scales and other expenses.

There can be no assurance that such factors will not have a material adverse
effect on the Combined Company's future international sales and, consequently,
the Combined Company's business, operating results and financial condition.

DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF THIRD PARTY CLAIMS FOR
INFRINGEMENT

Herley does not have any patents. GMC has 12 patents in the United States which
cover various products. The Combined Company will rely on a combination of
patent, copyright and trademark laws, trade secrets, confidentiality procedures
and contractual provisions to protect its proprietary rights. The laws of some
foreign countries do not protect proprietary rights as thoroughly as do the laws
of the United States. Policing unauthorized use of Herley's or GMC's products is
difficult, time-consuming and costly. However, the actions taken by the Combined
Company to establish and protect its proprietary rights may not be enough to
prevent imitation of its products or to prevent others from claiming violations
of their proprietary rights by the Combined Company. Any such claims, whether
with or without merit, could be time-consuming, result in costly litigation and
diversion of resources, cause product shipment delays or require the Combined
Company to enter into royalty or licensing agreements. Any such royalty or
licensing agreements may not be available on terms acceptable to the Combined
Company or at all. In the event of a successful claim of product infringement
against the Combined Company and the failure or inability of the Combined
Company to license the infringed or similar technology, the Combined Company's
business, operating results and financial condition could be materially
adversely affected.

POTENTIAL ANTI-TAKEOVER PROVISIONS

Certain provisions of Delaware law and the Combined Company's Certificate of
Incorporation and By-laws could make it more difficult for a third party to
acquire control of Herley, even if the change in control could be beneficial to
the interests of the stockholders. These provisions include:

- Section 203 of the Delaware General Corporation Law, which prohibits
certain business combinations with interested stockholders,

17
<PAGE> 27

- the classification of Herley's Board of Directors into three classes and

- the requirement that stockholders owning at least 80% of the outstanding
shares of Herley common stock approve certain transactions, including
mergers and sales or transfers of all or substantially all of the assets
of the Combined Company.

These provisions could limit the price that certain investors might be willing
to pay in the future for shares of Herley common stock and the Warrants. See
"Description of Herley Capital Stock."

YEAR 2000 RISK

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 Herley or a third party dealing with Herley 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 Herley.

A substantial part of Herley'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 Herley is
unable to perform under these contracts due to a Year 2000 problem, the customer
could terminate the contract for default. While lost revenues from such an event
are a concern for Herley, the greater risks are the consequential damages for
which Herley could be liable for failure to perform under the contracts. Such
damages could have a material adverse impact on Herley's results of operations
and financial position. Herley has reviewed its computer and other systems to
attempt to ensure that they will be Year 2000 compliant. Herley has been advised
by the provider of its computer hardware that the hardware complies with Year
2000 requirements. Herley's financial, manufacturing, and other software
applications related to its hardware have been updated to comply with Year 2000.
Certain modules have been fully tested, with the remaining modules to be tested
by the end of fiscal 1999.

Herley 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. This process will be ongoing and Herley'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
Herley believes would have a material adverse impact on its operations. However,
Herley cannot control the conduct of its suppliers. Therefore, there can be no
guarantee that Year 2000 problems originating with a supplier will not occur.
There can be no absolute assurance that third parties will convert their systems
in a timely manner. Herley 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.

ADDITIONAL ISSUANCES OF STOCK WITHOUT STOCKHOLDER APPROVAL

After this offering, Herley will have an aggregate of approximately 8,903,302
shares of common stock authorized but unissued and not reserved for specific
purposes. All of such shares may be issued without any action or approval by the
Combined Company's stockholders. Any shares issued would further dilute the
percentage ownership of the Company held by the investors in this offering.
Unissued but reserved shares of Herley common stock include shares of common
stock reserved for issuance in connection with the exercise of (i) the Warrants,
(ii) the stock options issued under Herley's stock option
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plans, (iii) currently outstanding warrants, including the warrants held by
officers and directors.

The market price of the Herley common stock could drop as a result of sales of a
large number of shares in the market, or the perception that such sales could
occur. These factors could also make it more difficult for the Combined Company
to raise funds through future offerings of Herley common stock during the terms
of these stock options and warrants because of the potential dilution and
because the holders thereof might be expected to convert or exercise them if the
market price of the Herley common stock exceeds their conversion or exercise
price. See "Description of Herley Capital Stock."

CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS

This Proxy Statement/Prospectus contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities and Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of certain
factors, including those set forth in the various risk factors set forth herein.
In connection with forward-looking statements which appear herein, stockholders
should carefully review the factors set forth in this Proxy Statement/Prospectus
under "Risk Factors." Reference is also made to the particular forward-looking
discussions set forth under "Herley -- Herley Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "GMC -- GMC
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

GENERAL MICROWAVE CORPORATION SPECIAL MEETING

DATE, TIME AND PLACE OF GMC MEETING

The GMC Meeting will be held at 5500 New Horizons Boulevard, Amityville, New
York on Wednesday, January 6, 1999 at 10:00 a.m. local time.

PURPOSE

The purposes of the GMC Meeting are to approve the Merger and adopt the
Agreement and to transact such other matters as may properly come before the GMC
Meeting or any postponements or adjournments thereof.

RECORD DATE AND OUTSTANDING SHARES

Only shareholders of record of GMC common stock at the close of business on
November 17, 1998 (the "GMC Record Date") are entitled to notice of, and to vote
at, the GMC Meeting. As of the GMC Record Date, there were 154 shareholders of
record holding an aggregate of approximately 1,214,275 shares of GMC common
stock.

On or about December 11, 1998, a notice meeting the requirements of New York law
is being mailed to all shareholders of record as of the GMC Record Date.

VOTE REQUIRED

Pursuant to the New York Business Corporation Law (the "NYBCL" or "NY
Corporation Law") and the GMC Certificate of Incorporation, as amended, the
affirmative vote of the holders of two-thirds of the GMC common stock
outstanding as of the GMC Record Date is required to approve and adopt the
Agreement. Each shareholder of record

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of GMC common stock on the GMC Record Date will be entitled to cast one vote per
share on each matter to be acted upon at the GMC Meeting.

The representation, in person or by proxy, of at least a majority of the
outstanding shares of GMC common stock entitled to vote at the GMC Meeting is
necessary to constitute a quorum for the transaction of business. The effect of
an abstention and of a broker "non-vote" is the same as that of a vote "against"
the proposal.

HERLEY'S IRREVOCABLE PROXIES AND STOCK OWNERSHIP

In connection with the execution of the Agreement, the entire Board of Directors
of GMC, two officers of GMC, and Mr. Frederick Zissu, a large shareholder and
former Chairman of GMC, granted irrevocable proxies to vote their shares of GMC
common stock (which, in the aggregate, represent approximately 30% of the
outstanding common stock of GMC) in favor of the Merger and the adoption of the
Agreement.

In addition, as of November 17, 1998, Herley has purchased 365,600 shares of GMC
common stock on the open market, which represents approximately 30% of the
outstanding common stock of GMC. Together with the shares Herley is entitled to
vote by virtue of the irrevocable proxies as of November 17, 1998, Herley has
voting power over 721,659, or 60%, of the outstanding common stock of GMC. Under
the NYBCL, an affirmative vote of shareholders holding two-thirds of the
outstanding common stock of GMC is required to approve the Agreement.

PROXIES

Each of the persons named as proxies for the GMC Meeting is an officer of GMC.
All shares of GMC common stock that are entitled to vote and are represented at
the GMC Meeting either in person or by properly executed proxies received prior
to or at the GMC Meeting and not duly and timely revoked will be voted at the
GMC Meeting in accordance with the instructions indicated on such proxies. If no
such instructions are indicated, such proxies will be voted for the approval of
the Agreement.

The GMC Board knows of no other matter to be presented at the GMC Meeting. If
any other matter upon which a vote may properly be taken should be presented at
the GMC Meeting, shares represented by all proxies received by the GMC Board
will be voted with respect thereto in accordance with the judgement of the
persons named as proxies in the proxies.

Execution of a proxy does not in any way affect a shareholder's right to attend
the meeting and vote in person. Any proxy may be revoked by a shareholder at any
time before it is exercised by delivering a written revocation or a later-dated
proxy to the Secretary of GMC, or by attending the meeting and voting in person.
Any written notice of revocation or subsequent proxy should be sent so as to be
delivered to General Microwave Corporation at 5500 New Horizons Boulevard,
Amityville, New York 11701, Attention: Secretary, or hand-delivered to the
Secretary of GMC, in each case at or before the taking of the vote at the GMC
Meeting.

SOLICITATION OF PROXIES; EXPENSES

All costs of solicitation of proxies for the GMC Meeting will be borne by GMC.
Brokers, custodians and fiduciaries will be requested to forward proxy
soliciting material to the owners of stock held in their names, and GMC will
reimburse them for their reasonable out-of-pocket costs. In addition, proxies
may also be solicited by certain directors, officers

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and employees of GMC personally or by mail, telephone or telegraph following the
original solicitation. Such persons will not receive additional compensation for
such solicitation.

APPRAISAL RIGHTS

Pursuant to the NY Corporation Law, and as described in greater detail in the
Notice of the Meeting and below, holders of GMC common stock will be entitled to
appraisal rights in connection with the Merger. A holder of GMC common stock who
desires to pursue appraisal rights must (i) file a written objection to the
Agreement with GMC before the taking of the shareholders' vote on the Agreement,
(ii) refrain from voting in favor of the Agreement and (iii) make written demand
from the surviving corporation for payment for the shareholder's shares, all in
accordance with the NY Corporation Law. Such appraisal rights are not
conditioned upon voting against the Agreement. See "The Merger -- Appraisal
Rights."

RECOMMENDATION OF GMC BOARD OF DIRECTORS

THE GMC BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY AND HAS DETERMINED THAT THE MERGER IS FAIR TO, AND IN THE
BEST INTERESTS OF, GMC AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, THE
GMC BOARD UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE
AGREEMENT.

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THE MERGER

THE FOLLOWING DISCUSSION SUMMARIZES THE PROPOSED MERGER AND RELATED
TRANSACTIONS. THE FOLLOWING IS NOT, HOWEVER, A COMPLETE STATEMENT OF ALL
PROVISIONS OF THE AGREEMENT AND RELATED AGREEMENTS. DETAILED TERMS OF AND
CONDITIONS TO THE MERGER AND CERTAIN RELATED TRANSACTIONS ARE CONTAINED IN THE
AGREEMENT, A COPY OF WHICH IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS
ANNEX A. AMENDMENT NO. 1 TO THE AGREEMENT IS ATTACHED AS ANNEX B. REFERENCE IS
ALSO MADE TO THE OTHER ANNEXES HERETO. STATEMENTS MADE IN THIS PROXY
STATEMENT/PROSPECTUS WITH RESPECT TO THE TERMS OF THE MERGER AND SUCH RELATED
TRANSACTIONS ARE QUALIFIED IN THEIR RESPECTIVE ENTIRETIES BY REFERENCE TO THE
MORE DETAILED INFORMATION SET FORTH IN THE AGREEMENT AND THE OTHER ANNEXES
HERETO. THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING
THOSE SET FORTH IN "RISK FACTORS" AND ELSEWHERE HEREIN.

BACKGROUND OF THE MERGER

The terms of the Agreement are the result of arm's-length negotiations between
representatives and legal advisors of Herley and GMC. The following is a brief
discussion of the background of those negotiations.

In early July 1998, Mr. Lee N. Blatt, Chairman and Chief Executive Officer of
Herley, called Mr. Sherman Rinkel, Chairman of GMC, to indicate that Herley was
interested in pursuing an alliance with GMC. Following that initial contact
Messrs. Blatt and Rinkel had preliminary discussions regarding a possible
acquisition of GMC by Herley.

On July 17, 1998, Messrs. Blatt and Rinkel met to discuss the general terms of a
merger with no specific agreement resulting. At the meeting, Mr. Blatt expressed
an interest in acquiring GMC at a purchase price of $16 per share. Mr. Rinkel
informed Mr. Blatt that the proposed purchase price was insufficient. Messrs.
Blatt and Rinkel agreed to have further discussions regarding a possible
transaction between Herley and GMC and to inform their respective Boards of
Directors regarding the status of such discussions.

From July 17 to July 31, 1998, Mr. Blatt, Mr. Rinkel and, on one occasion, Mr.
Michael Magidson, a director of GMC, held various meetings in person and by
telephone to further discuss a possible transaction between GMC and Herley and
Mr. Rinkel discussed the proposed acquisition with members of the Board of
Directors and GMC's legal counsel, Mr. Michael I. Stolzar, who is also a
director. By July 31, 1998, Messrs. Blatt and Rinkel had reached a preliminary
agreement as to a purchase price of $18 per share in cash and a Warrant to
purchase one share of Herley common stock, subject to the execution of a
definitive agreement.

On August 3, 1998, Mr. Stolzar and Herley's legal counsel, Mr. David H.
Lieberman, a director of Herley, began discussions related to the terms and
conditions of the Agreement. On August 11, 1998, Mr. Lieberman delivered a draft
of the Agreement to GMC and Mr. Stolzar, which contained, among other things, a
requirement that the directors of GMC and certain other GMC shareholders execute
irrevocable proxies in favor of the Merger. Over the next ten days, Messrs.
Stolzar and Lieberman held several meetings by telephone in which various terms
of the Agreement, the proxies and the Warrant were negotiated. During the same
period of time, Mr. Rinkel continued to discuss the proposed acquisition with
members of the Board of Directors of GMC.

Concurrently with his negotiations with Herley, Mr. Rinkel contacted other third
parties involved in the electronics equipment and defense contracting industries
to determine

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whether any of such parties were interested in a strategic alliance with or
acquisition of GMC. In response to his informal inquiries, Mr. Rinkel did not
receive any indications of interest from such third parties.

On August 21, 1998, at a special meeting, the GMC Board of Directors met to
review the proposed merger transaction. Mr. Rinkel and Mr. Stolzar reported on
their negotiations with Mr. Blatt and Herley's legal advisors. Mr. Rinkel
reviewed with the GMC Board his contacts with other third parties in the
electronics equipment and defense contracting industries regarding a possible
transaction. Following such discussions, the GMC Board of Directors approved the
terms of the proposed transaction with Herley and the Agreement. Following the
conclusion of GMC's special meeting on the evening of August 21, 1998, the
Agreement was executed and delivered by the parties. On August 24, 1998, Herley
and GMC issued a joint press release announcing the execution of the Agreement.

On November 5, 1998, Nancy D. Lieberman, one of Herley's legal counsel,
delivered to Mr. Stolzar a proposed Amendment No. 1 to Agreement and Plan of
Merger. The amendment contained, among other things, a revision that made GMC
the surviving corporation of the merger with Acquisition. On the following day,
Mr. Stolzar and Ms. Lieberman met by telephone to discuss the proposed
amendment. On November 12, 1998, at a special meeting, the GMC Board of
Directors met by telephone to review and approve the proposed amendment. At that
meeting, the GMC Board also considered the fairness opinion provided by Franco,
Lewis & Company, Inc. and called the Special Meeting of Shareholders of GMC to
consider approval and adoption of the Merger.

GMC'S REASONS FOR THE MERGER

The GMC Board has approved unanimously the Agreement, has determined unanimously
that the Merger is fair and advisable and in the best interests of GMC and its
shareholders and recommends unanimously that holders of GMC common stock vote
FOR approval of the Agreement.

In reaching its decision to approve the Agreement and to recommend that GMC's
shareholders vote to approve and adopt the Agreement, the GMC Board considered a
number of factors, including the following:

(i) Information with respect to the financial condition, results of operations
and business of GMC, on both a historical and a prospective basis, and the
influence of current industry, economic and market conditions;

(ii) Strategic alternatives (including continuing the GMC business in its
present configuration on a stand-alone basis without significant changes),
none of which the GMC Board believed to be as favorable to the holders of
the shares of GMC common stock as the Merger;

(iii) The relationship of the value of the consideration offered to the recent
trading prices of GMC common stock and the fact that the cash portion
alone of the merger consideration represented a 69% premium over the
closing price of GMC common stock on August 20, 1998 (the last full
trading day prior to the approval of the Agreement by the GMC Board);

(iv) The good strategic fit between the two companies in view of their
respective product lines and markets that are expected to produce a
favorable impact on the long-term value of Herley as well as enhance the
competitive position of the combined entity;

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(v) The opportunity for all GMC shareholders to maintain an ownership stake in
the combined entity and realize the potential long-term benefits of the
Merger; and

(vi) The terms and conditions of the Agreement, including the restrictions
against GMC discussions with other potentially interested companies and
the fact that either party could terminate the Agreement if the Merger is
not consummated by January 8, 1999.

The GMC Board also considered certain potential risks relating to the Merger,
including but not limited to the risk that the Merger would not be consummated,
with resulting distraction in the interim to GMC's normal business operations.
The GMC Board believed, however, that these risks were outweighed by the
potential benefits to be realized from the Merger.

Based on this analysis, the GMC Board unanimously determined that the Merger is
fair to, and in the best interests of, GMC's shareholders. The foregoing
discussion of the information and factors considered by the GMC Board is not
intended to be exhaustive, and such information and factors were considered
collectively by the GMC Board in connection with its review of the Agreement and
the transactions contemplated thereby. In view of the variety of factors
considered in connection with its evaluation of the Merger, the GMC Board did
not find it practicable to, and did not, quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination. In
addition, individual members of the GMC Board may have given different weights
to different factors.

THE GMC BOARD RECOMMENDS THAT GMC SHAREHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AND THE AGREEMENT.

HERLEY'S REASONS FOR THE MERGER

The Board of Directors of Herley believes that the Combined Company will have
the potential to realize long-term improved operating and financial results and
a stronger competitive position. Herley believes that there is a strategic fit
among the two companies' businesses. Herley also believes that the Merger will
provide greater opportunities to develop business relationships, license
technology, and engage in other strategic combinations and transactions
involving their respective products and technologies than would be the case if
the companies otherwise independently engaged in these activities.

OPINION OF FRANCO, LEWIS & COMPANY, INC.

GMC engaged Franco, Lewis & Company, Inc.("FLCI") to render an opinion as to the
fairness from a financial point of view to the holders of the outstanding shares
of GMC common stock of the consideration to be received by such holders in the
Merger. FLCI was selected by the GMC Board based on FLCI's qualifications and
expertise, as well as FLCI's historic investment banking relationship and
familiarity with GMC. FLCI rendered its written opinion on November 12, 1998 to
the GMC Board that, as of such date, the consideration to be received by the
holders of the common stock in the Merger is fair to such holders from a
financial point of view. No limitations were placed on FLCI by the GMC Board
with respect to the investigation made or the procedures followed in preparing
and rendering its opinion. However, for purposes of this opinion and with the
approval of the Board of Directors of GMC, FLCI assumed that the warrants to be
received in the Merger by holders of GMC common stock had no value.

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THE FULL TEXT OF THE OPINION OF FLCI IS ATTACHED HERETO AS ANNEX C. GMC
SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY FOR THE ASSUMPTIONS
MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY
FLCI. THE SUMMARY OF THE OPINION OF FLCI SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO THE FULL TEXT
OF SUCH OPINION. FLCI'S OPINION WAS PREPARED FOR THE GMC BOARD OF DIRECTORS AND
IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
CONSIDERATION TO BE RECEIVED BY HOLDERS OF SHARES OF GMC COMMON STOCK PURSUANT
TO THE AGREEMENT AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY GMC SHAREHOLDER
AS TO HOW TO VOTE AT THE GMC MEETING.

In its review of the Merger, and in arriving at its opinion, FLCI, among other
things: (i) reviewed the publicly available consolidated financial statements of
GMC for recent years and interim periods to date and certain other relevant
financial and operating data of GMC made available to FLCI from published
sources and from the internal records of GMC; (ii) reviewed certain internal
financial and operating information, including certain projections, relating to
GMC prepared by the management of GMC; (iii) discussed the business, financial
condition and prospects of GMC with certain of its officers; (iv) reviewed the
recent reported prices and trading activity for the common stock of GMC and
compared such information and certain financial information for GMC with similar
information for certain other companies engaged in businesses FLCI considered
comparable; (v) reviewed the financial terms, to the extent publicly available,
of certain comparable merger and acquisition transactions; (vi) reviewed the
Agreement; and (vii) performed such other analyses and examinations and
considered such other information, financial studies, analyses and
investigations and financial, economic and market data as FLCI deemed relevant.

FLCI did not assume responsibility for independent verification of any of the
information concerning GMC considered in connection with its review of the
Merger and, for purposes of its opinion, FLCI assumed and relied upon the
accuracy and completeness of all such information. FLCI assumed that there has
been no material change in GMC's assets, financial condition, results of
operations, business or prospects since the respective dates of their last
financial statements. FLCI relied on advice of counsel and independent
accountants to GMC as to all legal and financial reporting matters with respect
to GMC, the Merger and the Agreement, including the legal status and financial
reporting of litigation involving GMC. FLCI assumed that the Merger will be
consummated in a manner that complies in all respects with the applicable
provisions of the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended, and all other applicable federal
and state statutes, rules and regulations. In connection with its opinion, FLCI
did not prepare or obtain any independent evaluation or appraisal of any of the
assets or liabilities of GMC, nor did it conduct a physical inspection of the
properties and facilities of GMC. With respect to the financial forecasts and
projections used in its analysis, FLCI assumed that they reflected the best
currently available estimates and judgments of the expected future financial
performance of GMC. For the purposes of its opinion, FLCI also assumed that GMC
was not a party to any pending transactions, including external financings,
recapitalizations or merger discussions, other than the Merger and those in the
ordinary course of conducting their respective businesses. FLCI's opinion is
necessarily based upon market, economic, financial and other conditions as they
existed and can be evaluated as of the date of the opinion and any subsequent
change in such conditions would require a reevaluation of such opinion.

The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the FLCI analyses

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<PAGE> 35

set forth below does not purport to be a complete description of the
presentation by FLCI to the GMC Board. In arriving at its opinion, FLCI did not
attribute any particular weight to any analysis or factor considered by it but
rather made qualitative judgments as to the significance and relevance of each
analysis and factor. Accordingly, FLCI believes that its analyses and the
summary set forth below must be considered as a whole and that selecting
portions of its analyses without considering all analyses or of the following
summary , without considering all factors and analyses, could create an
incomplete view of the processes underlying the analyses set forth in the FLCI
presentation to the GMC Board and its opinion. In performing its analyses, FLCI
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the control
of GMC. The analyses performed by FLCI (and summarized below) are not
necessarily indicative of actual values or actual future results which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be
acquired.

The following is a brief summary of certain financial analyses performed by FLCI
in connection with providing its written opinion to the GMC Board on November
12, 1998.

Analysis of Publicly Traded Comparable Companies: FLCI compared selected
historical and projected financial information of GMC to publicly traded
companies FLCI deemed to be comparable to GMC. Such information included the
ratios of market value and enterprise value (market value plus debt less cash)
on a per share basis to latest twelve months' earnings per share, projected
earnings per share, book value per share and latest twelve months revenue per
share. FLCI examined eleven such companies and focused on six companies with
market capitalizations under $100 million. FLCI noted high, low, mean and median
share price multiples for the comparable companies of 17.8, 9.5, 12.3 and 11.0
times latest twelve months earnings per share, respectively; 18.1, 6.5, 12.7 and
13.0 times projected earnings per share, respectively; 1.8, 0.7, 1.2 and 1.3
times book value per share, respectively; and 2.1 0.5, 1.3 and 1.2 times latest
twelve months revenue per share, respectively. FLCI also noted high, low, mean
and median enterprise value multiples of 15.5, 11.1, 12.3 and 10.2 times latest
twelve months earnings per share, respectively; 21.7, 12.8, 12.7 and 11.5 times
projected earnings per share, respectively; 1.6, 1.2, 1.2 and 1.3 times book
value per share, respectively; and 2.0, 1.2, 1.2 and 1.2 times latest twelve
months revenue per share, respectively.

Discounted Cash Flow Analysis: FLCI performed a discounted cash flow analysis
for GMC using projected financial performance through 2003 derived from
projections prepared by GMC management. The analysis aggregated (i) the present
value of the projected free cash flow (defined as earnings before interest and
taxes ("EBIT"), less increases in working capital, plus depreciation and
amortization, and less capital expenditures) through 2003 and (ii) the present
value of a range of terminal values (the hypothetical value of selling the
enterprise in its entirety at some future date) for the year 2003. The terminal
values for GMC were determined by applying multiples ranging from six to eight
times GMC's estimated EBIT in 2003 (or 9.8 to 13.0 times net income). GMC's free
cash flow streams and terminal values were discounted to present values using
discount rates ranging from 15% to 25%. Such analysis indicated a range of
equity values for GMC of between $9.40 per share and $17.34 per share with a
mean of $12.97 per share and a median of $12.77 per share.

Premium Analysis: FLCI compared the cash offer price per share for each share
of GMC common stock to the last sale price of GMC Common Stock on both one day
and

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four weeks prior to the announcement of the Merger to similar premiums for
certain defense aerospace electronics company transactions announced since 1996.
FLCI analyzed eleven such public company defense aerospace transactions and
focused on a subset of six transactions in which the value of the transactions
was below $500 million. FLCI observed that the median one trading day premium
and four-week premium paid in six transactions with values below $500 million
were 37.3% and 34.3%, respectively. This compared with the proposed acquisition
in which the one trading day premium of the cash offer price per share over the
closing price of GMC common stock was 69.4% and the four-week premium of the
cash offer price per share over the closing price of GMC common stock was 84.6%.

Analysis of Selected Merger and Acquisition Transactions: FLCI compared the
Merger with selected merger and acquisition transactions for eleven companies in
the defense aerospace industry and focused on six transactions with values below
$500 million. In examining these transactions, FLCI analyzed certain income
statement and balance sheet parameters of the acquired companies relative to the
consideration offered. High, low, mean and median multiples of latest twelve
months revenue were 2.1, 0.6, 1.3 and 1.6 times, respectively, which compared to
1.0 times latest twelve months revenue for GMC in the Merger. FLCI also noted
high, low, mean and median multiples of book value of 3.0, 1.3, 2.0 and 2.1
times, respectively, compared to 1.5 times book value for GMC in the Merger.

No company or transaction used in the above analyses is identical to GMC or the
Merger. Accordingly, an analysis of the results of the foregoing is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics between GMC and the
company or companies to which it is being compared.

The foregoing description of FLCI's opinion is qualified in its entirety by
reference to the full text of such opinion which is attached as Annex C to this
Registration Statement.

FLCI, as part of its investment banking services, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, strategic transactions, negotiated underwritings, private
placements and valuations for corporate and other purposes. In the past, FLCI
has provided financial advisory services to GMC and has received fees for
rendering these services. In addition, Edmond D. Franco, an executive officer
and holder of a significant percentage of the common stock of FLCI, is a member
of the Board of Directors of GMC.

GMC has agreed to pay FLCI a fairness opinion fee of $125,000 in connection with
the delivery of its fairness opinion. GMC also has agreed to reimburse FLCI for
its reasonable out-of-pocket expenses and to indemnify FLCI against certain
liabilities, including liabilities under the federal securities laws or relating
to or arising out of FLCI's engagement.

INTERESTS OF CERTAIN PERSONS

EMPLOYMENT AND CONSULTING AGREEMENTS

The Agreement provides that four of GMC's Executives -- Mitchell Tuckman, Arnold
H. Levine, Rozalie Schachter and Howard Cohen -- will become executive employees
of Herley at the Effective Time of the Merger pursuant to employment agreements
between such persons and Herley having a term of two years. The terms of
employment contained

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in such agreements are substantially similar to the terms governing such
persons' current employment by GMC.

Sherman A. Rinkel, GMC's Chairman, will become a consultant to Herley pursuant
to a consulting agreement which commences upon the closing of the Merger and
terminates, if not otherwise extended, two years thereafter. Mr. Rinkel is
currently employed as a consultant by GMC upon terms and conditions
substantially similar to those contained in such consulting agreement.

STOCK OWNERSHIP FOLLOWING THE MERGER

At the Effective Time of the Merger, Acquisition will cease to exist and all
shares of GMC common stock (other than shares held in the treasury of GMC or
owned by Acquisition, Herley or any wholly-owned subsidiary of Herley or GMC)
will be converted into the right to receive cash and Warrants under the terms of
the Merger or, where applicable, will be represented by dissenters' rights
pursuant to Section 623 of the NYBCL. If all shares of GMC common stock are
exchanged pursuant to the terms of the Merger (other than treasury shares or
shares owned by Acquisition, Herley or any wholly-owned subsidiary of Herley or
GMC), holders of shares of GMC common stock and/or options to acquire shares of
GMC common stock will hold Warrants entitling such holders, in the aggregate, to
acquire 848,675 and 118,000 shares of Herley common stock in respect of shares
of GMC common stock and options to purchase, respectively. As of December 1,
1998, there were 5,295,540 shares of Herley common stock currently issued and
outstanding, 1,485,000 shares of Herley common stock reserved for issuance
pursuant to outstanding warrants and 3,349,483 shares of Herley common stock
reserved for issuance under various stock option plans.

APPRAISAL RIGHTS

Section 910 of the NYBCL provides that any holder of GMC common stock as of the
GMC Record Date who has not voted in favor of the Agreement has the right, as an
alternative to receiving the merger consideration set forth in the Agreement, to
receive payment of the judicially determined "fair value" of his or her shares
as of the date prior to the GMC Meeting, as well as certain other rights and
benefits ("Appraisal Rights"), subject to Section 623 of the NYBCL. The
shareholders of record of GMC common stock which are eligible to, and do,
exercise their Appraisal Rights with respect to the Merger are referred to
herein as "GMC Dissenting Shareholders," and the shares of stock with respect to
which they exercise Appraisal Rights are referred to herein as "Dissenting
Shares." If a GMC shareholder has a beneficial interest in shares of GMC common
stock that are held of record in the name of another person, and such
shareholder desires to perfect whatever Appraisal Rights such beneficial
shareholder may have, such beneficial shareholder must act promptly to cause the
shareholder of record timely and properly to follow the steps summarized below.

Pursuant to the NYBCL, a shareholder of GMC may dissent from the proposed
corporate action to approve the Agreement and receive the right to an appraisal
of such shareholder's shares. If the Merger is consummated, the GMC Dissenting
Shareholders will be entitled, if they strictly comply with the provisions of
the NYBCL, to have the fair value of their shares judicially determined and paid
to them. The following discussion is not a complete statement of the NYBCL
relating to Appraisal Rights, and is qualified in its entirety by reference to
Sections 623 and 910 of the NYBCL attached to this Proxy Statement/Prospectus
as Annex D and incorporated herein by reference. This discussion and

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Sections 623 and 910 of the NY Corporation Law should be reviewed carefully by
any shareholder who wishes to exercise statutory Appraisal Rights or wishes to
preserve the right to do so, since failure to comply with the required
procedures will result in the loss of such rights. A shareholder of GMC who
votes for the adoption and approval of the Merger will be deemed to have waived
his or her rights to exercise Appraisal Rights with respect to all shares of GMC
common stock held by such shareholder. Any holder who is considering dissenting
should consult his or her legal advisor.

1. A shareholder who wishes to assert his or her legal right to dissent must
file a written objection to the Merger with GMC either prior to the Meeting
or at the Meeting prior to the vote with respect to the approval of the
Agreement. The objection must include a notice of the shareholder's election
to dissent with respect to all of his or her shares. A GMC Dissenting
Shareholder may not vote for the Merger and retain Appraisal Rights.

2. Within ten days of shareholder approval of the Merger, GMC must give each GMC
Dissenting Shareholder written notice by registered mail of such approval.

3. A notice of election to dissent may be withdrawn by a GMC Dissenting
Shareholder at any time prior to his or her written acceptance of an offer
made by GMC or the surviving corporation, as the case may be; but not later
than sixty days after the Effective Time of the Merger.

4. At the time of filing an objection or within one month thereafter, a GMC
Dissenting Shareholder must submit the certificates representing the
Dissenting Shares to the surviving corporation or its transfer agent. A GMC
Dissenting Shareholder who fails to timely submit his or her share
certificates may lose Appraisal Rights.

5. No later than ninety days following the date of the approval of the Merger,
the surviving corporation shall make a written offer by registered mail to
each GMC Dissenting Shareholder to pay a specified price for Dissenting
Shares. Such offer must be accompanied by an advance payment for not less
than eighty percent of the value of the offer.

6. If the GMC Dissenting Shareholder rejects GMC's offer of payment, GMC may,
within twenty days of the expiration of any applicable time period, institute
a special proceeding in the Supreme Court of the State of New York to
determine the rights of GMC Dissenting Shareholders. If GMC does not initiate
any such action, any GMC Dissenting Shareholder who has rejected GMC's offer
may do so within the thirty days immediately following on behalf of himself
and all other GMC Dissenting Shareholders who have rejected GMC's offer. The
failure to initiate any such action within the period specified shall be
deemed a waiver of all Appraisal Rights.

7. Normally, the parties must bear their own costs and expenses in connection
with a judicial determination of dissenters' rights.

CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

The following describes the principal federal income tax consequences of the
Merger, assuming that the Merger is consummated as contemplated herein, and of
the ownership of the Warrants. The discussion assumes that a GMC shareholder
holds its GMC common stock and will hold its Warrants as capital assets (i.e.,
generally for investment). This discussion is based on current laws and
interpretations thereof, and there can be no assurance that future legislation,
regulations, administrative rulings, or court decisions will not adversely
affect the accuracy of the statements contained herein. The discussion does not
take account of rules that may apply to stockholders that are subject to special
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treatment under federal income tax laws (including, without limitation, trusts,
S corporations, taxpayers subject to alternative minimum tax, insurance
companies, dealers in securities, certain retirement plans, financial
institutions, tax exempt organizations, holders who are not United States
citizens or residents, GMC shareholders who acquired GMC common stock pursuant
to the exercise of employee stock options or rights or otherwise as
compensation, and persons in special situations, including persons who hold
shares of GMC common stock as part of a straddle). No rulings have been
requested or received from the Internal Revenue Service (the "IRS") as to the
matters discussed herein and there is no intent to seek any such rulings.
Accordingly, no assurance can be given that the IRS will not challenge the tax
treatment of certain matters discussed in this summary or, if it does challenge
the tax treatment, that it will not be successful.

THE DISCUSSION BELOW DOES NOT ADDRESS STATE, LOCAL OR FOREIGN TAX CONSEQUENCES
OF THE MERGER OR THE OWNERSHIP OF WARRANTS AND THE SPECIFIC TAX CONSEQUENCES TO
EACH GMC SHAREHOLDER MAY DIFFER. CONSEQUENTLY, EACH GMC SHAREHOLDER SHOULD
CONSULT ITS OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES, INCLUDING THE
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO IT, OF THE
MERGER AND THE OWNERSHIP OF WARRANTS.

GMC SHAREHOLDERS

Effect of Merger

For each holder of GMC common stock, the Merger will be a taxable transaction
for federal income tax purposes and such holder will be treated as if, at the
Effective Time of the Merger, it had sold each of its shares for cash and a
Warrant. A holder of GMC common stock will recognize capital gain or loss equal
to the difference between (x) its tax basis in the GMC common stock surrendered
and (y) the sum of (i) any cash received, plus (ii) the fair market value of the
Warrants received, determined as of the Effective Time.

The gain or loss recognized as a result of the Merger will be treated as a
capital gain or loss, provided that GMC is not treated for federal income tax
purposes as a "collapsible corporation." GMC's management believes that GMC is
not a collapsible corporation for federal income tax purposes. For federal
income tax purposes capital losses are generally deductible only against capital
gains and not against ordinary income.

Holding of Warrants

Warrants received by a holder of GMC common stock in exchange for GMC common
stock will have a tax basis equal to the fair market value of each Warrant
received and the Effective Time will commence a new holding period for that
Warrant.

Exercise of Warrants

Generally, no gain or loss will be recognized for federal income tax purposes
upon exercise of a Warrant. The tax basis of shares of Herley common stock
acquired upon exercise of a Warrant will be equal to the sum of (i) the holder's
tax basis in such Warrant and (ii) the exercise price. The holding period of the
Herley Common Stock acquired upon exercise of a Warrant will begin on the date
of exercise of the Warrant.

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Disposition of Warrants

In general, the sale, exchange or other taxable disposition of a Warrant will
result in gain or loss to the holder in an amount equal to the difference
between the amount realized on such sale, exchange or other disposition and the
holder's tax basis in the Warrant. Such gain or loss generally will be long-term
capital gain or loss if the Warrant is held by the holder for more than one year
at the time of the disposition and the Herley Common Stock issuable upon
exercise of such Warrant would have been a capital asset if acquired by the
holder.

Expiration of Warrants

The expiration of a Warrant should generally result in a long-term capital loss
to the holder equal to the holder's tax basis in the Warrant if the Warrant is
held by the holder for more than one year at the time of the expiration and the
Herley common stock issuable upon exercise of the Warrant would have been a
capital asset if acquired by such stockholder.

Backup Withholding

Under the federal income tax backup withholding rules, unless an exemption
applies, the Payment Agent will be required to withhold, and will withhold, 31%
of all payments to which a payee is entitled pursuant to the Merger, unless the
payee provides a tax identification number (social security number, in the case
of an individual, or employer identification number in the case of other GMC
shareholders) and certifies under penalties of perjury, that such number is
correct. Each holder of GMC common stock, and, if applicable, each other payee,
should complete and sign the substitute Form W-9 which will be included as part
of the letter of transmittal to be returned to the Payment Agent in order to
provide the information and certification necessary to avoid backup withholding,
unless an applicable exception exists and is proved in a manner satisfactory to
the Payment Agent. The exceptions provide that certain holders (including, among
others, all corporations and certain foreign individuals) are not subject to
these backup withholding and reporting requirements. Any amounts withheld will
be allowed as a credit against the holder's federal income tax liability for
such year.

HERLEY, ACQUISITION AND GMC

Effect of Merger

The merger of Acquisition into GMC, with GMC surviving and with GMC shareholders
receiving the merger consideration in the transaction, constitutes a taxable
reverse subsidiary merger which will be treated for federal income tax purposes
as a direct purchase by Herley of the GMC common stock from the GMC shareholders
in exchange for the merger consideration, and as such the transitory existence
of Acquisition as the wholly-owned subsidiary of Herley will be disregarded for
federal income tax purposes. Because Herley will be treated as purchasing the
GMC common stock directly from the GMC shareholders, unless a Code Section 338
election is made (or is deemed to have been made under the Code) to treat the
purchase by Herley of the GMC common stock as a purchase of the assets of GMC
resulting in a stepped up basis in the GMC assets, no gain or loss will be
recognized by GMC as a result of the Merger. Further, no gain or loss will be
recognized by Herley upon the receipt of the shares of GMC common stock from the
GMC shareholders in exchange for the merger consideration. Herley's adjusted tax
basis in the GMC common stock acquired in the Merger will generally be equal to
the

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value of the merger consideration paid by Herley to the GMC shareholders in
exchange for such GMC common stock.

THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. STOCKHOLDERS SHOULD NOTE THAT THE PARTIES HAVE NOT OBTAINED,
AND WILL NOT OBTAIN, A RULING FROM THE IRS OR AN OPINION OF COUNSEL REGARDING
THE MATTERS DESCRIBED HEREIN. EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR
ITS TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO THE STOCKHOLDER OF THE
PROPOSED TRANSACTIONS, INCLUDING FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES.

ACCOUNTING TREATMENT

The Merger will be accounted for as a "purchase" as such term is used under
generally accepted accounting principles. Accordingly, from and after the
Effective Time, GMC's consolidated results of operations will be included in
Herley's consolidated results of operations. For purposes of preparing Herley's
consolidated financial statements, Herley will establish a new accounting basis
for GMC's assets and liabilities based upon the estimated fair market values
thereof and Herley's purchase price, including the costs of the acquisition.
Accordingly, the purchase accounting adjustments made in connection with the
development of the pro forma combined condensed financial information appearing
elsewhere in this Proxy Statement/Prospectus are preliminary and have been made
solely for purposes of developing such pro forma combined condensed financial
information to comply with disclosure requirements of the Securities and
Exchange Commission (the "Commission"). Although the final allocation may
differ, the pro forma combined condensed financial information reflects Herley
management's best estimate based upon currently available information. See
"Unaudited Pro Forma Financial Information."

GOVERNMENTAL AND REGULATORY APPROVALS

Herley and GMC are aware of no governmental or regulatory approvals required for
consummation of the Merger, other than compliance with the federal securities
laws and applicable state securities and "blue sky" laws.

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CERTAIN PROVISIONS OF THE MERGER AGREEMENT

THE FOLLOWING IS A SUMMARY OF CERTAIN MATERIAL PROVISIONS OF THE AGREEMENT NOT
SUMMARIZED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. THE FOLLOWING SUMMARY
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE AGREEMENT, A COPY OF WHICH IS ATTACHED AS ANNEX A TO THIS PROXY
STATEMENT/PROSPECTUS AND AMENDMENT NO. 1 TO THE AGREEMENT, A COPY OF WHICH IS
ATTACHED AS ANNEX B TO THIS PROXY STATEMENT/PROSPECTUS.

EFFECTIVE TIME

The Merger will become effective upon the filing of a Certificate of Merger with
the Secretary of State of New York or at such later time as may be specified in
the Certificate of Merger (the "Effective Time"). The Closing Date will occur as
soon as practicable (but no later than three business days) following the
approval of the Merger by GMC's shareholders, except that the Closing Date may
be adjourned in the event that a condition of closing has not been satisfied or
waived, in which case the Closing Date shall be no later than three business
days following the satisfaction or waiver of any such condition or at such other
time as GMC and Acquisition may agree. Assuming all conditions to the Merger are
met or waived prior thereto, it is anticipated that the Closing Date and
Effective Time will be on or about January 8, 1999.

CONVERSION OF SHARES AND OPTIONS

At the Effective Time, Acquisition will merge with and into GMC and Herley will
own all of the capital stock of GMC. By virtue of the Merger and without any
action on the part of the holders thereof: (a) all shares of GMC common stock
held in the Treasury of GMC will be cancelled and retired; and (b) each then
outstanding share of GMC common stock, other than shares of GMC common stock
held by persons exercising dissentersI rights under Section 623 of the NY
Corporation Law and shares held in the treasury of GMC or owned by Acquisition,
Herley or any wholly-owned subsidiary of Herley or GMC, will be converted into
the right to receive $18.00 in cash and a Warrant evidencing the right to
purchase one share of Herley common stock at an exercise price of $14.40 until
January 11, 1999, and $15.60 thereafter.

All outstanding options to purchase shares of GMC common stock shall, whether or
not exercisable or vested, become fully exercisable and vested. At the Effective
Time, each option to purchase a share of GMC common stock shall be cancelled in
exchange for the right to receive an amount equal to the difference between
$18.00 and the exercise price thereof plus a Warrant to purchase one share of
Herley common stock. There are outstanding options to acquire 88,000 shares of
GMC common stock under GMC's 1990 Stock Option Plan and 30,000 shares of GMC
common stock under the 1997 Non-Employee Director Stock Option Plan.

At or before the Effective Time, Acquisition shall make available to American
Stock Transfer & Trust Company, as paying agent (the "Paying Agent"), sufficient
funds and Warrants to satisfy the obligations to holders of shares of GMC common
stock. Promptly after the Effective Time, the Paying Agent shall mail to each
record holder of shares of GMC common stock and each option holder previously
identified by GMC a letter of transmittal and instructions for use in
surrendering certificates representing shares of GMC common stock, presenting
claims with respect to options to purchase outstanding shares and receiving
payment therefor. Any portion of the payment fund, whether as cash or

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Warrants, not disbursed within twelve months of the Effective Time will be paid
over to Acquisition.

STOCK EXCHANGE LISTING

The Warrants to be issued in connection with the Merger will be listed on
NASDAQ. The approval of NASDAQ for listing the Warrants is expected to be
obtained prior to the Effective Time, subject to official notice of issuance.
For a further description of the terms of the Warrants, see "Description of
Herley Capital Stock -- Description of Warrants."

REPRESENTATIONS AND WARRANTIES

The Agreement contains various customary representations and warranties by GMC,
Herley and Acquisition, as the case may be, concerning (i) organization, good
standing and corporate power, (ii) authorization of the Agreement and related
transactions, (iii) capitalization, (iv) consents and approvals, (v) financial
statements, (vi) the absence of certain changes and events, (vii) governmental
authorization and compliance with applicable laws, (viii) tax matters, (ix)
title to property, liens and encumbrances, (x) material contracts, (xi)
litigation, (xii) intellectual property, (xiii) employee benefit plans, (xiv)
finders' fees, (xv) disclosure of agreements, events or occurrences which might
have a material adverse effect, (xvi) the absence of material misstatements or
omissions in the proxy statement and registration statement, (xvii) insider
interests, (xviii) labor controversies, (xix) use of real property, (xx)
accounts receivable, (xxi) compliance with environmental laws, and (xxii) the
validity of the Warrants.

CONDUCT OF GMC'S BUSINESS PRIOR TO MERGER

Pursuant to the Agreement, GMC has agreed on behalf of itself and its
subsidiaries, that during the period from the date of the Agreement and
continuing until the earlier of the termination of the Agreement pursuant to its
terms or the Effective Time, except as set forth in certain disclosure schedules
or to the extent that the other party shall otherwise consent in writing, to
carry on its business diligently and in accordance with good commercial practice
and to carry on its business in the usual, regular and ordinary course, in
substantially the same manner as heretofore conducted, to pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, to pay
or perform other material obligations when due, and use its commercially
reasonable efforts consistent with past practices and policies to preserve
intact its present business organization, keep available the services of its
present officers and employees and preserve its relationships with customers,
suppliers, distributors, licensors, licensees, and others with which it has
business dealings. In addition, except as set forth in certain disclosure
schedules without the prior written consent of Acquisition and Herley, GMC has
agreed as follows:

(a) GMC will not, and will not cause or permit any of its subsidiaries to,
engage in any activities or transactions which will be outside the
ordinary course of their respective businesses consistent with past
practices, except as shall be provided for or specifically contemplated by
the Agreement, and GMC and its subsidiaries will consult with Acquisition
prior to making any significant business decisions;

(b) GMC will not subdivide or reclassify the shares of GMC common stock, issue
any shares of its capital stock, except upon the exercise of outstanding
options under its option plans or amend its Certificate of Incorporation
or By-laws;

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(c) GMC will not declare or pay any dividend or other distribution in respect
of its shares of capital stock or acquire for value, or permit any
subsidiary to acquire for value, any shares of capital stock of GMC;

(d) GMC will afford to the officers, attorneys, accountants and other
authorized representatives of Acquisition reasonable access to its and its
subsidiaries' plants, properties, books, tax returns and minute books and
other corporate records during normal business hours in order that
Acquisition may have full opportunity to make such investigation as
Acquisition shall desire of the affairs of GMC and its subsidiaries.

(e) GMC will comply with all applicable securities laws and will obtain such
governmental permits, orders or consents, if any, as may be required of it
in connection with the transactions contemplated by the Agreement;

(f) GMC will not, and will not cause or permit its subsidiaries to, take any
action to institute any new severance or termination pay practices with
respect to any directors, officers, or employees of GMC or any of its
subsidiaries or to increase the benefits payable under its severance or
termination pay practices in effect on the date thereof;

(g) GMC will not, and will not cause or permit its subsidiaries to, adopt or
amend, in any material respect, except as may be required by applicable
law or regulation, any collective bargaining, bonus, profit sharing,
compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment or other employee benefit plan,
agreement, trust, fund, plan or arrangement for the benefit or welfare of
any directors, officers or employees of GMC or any of its subsidiaries;

(h) GMC and its subsidiaries will use their best efforts to maintain their
relationships with their suppliers and customers, and if and as requested
by Acquisition, (i) GMC and its subsidiaries shall make reasonable
arrangements for representatives of Acquisition to meet with suppliers and
customers of GMC and its subsidiaries, and (ii) GMC and its subsidiaries
shall schedule, and the management of GMC and its subsidiaries shall
participate in, meetings of representatives of Acquisition with employees
of GMC and its subsidiaries or their union representatives;

(i) GMC will, and will cause its subsidiaries to, maintain all of its and
their respective properties in customary repair, order and condition,
reasonable wear and tear excepted, and will maintain, and will cause its
subsidiaries to maintain, insurance upon all of its and their properties
and with respect to the conduct of its and their businesses in such
amounts and of such kinds comparable to that in effect on the date of the
Agreement;

(j) GMC and its subsidiaries will maintain their books, accounts and records
in the usual, regular and ordinary manner, on a basis consistent with
prior years;

(k) GMC and its subsidiaries will duly comply with all laws applicable to each
of them and to the conduct of their respective businesses;

(l) no change shall be made in the banking and safe deposit arrangements of
GMC or its subsidiaries existing on the date hereof without the prior
written consent of Acquisition and no powers of attorney shall be granted
by GMC or any of its subsidiaries;

(m) except as contemplated by the Acquisition, GMC will not, and will not
permit any of its subsidiaries to, acquire or agree to acquire by merging
or consolidating with, purchasing substantially all of the assets of or
otherwise, any business or any
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corporation, partnership, association, or other business organization or
division thereof; and

(n) GMC will promptly advise Acquisition in writing of any material adverse
change in the financial condition, business or operations of GMC or any of
its subsidiaries and of any breach of its representations or warranties
contained herein.

(o) Stock Options. GMC will not issue any stock options under any option
plan.

(p) No Other Negotiations. Prior to the earlier of the Closing or the
termination of the Agreement, GMC shall not directly or indirectly
solicit, initiate or encourage inquiries or proposals with respect to,
furnish any information relating to, or participate in, continue or enter
into any negotiations or discussions concerning, any merger, consolidation
or other business combination with or the purchase of all or a portion of
the assets of, or any equity interest in GMC or any of its subsidiaries;
and GMC shall instruct each officer, director, affiliate and advisor of
GMC and its subsidiaries to refrain from doing any of the above. GMC has
agreed to advise Acquisition immediately in writing of, and to communicate
therein the terms of, any such inquiry of proposal which any of them shall
receive.

EXPENSES

All fees and expenses incurred in connection with the Agreement and the
transactions contemplated thereby will be paid by the party incurring such
expenses. However, while GMC is responsible for the payment of its own expenses,
if the Merger is completed, Acquisition and Herley will, in economic terms, have
borne all the expense of GMC incurred in connection with the Merger.

CONDITIONS TO THE MERGER

The respective obligations of each party to the Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions: (a) the Agreement shall have been approved and adopted by
the requisite vote under applicable law by the shareholders of GMC; (b) the
Commission shall have declared the Registration Statement effective and no stop
order suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of the Proxy Statement, shall have been initiated
or threatened in writing by the Commission; and (c) no court, administrative
agency or commission or other governmental authority or instrumentality shall
have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and which has the effect
of making the Merger illegal or otherwise prohibiting consummation of the
Merger.

The obligations of Acquisition and Herley to consummate the Merger are expressly
conditioned upon the waiver or the fulfillment, to Acquisition's satisfaction,
of the following conditions: (a) that all of GMC's representations and
warranties contained in the Agreement be true and correct in all material
respects as if made on the Closing Date; (b) that all of GMC's covenants and
agreements contained in the Agreement shall have been performed at or prior to
the Closing Date and such compliance shall be certified by GMC's Chairman and
Chief Financial Officer; (c) Acquisition shall have received an opinion of
Messrs. Zissu Gumbinger & Stolzar LLP, counsel for GMC, in form reasonably
acceptable to Acquisition; (d) the percentage of dissenting shareholders
asserting their rights under Sections 623 and 910 of the NYBCL shall be fifteen
percent (15%) or less;
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(e) GMC's Board shall have adopted resolutions terminating its option plans as
of the Effective Time; (f) except as previously disclosed, there shall have been
no material adverse change in the condition (financial or otherwise) of the
business or prospects of GMC or any of its subsidiaries or their respective
assets; (g) GMC shall have received a fairness opinion which states
unequivocally that the consideration to be paid by Acquisition with respect to
Shares is fair and adequate to GMC's shareholders; (h) that the aforementioned
employment agreements and consulting agreement shall have been executed and
delivered; (i) that Acquisition shall have completed its due diligence with
respect to GMC and determined that GMC's representations, warranties and
covenants contained in the Agreement are true and correct in all material
respects, which condition has been satisfied as of the date hereof; and (j) that
the Merger has been completed on or before January 8, 1999.

GMC's obligations under the Agreement are dependent upon the waiver or
satisfaction by Acquisition and/or Herley of the following conditions: (a) all
of the representations and warranties of Acquisition and Herley contained in the
Agreement shall be true and correct as of the Closing Date; (b) Acquisition and
Herley shall have performed all of the covenants and agreements contained in the
Agreement to be performed by them at or prior to the Closing Date; (c)
Acquisition and Herley shall have delivered a certificate, executed by their
respective Presidents, certifying as to the satisfaction of conditions (a) and
(b) above (d) GMC shall have received an opinion of Blau, Kramer, Wactlar &
Lieberman, P.C., counsel to Acquisition and Herley, with respect to certain
matters specified in the Agreement; (e) Acquisition shall have deposited
sufficient monies and Warrants with the Paying Agent to consummate the Merger;
and (f) that the Merger has been completed on or before January 8, 1999.

TERMINATION

The Merger may be terminated (a) at any time prior to the filing of the
Certificate of Merger with the Secretary of State of New York by consent of
Acquisition and GMC; (b) by any party not in material breach of the Agreement in
the event that a material condition of closing has not been satisfied or waived
within the time allowed; (c) by Acquisition, if not in material breach under the
Agreement, if any of the conditions to be satisfied by GMC have not been
satisfied within the time allowed; and (d) by GMC, if not in material breach, if
any of the conditions to be satisfied by Acquisition and/or Herley have not been
satisfied within the time allowed.

INDEMNIFICATION

By approving the Agreement, the directors of GMC agreed to waive and not assert
any claims for indemnification which they may have against the surviving
corporation after the Merger to the extent of any increase after the Closing
Date in the market value of the surviving corporation. The surviving corporation
shall retain liability for any claims to indemnification to the extent that such
claims are covered by GMC's existing liability insurance, which insurance is
anticipated to continue for a three-year period after the Effective Time.

Section 722 of the NYBCL provides for the indemnification of directors,
officers, employees and agents of a corporation and for persons who serve at its
request as directors, officers, employees or agents of another entity, provided
that such persons have acted in good faith for a purpose he or she reasonably
believed to be in or not opposed to the best

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interests of the corporation, in addition, had no reasonable cause to believe
his or her conduct was unlawful.

Acquisition's Certificate of Incorporation includes a provision eliminating the
personal liability of directors to the extent permitted by law. Acquisition's
By-laws also provide indemnification to directors and officers and permit
indemnification for employees and agents, including against claims brought under
state or Federal securities laws, to the full extent allowable under New York
law.

Section 145 of the Delaware Corporation Law provides that indemnification of
directors, officers, employees and other agents of a corporation, and persons
who serve at its request as directors, officers, employees or other agents of
another organization, may be provided by it.

Herley's Certificate of Incorporation includes provisions eliminating the
personal liability of Herley's directors for monetary damages resulting from
breaches of their fiduciary duty except, pursuant to the limitations of the
Delaware General Corporation Law (i) for any breach of the director's duly of
loyalty to Herley or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or any
amendatory or successor provision thereto, or (iv) with respect to any
transaction from which the director derived an improper personal benefit.
Herley's By-laws provide indemnification to directors and officers and permits
indemnification for employees and agents, including against claims brought under
state or Federal securities laws, to the full extent allowable under Delaware
law. Herley also has entered into indemnification agreements with its directors
and executive officers providing, among other things, that Herley will provide
defense costs against any such claim, subject to reimbursements in certain
events. Herley also maintains a directors and officers liability insurance
policy.

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<PAGE> 48

COMPARATIVE PER SHARE DATA

The following table sets forth certain historical per share data of Herley and
GMC, and combined per share data on an unaudited pro forma basis after giving
effect to the Merger on a purchase basis of accounting, assuming that $18.00 is
paid in cash and one Warrant to purchase one share of Herley common stock is
issued in exchange for one share of GMC common stock in the Merger. The
historical book value per share was calculated by dividing shareholders' equity
by the number of shares of common stock outstanding at the end of each period.
The pro forma combined book value per share was calculated by dividing pro forma
combined shareholders' equity by the number of Herley common shares outstanding
at the end of the period, and does not assume the exercise of any Warrants. This
data should be read in conjunction with the selected historical financial data,
the unaudited pro forma combined condensed financial information and the
separate historical financial statements of Herley and GMC and notes thereto,
included elsewhere in this Proxy Statement/Prospectus. The pro forma combined
per share data is not necessarily indicative of the operating results that would
have been achieved had the Merger been consummated as of the beginning of the
periods presented and should not be construed as representative of future
operations.

<TABLE>
<CAPTION>
HERLEY GMC GMC
52 WEEKS YEAR SIX MONTHS
ENDED ENDED ENDED
AUGUST 2, FEBRUARY 28, AUGUST 29, PRO FORMA
1998 1998 1998 COMBINED
--------- ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Earnings from continuing
operations per common share:
Basic......................... $1.11 $ 1.59 $ .66 $1.31
===== ====== ====== =====
Diluted....................... $1.02 $ 1.56 $ .64 $1.20
===== ====== ====== =====
Book value per share............ $7.68 $11.93 $12.59 $7.79
===== ====== ====== =====
</TABLE>

39
<PAGE> 49

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed financial statements assume
a business combination between Herley and General Microwave Corporation (GMC)
accounted for as a purchase. The pro forma combined condensed statements of
income combine Herley's historical results for the fiscal year ended August 2,
1998 with the historical results of GMC for the twelve-month period ended August
29, 1998. The unaudited pro forma combined condensed balance sheet combines
Herley's August 2, 1998 consolidated balance sheet with GMC's August 29, 1998
consolidated balance sheet.

The unaudited pro forma combined condensed financial statements do not reflect
the cost savings and synergies which might be achieved from the merger. The
unaudited pro forma combined condensed financial statements do not purport to be
indicative of the operating results or financial position that would have been
achieved had the merger been effected on the date or dates indicated or the
results which may be obtained in the future.

These pro forma statements are based on, and should be read in conjunction with,
the audited consolidated financial statements, including the notes thereto, of
Herley and GMC included elsewhere in this Proxy Statement/Prospectus.

40
<PAGE> 50

UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME

<TABLE>
<CAPTION>
GMC
HERLEY FOR THE
FOR THE FISCAL TWELVE-MONTH
YEAR ENDED PERIOD ENDED
AUGUST 2, AUGUST 29, PRO FORMA PRO FORMA
1998 1998 ADJUSTMENTS COMBINED
-------------- ------------ ----------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............ $40,798 $22,679 $63,477
Cost of products
sold............... 24,169 14,090 589(8) 38,848
Selling and
administrative
expenses........... 8,339 6,161 214(7) 14,714
------- ------- -------
Operating income... 8,290 2,428 9,915
------- ------- -------
Other income
(expense):
Interest expense... (446) (94) (608)(9) (1,148)
Dividend and
interest
income.......... 453 169 (340)(10) 282
Other.............. 133 (82) 51
------- ------- -------
140 (7) (815)
------- ------- -------
Income before
income taxes.... 8,430 2,421 9,100
Provision for income
taxes.............. 2,934 191(13) (523)(11) 2,602
------- ------- -------
Income from
continuing
operations......... $ 5,496 $ 2,230 $ 6,498
======= ======= =======
Earnings per common
share -- Basic..... $ 1.11 $ 1.84 $ 1.31
======= ======= =======
Basic weighted
average common
shares............. 4,969,248 1,210,210 4,969,248
======= ======= =======
Earnings per common
share -- Diluted... $ 1.02 $ 1.79 $ 1.20
======= ======= =======
Diluted weighted
average common
shares............. 5,407,283 1,244,322 5,407,283
======= ======= =======
</TABLE>

See accompanying notes to unaudited pro forma combined condensed financial
statements
41
<PAGE> 51

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
HERLEY GMC
AUGUST 2, AUGUST 29, PRO FORMA PRO FORMA
1998 1998 ADJUSTMENTS COMBINED
--------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................... $10,689 $ 4,688 $(13,500)(4) $ 1,877
Accounts receivable, net.................... 6,194 3,493 -- 9,687
Costs incurred and income recognized in
excess of billings on uncompleted
contracts................................ 1,665 -- -- 1,665
Prepaid expenses and other current assets... 825 228 -- 1,053
Inventories................................. 15,069 5,006 -- 20,075
Deferred taxes.............................. 1,995 794 120(3) 2,909
------- -------- -------
Total current assets..................... 36,437 14,209 37,266
------- -------- -------
Property, plant and equipment, net............ 12,550 5,820 7,000(3) 25,370
Intangible assets............................. 6,080 566 4,277(3) 10,923
Other assets.................................. 2,486 210 -- 2,696
------- -------- -------
Total assets............................. $57,553 $ 20,805 $76,255
======= ======== =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt........... $ 405 $ 663 -- $ 1,068
Accounts payable and accrued expenses....... 6,468 3,465 300(3) 10,233
Reserve for contract losses................. 1,145... -- -- 1,145
Advance payments on contracts............... 1,825... -- -- 1,825
------- -------- -------
Total current liabilities................ 9,843 4,128 14,271
------- -------- -------
Long-term debt................................ 4,111 797 9,430(5) 14,338
Deferred income taxes......................... 3,158 590 2,800(3) 6,548
Minority interest............................. -- 51 51
------- -------- -------
Total liabilities........................ 17,112 5,566 35,208
------- -------- -------
SHAREHOLDERS' EQUITY:
Common stock................................ 527 17 (17)(6) 527
Additional paid-in-capital.................. 20,324 9,631 (9,025)(6) 20,930
Retained earnings........................... 19,590 8,780 (8,780)(6) 19,590
Less treasury stock at cost................. -- (3,189) 3,189(6) --
------- -------- -------
Total shareholders' equity............... 40,441 15,239 41,047
------- -------- -------
Total liabilities and shareholders'
equity................................. $57,553 $ 20,805 $76,255
======= ======== =======
</TABLE>

See accompanying notes to unaudited pro forma combined condensed financial
statements
42
<PAGE> 52

NOTES TO THE PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1. The unaudited pro forma combined condensed financial statements reflect
the acquisition by Herley of all of the issued and outstanding common
stock of General Microwave Corporation (GMC), including outstanding stock
options, for $18.00 per share and an estimated 966,675 three-year Warrants
to purchase one share of Herley's common stock. The Warrants are valued at
the average of the trading price of similar warrants currently on the
market of $.625 per Warrant. This average is based on the trading history
during October 1998. The aggregate estimated purchase price is calculated
as follows (in thousands, except per share and per share data):

<TABLE>
<S> <C>
365,600 shares previously acquired in the open market....... $ 6,273
848,675 shares at $18.00 per share.......................... 15,276
118,000 stock options at $18.00 per share, net of exercise
price..................................................... 1,279
966,675 Warrants at $.625................................... 604
Estimated transaction expenses.............................. 104
-------
Estimated Purchase Price.................................... $23,536
=======
</TABLE>

2. Herley's fiscal year ends on the Sunday closest to July 31. In the
accompanying unaudited combined condensed pro forma statements of income
the results of Herley's fiscal year ended August 2, 1998 have been
combined with the unaudited results of GMC for the twelve-month period
ended August 29, 1998. The unaudited pro forma condensed financial
statements have been derived from the audited financial statements of
Herley as of and for the fiscal year ended August 2, 1998 and the
unaudited financial statements of GMC as of and for the twelve-month
period ended August 29, 1998. GMC's fiscal year ends on February 28,
however, in order to present GMC's operating results on a basis more
consistent with Herley's fiscal year, the unaudited statement of
operations of GMC for the twelve-month period ended August 29, 1998 was
used. The GMC unaudited statement of operations for the twelve-month
period ended August 29, 1998 was derived from the unaudited interim
financial statements of GMC for the three-month periods ended November 29,
1997, February 28, 1998, May 30, 1998 and August 29, 1998.

3. This adjustment reflects the excess of consideration over net assets
acquired. The following is a calculation (in thousands except per share
data):

<TABLE>
<S> <C>
Estimated Purchase Price.................................... $23,536
Preliminary purchase accounting adjustments:
Fair value adjustment to property, plant and equipment.... (7,000)
Accrual of pension termination costs...................... 300
Deferred tax impact of fair value adjustments............. 2,680
Net book value of GMC net assets acquired as of August 29,
1998...................................................... (15,239)
-------
Excess of consideration over net assets acquired............ $ 4,277
-------
</TABLE>

The total consideration will be allocated to the assets and liabilities of
GMC based on their estimated fair value. A preliminary allocation by
Herley of the purchase price has been presented in the pro forma combined
condensed financial statements in which the historical GMC property, plant
and equipment has been adjusted to its

43
<PAGE> 53

estimated fair value. The impact of this fair value adjustment has also
been reflected in pro forma deferred tax balances. An additional
adjustment of the purchase price has been made to accrue for the estimated
costs associated with the termination of GMC's pension plan. The deferred
tax impact of this adjustment has also been reflected in the pro forma
combined condensed financial statements. The excess of consideration over
the adjusted fair value of GMC net assets acquired has been preliminarily
allocated to goodwill.

A final allocation of the purchase price to the GMC assets acquired and
liabilities assumed is dependent upon certain valuations and studies that
have not progressed to a stage where there is sufficient information to
make such an allocation in the accompanying pro forma financial
information.

The allocation of the purchase price of GMC will be revised when
additional information concerning asset and liability valuations is
obtained. Adjustments, which could be significant, will be made during the
allocation period based on detailed reviews of the fair values of assets
acquired and liabilities assumed and could result in a substantial change
in goodwill.

4. This entry represents the payment of cash from current available funds to
the shareholders of the GMC common stock.

5. This adjustment represents additional borrowings under Herley's line of
credit facility of $9,429,800 for the purpose of financing the remaining
cash portion of the estimated purchase price.

6. These adjustments represent the elimination of GMC's shareholders' equity
accounts. Also reflected within the adjustment to additional paid-in
capital is the recording of the estimated fair value of the Warrants of
approximately $604,000 to be granted as part of the purchase price. The
unaudited pro forma combined condensed financial statements do not assume
the exercise of any Warrants (see Note 1).

7. This entry reflects the adjustment to the amortization for the effect of
the excess of consideration over net assets acquired. For purposes of the
pro forma condensed combined financial statements, the Herley management
expects that amounts allocated to goodwill will be amortized over 20 years
on a straight-line basis (see Note 3).

8. This entry reflects the adjustment to depreciation expense for the effect
of the fair value adjustment of GMC's property, plant and equipment based
on a preliminary evaluation of the fair value (see Note 3).

9. These adjustments represent the recognition of interest expense on the
additional borrowings of Herley to finance the estimated purchase price
(see Note 5). The interest expense was calculated based on Herley's
incremental borrowing rate under its line of credit facility at the
Federal Funds Target Rate plus 1.65% or approximately 6.45%. A change of
1/8% in the incremental rate would affect interest expense by $11,787 for
the fiscal year.

10. The adjustment reflects the loss of interest income generated from the
cash and cash equivalents that were used to purchase the GMC common stock
(see Note 4).

11. This entry represents the tax benefit of the pro forma adjustments,
excluding nondeductible goodwill amortization, of $522,592.

44
<PAGE> 54

12. Pro forma per share data are based on the number of Herley common and
common equivalent shares that would have been outstanding had the
Herley/GMC merger occurred on the earliest date presented.

13. The effective tax rate for GMC is lower than the statutory tax rate due to
the reversal of a valuation allowance of $698,000 during the twelve months
presented that was previously provided against deferred tax assets.

14. Certain amounts have been reclassified to conform to the pro forma
presentation.

45
<PAGE> 55

HERLEY

GENERAL

Herley 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.

Herley's command and control systems are used on training and test ranges
domestically and in foreign countries. Herley 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.

Herley has grown internally and through five strategic acquisitions. As a
result, Herley 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, Herley has designed and manufactured microwave
devices for use in various tactical military programs. In June 1986, Herley
acquired a small engineering company, Mission Design, Inc., engaged in the
design and development of transponders. This acquisition enabled Herley to enter
the flight instrumentation business beginning with the design and manufacture of
range safety transponders. In September 1992, Herley acquired substantially all
of the assets of Micro-Dynamics, Inc. ("MDI") of Woburn, Massachusetts, a
microwave subsystem designer and manufacturer. In June 1993, Herley acquired
Vega Precision Laboratories, Inc. ("Vega") of Vienna, Virginia, a manufacturer
of flight instrumentation products. In March 1994, Herley entered into an
exclusive license agreement for the manufacture, marketing and sale of the
Multiple Aircraft GPS Integrated Command & Control (MAGIC(2)) systems. In July
1995, Herley acquired certain assets and the business of Stewart Warner
Electronics Corp. of Chicago, Illinois, a manufacturer of high frequency radio
and IFF interrogator systems. In August 1997, Herley acquired Metraplex
Corporation ("Metraplex") of Frederick, Maryland, which has enabled Herley to
enter the airborne PCM and FM telemetry and data acquisition systems market.

PRODUCTS

COMMAND AND CONTROL SYSTEMS (C(2))

For over thirty years, Vega (a division of Herley) has been manufacturing
products in the radar enhancement field. Herley'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.

46
<PAGE> 56

Herley's command and control systems are currently in service throughout the
world. Herley'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 MAGIC(2) system, Herley 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. Herley's engineers and marketers are now able to
offer the MAGIC(2) system as a supplement to, or replacement for, this installed
base of equipment. The MAGIC(2) 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 MAGIC(2) 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 Herley 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 MAGIC(2) system provides control of multiple targets from a single ground
control system, and utilizes GPS to provide accurate position information. The
MAGIC(2) 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 Herley command and control system, which may be mounted in a trailer that
may be moved from place to place by helicopter or truck. Herley also
manufactures portable command and control systems that are mounted on tripods
that can be easily transported by an operational team. The portable units permit
ready deployment in rugged terrain and may also be used on ships during open
ocean exercises.

In recent years, teaming arrangements between prime military contractors and
Herley have increased. Large companies bidding on major programs seek to align
themselves with parts and systems manufacturers such as Herley for economic
reasons as well as for the technical expertise afforded by such alliances.
Teaming arrangements with Tracor

47
<PAGE> 57

Corporation and Northrop Grumman Corporation have resulted in recent awards to
Herley for command and control systems in Australia and Singapore, and Herley 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. Herley 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.

Herley's acquisition of Metraplex in 1997 allows Herley 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 Herley in providing its telemetry transmitters and flight termination
receivers, Herley 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

Herley 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.

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

48
<PAGE> 58

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, Herley 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 Herley
are employed in many defense electronics military systems as well as missile
programs. Herley also manufactures magnetrons, which are the power source
utilized in the production of Herley's transponders.

Herley 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, Herley has only one significant competitor in this market.

Herley 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.

49
<PAGE> 59

NEW PRODUCT DEVELOPMENT AND APPLICATIONS

Herley 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. Herley's primary efforts are focused on
engineering design and product development activities rather than pure research.
A substantial portion of Herley's development activities have been funded by
Herley's customers. Certain of Herley's officers and engineers are involved at
various times and in varying degrees in these activities. Herley'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 Herley 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 Herley's existing
customers. With its acquisition of Metraplex in August 1997, Herley now offers
data link systems to its customers, either directly or through teaming
arrangements. Upon receipt of an order, Herley 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, Herley
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 Herley 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, Herley has been seeking commercial applications for
the magnetron tubes produced by Herley's MDI division. In 1995, Herley 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

50
<PAGE> 60

applications. Based on initial engineering results, prototype tubes were
designed, manufactured and tested satisfactorily to the specifications required.
Herley 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 Herley'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 Herley is deemed by the customer to have developed proprietary
equipment not available from other parties or where there is a very stringent
delivery schedule.

All of Herley'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, Herley 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 Herley under the contract to the date of termination plus a
fee based on the work completed.

MARKETING AND DISTRIBUTION

Herley'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. Herley 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

Herley'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 Herley'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 Herley for military and space
launch applications are subject to testing procedures based upon customer
requests. All of such testing is performed by Herley at its facilities.

51
<PAGE> 61

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

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

Electronic components and other raw materials used in Herley's products are
purchased by Herley 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 Herley.

Herley 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 Herley's firm fixed backlog.

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

COMPETITION

The flight instrumentation and microwave products that Herley manufactures are
subject to varied competition depending on the product and market served.
Competition is generally based upon technology, design, price and past
performance. Herley'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, Herley 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
Herley. Competitors include Aydin Corporation, L-3 Communications Corporation,
Microsystems, Inc., AMP, Inc. and Remec, Inc.

EMPLOYEES

As of October 4, 1998, Herley 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 Herley's employees are covered by collective
bargaining agreements and Herley considers its employee relations to be
satisfactory. Herley 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,
Herley has

52
<PAGE> 62

established competitive benefits programs, including a 401k employee savings
plan, and stock option plans.

INTELLECTUAL PROPERTY

Herley does not presently hold any significant patents applicable to its
products. In order to protect its intellectual property rights, Herley 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 Herley to protect its intellectual property rights will be
adequate to prevent misappropriation of Herley's technology or to preclude
competitors from independently developing such technology. Trade secret and
copyright laws afford Herley limited protection.

PROPERTIES

Herley's properties are as follows:

<TABLE>
<CAPTION>
OWNED
OR
LOCATION PURPOSE OF PROPERTY AREA LEASED
-------- ------------------- ---- ------
<S> <C> <C> <C>
Lancaster, PA(1) Production, engineering, administrative 71,200 sq. ft. Owned
and executive offices
Woburn, MA Production, engineering and 60,000 sq. ft. Owned
administration
Chicago, IL Production, engineering and 9,700 sq. ft. Leased
administration
Frederick, MD Production, engineering and 11,000 sq. ft. Leased
administration
Lancaster, PA Land held for expansion 26 Acres Owned
</TABLE>

- -------------------------
(1) Herley'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.

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

LEGAL PROCEEDINGS

Herley is not involved in any material legal proceedings.

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<PAGE> 63

HERLEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE HISTORICAL
FINANCIAL STATEMENTS OF HERLEY, RELATED NOTES AND OTHER FINANCIAL INFORMATION
INCLUDED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS.

OVERVIEW

Herley 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 Herley'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. Herley 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 Herley under the contract to the date of termination plus a
fee based upon work completed.

Substantially all of Herley'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 Herley'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.

Herley 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. Herley'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

54
<PAGE> 64

approximately $1,562,000,$1,828,000, and $1,453,000 in fiscal years 1998, 1997
and 1996, respectively. Costs of Herley's internally funded product development
efforts are included in Herley'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.

Herley'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
earnings. In August 1997, Herley 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 Herley's consolidated statements of income expressed as
a percentage of net sales. There can be no assurance that trends in sales growth
or operating results will continue in the future.

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 2, AUGUST 3, JULY 28,
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
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................................ 20.4% 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%
===== ===== =====
</TABLE>

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.

55
<PAGE> 65

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

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

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<PAGE> 66

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 included
elsewhere in this Proxy Statement/Prospectus.

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, Herley 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 Herley, 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. Herley 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 Herley's
interest in the M.D. Sass Re/Enterprise-II, L.P., limited partnership. Herley
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.

Herley 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, Herley had
borrowings outstanding of $1,500,000. No borrowings were outstanding on this
line at August 3, 1997.

In January 1998, Herley purchased 89,888 shares of its outstanding common stock
for $1,084,326 from certain officers of Herley based on the fair market value of
the stock on the date acquired. During the fiscal year ended August 3, 1997,
Herley 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 Herley common stock, which was terminated in June
1997.

57
<PAGE> 67

Herley 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 Herley. See "Herley Management and Executive
Compensation."

Herley 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.

YEAR 2000 READINESS

The most likely reason for a customer to terminate a contract for default would
be due to Herley's inability to manufacture and deliver product under the
contract. Breakdowns in any number of Herley's computer systems and applications
could prevent Herley from being able to manufacture and ship its products.
Examples are failures in Herley'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. Herley's products do not contain computer devices that require
remediation to meet Year 2000 requirements. A review of Herley's status with
respect to remediating its computer systems for Year 2000 compliance is
presented below.

For its information technology, Herley currently utilizes a Hewlett Packard
HP3000-based computing environment. Hewlett Packard has advised Herley that the
HP3000 hardware is in compliance with Year 2000 requirements. Herley'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, Herley
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.

Herley 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. Herley will develop a questionnaire to be
sent to its significant suppliers, and to its test equipment manufacturers
concerning embedded technology, regarding their

58
<PAGE> 68

compliance and attempt to identify any problem areas with respect to them. This
process will be ongoing and Herley'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 Herley believes would have a material
adverse impact on its operations. However, Herley cannot control the conduct of
its suppliers. Therefore, there can be no guarantee that Year 2000 problems
originating with a supplier will not occur. Herley 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. Herley 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 Herley to
address the Year 2000 problem. There can be no absolute assurance that third
parties will convert their systems in a timely manner. Herley 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.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Herley is subject to market risk associated with changes in interest rates and
stock prices. Herley has not entered into any derivative financial instruments
to manage the above risks and Herley has not entered into any market risk
sensitive instruments for trading purposes. Herley'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. Herley
will be subject to potentially adverse movements in foreign currency rate
changes. Herley does not anticipate any other material changes in its primary
market risk exposures in fiscal 1999.

As of August 2, 1998, Herley 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 Herley'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:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING DURING: MORTGAGE LINE OF CREDIT
- -------------------------- ---------- --------------
<S> <C> <C>
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
========== ==========
</TABLE>

59
<PAGE> 69

HERLEY MANAGEMENT AND EXECUTIVE COMPENSATION

OFFICERS AND DIRECTORS OF HERLEY

The directors and executive officers of Herley are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH HERLEY
- ---- --- -----------------------
<S> <C> <C>
Lee N. Blatt.......................... 70 Chairman of the Board and Chief
Executive Officer
Myron Levy............................ 58 President and Director
Anello C. Garefino.................... 51 Vice President-Finance, Treasurer and
Chief Financial Officer
Allan Coon............................ 62 Vice President
Adam J. Bottenfield................... 38 Vice President-Engineering
Ray Umbarger.......................... 51 Vice President-Domestic Marketing
George Hopp........................... 60 Vice President-International Marketing
Glenn Rosenthal....................... 38 Vice President
Mark A. Krumm......................... 52 Vice President-Business Development
Howard M. Eckstein.................... 47 Vice President-New Product Development
David H. Lieberman.................... 53 Secretary and Director
Adm.Thomas J. Allshouse (Ret.)........ 73 Director, Member of Compensation and
Audit Committees
Alvin M. Silver....................... 67 Director, Member of Compensation and
Audit Committees
John A. Thonet........................ 48 Director
Adm. Edward K. Walker, Jr. (Ret.)..... 65 Director, Member of Compensation and
Audit Committees
</TABLE>

MR. LEE N. BLATT is a co-founder of Herley and has been Chairman of the Board of
Herley since its organization in 1965. Mr. Blatt holds a Bachelors Degree in
Electrical Engineering from Syracuse University and a Masters Degree in Business
Administration from City College of New York. Mr. Blatt's term as a director
expires at the 2000 annual meeting of stockholders.

MR. MYRON LEVY has been President of Herley since June 1993 and served as
Executive Vice President and Treasurer since May 1991, and prior thereto as Vice
President for Business Operations and Treasurer since October 1988. For more
than ten years prior to joining Herley, Mr. Levy, a certified public accountant,
was employed in various executive capacities, including Vice-President, by
Griffon Corporation (formerly Instrument Systems Corporation). Mr. Levy's term
as a director expires at the 1998 annual meeting of stockholders.

MR. ANELLO C. GAREFINO has been employed by Herley in various executive
capacities for more than the past five years. Mr. Garefino, a certified public
accountant, was appointed Vice President-Finance, Treasurer and Chief Financial
Officer in June 1993. From 1987 to January 1990, Mr. Garefino was Corporate
Controller of Exide Corporation.

MR. ALLAN COON joined Herley in 1992 and was appointed as a Vice President in
December 1995. Prior to joining Herley, Mr. Coon was Senior Vice President and
Chief

60
<PAGE> 70

Financial Officer of Alpha Industries, Inc., a publicly traded company engaged
in military and commercial electronic programs.

MR. ADAM J. BOTTENFIELD was appointed Vice President -- Engineering in July
1997. Mr. Bottenfield has been employed by Herley as Systems Engineering Manager
of Herley-Vega Systems since Herley's acquisition of Vega in 1993. From 1984 to
1993, Mr. Bottenfield was Manager of Digital and Software Engineering of Vega.

MR. RAY UMBARGER was appointed Vice President -- Domestic Marketing in July
1997, having been employed by Herley since June 1995. For more than ten years
prior to that, Mr. Umbarger served in the U.S. Navy where he was a Captain. His
responsibilities in the Navy included the design, development production,
deployment and life cycle support of all Navy, and in some cases, all Department
of Defense target systems. Mr. Umbarger received a Bachelors Degree in
Aeronautical Engineering from the U.S. Naval Academy, a Masters Degree in
Aeronautical Engineering from Princeton University and a Masters Degree in
Business Administration from Monmouth College.

MR. GEORGE HOPP was appointed Vice President -- International Marketing in July
1997. Mr. Hopp has been employed by Herley in a sales and marketing position
since 1995 and directs the operations of Herley's GSS division. For more than
ten years prior to joining Herley, Mr. Hopp was Director of International
Programs for Northrop Grumman, Military Aircraft Division.

MR. GLENN ROSENTHAL was appointed Vice President of Herley in August 1997. From
June 1988 until its acquisition by Herley in August 1997, Mr. Rosenthal was
employed by Metraplex Corporation, holding the positions of President (from June
1996) and Chief Operations Officer (from 1995). Mr. Rosenthal holds a Bachelors
Degree in Engineering from Carnegie Mellon University.

MR. MARK A. KRUMM was appointed Vice President for Business Development upon
joining Herley in November 1997. For more than 10 years prior to joining Herley,
Mr. Krumm was program manager for various electronic defense systems with Harris
Corporation. Mr. Krumm has a Bachelors Degree in Aerospace engineering from St.
Louis University and holds a Masters Degree in Business Administration from
Southern Illinois University.

MR. HOWARD M. ECKSTEIN was appointed Vice President-New Product Development upon
joining Herley in April 1998. Mr. Eckstein has 25 years experience in the design
and development of aerospace telemetry equipment and systems. Mr. Eckstein
served from 1992 to 1998 as Vice President-Advanced Products for L3
Communications, and as Vice President-Engineering from 1986 to 1992. Mr.
Eckstein earned his Bachelors Degree in Electrical Engineering from the
Pennsylvania State University and holds a Masters Degree in Engineering from the
University of Pennsylvania.

MR. DAVID H. LIEBERMAN has been a director of Herley since 1985 and Secretary of
Herley since 1994. Mr. Lieberman has been a practicing attorney in the State of
New York for more than the past ten years and is a member of the firm of Blau,
Kramer, Wactlar & Lieberman, P.C., general counsel to the Herley. Mr.
Lieberman's term as a director expires at the 1999 annual meeting of
stockholders.

ADMIRAL THOMAS J. ALLSHOUSE (RET.) has been a director of Herley since September
1983. Prior to 1981, when he retired from the United States Navy, Admiral
Allshouse served for 34 years in various naval officer positions, including
acting as commanding officer of the United States Naval Ships Parts Control
Center. Admiral Allshouse holds a Bachelors Degree in Engineering from the
United States Naval Academy and a Masters Degree in

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<PAGE> 71

Business Administration from Harvard University. Admiral Allshouse's term as a
director expires at the 1999 annual meeting of stockholders.

MR. JOHN A. THONET has been a director of Herley since 1991 and President of
Thonet Associates, an environmental consulting firm specializing in land
planning and zoning matters for the past ten years. Mr. Thonet is the son-in-law
of Mr. Blatt. Mr. Thonet's term as a director expires at the 1998 annual meeting
of stockholders.

DR. ALVIN M. SILVER has been a director of Herley since October 1997. Since
1977, Dr. Silver has been Executive Vice President of the Ademco Division of
Pittway Corporation. Dr. Silver holds a Bachelors Degree in Industrial
Engineering from Columbia University, a Masters Degree in Industrial Engineering
from Stevens Institute of Technology and a Doctor of Engineering Science Degree
in Industrial Engineering/ Operations Research from Columbia University. Dr.
Silver is a Professor at the Frank G. Zarb School of Business of Hofstra
University. Mr. Silver's term as a director expires at the 1998 annual meeting
of stockholders.

ADMIRAL EDWARD K. WALKER, JR. (RET.) has been a director of Herley since October
1997. Since his retirement from the United States Navy in 1988, Admiral Walker
has been the Director of Corporate Strategy for Resource Consultants, Inc., a
member of Gilbert Associates, Inc. which is a professional services company
supporting the Department of Defense, particularly the Navy, in a wide range of
technical, engineering and management disciplines. Prior to his retirement from
the United States Navy, Admiral Walker served for 34 years in various naval
officer positions, including Commander of the Naval Supply Systems Command, and
Chief of Supply Corps. Admiral Walker holds a Bachelors Degree from the United
States Naval Academy and Masters Degree in Business Administration from The
George Washington University. Admiral Walker's term as a director expires at the
2000 annual meeting of stockholders.

EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation with
respect to Herley's Chairman/Chief Executive Officer and its four most highly
compensated executive officers other than the Chief Executive Officer (the
"named executive officers") for services rendered for the fiscal years ended
August 2, 1998, August 3, 1997 and July 28, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION (1) ------------------------------
NAME AND ----------------------------- SECURITIES
PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION YEAR SALARY(2) BONUS(3) OPTIONS/SARS(4) COMPENSATION
- --------- ------ --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Lee N. Blatt............. 1998 $485,549 $303,191 -- $4,800(6)
Chairman of 1997 531,629 302,432 599,999(5) 4,500
the Board 1996 483,028 203,068 133,333(7) 4,500
Myron Levy............... 1998 $333,912 $242,553 -- $9,300(6)
President 1997 307,764 181,460 400,000(5) 9,000
1996 288,726 121,841 66,667(7) 7,380
</TABLE>

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<PAGE> 72

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION (1) ------------------------------
NAME AND ----------------------------- SECURITIES
PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION YEAR SALARY(2) BONUS(3) OPTIONS/SARS(4) COMPENSATION
- --------- ------ --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Allan Coon............... 1998 $110,011 $ 30,000 -- $6,153(6)
Vice President 1997 110,011 -- 73,332(5) 5,751
1996 110,011 30,000 13,333(7) 4,569
Anello C. Garefino....... 1998 $100,760 $ 20,000 -- $3,845(6)
Vice President 1997 101,914 -- 59,999(5) 3,579
Finance-Treasurer 1996 97,885 15,000 13,333(7) 3,424
George Hopp.............. 1998 $107,615 $ 7,500 -- $1,488(6)
Vice President 1997 107,615 -- 18,666(5) 1,422
1996 104,000 -- -- 1,185
</TABLE>

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

(1) Does not include Other Annual Compensation because amounts of certain
perquisites and other non-cash benefits provided by Herley do not exceed the
lesser of $50,000 or 10% of the total annual base salary and bonus disclosed
in this table for the respective officer.

(2) Amounts set forth herein include cost of living adjustments under employment
contracts.

(3) Represents for Messrs. Blatt and Levy incentive compensation under
employment agreements. See "Herley Management and Executive
Compensation -- Employment Agreements."

(4) Adjusted to give effect to a four-for-three stock split on September 30,
1997. This table includes warrants issued to these individuals outside the
stock option plans.

(5) Consisting of the following options issued in October 1996 for the right to
purchase Herley common stock at a price of $6.9375: Lee N. Blatt -- 133,333;
Myron Levy -- 100,000, Allan Coon -- 26,666, Anello C. Garefino -- 13,333;
options granted in February 1997 at a price of $8.3438 and repriced to
$6.0938 in April 1997: Lee N. Blatt 133,333, Myron Levy -- 100,000, Allan
Coon -- 20,000, Anello C. Garefino -- 20,000 and George Hopp -- 5,333; and
options granted in May 1997 at a price of $6.4688: Lee N. Blatt -- 333,333,
Myron Levy -- 200,000, Allan Coon -- 26,666, Anello C. Garefino -- 26,666
and George Hopp -- 13,333.

(6) All Other Compensation includes: (a) group term life insurance as follows:
$4,500 for Mr. Levy, $2,387 for Mr. Coon, $522 for Mr. Garefino, and $1,488
for Mr. Hopp, and (b) contributions to Herley's 401(k) Plan as a pre-tax
salary deferral as follows: $4,800 for each of Messrs. Blatt and Levy,
$3,766 for Mr. Coon, and $3,323 for Mr. Garefino.

(7) Represents warrants issued in December 1995 for the right to purchase Herley
common stock at a price of $4.6425.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

No options were granted to the named executive officers in fiscal 1998.

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<PAGE> 73

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES

The following table sets forth stock options exercised during fiscal 1998 and
all unexercised stock options and warrants held by the named executive officers
as of August 2, 1998.

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AND
OPTIONS AND WARRANTS WARRANTS AT FISCAL
SHARES AT FISCAL YEAR-END(2) YEAR-END(3)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lee N. Blatt......... -- $ -- 311,112 -- $1,491,505 $ --
Myron Levy........... -- -- 255,559 66,666 1,091,078 231,244
Allan Coon........... 15,000 111,408 49,444 8,888 160,883 30,830
Anello Garefino...... -- -- 43,335 8,888 192,802 30,830
George Hopp.......... -- -- 10,223 10,666 46,205 36,997
</TABLE>

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

(1) Values are calculated by subtracting the exercise price from the trading
price of the Herley common stock as of the exercise date.

(2) Adjusted to give effect to a four-for-three stock split effective September
30, 1997.

(3) Based upon the trading price of the Herley common stock of $9.9375 on August
2, 1998.

EMPLOYMENT AGREEMENTS

Lee N. Blatt has entered into a new employment agreement with Herley, dated as
of October 1, 1998, which provides for a four year and three month term,
terminating on December 31, 2002. Pursuant to the agreement, Mr. Blatt receives
compensation consisting of a base salary of $475,000, with an annual cost of
living increase and an incentive bonus. Mr. Blatt's incentive bonus is 5% of the
pretax income of Herley in excess of 10% of Herley's stockholders' equity for
specific periods, as adjusted for stock issuances. Mr. Blatt's incentive bonus
cannot exceed his base salary.

Myron Levy has entered into a new employment agreement with Herley, dated as of
October 1, 1998, which provides for a four year and three month term,
terminating on December 31, 2002, and a five year consulting period commencing
at the end of the active employment period. Pursuant to the agreement, Mr. Levy
receives compensation consisting of a base salary of $325,000, with an annual
cost of living increase and an incentive bonus. Mr. Levy's incentive bonus is 4%
of the pretax income of Herley in excess of 10% of Herley's stockholders' equity
for specific periods, as adjusted for stock issuances. Mr. Levy's incentive
bonus cannot exceed his base salary. Mr. Levy's compensation during the
consulting period is at the annual rate of $100,000.

The employment agreements with Messrs. Blatt and Levy provide for certain
payments following death or disability. The employment agreements also provide
in the event of a change in control of Herley, as defined therein, the right, at
their election, to terminate the agreement and receive a lump sum payment of
approximately three times their annual salary.

Allan Coon has entered into a severance agreement with Herley, dated June 11,
1997, which provides that in the event Mr. Coon is terminated other than for
cause prior to June 12, 1999, he is entitled to two years' base salary and in
the event he is so terminated

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<PAGE> 74

after June 11, 1999 and before June 12, 2002, he is entitled to one year's base
salary. Mr. Coon's present base salary is $110,000.

Anello C. Garefino has entered into a severance agreement with Herley, dated
February 18, 1998, which provides that in the event Mr. Garefino is terminated
other than for cause prior to February 19, 2000, he is entitled to two years'
base salary and in the event he is so terminated after February 18, 2000 and
before February 19, 2003, he is entitled to one year's base salary. Mr.
Garefino's present base salary is $105,000.

INDEMNIFICATION AGREEMENTS

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

STOCK PLANS

Certain officers and directors of Herley hold options or warrants to purchase
Herley common stock under Herley's 1992 Non-Qualified Stock Option Plan, 1996
Stock Option Plan, 1997 Stock Option Plan (collectively, the "Stock Plans") and
warrant agreements.

1992 NON-QUALIFIED STOCK OPTION PLAN. The 1992 Non-Qualified Stock Option Plan
covers 1,333,333 shares of Herley 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 Compensation Committee or the Board of Directors. 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. In
December 1995, this plan was terminated except for outstanding options
thereunder. At August 2, 1998, non-qualified options to purchase 97,119 shares
of Herley common stock were outstanding under this plan.

1996 STOCK OPTION PLAN. The 1996 Stock Option Plan covers 666,666 shares of
Herley common stock. Options granted under the plan may be incentive stock
options qualified under Section 422 of the Internal Revenue Code of 1986, as
amended or non-qualified stock options. Under the terms of the plan, the
exercise price of options granted under the plan will be the fair market value
at the date of grant. The nature and terms of the options to be granted are
determined at the time of grant by the Compensation Committee or the Board of
Directors. If not specified, 100% of the shares can be exercised one year after
the date of grant. The options expire ten years from the date of grant. At
August 2, 1998, non-qualified options to purchase 337,331 shares of Herley
common stock were outstanding under this plan.

1997 STOCK OPTION PLAN. The 1997 Stock Option Plan covers 1,666,666 shares of
Herley common stock. Options granted under the plan may be incentive stock
options qualified under Section 422 of the Internal Revenue Code of 1986, as
amended or non-qualified stock options. Under the terms of the plan, the
exercise price of options granted under the plan will be the fair market value
at the date of grant. The nature and terms of the options to be granted are
determined at the time of grant by the Compensation Committee or the

65
<PAGE> 75

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 88,333 shares of Herley common stock were granted during the
fiscal year ended August 2, 1998. At August 2, 1998, options to purchase 426,394
shares of Herley common stock were outstanding under this plan. On August 14,
1998, Herley issued 10 year options to purchase 250,000 shares of Herley common
stock under this plan to each of Lee N. Blatt and Myron Levy, which options vest
one-third on each of the grant date and on the first and second anniversary of
the grant date.

WARRANT AGREEMENTS. In April 1993, common stock warrants were issued to certain
officers and directors for the right to acquire 573,333 shares of Herley common
stock at an exercise price of $5.3475 per share, which was the closing price of
the Herley common stock on the date of issue. In December 1995, warrants with
respect to 533,333 of these shares were canceled. The warrants expire April 30,
1998. In December 1995, warrants were issued to certain officers for the right
to acquire 293,333 shares of Herley common stock at an exercise price of $4.6425
per share at date of issue. These warrants expire December 13, 2005. At August
2, 1998, warrants to purchase 280,000 shares of Herley common stock were
outstanding.

EMPLOYEE SAVINGS PLAN

Herley maintains an Employee Savings Plan that qualifies as a thrift plan under
Section 401(k) of the Internal Revenue Code. This plan allows employees to
contribute between 2% and 15% of their salaries to the plan. Herley, at its
discretion, can contribute 100% of the first 2% of the employees' salary so
contributed and 25% of the next 4% of salary. Additional Herley contributions
can be made, depending on profits. The aggregate benefit payable to an employee
depends upon the employee's rate of contribution, the earnings of the fund, and
the length of time such employee continues as a participant. Herley 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 fiscal years ended
August 3, 1997 and July 28, 1996, respectively. For the year ended August 2,
1998, $4,800, $4,800, $3,766, and $3,323 was contributed by Herley to this plan
for Messrs. Blatt, Levy, Coon and Garefino, respectively, and $24,328 was
contributed for all officers and directors as a group.

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<PAGE> 76

HERLEY STOCK INFORMATION

HERLEY SECURITY OWNERSHIP

The following table sets forth the indicated information as of November 17, 1998
with respect to the beneficial ownership of Herley's securities by (i) all
persons known to Herley to be beneficial owners of more than 5% of Herley's
common stock based on filings with the Commission, (ii) each director of Herley,
and (iii) by all officers and directors as a group:

<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
DIRECTOR BENEFICIALLY
AGE SINCE OWNED(1)(4)
--- -------- ------------------
<S> <C> <C> <C> <C>
Lee N. Blatt(2)(5).......................... 70 1965 608,552 (10.7%)
Myron Levy(5)(6)............................ 58 1992 548,687 (9.7%)
Anello C. Garefino(5)....................... 51 -- 56,424 (1.1%)
Allan Coon.................................. 62 -- 49,444
Adam J. Bottenfield......................... 38 -- 20,667
Ray Umbarger................................ 51 -- 13,620
George Hopp................................. 60 -- 14,667
Glenn Rosenthal............................. 38 -- 8,256
Mark A. Krumm............................... 52 -- 1,000
Adm. Thomas J. Allshouse (Ret.)(5).......... 73 1983 26,666
David H. Lieberman(5)....................... 53 1985 7,933
John A. Thonet(3)(5)........................ 48 1991 21,693
Alvin M. Silver............................. 67 1997 6,500
Adm. Edward K. Walker, Jr. (Ret.)........... 65 1997 2,500
Directors and officers as a group (14
persons).................................. 1,386,609 (22.3%)
</TABLE>

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

(1) No executive officer or director owns more than one percent of the
outstanding shares of Herley common stock unless otherwise indicated.
Ownership represents sole voting and investment power.

(2) Does not include an aggregate of 470,229 shares owned by family members,
including Hannah Thonet, Rebecca Thonet, Kathi Thonet, Randi Rossignol, Max
Rossignol, Henry Rossignol, Patrick Rossignol and Allyson Gerber of which
Mr. Blatt disclaims beneficial ownership.

(3) Does not include 133,332 shares owned by Mr. Thonet's children, Hannah and
Rebecca Thonet, and 76,278 shares owned by his wife, Kathi Thonet. Mr.
Thonet disclaims beneficial ownership of these shares.

(4) Includes shares subject to options exercisable within the 60 days after
November 17, 1998 at prices ranging from $2.535 to $9.25 per share pursuant
to Herley's Stock Plans: Lee N. Blatt -- 261,113, Myron Levy -- 272,226,
Anello C. Garefino -- 30,002, Allan Coon -- 49,444, George Hopp -- 10,223,
Glenn Rosenthal -- 6,667, Mark A. Krumm -- 1,000, Adm. Thomas J.
Allshouse -- 13,333, David H. Lieberman --

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<PAGE> 77

7,333, John A. Thonet -- 13,333, Alvin M. Silver -- 2,500, Edward K.
Walker -- 2,500, Ray Umbarger -- 12,667, Adam J. Bottenfield -- 17,332.

(5) Includes shares subject to outstanding warrants exercisable within 60 days
after November 17, 1998 at a price of $4.6406: Lee Blatt -- 133,333, Myron
Levy -- 66,667, Anello C. Garefino -- 13,333.

(6) Does not include 5,000 shares owned by Mr. Levy's daughter, Stephanie Levy
of which Mr. Levy disclaims beneficial ownership.

HERLEY STOCK PRICE AND DIVIDEND INFORMATION

Herley 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 Herley common stock for the periods indicated and
gives retroactive effect to the four-for-three stock split of the common stock
on September 30, 1997.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
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............................................. 10.50 7.63
Second Quarter (through December 3, 1998)................. 12.06 7.63
</TABLE>

The closing price on December 3, 1998 was $11.875. As of December 3, 1998 there
were approximately 1,000 record holders (including beneficial holders) of the
Herley common stock.

There have been no cash dividends declared or paid by Herley on its common stock
during the past two fiscal years or the current fiscal year.

GMC

GENERAL

GMC is engaged primarily in the design, development, manufacture and marketing
of microwave and electronic systems, equipment and components. GMC is organized
into three operating divisions in three locations with strong inter-divisional
ties. The parent company, General Microwave Corporation, operates GMC's largest
division, its microwave division located in Amityville, New York. A substantial
portion of GMC's microwave products is sold to manufacturers and users of
microwave systems and equipment for applications in the defense electronics
industry. GMC also sells these components and

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<PAGE> 78

equipment for use in the industrial sector as well as in commercial
telecommunications industries. Typical applications for GMC's microwave products
include electronic warfare and countermeasures, airborne and shipboard
navigation and communications, radar systems, missile guidance systems,
automatic test equipment, and satellite communications.

GMC's subsidiaries, General Microwave Israel Corporation and General Microwave
Israel (1987) Ltd. in Jerusalem, Israel, conduct research and development and
manufacturing operations largely devoted to the production of microwave
oscillators. GMC's subsidiary, General Microcircuits Corporation in Billerica,
Massachusetts, engages in the design, manufacture and sale of hybrid
microcircuits largely intended for military applications.

In February, 1997, GMC decided to concentrate on its core businesses and adopted
a plan to exit the fiber optics business of its Math Associates subsidiary. On
September 24, 1997, a sale of certain of the assets of Math was completed. (See
Note 2 to the February 28, 1998 Consolidated Financial Statements included
elsewhere herein.) Accordingly, unless otherwise indicated, all of the
information contained below has been restated to delete data applicable to Math
Associates, Inc. (now known as GMC Associates, Inc.).

GMC has traditionally developed new products for sale as standard catalog items
as well as products designed to customer specifications under fixed price
contracts. GMC's catalogs currently list over 300 products.

The following table sets forth, for the periods indicated, unaudited information
with respect to GMC's net sales contributed by each class of similar products
which accounted for 15% or more of consolidated net sales in any of the last
three fiscal years.

<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Microwave Components................... $15,244,037 $14,463,094 $11,833,453
Power Measuring Instruments............ $ 2,031,890 $ 1,894,491 $ 2,148,258
Hybrid Microcircuits................... $ 3,664,140 $ 3,323,266 $ 2,958,868
Other.................................. $ 377,515 $ 380,037 $ 487,031
Net Sales............................ $21,317,582 $20,060,888 $17,427,610
</TABLE>

MARKETING

GMC markets its products through an internal marketing department and through
independent domestic and independent foreign sales organizations.

RESEARCH AND DEVELOPMENT

GMC's research and development is conducted both through internally funded
activities and through customer funded research and development under fixed
price and cost plus fixed fee product development contracts.

Internally funded research and development expenditures aggregated $295,500,
$495,000 and $1,090,000 in fiscal 1998, 1997 and 1996, respectively. These
expenditures are net of reimbursements received under agreements with the
government of Israel and another entity in the amounts of $104,000 in fiscal
1996.

In addition to GMC sponsored development activities, GMC continues to expand and
improve its product line and technology through performance under certain fixed
price and cost plus fixed fee contracts requiring the development and
manufacture of new products.

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<PAGE> 79

Development and manufacturing costs incurred in connection with customer funded
prototype development contracts are included in cost of sales. The estimated
amount spent by GMC during each of the last three fiscal years on customer
sponsored research and development activities aggregated $1,075,000, $350,000
and $625,000 in fiscal 1998, 1997 and 1996, respectively. GMC is currently
engaged in the design and manufacture of new prototypes in connection with
various electronic countermeasures, electronic warfare, radar, navigation and
communications programs of the United States Government. GMC also understands
that many of such engagements by major industrial corporations are for the
design and manufacture of products for foreign governments and agencies thereof.

RAW MATERIALS

Manufacturing operations consist of fabrication, assembly and testing of
components, systems and equipment built from fabricated parts as well as printed
circuits, electronic materials and components purchased from outside sources.
Manual and semi-automatic methods are employed in the manufacturing process,
depending principally upon production volumes. Inspection and testing are
critical to the achievement of product reliability and performance standards
demanded by GMC's customers. GMC utilizes proprietary and other testing
equipment in its operations and is continuously developing new testing
techniques to maintain its products' performance standards.

Electronic components and raw materials used in GMC's products are generally
available from a large number of suppliers. Some materials are standard items
and others are manufactured to GMC's specifications by subcontractors. GMC is
not dependent upon any single supplier for any component or material and has not
experienced significant interruptions in production due to a shortage of raw
materials.

PATENTS AND TRADEMARKS

GMC has 12 patents in the United States which cover various products. GMC
considers that its competitive position depends more upon the technical
expertise and creative ability of its engineering and development personnel than
upon its patents, patent applications and trademarks.

CUSTOMERS

GMC's customers consist primarily of the United States Government and major
industrial corporations that incorporate GMC's products into a variety of
military, and to a lesser extent, commercial systems. At present, GMC estimates
that it has approximately 2,500 customers. During fiscal 1998, no customers
other than Litton Systems, Inc. accounted for 10% or more of GMC's net sales.
Litton accounted for approximately 16% of net sales.

Although the end-use for GMC's products is not always identifiable, Management
estimates that sales for direct or indirect use by the United States Government
represented approximately 53%, 42% and 55% of GMC's net sales in fiscal 1998,
1997 and 1996, respectively. The timing and level of appropriations by the
federal government can influence GMC's operating results significantly. No
material portion of the Company's business is subject to renegotiation or
limitation of profits on contracts or subcontracts by the federal government.
However, the federal government, or agencies thereof, may terminate their
contracts, in whole or in part, at their convenience. In such event, the
government agency is obligated generally to pay the costs incurred by GMC under
the contract plus a fee based upon work completed. Substantial curtailment or
termination of

70
<PAGE> 80

the government programs which, directly or indirectly, fund GMC's contracts
could have a material adverse effect upon GMC's operating results.

Foreign sales, primarily in Israel, Japan, Norway, United Kingdom, India,
France, Australia and Canada accounted for approximately 34%, 34% and 25% of
GMC's net sales in fiscal 1998, 1997 and 1996, respectively. Foreign sales in
fiscal 1998 include immaterial amounts of direct sales to 5 foreign governments
or agencies thereof.

COMPETITION

GMC's ability to compete is dependent on several factors, including product
performance, quality and reliability, product development capabilities, price,
and the ability to meet delivery schedules and customer specifications. The
microwave component and equipment markets are highly competitive and are
characterized by rapid advances in technology resulting in the introduction of
new products with improved performance characteristics, thereby subjecting GMC's
products to the risk of technological obsolescence.

GMC has numerous competitors, including some of its current customers with
captive microwave component design and manufacturing operations. In addition,
GMC competes with certain of its suppliers of semiconductor devices. GMC also
competes with a variety of companies across its entire product line. Many of
GMC's competitors have greater financial and other resources than does GMC.

In response to increased competitive pressure caused by tightened government
purchasing practices, GMC continues to implement cost reductions on its current
products and expand its selling and marketing efforts in the United States and
abroad and continuously endeavors to expand its activities in non-military
aspects of the electronics industry. GMC has traditionally emphasized the
integrity, reliability and performance of its products.

BACKLOG

GMC's backlog was approximately $13,886,000 at February 28, 1998 and $16,946,000
at February 28, 1997. Although the contemplated end-use for products ordered is
not always identifiable, Management estimates that approximately 38% and 35% of
GMC's backlog at February 28, 1998 and February 28, 1997, respectively, is
attributable to products ordered for direct or indirect use by the United States
Government.

GMC manufactures standard components and equipment for inventory and specialized
components, systems and equipment pursuant to orders from customers. Orders are
included in backlog upon the receipt by GMC of verbal or written purchase orders
with firm delivery dates. Approximately 86% and 87%, respectively, of the
backlog at February 28, 1998 and February 28, 1997 is scheduled for shipment
within 12 months of such dates. The amount of backlog expected to be shipped
over such periods represents only a portion of anticipated sales for such
periods. Most of the orders included in GMC's current backlog may be cancelled
by customers without cause or penalty, subject to payment for costs incurred and
normal profit thereon.

SEGMENTS AND OTHER FINANCIAL DATA

Information concerning business segments and the estimated geographical
allocation of GMC's total sales is contained in Note 15 to the Consolidated
Financial Statements of GMC included elsewhere in this Proxy
Statement/Prospectus. The risks associated with GMC's sales in foreign countries
are no different from those experienced

71
<PAGE> 81

domestically. There is no significant difference in the estimated profitability
of such business.

See the information concerning working capital contained in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" elsewhere in this Proxy
Statement/Prospectus.

OTHER INFORMATION

At February 28, 1998, GMC had approximately 243 full-time employees. None of
GMC's employees is subject to a collective bargaining agreement.

GMC's business is not seasonal.

GMC does not anticipate that compliance with federal, state and local provisions
which have been enacted or adopted regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment,
will have material effects on the earnings or competitive position of GMC. GMC
does not anticipate making any material capital expenditures for environmental
control facilities for the remainder of its current fiscal year or its
succeeding fiscal year.

PROPERTIES

GMC manufactures microwave components and equipment in an approximately 60,000
square foot building it constructed on approximately 9.5 acres of land in the
New Horizons Business Center in Amityville, New York. The building provides an
integrated plant for GMC's operations including executive offices and research
and manufacturing facilities.

Substantially all of the estimated cost of the acquisition, construction and
equipping of the Amityville building was financed through variable rate
industrial development revenue bonds issued by the Town of Babylon Industrial
Development Agency (New York). GMC is leasing the facility from the issuer of
the Bonds at a rental equal to the amounts due from time to time under the
Bonds. At the expiration of the lease term on October 1, 1999, GMC may buy the
facility for nominal consideration. The indebtedness with respect to the Bonds
is secured by a mortgage of the premises. See Note 8 to the February 28, 1998
Consolidated Financial Statements of GMC included herein for additional
information concerning the Bonds.

GMC conducts its Israeli operations from an approximately 12,000 square foot
plant in the Talpiot Industrial Zone of Jerusalem. See Note 8 to February 28,
1998 Consolidated Financial Statements included herein for additional
information concerning the Talpiot facility. General Microcircuits Corporation
conducts its operations from an approximately 8,000 square foot leased facility
in Billerica, Massachusetts.

LEGAL PROCEEDINGS

There are no material pending legal proceedings to which GMC or any of its
subsidiaries is a party or of which any of their property is the subject as of
the date hereof.

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<PAGE> 82

GMC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion should be read in conjunction with the historical
financial statements of GMC, related notes and other financial information
included elsewhere in this Proxy Statement/Prospectus.

RESULTS OF OPERATIONS

SIX MONTHS ENDED AUGUST 29, 1998 COMPARED WITH THE SIX MONTHS ENDED AUGUST 30,
1997

During the first half of fiscal 1999, net sales were $11,835,926 compared with
$10,474,928 for the first half of fiscal 1998, representing a 13.0% increase.
Net earnings were $797,967 or $.66 basic net earnings per share and $.64 diluted
net earnings per share for the current period, as compared to net earnings of
$485,357 or $.40 basic and diluted net earnings per share from continuing
operations for the prior six month period. Net earnings for the first half of
fiscal 1998 were $1,438,168 or $1.19 basic net earnings per share and $1.18
diluted net earnings per share, which included net earnings from discontinued
operations of $952,811, or $.79 per basic share and $.78 per diluted share.

Sales increased primarily in the Amityville facility with significant earnings
improvement at both the Amityville and Billerica, Massachusetts facilities.

Cost of sales, as a percentage of sales, decreased to 62.1% in the first half of
fiscal 1999, compared to 65.2% in the first half of fiscal 1998, as a result of
a better product mix and continued improvements in processes and controls.

During the first half of fiscal 1999, selling expenses decreased as a percentage
of sales to 10.3% from 12.1% in the prior year principally due to lower
commissions and royalties payable related to the customer mix in the first half
of fiscal 1999. Interest expense decreased due to reduced borrowings. Investment
income increased because of increased levels of cash outstanding.

The provision for income taxes for the six months ended August 29, 1998,
reflects an estimated annual effective tax rate of approximately 32.9%. This
rate is less than the federal statutory rate of 34% principally due to a lower
tax rate on the income generated by GMC's Israeli subsidiary offset partially by
the provision for state income taxes.

During the first half of fiscal 1999, sales orders booked were $14.8 million and
the backlog was $16.9 million compared with $8.2 million and $14.7 million,
respectively, for the first half of fiscal 1998.

FISCAL 1998 COMPARED TO FISCAL 1997

In fiscal 1998, GMC had net earnings from continuing operations of $1,917,390 or
$1.59 basic and $1.56 diluted net earnings per share, as well as a net gain of
$952,811 from disposal of Math Associates, Inc., resulting in net earnings of
$2,870,201 or $2.38 basic net earnings per share and $2.34 diluted net earnings
per share. In fiscal 1997, GMC had net earnings of $201,730 or $.17 basic and
diluted net earnings per share from continuing operations and a net loss of
$3,085,736 or $2.56 basic and diluted net loss per share, after a loss of
$3,287,466 from discontinued operations. In fiscal 1996, GMC had a net loss from
continuing operations of $1,142,126 or $.95 basic and diluted net earnings per
share, and a net loss of $1,776,791 or $1.48 basic and diluted net earnings per
share, after a loss of $634,665 from discontinued operations.

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<PAGE> 83

The current year sales from continuing operations of $21,317,582 increased by
6.3% over the prior year. Sales of microwave components, hybrid microcircuits
and power measuring instruments all increased in fiscal 1998 as compared to
fiscal 1997. Fiscal 1997 sales ($20,060,888) had increased 15.1% over the fiscal
1996 sales level ($17,427,610) because of increased production levels and
shipments to a significant customer.

Fiscal 1998's operating earnings from continuing operations improved
dramatically (311%) in comparison to fiscal 1997 primarily due to gross profit
margins increasing to 36.3% in fiscal 1998 in comparison to 31.6% in the prior
year on increased sales. This improvement resulted from manufacturing
efficiencies, successful customer sponsored development activities and
reductions of overhead expenditures relative to production labor at the
Amityville, New York facility, as well as production efficiencies at the
Billerica, Massachusetts facility. Fiscal 1997's operating earnings from
continuing operations improved substantially in comparison to fiscal 1996
primarily due to increased gross profit margins, increased sales and reductions
in GMC sponsored research and development expenses. Fiscal 1996's operating
losses from continuing operations resulted principally from technical problems
which delayed shipments, increased production costs on a development program for
hybrid microcircuits products, inventory valuation reserves, as well as
increased selling expenses. In fiscal 1996, GMC recorded valuation reserves and
write offs related to the disposal of obsolete inventory of approximately
$440,000 and incurred one-time severance expenses aggregating $158,000.
Operating losses from discontinued operations in fiscal 1997 and fiscal 1996
resulted from additional inventory valuation reserves, low gross profit margins
and cost overruns on a fiber optic development program.

In February 1997, GMC decided to concentrate on its core businesses and adopted
a plan to exit the fiber optics business, which was operated by its Math
Associates, Inc. subsidiary (see Note 2 to GMC'S Consolidated Financial
Statements). Accordingly, unless otherwise indicated, all of the information
herein has been reclassified to present the assets, liabilities and results of
operations of the fiber optics business as a discontinued operation. On
September 24, 1997, a sale of certain of the assets of Math Associates, Inc. was
completed, which resulted in a gain from discontinued operations of $952,811 as
recorded in the consolidated financial statements for the year ended February
28, 1998. This gain relates principally to the proceeds from the sale of assets
and the reversal of estimated costs of liquidation which will no longer be
incurred as a result of the sale, and a provision for operating losses during
the phase out period that did not materialize.

New orders booked during the current year from continuing operations were
approximately $18.3 million compared to approximately $26.2 million last year.
The backlog of orders at February 28, 1998 was $13.9 million compared to $16.9
million at February 28, 1997. In the opinion of management, the strong
performance exhibited by GMC during fiscal 1998 is the result of its focused
effort to bring GMC back to growth and profitability. Although new orders booked
during fiscal 1998 did not achieve the levels of the prior year, GMC does not
believe that such reduction in orders in fiscal 1998 will have a material
adverse impact on its sales development in fiscal 1999. In fiscal 1996, orders
booked from continuing operations were $19.4 million and the backlog was $10.9
million at the year end.

General and administrative expenses, as a percentage of sales, were relatively
consistent in fiscal 1998 and 1997. Selling expenses as a percentage of sales
decreased in fiscal 1998 compared to 1997 as part of planned cost control
efforts. In fiscal 1997, while both selling and general and administrative
expenses increased, when compared to the prior year, they

74
<PAGE> 84

both decreased as a percentage of sales due to budget and cost control efforts.
Although GMC sponsored research and development expenditures were reduced in
fiscal 1998 to $296,000 in comparison to $496,000 in fiscal 1997 and $1,094,000
in fiscal 1996, customer-sponsored research and development projects aggregated
$1,075,000 in fiscal 1998, as compared to $350,000 in fiscal 1997 and $625,000
in fiscal 1996. Research and development expenditures were significantly reduced
in fiscal 1997 in comparison to fiscal 1996 as the Israeli operation moved from
development efforts to increased production.

Interest expense decreased in fiscal 1998 as compared to fiscal 1997 as a result
of repayments of both short and long-term borrowings. Interest expense increased
in fiscal 1997 as compared to fiscal 1996 as a result of increased short term
borrowings at the Israeli operation. Dividend and interest income were
significantly higher in fiscal 1998 compared to the prior year as a result of
increased cash flow with resulting average higher investment balances.

The fiscal 1998 tax benefit results principally from the impact of previously
unrecognized tax benefits, generated primarily from the net loss on disposal of
Math Associates, Inc., net of state and foreign taxes of approximately $76,000.
In fiscal 1997, GMC recorded a tax provision related to continuing operations of
$40,000, as compared to a tax benefit of $222,000 for fiscal 1996. The fiscal
1997 tax provision principally represents taxes on the earnings of GMC's Israeli
operations. The fiscal 1996 tax benefit resulted primarily from a tax loss
carryback claim to recover Federal taxes paid for a three-year period and the
reduction of net deferred tax liabilities.

During the periods covered by this discussion, inflation did not have any
significant effect on GMC's business.

FISCAL 1997 COMPARED TO FISCAL 1996

In fiscal 1997, GMC had net earnings from continuing operations of $201,730 or
$.17 per share, a net loss of $3,287,466 from discontinued operations resulting
in a net loss after discontinued operations of $3,085,736 or $2.56 per share. In
fiscal 1996, GMC had a net loss of $1,142,126 or $.95 per share from continuing
operations and a net loss after discontinued operations of $1,776,791 or $1.48
per share. In fiscal 1995, GMC had net earnings from continuing operations of
$466,960 or $.38 per share, and a net profit after discontinued operations of
$174,676 or $.14 per share.

In February 1997, GMC decided to concentrate on its core businesses and adopted
a plan to exit the fiber optics business, which was operated by its Math
Associates subsidiary. (See Note 2 to Consolidated Financial Statements).
Accordingly, unless otherwise indicated, all of the information herein has been
reclassified to present the assets, liabilities and results of operations of the
discontinued fiber optics business as a discontinued operation. The loss from
discontinued operations includes a loss from operations for fiscal year 1997 of
approximately $627,000, as well as an estimated loss on disposal (including
management's best estimates of recoverability of assets and estimated loss
during the phase-out period) of approximately $2,660,000.

The current year sales from continuing operations of $20,060,888 increased by
$2,633,278 from the prior year, and was slightly higher than sales of two years
ago ($19,069,364). Sales of microwave components and hybrid microcircuits
increased in fiscal 1997 as compared to fiscal 1996, because of increased
production levels and shipments to a significant customer.

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<PAGE> 85

Fiscal 1997's operating earnings from continuing operations improved
substantially in comparison to fiscal 1996 primarily due to increased gross
profit margins, increased sales and reductions in research and development
expenses. Operating losses from discontinued operations in fiscal 1997 resulted
from additional inventory valuation reserves, low gross profit margins and cost
overruns on a fiber optic development program. Fiscal 1996's operating losses
from continuing operations resulted principally from technical problems which
delayed shipments, increased production costs on a development program for
hybrid microcircuits products, inventory valuation reserves, as well as
increased selling expenses. In fiscal 1996, GMC recorded valuation reserves and
write offs related to the disposal of obsolete inventory of approximately
$440,000 and incurred one-time severance expenses aggregating $158,000. The loss
from operations of the discontinued business increased due to technical
problems, increased production costs on a fiber optic development program and
increased inventory valuation reserves.

Management's efforts to increase shipments , implement more effective operations
and reduce cost of sales, resulted in significantly improved fiscal 1997 fourth
quarter profitability from continuing operations of approximately $597,000 as
compared to approximately $274,000 in fiscal 1996. Management will continue to
focus on further process and quality effectiveness for gross profit margin
improvement in fiscal 1998. As part of its efforts to improve earnings in fiscal
1998, management decided to focus on GMC's core businesses and discontinue the
lower profit margin fiber-optic systems and components business.

New orders booked during the current year from continuing operations were
approximately $26.2 million compared to approximately $19.4 million last year.
The backlog of orders at February 28, 1997 was $16.9 million compared to $10.9
million at February 29, 1996. In fiscal 1995, orders booked from continuing
operations were $20.0 million and the backlog was $9.2 million at the year end.

Cost of sales during fiscal 1997, as a percentage of sales, was 68.4% compared
with 71.4% in 1996 and 67.6% in 1995. In fiscal 1997, the cost of sales
percentage decreased primarily due to resolution of technical problems and
production difficulties experienced in 1996 on two large production programs in
microwave components and hybrid microcircuits, as well as improved efficiencies.
In fiscal 1996, the cost of sales percentage increased primarily due to
technical problems and cost overruns on a certain development program and
increased inventory valuation reserves, as well as non-recurring severance
expenses.

In fiscal 1997, while both selling and general and administrative expenses
increased, when compared to the prior year, they both decreased as a percentage
of sales due to budget and cost control efforts. Research and development
expenditures were significantly reduced in 1997 in comparison to 1996 as the
Israeli operation moved from development efforts to increased production. In
fiscal 1996, selling and general and administrative expenses increased, when
compared to 1995, due primarily to increased selling efforts at the Amityville
microwave operations. Research and development expenses increased from the prior
year because of increases at General Microwave Israel, notwithstanding decreases
in the U.S. divisions.

Interest expense increased in fiscal 1997 as compared to 1996 as a result of
increased short term borrowings at the Israeli operation. Although borrowing and
interest thereon increased in fiscal 1996, interest expense decreased compared
to fiscal 1995's interest expense which included interest due on taxes paid
pursuant to a tax audit. Dividend and interest income were lower in fiscal 1996
compared to the prior year as a result of a reduction in average investment
balances and lower interest rates during the year.

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<PAGE> 86

In fiscal 1997 GMC recorded a tax provision related to continuing operations of
$40,000, as compared to a tax benefit of $222,000 for fiscal 1996 and a tax
benefit of $266,000 for fiscal 1995. The fiscal 1997 tax provision principally
represents taxes on the earnings of GMC's Israeli operations. The fiscal 1996
tax benefit resulted primarily from a tax loss carryback claim to recover
Federal taxes paid for a three-year period and the reduction of net deferred tax
liabilities. The fiscal 1995 tax benefit resulted primarily from the Israeli
government's approval to utilize a corporate tax rate of 10% in Israel instead
of the statutory 38% as well as the reversal of excess liabilities no longer
determined to be required given the completion of tax audits of several years in
fiscal 1995.

During the periods covered by this discussion, inflation did not have any
significant effect on GMC's business.

LIQUIDITY AND CAPITAL RESOURCES

At August 29, 1998, GMC's ratio of current assets to current liabilities was 3.4
to 1 compared to 3.2 to 1 at February 28, 1998.

During the first half of fiscal 1999, cash flows from continuing operations
increased to approximately $1,964,000 as compared to the comparable period last
year of approximately $957,000, primarily due to increased profitability from
operations and reductions in accounts receivable during the six month period. A
portion of cash flows during the first half of fiscal 1999 were utilized to
purchase equipment for approximately $436,000 and repay long and short term
borrowings totaling approximately $252,000. GMC expects to spend up to $350,000
during the remainder of the year for capital equipment.

The agreements relating to the GMC's 7-Day Demand Industrial Development Revenue
Bonds contain several restrictive covenants. GMC must, among other things,
maintain profitable operations, a minimum ratio of current assets to current
liabilities, a minimum level of tangible net worth, as defined, and must not
exceed a specified debt to equity ratio. The tangible net worth covenant limits
the ability of GMC to pay cash dividends. As a result of such covenant, there is
approximately $2,507,000 of unrestricted funds available for the payment of cash
dividends as of August 29, 1998. Management of GMC anticipates using such funds
to enhance future operations and does not anticipate cash dividends in the
immediately foreseeable future. In addition, as of August 1998, GMC is no longer
required to make monthly sinking fund payments towards its annual bond payment.
This amount is reflected as restricted cash on the accompanying consolidated
balance sheet as of February 28, 1998.

GMC believes that its present resources, including available credit, are
sufficient to meet its needs for the foreseeable future.

On August 21, 1998, GMC entered into an agreement and plan of merger dated as of
August 21, 1998 that contemplates the merger of GMC into a wholly-owned
subsidiary of Herley for $18.00 per outstanding share of stock of GMC in cash
and a three year Warrant to purchase one share of common stock of Herley
exercisable at $14.40 per share through January 11, 1999, and thereafter at
$15.60 per share until expiration. Thirty percent of General Microwave
Corporation's shareholders have signed irrevocable proxies agreeing to the
merger of the two companies. The transaction is subject to the approval of the
stockholders of GMC and customary closing conditions.

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<PAGE> 87

YEAR 2000 CONVERSION

GMC has initiated a comprehensive Year 2000 program to insure there will be no
adverse business effects by Year 2000 issues. GMC has instituted extensive
internal review and testing procedures on an ongoing basis to guarantee that all
systems are compliant. At the same time it is contacting its vendors and service
providers and requiring written Year 2000 compliance. Based on GMC's ongoing
evaluation, management currently believes that the costs to achieve year 2000
compliance will not be material to GMC's financial position or results of
operations. GMC expects to complete its investigation, remediation and
contingency planning activities for all mission critical systems and areas by
June 30, 1999. At this time, GMC does not believe that it has any internal
mission critical Year 2000 issues that it cannot remedy. General Microwave
products are free from components that are time and date dependent and therefore
will not be affected by the Year 2000. Despite its efforts to survey its
customers, suppliers and service providers, GMC cannot be certain as to the
actual Year 2000 readiness of these third parties or the impact that any non-
compliance on their part may have on GMC's business, results of operations or
financial condition.

GMC MANAGEMENT AND EXECUTIVE COMPENSATION

DIRECTORS AND MANAGEMENT OF GMC

The following table sets forth the name, age and principal occupation during the
past five years of the members of the Board of Directors and executive officers
of GMC, including the office and position presently held with GMC, and the year
in which the person first became a director. All executive officers of GMC have
terms of office which run until the next succeeding meeting of the Board of
Directors following the annual meeting of stockholders or until their successors
are elected and qualified unless they are sooner removed by the Board.

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND
OTHER POSITIONS WITH GMC
(CURRENT AND DURING THE PAST
FIVE YEARS WITH GMC UNLESS FIRST BECAME
NAME AGE OTHERWISE STATED) A DIRECTOR
- ---- --- ----------------------------- ------------
<S> <C> <C> <C>
Sherman A. Rinkel*........... 72 Chairman of the Board of 1960
Directors of GMC, Retired
President and Chief Executive
Officer of GMC(1)
Moe Wind..................... 74 Retired Senior Vice 1960
President, Treasurer and
Assistant Secretary of GMC(2)
Stanley Simon................ 80 Owner of Stanley Simon & 1989
Associates, management and
financial consultants(3)
Mitchell Tuckman*............ 47 President and Chief Executive 1994
Officer of GMC(4)
Edmond D. Franco............. 41 Principal of Franco, Lewis & 1995
Company, Inc., an investment
banking firm(5)
</TABLE>

78
<PAGE> 88

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND
OTHER POSITIONS WITH GMC
(CURRENT AND DURING THE PAST
FIVE YEARS WITH GMC UNLESS FIRST BECAME
NAME AGE OTHERWISE STATED) A DIRECTOR
- ---- --- ---------------------------- ------------
<S> <C> <C> <C>
Michael I. Stolzar.......... 50 Attorney, Partner of Zissu 1995
Gumbinger & Stolzar LLP(6)
Michael D. Magidson*........ 55 Executive Vice President, 1997
Gerald Metals, Inc., an
international metals
merchant, refiner and
processor
Arnold H. Levine............ 59 Vice President -- Finance, 1998
Treasurer, Chief Financial
Officer and Assistant
Secretary of GMC(7)
Rozalie Schachter........... 51 Vice President -- Business 1998
Development of GMC(8)
Howard Cohen................ 61 Vice President -- --
Administration and Assistant
Secretary
Robert E. DeBrecht.......... 54 Vice President -- --
Engineering(9)
</TABLE>

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

* Member of the Executive Committee of the Board of Directors of GMC

(1) Mr. Rinkel retired as President and Chief Executive Officer of GMC on March
1, 1995. He became Chairman of the Board in May, 1995.

(2) Mr. Wind retired as an officer of GMC on March 1, 1992.

(3) Mr. Simon is also a trustee of Vornado Realty Trust.

(4) Mr. Tuckman became President -- Chief Executive Officer of GMC in March,
1995. He was Executive Vice President and Chief Operating Officer of GMC
from August, 1994 until then. From June, 1993 until August, 1994, Mr.
Tuckman was Vice President-Microwave Engineering of the Corporation. He was
Chief Microwave Engineer of GMC before that.

(5) Mr. Franco has been a principal of Franco, Lewis & Company, Inc., an
investment banking firm he co-founded, since July, 1992. From February, 1992
until July, 1992, he was a Senior Advisor to the Ministry of Privatization
of the Czech Republic. From January, 1991 until February, 1992, Mr. Franco
was an independent financial consultant. From 1989 until December, 1990, Mr.
Franco was a Principal -- Investment Banking Division of Morgan Stanley &
Co., Incorporated. From 1978 until 1989, Mr. Franco was an investment banker
in the Corporate Finance Department of Drexel Burnham Lambert, Incorporated
where he held a variety of positions, the last of which was First Vice
President.

(6) Mr. Stolzar has been Secretary and Assistant Treasurer of GMC since June,
1981. During the past five years, he has been principally employed as a
practicing attorney. Mr. Stolzar has been a partner of Zissu Gumbinger &
Stolzar LLP since November, 1980.

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<PAGE> 89

(7) Mr. Levine became Vice President -- Finance, Chief Financial Officer,
Treasurer and Assistant Secretary of GMC in March, 1995. From 1989 until
then, he was Vice President-Finance and a director of Cardion Inc., a
subsidiary of Siemens Corporation.

(8) Dr. Schachter became Vice President -- Business Development of GMC in
December, 1991. Prior to joining GMC in 1990, Dr. Schachter was a technical
director at American Cyanimid Corporation.

(9) Mr. DeBrecht became Vice President -- Engineering of the Company in May
1996. He was a computer consultant in the securities, financial, insurance
benefits and office productivity areas from 1987 until then. Before that, he
was a product and engineering manager at Narda Microwave Co. and a chief
engineer at the Company.

EXECUTIVE COMPENSATION

The following table sets forth information concerning total compensation earned
by or paid during each of the last three fiscal years to the President-Chief
Executive Officer of GMC, and the four most highly compensated executive
officers of GMC who served in such capacities for the fiscal year ended February
28, 1998 (the "named executive officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ----------------------
NAME AND COMPENSATION(1)
PRINCIPAL FISCAL --------------------- SECURITIES UNDERLYING
POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#)(3)
--------- ------ --------- -------- ----------------------
<S> <C> <C> <C> <C>
Mitchell Tuckman............. 1998 $142,500 $31,623 0
President -- Chief 1997 142,500 0 10,000
Executive Officer 1996 146,000 0 0
Rozalie Schachter............ 1998 114,000 19,624 0
Vice President -- 1997 114,000 0 7,500
Business Development 1996 117,000 0 0
Howard Cohen................. 1998 112,100 19,404 0
Vice President -- 1997 112,100 0 3,500
Administration 1996 115,050 0 0
Arnold H. Levine(1).......... 1998 112,000 19,393 0
Vice President -- Finance 1997 107,500 0 5,000
Chief Financial 1996 100,491 0 5,000
Officer (Principal
Financial and Chief
Accounting Office)
</TABLE>

80
<PAGE> 90

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

(1) Mr. Levine became an executive officer of GMC during fiscal year 1996.

(2) Mr. DeBrecht became an executive officer of GMC during fiscal year 1997.

(3) The options reported as granted in fiscal year 1997 were previously granted
options which were repriced as part of GMC-wide option repricing to reflect
the then current market value of GMC's common stock at that time. The
options reported as granted to Mr. DeBrecht in that year (the only ones on
the table originally granted in that year) were granted and then repriced,
thus 10,000 shares are reported as securities underlying options granted to
him in that year although after giving effect to the repricing, he only had
an option to purchase 5,000 shares of GMC's common stock.

STOCK OPTION GRANTS AND EXERCISES

GMC has in effect an employee stock option plan. It does not have any restricted
stock or stock appreciation rights plans. During the last fiscal year, no
options were granted to or exercised by any of the named executive officers. The
following table contains information concerning the 1998 fiscal year end value
of unexercised options held by the named executive officers.

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES

The following table sets forth stock options exercised during fiscal 1998 and
all unexercised stock options and warrants held by the named executive officers
as of February 28, 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END(#) AT FY-END(#)
NAME EXERCISABLE/UNEXERCISEABLE EXERCISABLE/UNEXERCISEABLE
- ---- -------------------------- --------------------------
<S> <C> <C>
Mitchell Tuckman..................... 10,000/0 22,500/0
Rozalie Schachter.................... 7,500/0 16,875/0
Howard Cohen......................... 3,500/0 7,875/0
Arnold H. Levine..................... 3,750/1,250 8,437.50/2,812.50
Robert DeBrecht...................... 2,500/2,500 5,625/5,625
</TABLE>

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<PAGE> 91

GMC STOCK INFORMATION

GMC SECURITY OWNERSHIP

The following table sets forth certain information as of September 16, 1998 with
respect to the ownership of GMC's common stock, par value $.01 per share, by
each director or GMC and nominee for election as a director, each of the named
executive officers, all directors and executive officers of GMC as a group, and
each person known to GMC to own beneficially more than five percent of GMC's
common stock.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME BENEFICIAL OWNERSHIP (1) CLASS (16)
- ---- ------------------------ ----------
<S> <C> <C>
Sherman A. Rinkel.............................. 85,872(2) 7.1%
71 Northgate Circle
Melville, New York 11747
Moe Wind....................................... 34,470(3) 2.8%
31 Longwood Drive
Dix Hills, New York 11746-4715
Stanley Simon.................................. 2,855(4) *
c/o Stanley Simon & Associates
70 Pine Street
New York, New York 10270
Mitchell Tuckman............................... 12,838(5) 1.0%
c/o General Microwave Corporation
5500 New Horizons Boulevard
Amityville, New York 11701
Edmond D. Franco............................... 2,025(6) *
Franco, Lewis & Company, Inc.
63 Wall Street
New York, New York 10005
Michael I. Stolzar............................. 1,025(7) *
Zissu Gumbinger & Stolzar LLP
950 Third Avenue
New York, New York 10022
Michael D. Magidson............................ 1,376(8) *
17 Broadview Road
Westport, Connecticut 06880
Arnold H. Levine............................... 5,000(9) *
c/o General Microwave Corporation
5500 New Horizons Boulevard
Amityville, New York 11701
</TABLE>

82
<PAGE> 92

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME BENEFICIAL OWNERSHIP (1) CLASS (16)
- ---- ------------------------ ----------
<S> <C> <C>
Rozalie Schachter............................. 12,562(10) 1.0%
c/o General Microwave Corporation
5500 New Horizons Boulevard
Amityville, New York 11701
Howard Cohen.................................. 18,290(11) 1.5%
c/o General Microwave Corporation
5500 New Horizons Boulevard
Amityville, New York 11701
Robert DeBrecht............................... 3,750(12) *
c/o General Microwave Corporation
5500 New Horizons Boulevard
Amityville, New York 11701
All directors and executive................... 180,263(13) 14.4%
officers as a group (11 persons,
including those listed above)
Frederick Zissu............................... 213,396(14) 17.6%(17)
197 Hamburg Turnpike
Wayne, New Jersey 07470
Herley Industries, Inc........................ 717,959(15) 59.3%
10 Industry Drive
Lancaster, Pennsylvania 17603
</TABLE>

- -------------------------
* Under 1%

(1) Unless otherwise indicated, each person is the direct owner of and has sole
voting power and sole investment power with respect to such shares.

(2) Does not include 2,420 shares owned by Mr. Rinkel's wife in which shares
Mr. Rinkel disclaims any beneficial interest. Includes 825 shares which Mr.
Rinkel could acquire within 60 days upon exercise of stock options.

(3) Does not include 2,000 shares owned by Mr. Wind's daughter in which shares
Mr. Wind disclaims any beneficial interest. Includes 825 shares which Mr.
Wind could acquire within 60 days upon exercise of stock options.

(4) Includes 825 shares which Mr. Simon could acquire within 60 days upon
exercise of stock options and 700 shares owned by the estate of Mr. Simon's
wife.

(5) Includes 11,000 shares which Mr. Tuckman could acquire within 60 days upon
exercise of stock options.

(6) Includes 825 shares which Mr. Franco could acquire within 60 days upon
exercise of stock options.

(7) Includes 825 shares which Mr. Stolzar could acquire within 60 days upon
exercise of stock options.

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<PAGE> 93

(8) Does not include 4,851 shares owned by Mr. Magidson's wife in which shares
Mr. Magidson disclaims any beneficial interest. Includes 825 shares which
Mr. Magidson could acquire within 60 days upon exercise of stock options.

(9) Includes 5,000 shares which Mr. Levine could acquire within 60 days upon
exercise of stock options.

(10) Includes 7,500 shares which Dr. Schachter could acquire within 60 days upon
exercise of stock options.

(11) Includes 4,500 shares which Mr. Cohen could acquire within 60 days upon
exercise of stock options.

(12) Includes 2,500 shares which Mr. DeBrecht could acquire within 60 days upon
exercise of stock options.

(13) Includes 36,700 shares which could be acquired within 60 days upon exercise
of stock options.

(14) Does not include 1,000 shares owned by Mr. Zissu's wife in which shares Mr.
Zissu disclaims any beneficial interest.

(15) Based on Amendment No. 1 to a Schedule 13D dated September 16, 1998 filed
by Herley Industries, Inc. Herley Industries, Inc. has sole voting power
with respect to 361,900 shares, shared voting power with respect to 356,059
shares, sole dispositive power with respect to 361,900 shares and shared
dispositive power with respect to 356,059 shares. By reason of the proxies
granted to Acquisition, Sherman A. Rinkel, Moe Wind, Stanley Simon,
Mitchell Tuckman, Edmond D. Franco, Michael I. Stolzar, Michael D.
Magidson, Arnold H. Levine, Rozalie Schachter, Robert D. DeBrecht, Howard
Cohen and Frederick Zissu, Acquisition and Herley Industries, Inc.,
respectively, have directly or indirectly, the sole right to vote or direct
the vote of the shares owned by those persons in connection with the
proposed Merger and those shares are also included here and in the number
of shares and the percentage of shares owned by the applicable individuals.

(16) Based on 1,210,903 shares outstanding as of September 16, 1998. This number
has been adjusted, where necessary, with respect to particular persons by
adding to it the number of shares which could be acquired within 60 days
upon exercise of stock options.

(17) Based on 1,247,603 shares outstanding. This number was arrived at by adding
to the total number of shares outstanding as of September 16, 1998, the
number of shares which could have been acquired within 60 days upon
exercise of stock options by persons included in the group.

84
<PAGE> 94

GMC STOCK PRICE AND DIVIDEND INFORMATION

GMC's common stock is quoted on the American Stock Exchange under the symbol
GMW. The following table sets forth for the periods indicated the high and low
closing prices for GMC's common stock:

<TABLE>
<CAPTION>
SALES PRICE
(AMEX)
---------------
HIGH LOW
------ -----
<S> <C> <C>
FISCAL YEAR 1997
First Quarter............................................. $ 8.25 $6.00
Second Quarter............................................ 8.13 6.25
Third Quarter............................................. 6.19 4.50
Fourth Quarter............................................ 5.38 4.50
FISCAL YEAR 1998
First Quarter............................................. $ 6.88 $3.75
Second Quarter............................................ 8.88 6.13
Third Quarter............................................. 13.50 6.75
Fourth Quarter............................................ 9.75 6.88
FISCAL YEAR 1999
First Quarter............................................. $11.75 $6.75
Second Quarter............................................ 17.38 9.00
Third Quarter............................................. 18.25 16.38
Fourth Quarter (through December 3, 1998)................. 18.00 17.81
</TABLE>

The closing price on November 12, 1998 was $17.875. As of November 17, 1998
there were approximately 154 record holders of the GMC common stock.

There have been no cash dividends declared or paid by GMC on its common stock
during the past two fiscal years or the current fiscal year.

85
<PAGE> 95

DESCRIPTION OF HERLEY CAPITAL STOCK

CAPITAL STOCK

Herley's authorized capital stock consists of 20,000,000 shares of Herley common
stock, $.10 par value per share.

COMMON STOCK

GENERAL. Herley has 20,000,000 authorized shares of Herley common stock,
5,295,540 of which were issued and outstanding on November 17, 1998. All shares
of Herley common stock currently outstanding are validly issued, fully paid and
non-assessable, and all shares which are the subject of this Proxy
Statement/Prospectus, when issued and paid for upon the exercise of the
Warrants, will be validly issued, fully paid and non-assessable.

VOTING RIGHTS. Each share of Herley common stock entitles the holder thereof to
one vote, either in person or by proxy, at meetings of the stockholders.
Herley's Board of Directors consists of three classes, each of which serves for
a term of three years. At each annual meeting of the stockholders the directors
in only one class will be elected. The holders are not permitted to vote their
shares cumulatively. Accordingly, the holders of more than 50% of the
outstanding shares of Herley common stock can elect all of the directors of
Herley standing for election at a stockholders' meeting.

DIVIDEND POLICY. All shares of Herley common stock are entitled to participate
ratably in dividends when and as declared by Herley's Board of Directors out of
the funds legally available therefor. Any such dividends may be paid in cash,
property or additional shares of Herley common stock. Herley has not paid any
cash dividends in the past two fiscal years or the current fiscal year and does
not anticipate that cash dividends will be declared in the foreseeable future.
While Herley declared a four-for-three stock split effected as a stock dividend
effective September 30, 1997, payment of future dividends is subject to the
discretion of Herley's Board of Directors and will depend upon, among other
things, future earnings, the operating and financial condition of Herley, its
capital requirements, general business conditions and other pertinent facts.
Therefore there can be no assurance that any dividends on the Herley common
stock will be paid in the future. See "Dividend Policy."

MISCELLANEOUS RIGHTS AND PROVISIONS. Holders of Herley common stock have no
preemptive or other subscription rights, conversion rights, redemption or
sinking fund provisions. In the event of the liquidation or dissolution, whether
voluntary or involuntary, of Herley, each share of common stock is entitled to
share ratably in any assets available for distribution to holders of the equity
of Herley after satisfaction of all liabilities.

SHARES ELIGIBLE FOR FUTURE SALE. Herley has 5,295,540 shares of Herley common
stock outstanding, of which 4,612,327 are freely tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased by an "affiliate" of Herley (in general, a person who has a control
relationship with Herley), which will be subject to the limitations of Rule 144
adopted under the Securities Act. The remaining shares are deemed to be
"restricted securities," as that term is defined under Rule 144.

Upon completion of the Merger, Herley will have issued approximately 970,000
Warrants to purchase shares of Herley common stock, assuming that no GMC
shareholders exercise dissenters' rights. In addition, Herley has outstanding
1,265,000 warrants that will be exercisable for 1,265,000 newly issued shares of
Herley common stock Upon exercise of those warrants to purchase, all of these
shares of Herley common stock will also be freely tradeable without restriction
or future registration under the Securities Act.

86
<PAGE> 96

In general, under Rule 144 as currently in effect, subject to the satisfaction
of certain other conditions, a person, who owns restricted securities for at
least one year is entitled to sell, within any three-month period, a number of
such securities that does not exceed the greater of 1% of the total number of
securities outstanding of the same class or the average weekly trading volume of
the securities on all exchanges and/or reported through the automated quotation
system of a registered securities association during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule'144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
issue. In addition, an affiliate of the issuer is subject to such volume
limitations when selling both restricted and unrestricted securities. A person
who has not been an affiliate of Herley for at least the three months
immediately preceding the sale and who has beneficially owned the securities for
at least two years, however, is entitled to sell such securities under Rule 144
without regard to any of the limitations described above. Of the 683,213 shares
of Herley common stock that constitute restricted securities, 668,045 shares
have been held for more than one year.

No predictions can be made as to the effect, if any, that sales of shares of
Herley common stock under Rule 144 or otherwise or the availability of shares
for sale will have on the market, if any, prevailing from time to time. Sales of
a substantial number of shares of the Herley common stock pursuant to Rule 144
or otherwise may adversely affect the market price of the Herley common stock or
the Warrants.

DESCRIPTION OF WARRANTS

The following is a brief summary of certain provisions of the Warrants and of
Herley's currently outstanding common stock purchase warrants. Such summary does
not purport to be complete and is qualified in all respects by reference to the
Warrant Agreement (the "Warrant Agreement") among Herley, the Selling
Stockholders and American Stock Transfer & Trust Company (the "Warrant Agent").
A copy of the Warrant Agreement has been filed as an exhibit to the Registration
Statement. The Warrants to be issued upon consummation of the Merger are a
different class than the common stock purchase warrants which are currently
listed and traded on the Nasdaq National Market System under the symbol HRLYW.
The terms of the Warrants and the publicly-traded warrants are identical except
that the Warrants expire thirty-six months from their date of issuance and the
publicly-traded Warrants expire in January 1999, which is twenty-five months
from their date of issuance.

EXERCISE PRICE AND TERMS. Each Warrant entitles the registered holder thereof
to purchase one share of Herley common stock at an exercise price of $ 14.40 per
share prior to January 11, 1999 and $15.60 per share thereafter, subject to
adjustment in accordance with the anti-dilution and other provisions referred to
below. The holder of any Warrant may exercise such Warrant by surrendering the
certificate representing the Warrant to the Warrant Agent, with the subscription
form thereon properly completed and executed, together with payment of the
exercise price. The Warrants may be exercised at any time in whole or in part at
the exercise price then in effect until expiration of the Warrants. The Warrants
expire thirty-six months from their date of issuance. No fractional shares will
be issued upon the exercise of the Warrants.

The exercise price of the Warrants to be issued in the Merger is the same as the
exercise price of certain of Herley's outstanding warrants and bears no
relationship to any objective

87
<PAGE> 97

criteria of future value. Accordingly, such exercise price should in no event be
regarded as an indication of any future trading price.

ADJUSTMENTS. The exercise price and the number of shares of Herley common stock
purchasable upon the exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Herley common stock, or sale by Herley
of shares of its Herley common stock or other securities convertible into Herley
common stock (exclusive of shares issued upon the exercise or conversion of
outstanding options, warrants and convertible securities) at a price below the
market price of the Herley common stock as defined in the Warrant Agreement.
Additionally, an adjustment would be made in the case of a reclassification or
exchange of Herley common stock, consolidation or merger of Herley with or into
another corporation (other than a consolidation or merger in which Herley is the
continuing corporation) or sale of all or substantially all of the assets of
Herley in order to enable Warrant holders to acquire the kind and number of
shares of stock or other securities or property receivable in such event by a
holder of the number of shares of Herley common stock that might otherwise have
been purchased upon the exercise of the Warrant.

TRANSFER, EXCHANGE AND EXERCISE. The Warrants are in registered form and may be
presented to the Warrant Agent for transfer, exchange or exercise at any time on
or prior to their expiration date thirty-six months from the date of issuance,
at which time the Warrants become wholly void and of no value. If a market for
the Warrants develops, the holder may sell the Warrants instead of exercising
them. There can be no assurance, however, that a market for the Warrants will
develop or continue.

WARRANT HOLDER NOT A STOCKHOLDER. The Warrants do not confer upon holders any
voting, dividend or other rights as stockholders of Herley.

REDEMPTION OF WARRANTS. Herley may redeem the Warrants, in whole or in part, at
any time after 21 months from their issuance at a price of $1.00 per share of
common stock by delivery of 30 days' written notice if the average last reported
sales price of the Herley common stock has not been less than $17.60 per share
for the fifteen consecutive trading days immediately prior to the notice date.

CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION

Herley's Certificate of Incorporation and By-laws contain certain provisions,
including a prohibition against removal of directors other than for cause, that
are intended to enhance the continuity and stability of management by making it
more difficult for stockholders to remove or change the incumbent members of the
Board of Directors. The Certificate of Incorporation includes additional
provisions that are intended to discourage certain types of transactions that
involve an actual or threatened change of control of Herley. The Certificate of
Incorporation provides for a Board of Directors classified into three groups,
each of which group's term of office expires in successive years. The
Certificate of Incorporation also provides that written notice of the intent to
make a nomination at a meeting of stockholders must be received by Herley at
least 90 days in advance of such meeting.

The Certificate of Incorporation further requires that stockholders entitled to
vote 80% of the outstanding shares of the Herley common stock approve certain
business combinations with interested stockholders. These business combinations
include mergers, sales of assets in excess of $5,000,000, issuance of certain
securities having an aggregate fair market value

88
<PAGE> 98

of $5,000,000 or more, adoption of any plan of liquidation or dissolution and
any reclassification of securities unless approved by the disinterested members
of the Board of Directors the transaction complies with certain provisions
relating to the fair valuation and consummation of such business combination.

The Certificate of Incorporation further provides that stockholders of Herley
are not permitted to call a special meeting of stockholders or to require the
Board of Directors to call such a special meeting. Thus, a stockholder could not
force stockholder consideration of a proposal over the opposition of the Board
of Directors by calling a special meeting of the stockholders.

The foregoing provisions may adversely affect the ability of potential acquires
to obtain control of Herley in any transaction that is not approved by Herley's
Board of Directors. The use of these provisions as anti-takeover devices might
preclude stockholders from taking advantage of certain situations that they
believe could be favorable to their interests.

COMPARISON OF CAPITAL STOCK

THE FOLLOWING DISCUSSION SUMMARIZES THE MATERIAL DIFFERENCES BETWEEN THE RIGHTS
OF HOLDERS OF HERLEY COMMON STOCK AND HOLDERS OF GMC COMMON STOCK. SINCE HERLEY
IS ORGANIZED UNDER AND SUBJECT TO THE LAWS OF DELAWARE AND GMC IS ORGANIZED
UNDER THE LAWS OF NEW YORK, CERTAIN OF THESE DIFFERENCES ARISE BY STATUTE WHILE
OTHERS ARISE FROM VARIOUS PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
BY-LAWS OF EACH OF HERLEY AND GMC. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE CERTIFICATE OF
INCORPORATION AND BY-LAWS OF HERLEY AND GMC.

After consummation of the Merger, the holders of GMC common stock who receive
Warrants to purchase Herley common stock under the terms of the Agreement will,
upon exercise of such Warrants, become stockholders of Herley. As shareholders
of GMC, their rights are presently governed by New York law and the GMC
Certificate of Incorporation, as amended (the "GMC Certificate"), and By-laws
(the "GMC By-laws"). As stockholders of Herley, their rights will be governed by
Delaware law and by the Herley Certificate and Herley By-laws (the "Herley
By-laws").

SPECIAL MEETING OF STOCKHOLDERS

The Herley By-laws provide that special meetings of stockholders may be called
only by the Board of Directors. The GMC By-laws provide that special meetings of
stockholders may be called by GMC's president or any vice-president and must be
called by the president, vice-president or secretary at the request of a
majority of the Board. Neither corporation provides for the ability of
stockholders to demand a special meeting.

ACTION BY CONSENT OF STOCKHOLDERS

Under Delaware law, unless the certificate of incorporation provides otherwise,
any action to be taken by stockholders may be taken without a meeting, without
prior notice, and without a vote, if the stockholders having the number of votes
that would be necessary to take such action at a meeting at which all
stockholders were present and voted consent to the action in writing. The NY
Corporation Law, however, provides that any action required or permitted to be
taken by its stockholders cannot be effected other than by unanimous written
consent unless the certificate of incorporation otherwise provides. The GMC
Certificate does not provide for shareholder action by consent.

89
<PAGE> 99

CUMULATIVE VOTING

Under Delaware law, a corporation may provide in its certificate of
incorporation for cumulative voting by stockholders in elections of directors
(i.e., each stockholder casts as many votes for directors as he has shares of
stock multiplied by the number of directors to be elected). The GMC Certificate
does not provide for cumulative voting. The Herley Certificate does not provide
for cumulative voting, so holders of Herley common stock after the Merger will
not have cumulative voting rights.

CLASSIFICATION OF THE BOARD OF DIRECTORS

The Herley Certificate provides for the classification of its Board of Directors
into three classes. The Herley By-laws provide that the number of directors
shall not be less than three nor more than twelve. As a result of such
classification, a person wishing to propose alternative nominees for election to
the Herley Board of Directors would only be able to propose nominees for
one-third of the Board. The GMC Certificate does not provide for classes of
directors. The GMC By-laws provide that the number of directors shall be nine.

REMOVAL OF DIRECTORS

As Herley has a classified board, Section 141 of the Delaware General
Corporation Law provides that shareholders may effect removal of a director only
for cause. Section 706 of the NYBCL provides that a director may be removed for
cause by a majority vote of the shares entitled to vote provided, that if
stockholders are entitled to cumulative voting, no director can be removed
without cause if the votes cast against removal of such director would be
sufficient to elect him or her if then cumulatively voted at an election of the
entire board.

EXCULPATION OF DIRECTORS

Each of the Herley Certificate and the GMC Certificate provide that no director
shall be personally liable to Herley and GMC, respectively, or their respective
stockholders for monetary damages for breaches of fiduciary duty except where
such exculpation is expressly prohibited by law.

INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS

The Herley Certificate authorizes Herley to provide indemnification to its
agents to the maximum extent legally permissible. Herley's By-laws provide for
indemnification of any person made a party to any action, suit or proceeding by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation. Herley has entered into indemnification agreements with each of
its directors and executive officers. GMC's By-laws provide for indemnification
to its directors and executive officers to the maximum extent legally
permissible and that the corporation has the power to provide indemnification
for its employees and agents.

LEGAL MATTERS

The validity of the Warrants issuable pursuant to the Merger and the Herley
common stock issuable upon exercise of the Warrants will be passed on by Blau,
Kramer, Wactlar & Lieberman, P.C., Jericho, New York. Zissu Gumbinger & Stolzar
LLP, New York, New York is acting as counsel for GMC in connection with certain
legal matters relating to the Merger and the transaction contemplated thereby.

90
<PAGE> 100

EXPERTS

The consolidated financial statements of Herley Industries, Inc. and
Subsidiaries as of August 2, 1998 and August 3, 1997 and for each of the three
years in the period ended August 2, 1998 included elsewhere herein have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

The consolidated financial statements and schedule of General Microwave
Corporation as of February 28, 1998 and 1997, and for each of the years in the
three-year period ended February 28, 1998, have been included elsewhere herein
in reliance upon the reports of KPMG Peat Marwick LLP and Igal Brightman & Co.,
independent certified public accountants, as set forth in their reports thereon
appearing elsewhere herein, and upon the authority of said firms as experts in
accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

Herley and GMC are subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60601-2511. Copies of such
material may be obtained by mail from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission also maintains a Worldwide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at the
address "http://www.sec.gov". The Herley common stock is quoted on the Nasdaq
National Market ("Nasdaq") and the GMC common stock is quoted on the American
Stock Exchange ("Amex"). Such reports, proxy statements and other information
can also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.

Herley has filed with the Commission a registration statement on Form S-4
(herein, together with all amendments and exhibits thereto, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
Copies of the Registration Statement and the exhibits and schedules thereto may
be inspected, without charge, at the offices of the Commission, or obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THESE MATTERS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY HERLEY OR GMC. NEITHER THE DELIVERY HEREOF NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO

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<PAGE> 101

CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF. THIS PROXY
STATEMENT/ PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE SECURITIES OFFERED BY THIS PROXY STATEMENT/PROSPECTUS WHERE,
OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.

92
<PAGE> 102

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF HERLEY INDUSTRIES, INC.
Report of Independent Accountants......................... F-2
Consolidated Balance Sheet at August 2, 1998 and August 3,
1997................................................... F-3
Consolidated Statement of Income for the 52 weeks ended
August 2, 1998, the 53 weeks ended August 3, 1997 and
the 52 weeks ended July 28, 1996....................... F-5
Consolidated Statements of Shareholders' Equity for the 52
weeks ended August 2, 1998, the 53 weeks ended August
3, 1997 and the 52 weeks ended July 28, 1996........... F-6
Consolidated Statements of 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................... F-8
Notes to Consolidated Financial Statements................ F-10
CONSOLIDATED FINANCIAL STATEMENTS OF GENERAL MICROWAVE
CORPORATION
Reports of Independent Accountants........................ F-27
Consolidated Balance Sheets at February 28, 1998 and
1997................................................... F-29
Consolidated Statements of Operations for the three years
ended February 28, 1998 and 1997 and February 29,
1996................................................... F-31
Consolidated Statements of Stockholders' Equity for the
three years ended February 28, 1998 and 1997 and
February 29, 1996...................................... F-33
Consolidated Statements of Cash Flows for the three years
ended February 28, 1998 and 1997 and February 29,
1996................................................... F-34
Notes to Consolidated Financial Statements................ F-36
INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF GENERAL
MICROWAVE CORPORATION
Condensed Consolidated Balance Sheet at August 29, 1998
(Unaudited) and February 28, 1998...................... F-55
Condensed Consolidated Statements of Operations for the
six months ended August 29, 1998 (Unaudited)........... F-57
Condensed Consolidated Statements of Cash Flows for the
six months ended August 29, 1998 (Unaudited)........... F-58
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ F-60
</TABLE>

F-1
<PAGE> 103

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
<PAGE> 104

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
AUGUST 2, AUGUST 3,
1998 1997
----------- -----------
<S> <C> <C>
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
----------- -----------
</TABLE>

F-3
<PAGE> 105

<TABLE>
<CAPTION>
AUGUST 2, AUGUST 3,
1998 1997
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>

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

F-4
<PAGE> 106

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 2, AUGUST 3, JULY 28,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>

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

F-5
<PAGE> 107

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

<TABLE>
<CAPTION>
UNREALIZED GAIN
(LOSS) ON
COMMON STOCK ADDITIONAL AVAILABLE-
-------------------- PAID-IN RETAINED FOR-SALE TREASURY
SHARES AMOUNT CAPITAL EARNINGS SECURITIES STOCK TOTAL
--------- -------- ---------- ---------- ------------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 30,
1995.................. 3,015,988 $301,599 13,040,622 5,620,516 25,000 -- $ 8,987,737
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 3,170,579
Exercise of stock
options and
warrants.............. 175,559 17,556 885,289 (538,376) 364,469
</TABLE>

F-6
<PAGE> 108

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

F-7
<PAGE> 109

HERLEY INDUSTRIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 2, AUGUST 3, JULY 28,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
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
</TABLE>

F-8
<PAGE> 110

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 2, AUGUST 3, JULY 28,
1998 1997 1996
----------- ---------- ------------
<S> <C> <C> <C>
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 -- --
=========== ========== ============
</TABLE>

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

F-9
<PAGE> 111

HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

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

F-10
<PAGE> 112
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

factory overhead, reduced by amounts identified with revenue recognized on units
delivered or progress completed.

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

F-11
<PAGE> 113
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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).

F-12
<PAGE> 114
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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.

F-13
<PAGE> 115
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

<TABLE>
<CAPTION>
AUGUST 2, AUGUST 3,
1998 1997
----------- ----------
<S> <C> <C>
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
=========== ==========
</TABLE>

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.

F-14
<PAGE> 116
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE G -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following:

<TABLE>
<CAPTION>
AUGUST 2, AUGUST 3, ESTIMATED
1998 1997 USEFUL LIFE
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== ===========
</TABLE>

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.

Minimum annual rentals under noncancellable leases are as follows:

<TABLE>
<CAPTION>
YEAR ENDING FISCAL AMOUNT
------------------ --------
<S> <C>
1999.................................. $394,000
2000.................................. 318,000
2001.................................. 188,000
2002.................................. 165,000
</TABLE>

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.

F-15
<PAGE> 117
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

F-16
<PAGE> 118
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE I -- INCOME TAXES

Income tax provision consisted of the following:

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 2, AUGUST 3, JULY 28,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
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
========== ======== ========
</TABLE>

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:

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 2, AUGUST 3, JULY 28,
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
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...... -- 2.8 --
Other, net........................... .3 2.8 --
---- ----- -----
Effective tax rate................... 34.8% 9.1% 2.7%
==== ===== =====
</TABLE>

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.

F-17
<PAGE> 119
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
AUGUST 2, 1998 AUGUST 3, 1997
------------------------- -------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>

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:

<TABLE>
<CAPTION>
AUGUST 2, AUGUST 3,
RATE 1998 1997
----- ---------- ----------
<S> <C> <C> <C>
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
========== ==========
</TABLE>

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

(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.

F-18
<PAGE> 120
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING DURING: AMOUNT
- -------------------------- ----------
<S> <C>
1999............................. $ 404,984
2000............................. 1,950,220
2001............................. 497,583
2002............................. 503,082
2003............................. 550,000
2004............................. 610,000
----------
$4,515,869
==========
</TABLE>

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.

F-19
<PAGE> 121
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE L -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses include the following:

<TABLE>
<CAPTION>
AUGUST 2, AUGUST 3,
1998 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>

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-20
<PAGE> 122
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE N -- COMPUTATION OF PER SHARE EARNINGS

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

<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 2, 1998 AUGUST 3, 1997 JULY 28,1996
-------------- -------------- --------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>

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.

F-21
<PAGE> 123
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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%:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
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
</TABLE>

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.

F-22
<PAGE> 124
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 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.

F-23
<PAGE> 125
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

<TABLE>
<CAPTION>
NON-QUALIFIED STOCK OPTIONS
--------------------------------------
WEIGHTED WARRANT AGREEMENTS
AVERAGE -------------------------
NUMBER PRICE RANGE EXERCISE NUMBER PRICE RANGE
OF SHARES PER SHARE PRICE OF SHARES PER SHARE
---------- -------------- -------- --------- -------------
<S> <C> <C> <C> <C> <C>
Outstanding July 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
========== ========
</TABLE>

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

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER REMAINING AVERAGE NUMBER EXERCISABLE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- ----------------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 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
======= =======
</TABLE>

F-24
<PAGE> 126
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

<TABLE>
<CAPTION>
AUGUST 2, 1998
------------------------------
CARRYING AMOUNT FAIR VALUE
--------------- -----------
<S> <C> <C>
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
</TABLE>

F-25
<PAGE> 127
HERLEY INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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 January
1999. 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-26
<PAGE> 128

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
General Microwave Corporation:

We have audited the consolidated financial statements of General Microwave
Corporation and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits. We did not audit the consolidated financial
statements of General Microwave Israel Corporation, an indirect wholly-owned
subsidiary, as of and for the years ended February 28, 1998 and 1997 and
February 29, 1996, which statements reflect total assets constituting 19%, 26%
and 17% and total revenues constituting 18%, 15% and 11%, respectively, after
elimination of intercompany balances and sales, of the related consolidated
totals. Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for General Microwave Israel Corporation, is based solely on the reports of the
other auditors.

In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of General Microwave Corporation and
subsidiaries as of February 28, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended February 28, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, based on our audits and the reports of the
other auditors, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG Peat Marwick LLP

Jericho, New York
May 11, 1998

F-27
<PAGE> 129

AUDITORS' REPORT TO THE SHAREHOLDERS OF
GENERAL MICROWAVE (ISRAEL) CORPORATION AND SUBSIDIARY

We have audited the accompanying consolidated balance sheets of General
Microwave (Israel) Corporation ("the Company") and subsidiary as of February 28,
1998 and February 28, 1997, and the related consolidated statements of
operations, changes in shareholders' deficiency and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
Board of Directors and 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, including those prescribed under the Israeli Auditors' Regulations
(Auditor's Mode of Performance) -- 1973, which auditing standards are
substantially identical to generally accepted auditing standards in the United
States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Board of Directors and management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

The aforementioned financial statements have been prepared in U.S. dollars as
described in Note 2A.

As stated in Note 1B, the consolidated financial statements were prepared at the
request of the parent company and for its use only. The financial statements do
not include activities of the Company, if any, that are not directly reflected
in its books and records maintained in Israel.

In our opinion, except for the matter discussed in the preceding paragraph, the
financial statements present fairly, in all material respects, the consolidated
financial position of the Company and subsidiary as of February 28, 1998 and
February 28, 1997, and the consolidated results of operations, changes in
shareholders' deficiency and cash flows for the years then ended in accordance
with generally accepted accounting principles in Israel. As applicable to these
financial statements, such accounting principles are substantially identical in
all material respects to generally accepted accounting principles in the United
States, except as otherwise described in Note 22 to the consolidated financial
statements.

Pursuant to Section 211 of the Companies Ordinance (New Version) -- 1983, we
hereby state that we received all the information and explanations which we
requested and that our opinion on the consolidated financial statements is given
based on the best of the information and explanations which we received and as
reflected in the books of the Company.

Igal Brightman & Co.
Certified Public Accountants

Jerusalem, May 11, 1998

F-28
<PAGE> 130

GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 3,275,497 1,745,362
Restricted cash................................... 200,000 200,000
Accounts receivable, net of allowance for doubtful
accounts of approximately $45,700 in 1998 and
$27,150 in 1997................................ 4,440,355 4,121,809
Current assets of discontinued operations......... 13,942 1,012,050
Inventories....................................... 4,440,889 4,535,832
Prepaid expenses and other current assets......... 287,437 250,417
Deferred income taxes, net........................ 794,083 523,676
----------- -----------
Total current assets........................... 13,452,203 12,389,146
Property, plant and equipment, net.................. 5,714,943 5,990,992
Debt issuance costs, net............................ 35,629 56,497
Costs in excess of fair value of net assets
acquired, net..................................... 604,173 679,773
Other intangible assets, net........................ 137,686 144,392
Other assets........................................ 92,518 28,711
----------- -----------
$20,037,152 19,289,511
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt............ 675,000 709,670
Short-term borrowing.............................. 230,319 591,739
Accounts payable.................................. 656,387 945,145
Customer advance payments......................... 314,474
Current liabilities of discontinued operations.... 205,363 1,195,193
Accrued payroll and other employee benefits....... 816,487 691,227
Accrued expenses and other current liabilities.... 1,072,426 1,117,973
Accrued commissions............................... 189,595 294,400
----------- -----------
Total current liabilities...................... 4,160,051 5,545,347
----------- -----------
</TABLE>

F-29
<PAGE> 131

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Long-term debt, less current installments........... 806,250 1,627,141
Deferred income taxes............................... 589,995 547,303
Minority interest................................... 40,645 24,710
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized and unissued........................ -- --
Common stock, $.01 par value; 5,000,000 shares
authorized; issued 1,677,761 in 1998 and
1,672,761 in 1997.............................. 16,778 16,728
Additional paid-in capital........................ 9,630,499 9,605,549
Retained earnings................................. 7,981,583 5,111,382
----------- -----------
17,628,860 14,733,659
Less treasury stock, at cost........................ 3,188,649 3,188,649
----------- -----------
14,440,211 11,545,010
----------- -----------
$20,037,152 19,289,511
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-30
<PAGE> 132

GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 1998 AND 1997 AND FEBRUARY 29, 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net sales............................... $21,317,582 20,060,888 17,427,610
----------- ---------- ----------
Costs and expenses:
Cost of sales......................... 13,570,598 13,727,368 12,434,854
Selling............................... 2,406,503 2,414,014 2,259,367
General and administrative............ 3,197,464 2,973,517 2,820,194
Research and development.............. 295,500 496,419 1,093,627
----------- ---------- ----------
19,470,065 19,611,318 18,608,042
----------- ---------- ----------
Operating earnings (loss).......... 1,847,517 449,570 (1,180,432)
----------- ---------- ----------
Other expenses (income):
Interest expense...................... 134,960 219,283 148,682
Dividend and interest income.......... (120,274) (48,620) (57,060)
Minority interest in earnings (loss)
of consolidated subsidiary......... 15,935 6,539 (6,399)
Other, net............................ 51,006 30,638 98,471
----------- ---------- ----------
81,627 207,840 183,694
----------- ---------- ----------
Earnings (loss) from continuing
operations before income taxes
(benefit)............................. 1,765,890 241,730 (1,364,126)
Income taxes (benefit).................. (151,500) 40,000 (222,000)
----------- ---------- ----------
Earnings (loss) from continuing
operations............................ 1,917,390 201,730 (1,142,126)
Discontinued operations (note 2):
Loss from operations of discontinued
Math Associates, Inc., net of
applicable income tax benefits of
$332,000 in 1996................... -- (627,011) (634,665)
Gain (loss) on disposal of Math
Associates, Inc., including
provision of $319,725 for operating
losses during phase-out period in
1997............................... 952,811 (2,660,455) --
----------- ---------- ----------
Net earnings (loss)..................... $ 2,870,201 (3,085,736) (1,776,791)
=========== ========== ==========
Basic net earnings (loss) per share:
From continuing operations............ 1.59 .17 (.95)
From discontinued operations.......... .79 (2.73) (.53)
----------- ---------- ----------
Basic net earnings (loss) per share..... $ 2.38 (2.56) (1.48)
=========== ========== ==========
</TABLE>

F-31
<PAGE> 133

<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Diluted net earnings (loss) per share:
From continuing operations............ 1.56 .17 (.95)
From discontinued operations.......... .78 (2.73) (.53)
----------- ---------- ----------
Diluted net earnings (loss) per share... $ 2.34 (2.56) (1.48)
=========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-32
<PAGE> 134

GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED FEBRUARY 28, 1998 AND 1997 AND FEBRUARY 29, 1996

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------------- PAID-IN RETAINED --------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
--------- ------- ---------- ---------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, FEBRUARY
28, 1995........... 1,661,292 $16,613 9,531,034 9,973,909 466,464 $(3,184,183) 16,337,373
Net loss............. -- -- -- (1,776,791) -- -- (1,776,791)
Exercise of stock
options, net of
shares tendered.... 3,200 32 18,368 -- 638 (4,466) 13,934
--------- ------- --------- ---------- ------- ----------- ----------
BALANCES, FEBRUARY
29, 1996........... 1,664,492 16,645 9,549,402 8,197,118 467,102 (3,188,649) 14,574,516
Net loss............. -- -- -- (3,085,736) -- -- (3,085,736)
Shares purchased from
Employee Stock
Purchase Plan...... 8,269 83 56,147 -- -- -- 56,230
--------- ------- --------- ---------- ------- ----------- ----------
BALANCES, FEBRUARY
28, 1997........... 1,672,761 16,728 9,605,549 5,111,382 467,102 (3,188,649) 11,545,010
Net earnings......... -- -- -- 2,870,201 -- -- 2,870,201
Exercise of stock
options............ 5,000 50 24,950 -- -- -- 25,000
--------- ------- --------- ---------- ------- ----------- ----------
BALANCES, FEBRUARY
28, 1998........... 1,677,761 $16,778 9,630,499 7,981,583 467,102 $(3,188,649) 14,440,211
========= ======= ========= ========== ======= =========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-33
<PAGE> 135

GENERAL MICROWAVE CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 1998 AND 1997 AND FEBRUARY 29, 1996

<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) from continuing
operations........................... $1,917,390 201,730 (1,142,126)
Adjustments to reconcile net earnings
(loss) to net cash provided by
continuing operations:
Deferred income tax provision
(benefit).......................... (227,715) -- 152,000
Depreciation and amortization........ 756,041 809,265 883,467
Bad debt expense (recovery).......... 18,550 1,450 (14,239)
(Gain) loss on disposal of
equipment.......................... (3,624) 545 (4,867)
Minority interest in earnings (loss)
of consolidated subsidiary......... 15,935 6,539 (6,399)
Changes in assets and liabilities:
Accounts receivable................ (318,546) (141,037) 571,147
Inventories........................ 94,943 283,443 620,399
Prepaid expenses and other current
assets.......................... (37,020) 17,910 131,708
Accounts payable and accrued
liabilities..................... (325,590) 671,793 (285,689)
Customer advance payments.......... 314,474 -- --
Other, net......................... (63,807) 41,776 (202,026)
---------- --------- ----------
Net cash provided by continuing
operations................... 2,141,031 1,893,414 703,375
---------- --------- ----------
Net cash provided by (used in)
discontinued operations................. 954,279 133,851 (712,647)
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment............................ (380,670) (409,012) (550,306)
Proceeds from sale of fixed assets...... 15,087 19,533 13,511
Purchase of additional interest in
subsidiary........................... -- -- (279,000)
Purchases of intangible assets.......... (7,611) (17,137) (18,480)
Sale of short-term investments, net..... -- -- 757,909
---------- --------- ----------
Net cash used in investing
activities......................... (373,194) (406,616) (76,366)
---------- --------- ----------
Net cash used in investing activities of
discontinued operations................. -- (2,221) (26,272)
---------- --------- ----------
</TABLE>

F-34
<PAGE> 136

<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt.... (855,561) (698,448) (575,000)
Proceeds from long-term debt............ -- -- 404,009
Principal payments on short-term debt... (361,420)
Net proceeds from short-term
borrowings........................... -- 268,276 78,751
Proceeds from issuance of common
stock................................ -- 56,230 13,934
Proceeds from the exercise of stock
options.............................. 25,000 -- --
---------- --------- ----------
Net cash used in financing
activities......................... (1,191,981) (373,942) (78,306)
---------- --------- ----------
Net increase (decrease) in cash........... 1,530,135 1,244,486 (190,216)
Cash at beginning of year................. 1,945,362 700,876 891,092
---------- --------- ----------
Cash at end of year....................... $3,475,497 1,945,362 700,876
========== ========= ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-35
<PAGE> 137

GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1998 AND 1997 AND FEBRUARY 29, 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

(a) DESCRIPTION OF BUSINESS

General Microwave Corporation and its subsidiaries (the Company) are engaged
primarily in the design, development, manufacture and marketing of microwave
equipment and components. The Company is organized into three operating
divisions in separate locations. A majority of the Company's microwave products
are sold to manufacturers and users of microwave systems and equipment for
applications in the defense electronics industry. The Company also sells these
components and equipment for use in the industrial sector, as well as in
commercial telecommunications industries. Typical applications for the Company's
microwave products include electronic warfare and countermeasures; airborne and
shipboard navigation and communications; radar systems; missile guidance
systems; automatic test equipment; and satellite communications. On February 25,
1997, the Board of Directors of the Company adopted a plan to discontinue its
fiber optics business operated by its wholly-owned subsidiary, Math Associates,
Inc. On September 24, 1997, a sale of certain assets of Math Associates, Inc.
was completed (note 2).

A substantial portion of the Company's revenues is derived from military
sources. The Company manufactures components and instruments for a number of
ongoing military programs and is currently engaged in the design and manufacture
of prototypes in connection with various electronic countermeasures, electronic
warfare, radar, navigation and communications programs of the United States
Government and foreign governments and agencies thereof.

(b) PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of General Microwave
Corporation (GMC), its wholly-owned subsidiaries, General Microwave Foreign
Sales Corporation (FSC), Micro-El Patent Corporation and GMC Associates, Inc.
(formerly known as Math Associates, Inc. (Math)); its indirect wholly-owned
subsidiaries, General Microwave Israel Corporation (GMIC) and General Microwave
Israel (1987) Ltd. (GMIL); and its majority-owned subsidiary, General
Microcircuits Corporation (GMCC). All inter-company accounts and transactions
have been eliminated in consolidation.

Sales are recorded as units are delivered with the cost of sales recognized on
each shipment based upon an average estimated final contract unit cost,
including overhead costs. Losses on contracts are recorded when known.

(d) CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents. There were no cash equivalents at February 28, 1998 and
1997.

F-36
<PAGE> 138
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(e) INVENTORIES

Work-in-process inventory reflects all accumulated production costs, which are
comprised of direct production costs and overhead, reduced by amounts
attributable to units delivered. Work-in-process inventory is reduced to its
estimated net realizable value by a charge to cost of sales in the period excess
costs are identified. Raw materials and finished goods inventories are reflected
at the lower of cost or market, computed on the first-in, first-out (FIFO)
method.

(f) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost. Depreciation is charged to
operations over the estimated service lives of the related assets (ranging from
three to twenty-five years) using the straight-line method. Assets acquired
under capital lease and leasehold improvements are amortized over the life of
the lease or the estimated life of the asset, whichever is less.

(g) DEBT ISSUANCE COSTS

Costs incurred in connection with the issuance of Industrial Development Revenue
Bonds, amounting to $313,000, are being amortized over the life of the bonds
(fifteen years) on a straight-line basis.

(h) INTANGIBLE ASSETS

Intangible assets include patents recorded at cost which are amortized on a
straight-line basis over a period not to exceed seventeen years. Accumulated
amortization aggregated $92,629 and $78,311 at February 28, 1998 and 1997,
respectively.

The costs in excess of fair value of net assets acquired relate to the
acquisition of GMCC and are amortized on a straight-line basis over fifteen
years. Additionally, these costs include the cost of additional ownership of
GMCC increasing from 80% to 97% (note 6), which are amortized on a straight-line
basis over the remaining life of the original asset. Accumulated amortization
aggregated $387,109 and $311,578 at February 28, 1998 and 1997, respectively.

(i) PENSION EXPENSE

Pension expense for eligible employees is provided under an actuarial cost
method. The Company's policy is to make annual contributions to the plan in
accordance with actuarially determined funding requirements.

(j) RESEARCH AND DEVELOPMENT

Company funded research and development, net of research and development grants,
is charged directly to expense as incurred. Customer funded research and
development is recognized in net sales while the applicable costs are charged to
cost of sales.

F-37
<PAGE> 139
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(k) INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.

(l) EARNINGS PER SHARE

Earnings per share is computed in accordance with the provisions of Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share", which
became effective for the Company as of February 28, 1998. SFAS 128 requires the
presentation of basic and diluted earnings per share. As required by SFAS 128,
earnings per share for all prior periods presented have been restated. Basic
earnings per share is computed by dividing income available to common
shareholders (which for the Company equals its recorded net income) by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock, such as stock options, were
exercised, converted into common stock or otherwise resulted in the issuance of
common stock.

(m) RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The financial statements of the Company's Israeli operations, GMIC and GMIL,
were prepared in accordance with generally accepted accounting principles in
Israel. The differences between generally accepted accounting principles in
Israel and generally accepted accounting principles in the United States as they
pertain to GMIC and GMIL are not considered material to the consolidated
financial statements of the Company.

(n) FOREIGN CURRENCY TRANSLATION

The financial position and the results of operations of the Company's Israeli
operations are measured using the dollar as the functional currency. Gains or
losses resulting from translating transactions denominated in a foreign currency
were immaterial in fiscal 1998, 1997, and 1996.

(o) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on
March 1, 1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net

F-38
<PAGE> 140
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. SFAS No. 121 did not have a material impact on
the Company's financial position or results of operations in fiscal 1998 or
1997.

(p) STOCK OPTION PLAN

Prior to March 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations. As
such, compensation expense would be recorded on the date of grant only if and to
the extent that the current market price of the underlying stock exceeded the
exercise price. On March 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant.

Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.

(q) USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

(r) RECLASSIFICATIONS

Reclassifications are made whenever necessary to conform with the current year's
presentation.

(2) DISCONTINUED OPERATIONS

Pursuant to a Board of Directors resolution on February 25, 1997, the Company
adopted a plan to discontinue its electronic fiber optic systems and components
business. At February 28, 1997, a provision for loss on disposal of $2,660,455
was recorded in the accompanying consolidated financial statements principally
relating to the anticipated disposal of inventory and other assets, estimated
losses during the phase-out period and estimated costs of liquidation. This
business was operated by Math.

On September 24, 1997, a sale of certain of the assets of Math was completed,
which resulted in a gain from discontinued operations as recorded in the
consolidated financial statements as of February 28, 1998. This gain relates
principally to the proceeds of

F-39
<PAGE> 141
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$353,855 from the sale of assets and $598,956 from the reversal of estimated
costs of liquidation which will no longer be incurred as a result of the sale
and provision for operating losses during the phase out period that did not
materialize.

The consolidated financial statements of the Company have been reclassified to
reflect the effects of the Company's decision to account for the disposal of its
Math operations as discontinued operations. Accordingly, the net sales, costs
and expenses, assets and liabilities, and cash flows associated with Math have
been excluded from the respective captions in the accompanying consolidated
balance sheets, statements of operations and statements of cash flows.

Net sales of the discontinued operations were $1,917,298, $4,735,586 and
$4,908,579 for fiscal 1998, 1997 and 1996, respectively.

The following summarizes assets and liabilities of the discontinued operations
which have been segregated in the accompanying consolidated balance sheets:

<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Current assets -- discontinued operations:
Cash........................................... $ 3,077 148,583
Accounts receivable, net....................... 10,865 863,467
-------- ---------
$ 13,942 1,012,050
======== =========
Current liabilities -- discontinued operations:
Accounts payable............................... -- 186,084
Accrued expenses............................... 205,363 1,009,109
-------- ---------
$205,363 1,195,193
======== =========
</TABLE>

Discontinued operations include management's best estimates of amounts expected
to be realized on the remaining liquidation of the Math business. While these
estimates are based on an analysis of the recoverability of assets and estimated
expenses, actual results may differ.

(3) SUPPLEMENTAL CASH FLOW INFORMATION

Following is supplemental information relating to the consolidated statements of
cash flows:

<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.............................. $130,940 205,274 193,668
======== ======= =======
Income taxes.......................... $ 31,416 86,253 146,161
======== ======= =======
</TABLE>

F-40
<PAGE> 142
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) INVENTORIES

Inventories are comprised of the following:

<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Raw materials.................................. $2,106,835 1,802,020
Work-in-process........................... 2,484,041 2,371,040
Finished goods............................ 421,619 568,132
---------- ---------
5,012,495 4,741,192
Less progress billings and advanced payments... (571,606) (205,360)
---------- ---------
$4,440,889 4,535,832
========== =========
</TABLE>

(5) PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment is as follows:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land.......................................... $1,169,299 1,169,299
Buildings and improvements.................... 5,905,493 5,832,699
Test equipment................................ 1,522,271 1,406,230
Machinery and equipment....................... 3,319,337 3,273,314
Furniture and office equipment................ 1,709,148 1,587,777
Leasehold improvements........................ 266,165 266,165
Transportation equipment...................... 227,473 229,107
Tooling....................................... 90,196 86,596
Construction-in-process....................... -- 25,172
---------- ----------
14,209,382 13,876,359
Less accumulated depreciation and
amortization................................ 8,494,439 7,885,367
---------- ----------
$5,714,943 5,990,992
========== ==========
</TABLE>

Depreciation expense aggregated $645,255, $698,609 and $774,006 in fiscal 1998,
1997 and 1996, respectively. Repairs and maintenance costs are expensed as
incurred and amounted to approximately $454,000, $410,000 and $362,000 in fiscal
1998, 1997, and 1996, respectively.

The Company's Israeli operations were granted "approved enterprise status" and
are therefore entitled to investment grants from the Israeli government for
investments in production facilities. Such approval is conditional upon meeting
certain export requirements, once implementation of the investment program has
been completed. Investment grants reflected as an offset against the cost of
property and equipment amounted to $1,120,666 and $1,063,523 at February 28,
1998 and 1997, respectively. The conditions for receipt of grants in the amount
of $713,097 were fulfilled as of February 28, 1997. Should the Company not
fulfill the conditions applicable to receipt of the remaining grants, the

F-41
<PAGE> 143
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Israeli government is permitted to demand refund of the balance of $407,569,
plus interest. The Company is required to invest an additional $210,000 to
comply with the existing investment program. In management's opinion, the
Company will fulfill the relevant conditions relating to investment grants
received.

(6) MAJORITY-OWNED SUBSIDIARY

At February 28, 1998, the Company owns 97% of GMCC's outstanding common stock
(291,000 shares). Additionally, the Company owns all of the outstanding
preferred stock of GMCC. The interest in the investment in GMCC outstanding
common stock not owned by the Company is recorded as minority interest on the
accompanying consolidated balance sheets.

(7) INCOME TAXES

The components of income tax expense (benefit) from continuing operations are as
follows:

<TABLE>
<CAPTION>
1998 1997 1996
--------- ------ --------
<S> <C> <C> <C>
Current:
Federal.............................. $ 5,000 -- (346,000)
State................................ 36,800 8,000 (29,000)
Foreign.............................. 34,400 32,000 1,000
--------- ------ --------
76,200 40,000 (374,000)
--------- ------ --------
Deferred:
Federal and State.................... (227,700) -- 152,000
--------- ------ --------
$(151,500) 40,000 (222,000)
========= ====== ========
</TABLE>

F-42
<PAGE> 144
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of income taxes (benefit) from continuing operations computed
at the Federal statutory rate to reported income taxes (benefit) is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Tax at Federal statutory
rate................... $ 600,000 34.0% $82,000 34.0% $(463,800) (34.0)%
Change in beginning of
the year balance of the
valuation allowance.... (698,000) (39.9) (42,000) (17.4) 322,700 23.7
Benefit of lower tax rate
on foreign income...... (99,000) (5.6) (36,000) (14.9) -- --
Earnings of subsidiary
not consolidated for
tax purposes........... -- -- -- -- 58,600 4.3
State income taxes
(benefit), net......... 24,000 1.4 5,000 2.0 (115,000) (8.4)
Amortization of costs in
excess of fair value of
net assets acquired.... 26,000 1.5 26,000 10.8 25,700 1.9
Reversal of prior years'
over provisions........ -- -- -- -- (67,000) (4.9)
Other, net............. (4,500) -- 5,000 2.0 16,800 1.2
--------- ----- ------- ----- --------- -----
Income taxes (benefit)... $(151,500) (8.6)% $40,000 16.5% $(222,000) (16.2)%
========= ===== ======= ===== ========= =====
</TABLE>

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<PAGE> 145
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at February 28 are
presented as follows:

<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Inventories, principally due to obsolescence
reserve.......................................... $ 303,000 318,484
Net operating loss carryforwards.................... 397,410 77,400
Tax credit carryforwards............................ 243,000 248,000
Discontinued operations............................. -- 1,380,216
Allowance for doubtful accounts receivable.......... 19,700 9,867
Warranty reserve.................................... 60,442 25,135
Other............................................... 13,531 --
---------- ----------
Total deferred tax assets........................ 1,037,083 2,059,102
Less valuation allowance............................ (243,000) (1,518,555)
---------- ----------
Net deferred tax assets.......................... $ 794,083 540,547
========== ==========
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation and capitalized interest......... $ (577,621) (547,303)
Other............................................... (12,374) (16,871)
---------- ----------
Total deferred tax liabilities................... (589,995) (564,174)
---------- ----------
Net deferred assets (liabilities)................ $ 204,088 (23,627)
========== ==========
</TABLE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considered the
scheduled reversal of deferred tax assets and liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon projections of future taxable income over the periods which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of the net deferred tax assets. The amount
of the deferred tax assets considered realizable, however, could be reduced in
the near term if estimates of future taxable income are reduced.

At February 28, 1998, the Company has Federal net operating loss carryforwards
of approximately $990,000, New York State net operating loss carryforwards of
approximately

$578,000 and New York State tax credits of $243,000 which are available to
offset future taxable income, if any. These Federal and state net operating loss
carryforwards and state tax credits, which arose from both continuing and
discontinued operations, are available to offset future taxable income of
continuing operations. The Federal and New York State net operating loss
carryforwards expire starting in fiscal 2010.

F-44
<PAGE> 146
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Earnings before provision for (benefit of) income taxes, without giving effect
to inter-company eliminations, include income (losses) from foreign operations
of $343,872, $515,471 and ($541,212) in fiscal 1998, 1997 and 1996,
respectively.

(8) LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Industrial Development Revenue Bonds........... $1,200,000 1,700,000
Bank loans payable............................. 281,250 636,811
---------- ---------
1,481,250 2,336,811
Less current installments...................... 675,000 709,670
---------- ---------
$ 806,250 1,627,141
========== =========
</TABLE>

Under the terms of an agreement with the Town of Babylon Industrial Development
Agency and a bank, the Agency issued 1984 Variable Rate 7-Day Demand Industrial
Development Revenue Bonds in the amount of $6,000,000 to provide a substantial
portion of the funds for the construction and equipping of the Company's
manufacturing facility in Amityville, New York. Interest is payable
semi-annually at a variable rate which approximates 65% of the yield on 13-week
U.S. Treasury bills. Such rate was 3.40% and 3.25% at February 28, 1998 and
1997, respectively. Under the terms of the agreement, the Company obtained an
irrevocable bank letter of credit for the amount of the bonds plus certain
interest. The letter of credit, which amounted to approximately $1,373,000 and
$1,877,000 at February 28, 1998 and 1997, respectively, will be drawn on in the
event the Town of Babylon defaults on its obligations to the bondholders. This
letter of credit expires on September 15, 1998 and management is presently
negotiating the letter of credit with the bank. At any time prior to maturity,
the bonds are redeemable at the option of the Company at a redemption price of
100%. The bonds are due on October 1, 1999 with annual payment requirements of
$600,000 in fiscal 1999 and 2000. All property, plant and equipment acquired or
constructed by the Company with the proceeds of the bonds collateralize the
obligation.

The aforementioned bond agreement includes certain restrictive covenants, as
amended. The Company must, among other things, maintain profitable operations, a
minimum ratio of current assets to current liabilities, a minimum level of
tangible net worth, as defined and amended, and must not exceed a specified debt
to equity ratio. The tangible net worth covenant limits the ability of the
Company to pay cash dividends. As a result of such covenant there is
approximately $1,652,623 of unrestricted funds available for the payment of cash
dividends as of February 28, 1998. In addition, commencing April 1, 1996, the
Company is required to make monthly sinking fund payments of $40,000 towards its
annual bond payment. Such amount is reflected as restricted cash on the
accompanying consolidated balance sheet as of February 28, 1998.

During fiscal 1992 the Company's subsidiary, GMIL, entered into a capital lease
on its operating facility in the Talpiot Industrial Zone of Jerusalem, Israel at
a cost of $841,875. This transaction was primarily financed with a $750,000
long-term bank loan at an interest

F-45
<PAGE> 147
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

rate of LIBOR plus 1.5% (7.20% at February 28, 1997), of which $281,250 and
$356,250 was outstanding at February 28, 1998 and 1997, respectively. The loan
is secured by the premises, all of GMIL's assets and a guarantee by the Company
of $300,000.

Required principal payments on long-term debt are summarized as follows:

(9) SHORT-TERM BORROWING

The Company's Israeli subsidiary has outstanding short-term borrowings with a
bank aggregating $230,319 and $591,739 at interest rates of 6.05% and ranging
from 6.95% to 8.40% at February 28, 1998 and 1997, respectively. The short-term
borrowings were repaid in full in March 1998.

(10) EARNINGS PER SHARE

As discussed in note 1(l), the Company adopted SFAS No.128, which replaces the
calculation of primary and fully diluted earnings (loss) per share with basic
and diluted earnings (loss) per share. Prior periods have been restated to
conform to SFAS No.128 requirements. A reconciliation between numerators and
denominators of the basic and diluted earnings (loss) per share is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings (loss) per share
computation:
Net earnings (loss).................... $2,870,201 (3,085,736) (1,776,791)
Weighted average common shares
outstanding......................... 1,207,704 1,203,592 1,196,682
Basic earnings (loss) per share........ 2.38 (2.56) (1.48)
========== ========== ==========
Diluted earnings (loss) per share
computation:
Net earnings (loss).................... $2,870,201 (3,085,736) (1,776,791)
Weighted average common shares
outstanding......................... 1,207,704 1,203,592 1,196,682
Dilutive stock options................. 21,394 2,685
---------- ---------- ----------
Diluted common shares outstanding...... 1,229,098 1,206,277 1,196,682
Diluted earnings (loss) per share...... 2.34 (2.56) (1.48)
========== ========== ==========
</TABLE>

F-46
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GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) EMPLOYEE PENSION PLAN

The Company has a noncontributory defined benefit pension plan covering all
eligible employees of GMC. Pension expense is accrued in accordance with the
projected unit credit actuarial cost method. Although the Company reserves the
right to terminate the plan at any time, it is obligated to fund the recommended
contribution as long as the plan remains in effect.

The net pension expense includes the following components:

<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Service cost -- benefits earned
during the period.................. $ 119,700 137,700 128,900
Interest cost on projected benefit
obligation......................... 283,100 278,500 267,000
Actual return on assets.............. (828,100) (597,900) (506,200)
Net amortization and deferral........ 535,500 360,700 288,300
--------- -------- --------
Net pension expense................ $ 110,200 179,000 178,000
========= ======== ========
</TABLE>

Assumptions used in the accounting for net pension expense in fiscal 1998, 1997
and 1996 were:

<TABLE>
<S> <C>
Weighted average discount rate.............................. 7.5%
Average rate of increase in compensation levels............. 5.0
Expected long-term rate of return on assets................. 8.5
===
</TABLE>

The following table sets forth the funded status and the prepaid pension asset
of the Company's defined benefit plan at February 28:

<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of $3,458,700
in 1998 and $3,178,100 in 1997..................... $(3,556,500) (3,249,700)
=========== ==========
Projected benefit obligation for services rendered to
date............................................... (4,244,000) (4,019,200)
Plan assets at fair value............................ 4,362,200 3,720,100
----------- ----------
Funded status -- plan assets in excess of (less
than) projected benefit obligation.............. 118,200 (299,100)
Unrecognized net (gain) loss from past experience
different from that assumed........................ (146,800) 142,600
Unrecognized prior service cost...................... 170,800 240,300
Unrecognized net asset as of March 1, 1987 being
recognized over approximately 20 years............. (50,000) (55,400)
----------- ----------
Prepaid pension asset included in other assets....... $ 92,200 28,400
=========== ==========
</TABLE>

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GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pension plan assets consist principally of United States Government securities.

(12) STOCKHOLDERS' EQUITY

The 1990 Stock Option Plan (1990 Plan) provides for the issuance of up to
125,000 shares of common stock to key employees including officers and directors
who are employees. Options under the 1990 Plan, which expires on June 26, 2000,
may be either incentive stock options (ISO) or options not qualified under the
Internal Revenue Code. The purchase price of common stock under each option
shall be determined by the Stock Option Committee of the Board of Directors;
provided, however, that the stock purchase price pursuant to an ISO may not be
less than the fair market value of the common stock subject to the option on the
date that the option was granted, and may in no event be less than the par value
of the stock. Options granted to date under the 1990 Plan were at the fair
market value at the date of grant. Options vest 25% after nine months from the
date of grant and every nine months, thereafter. The 1990 Plan permits option
holders to pay the option exercise price with previously owned common stock of
the Company or a combination of cash and common stock. If any employee to whom
an ISO is granted owns common stock amounting to more than 10% of the total
voting power of all classes of stock of the Company, the option exercise price
must be at least 110% of the fair market value of common stock at the time the
option is granted and the option must terminate no later than five years from
the date the option is granted. At February 28, 1998, 39,250 options outstanding
are exercisable under the 1990 Plan.

In January 1997, the Company adjusted the exercise price of all outstanding
options to $5.00 per share, the then fair market value of the stock.

A summary of stock option transactions follows:

<TABLE>
<CAPTION>
1990 PLAN
-----------------------------
NUMBER
OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
OUTSTANDING, FEBRUARY 28, 1995............. 42,950 $ 6.35
Granted.................................... 16,000 6.79
Exercised.................................. (3,200) (5.75)
Canceled................................... (2,500) (7.50)
------
OUTSTANDING, FEBRUARY 29, 1996............. 53,250 6.34
Granted.................................... 8,000 6.77
Canceled................................... (9,500) (6.44)
------
OUTSTANDING, FEBRUARY 28, 1997............. 51,750 5.00
Granted.................................... 22,000 6.26
Exercised.................................. (5,000) (5.00)
Canceled................................... (3,000) (5.00)
------
OUTSTANDING, FEBRUARY 28, 1998............. 65,750 $ 5.42
======
</TABLE>

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<PAGE> 150
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The 1997 Non-Employee Director Stock Option Plan (1997 Plan) provides for the
issuance of options to purchase 2,500 shares of common stock to each
non-employee director of the Company on the date of each annual meeting of
shareholders, up to an aggregate of 60,000 shares, at the fair market value of
the common stock on the date of grant. 33% of the options are exercisable on the
first day of the calendar year following the annual meeting of shareholders, 33%
on the first day of the second year; and 34% on the first day of the third year.
Generally options expire ten years after the option grant date or three months
after termination of service as a director, which ever is earlier.

A summary of stock option transactions follows:

<TABLE>
<CAPTION>
1997 PLAN
-----------------------------
NUMBER WEIGHTED-
OF AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
OUTSTANDING, FEBRUARY 28, 1997................. -- $ --
------ -----
Granted........................................ 15,000 6.97
------ -----
OUTSTANDING, FEBRUARY 28, 1998................. 15,000 $6.97
====== =====
</TABLE>

The Company has an Employee Stock Purchase Plan which offers eligible employees
options to purchase common stock of the Company at a purchase price of 85% of
the lesser of the average market value of the common stock on the date of grant
or on the exercise date. The exercise date is the last business day of the
twenty-fifth month following the date of grant. Payment for the shares is made
through payroll deductions over a two-year period. The maximum number of shares
that may be issued under this Plan, as amended, is 140,000.

A summary of employee stock purchase transactions follows:

<TABLE>
<CAPTION>
NUMBER WEIGHTED-
OF AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
OUTSTANDING, FEBRUARY 28, 1995................. 13,283 $7.44
Canceled....................................... (4,839) (7.44)
------ -----
OUTSTANDING, FEBRUARY 29, 1996................. 8,444 7.44
Exercised...................................... (8,269) (6.80)
Granted........................................ 6,049 5.74
Canceled....................................... (175) (6.80)
------
OUTSTANDING, FEBRUARY 28, 1997................. 6,049 5.75
Canceled....................................... (2,677) (5.75)
------
OUTSTANDING, FEBRUARY 28, 1998................. 3,372 $5.75
======
</TABLE>

The Company applies APB Opinion No. 25 and related interpretations in accounting
for stock option plans. Accordingly, no compensation cost has been recognized.
The Company's net earnings (loss) and net earnings (loss) per share would have
increased to
F-49
<PAGE> 151
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the following pro forma amounts had compensation cost been recorded for the
stock option and stock purchase plans based on the fair value at the grant dates
for awards, as well as the January 1997 repricing of the outstanding stock
options:

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net earnings (loss):
As reported............................ $2,870,201 (3,085,736) (1,776,791)
Pro forma.............................. $2,830,093 (3,119,570) (1,810,625)
Basic net earnings (loss) per share:
As reported............................ $ 2.38 (2.56) (1.48)
Pro forma.............................. $ 2.34 (2.59) (1.51)
Diluted net earnings (loss) per share:
As reported............................ $ 2.34 (2.56) (1.48)
Pro forma.............................. $ 2.30 (2.59) (1.51)
</TABLE>

The per share weighted average fair value of stock options granted during fiscal
1998, 1997 and 1996 was $3.37, $3.36 and $3.43 respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
grants in fiscal 1998, 1997 and 1996, respectively: expected volatility of 27%,
15% and 20%; risk-free interest rates of 6.66%, 6.41% and 6.33%; expected lives
of 10.0, 7.1 and 10.0 years; and no dividend yields.

Pro forma net income reflects only options granted in fiscal 1998, 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings (loss)
amounts presented above because compensation cost is reflected over the options'
vesting period and compensation cost for options granted prior to March 1, 1995
is not considered.

(13) FINANCIAL INSTRUMENTS

SFAS Statement No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amounts at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying value of all financial instruments classified as a current asset or
current liability are deemed to approximate fair value because of the short
maturity of these instruments. In the opinion of management, the carrying value
of the Company's bank loan payable (note 8) approximates fair value as the
interest rate is based on the current LIBOR rate and such rate is believed to
approximate the rates that would be offered to GMIL for debt of the same
remaining maturities.

It is not practicable to estimate the fair value of the Company's Industrial
Development Revenue Bonds of $1,200,000 and $1,700,000 as of February 28, 1998
and 1997, respectively. The fair value of such bonds would be based upon the
rates an Industrial Development Agency would charge the Company to finance the
construction and/or equipping of a new manufacturing facility. Such rates are
not readily determinable, without incurring excessive cost. However, because the
carrying value of the bonds are based upon

F-50
<PAGE> 152
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a rate that fluctuates with a U.S. Treasury rate, management is of the opinion
that the difference between the carrying value and fair value would not be
material.

(14) ROYALTIES

The Office of the Chief Scientist (OCS) of the Ministry of Commerce and Industry
in Israel has approved grants to GMIC and GMIL for research and development
projects, which resulted in the manufacturing of products for sale.

For such projects which are commercially successful, the OCS is to be paid
royalties of 2% of gross annual sales, up to the amount of the grant received.
In fiscal 1998, GMIC and GMIL paid royalties of $117,739 to the OCS.

The Israel -- United Bi-national Industrial Research & Development Foundation
(BIRD) approved grants for research and development projects, which resulted in
the manufacturing of products for sale. The Company is required to pay royalties
to BIRD up to a maximum of 150% of the grant received, from the sale of such
products. In fiscal 1998, the Company paid royalties of approximately $99,000 to
BIRD.

(15) BUSINESS AND CREDIT CONCENTRATIONS

The Company's operations are in a single industry segment and involve the
manufacture of various types of microwave, electronic equipment and components.
The majority of the Company's business is defense related and consists of direct
and indirect sales to the United States Government and foreign governments or to
other companies that are manufacturing products for the defense industry.

(a) FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

Net sales to customers by geographic area are as follows:

<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28 OR 29,
---------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
United States................... $14,122,235 13,213,276 13,047,519
Other Western Hemisphere........ 197,887 96,664 55,638
Europe.......................... 2,459,366 2,719,076 2,473,485
Asia............................ 4,316,637 3,675,478 1,476,305
Other........................... 221,457 356,394 374,663
----------- ---------- ----------
$21,317,582 20,060,888 17,427,610
=========== ========== ==========
</TABLE>

F-51
<PAGE> 153
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Information concerning foreign and domestic continuing operations for fiscal
1998, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net sales:
United States................. $17,416,718 17,019,006 14,935,708
Israel........................ 6,207,651 6,671,661 3,732,718
Transfers between geographic
areas (eliminated in
consolidation)............. (2,306,787) (3,629,779) (1,240,816)
----------- ---------- ----------
$21,317,582 20,060,888 17,427,610
=========== ========== ==========
Operating earnings (loss):
United States................. $ 1,401,591 (234,641) (744,942)
Israel........................ 445,926 684,211 (435,490)
----------- ---------- ----------
$ 1,847,517 449,570 (1,180,432)
Identifiable assets of
continuing operations:
United States................. 15,953,247 13,525,361 14,058,281
Israel........................ 4,069,963 4,788,497 3,773,171
----------- ---------- ----------
$20,023,210 18,313,858 17,831,452
=========== ========== ==========
</TABLE>

In determining operating earnings (loss) for each geographic area, sales and
purchases between areas have been accounted for on the basis of internal prices
set by the Company. Identifiable assets are those tangible and intangible assets
used in operations in each geographic area. Identifiable assets of the Israeli
operations include trade accounts receivable from GMC of $201,476, $603,125 and
$116,464 as of February 28, 1998 and 1997 and February 29, 1996, respectively.

(b) CREDIT CONCENTRATIONS

During fiscal 1998, 1997 and 1996, after giving effect to discontinued
operations, one customer represented 16%, 26% and 10% of net sales,
respectively, of the Company. In addition, the Company had six and five
customers with individual balances in excess of 5% of accounts receivable, which
aggregated approximately $2,758,000 and $2,200,000, at February 28, 1998 and
1997, respectively.

The Company grants credit to customers based upon analysis of their financial
position and other factors. Consequently, an adverse change in those factors
could affect the Company's estimate of its bad debts. The Company estimates an
allowance for doubtful accounts based upon the creditworthiness of its customers
as well as general economic conditions. As the majority of the Company's sales
are made and credit is granted to the United States Government and customers in
the defense industry, the Company considers the credit risks associated with its
customers to be minimal.

F-52
<PAGE> 154
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(16) UNAUDITED QUARTERLY FINANCIAL INFORMATION

The following is a summary of quarterly operating results for fiscal 1998 and
1997 (in thousands, except per share amounts):

<TABLE>
<CAPTION>
1998
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales.................................. $4,987 5,488 4,623 6,220
Gross profit............................... 1,768 1,876 1,550 2,553
Net earnings:
Continuing operations.................... 168 317 218 1,214
Discontinued operations.................. -- 953 -- --
------ ----- ----- -----
Total................................. $ 168 1,270 218 1,214
====== ===== ===== =====
Basic net earnings per share:
Continuing operations.................... .14 .26 .18 1.00
Discontinued operations.................. -- .79 -- --
------ ----- ----- -----
Total................................. $ .14 1.05 .18 1.00
====== ===== ===== =====
Diluted net earnings per share:
Continuing operations.................... .14 .26 .17 .98
Discontinued operations.................. -- .78 -- --
------ ----- ----- -----
Total................................. $ .14 1.04 .17 .98
====== ===== ===== =====
</TABLE>

<TABLE>
<CAPTION>
1997
----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales.................................. $4,288 4,875 4,868 6,030
Gross profit............................... 1,553 1,322 1,321 2,138
Net earnings (loss):
Continuing operations.................... 50 (254) (191) 597
Discontinued operations.................. 5 (435) (196) (2,661)
------ ----- ----- -----
Total................................. $ 55 (689) (387) (2,064)
====== ===== ===== =====
Basic and diluted net earnings (loss) per
share:
Continuing operations.................... .04 (.21) (.16) .50
Discontinued operations.................. .01 (.36) (.16) (2.21)
------ ----- ----- -----
Total................................. $ .05 (.57) (.32) (1.71)
====== ===== ===== =====
</TABLE>

F-53
<PAGE> 155
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Earnings per share calculations for each of the quarters are based on weighted
average number of shares outstanding in each period, therefore, the sum of the
quarters does not necessarily equal the years' earnings (loss) per share.

F-54
<PAGE> 156

GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AUGUST 29, 1998 FEBRUARY 28, 1998
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash......................................... $ 4,687,847 $ 3,278,574
Restricted cash.............................. -- 200,000
Accounts receivable, net of allowance for
doubtful accounts......................... 3,493,281 4,451,220
Inventories.................................. 5,005,991 4,440,889
Prepaid expenses and other current assets.... 228,051 287,437
Deferred income taxes, net................... 794,083 794,083
----------- -----------
Total current assets...................... 14,209,253 13,452,203
Property, plant and equipment, net........... 5,820,046 5,714,943
Debt issuance costs, net..................... 25,195 35,629
Costs in excess of fair value of net assets
acquired, net............................. 566,373 604,173
Other intangible assets, net................. 130,686 137,686
Other assets................................. 53,620 92,518
----------- -----------
$20,805,173 $20,037,152
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt....... $ 662,883 $ 675,000
Short-term borrowing......................... -- 230,319
Accounts payable............................. 875,025 656,387
Customer advance payments.................... -- 314,474
Accrued payroll and other employee
benefits.................................. 785,129 816,487
Accrued expenses and other current
liabilities............................... 1,285,411 1,277,789
Income taxes payable......................... 295,104 --
Accrued commissions.......................... 224,675 189,595
----------- -----------
Total current liabilities................. 4,128,227 4,160,051
----------- -----------
Long term debt, less current installments...... 796,882 806,250
Deferred income taxes.......................... 589,995 589,995
Minority interest.............................. 50,692 40,645
</TABLE>

F-55
<PAGE> 157
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)

<TABLE>
<CAPTION>
AUGUST 29, 1998 FEBRUARY 28, 1998
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized and unissued............ -- --
Common stock, $.01 par value; 5,000,000
shares authorized; issued 1,678,011 at
August 29, 1998 and 1,677,761 at February
28, 1998.................................. 16,780 16,778
Additional paid-in capital................... 9,631,746 9,630,499
Retained earnings............................ 8,779,550 7,981,583
----------- -----------
18,428,076 17,628,860
Less: treasury stock, at cost.................. 3,188,699 3,188,649
----------- -----------
15,239,377 14,440,211
----------- -----------
$20,805,173 $20,037,152
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-56
<PAGE> 158

GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SIX MONTHS ENDED
----------------------- -------------------------
AUGUST 29, AUGUST 30, AUGUST 29, AUGUST 30,
1998 1997 1998 1997
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales..................................... $5,909,234 $5,487,800 $11,835,926 $10,474,928
Costs and expenses:
Cost of sales............................... 3,591,368 3,611,278 7,350,478 6,830,823
Selling..................................... 686,594 644,651 1,223,264 1,268,250
General and administrative.................. 921,369 767,545 1,844,577 1,578,918
Research and development.................... 161,400 100,430 254,681 213,831
---------- ---------- ----------- -----------
5,360,731 5,123,904 10,673,000 9,891,822
---------- ---------- ----------- -----------
Operating earnings............................ 548,503 363,896 1,162,926 583,106
---------- ---------- ----------- -----------
Other expenses (income):
Interest expense............................ 13,383 28,444 30,406 71,766
Dividend and interest income................ (45,169) (23,914) (94,738) (46,152)
Other....................................... 22,645 11,796 39,291 24,135
---------- ---------- ----------- -----------
(9,141) 16,326 (25,041) 49,749
---------- ---------- ----------- -----------
Earnings from continuing operations before
provision for income taxes.................. 557,644 347,570 1,187,967 533,357
Provision for income taxes.................... 200,000 30,000 390,000 48,000
---------- ---------- ----------- -----------
Net earnings from continuing operations....... 357,644 $ 317,570 $ 797,967 $ 485,357
Discontinued operations:
Gain on sales of assets of Math Associates,
Inc. ....................................... -- 952,811 -- 952,811
---------- ---------- ----------- -----------
Net earnings.................................. $ 357,644 $1,270,381 $ 797,967 $ 1,438,168
========== ========== =========== ===========
Basic net earnings per share:
From continuing operations.................. $ 0.30 $ 0.26 $ 0.66 $ 0.40
From discontinued operations................ -- 0.79 -- 0.79
---------- ---------- ----------- -----------
Basic net earnings per share.................. 0.30 $ 1.05 $ 0.66 $ 1.19
========== ========== =========== ===========
Diluted net earnings per share:
From continuing operations.................. 0.28 $ 0.26 $ 0.64 $ 0.40
From discontinued operations................ -- 0.78 -- 0.78
---------- ---------- ----------- -----------
Diluted net earnings per share................ $ 0.28 $ 1.04 $ 0.64 $ 1.18
========== ========== =========== ===========
Weighted average number of common shares
outstanding-Basic........................... 1,210,904 1,205,893 1,210,787 1,205,776
Weighted average number of common shares
outstanding-Diluted......................... 1,258,480 1,228,224 1,247,389 1,216,942
</TABLE>

See accompanying notes to consolidated financial statements.

F-57
<PAGE> 159

GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
-----------------------
AUGUST 29, AUGUST 30,
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings from continuing operations............... $ 797,967 $ 485,357
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization...................... 385,679 413,635
Gain on disposal of equipment...................... -- 1,394
Minority interest in earnings of consolidated
subsidiary....................................... 10,047 6,864
Changes in assets and liabilities:
Accounts receivable, net......................... 947,074 147,965
Inventories...................................... (565,102) 211,535
Prepaid expenses and other current assets........ 59,386 (5,737)
Accounts payable and accrued liabilities......... 604,436 (331,596)
Customer advance payments........................ (314,474) --
Other, net....................................... 38,898 27,761
---------- ----------
Net cash provided by operating activities..... 1,963,911 957,178
---------- ----------
Net cash provided by (used in) discontinued
operations............................................ (65,408) 278,291
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant & equipment............... (435,549) (230,082)
Purchase of intangible assets......................... -- (3,723)
---------- ----------
Net cash used in investing activities.............. (435,549) (233,805)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on long-term debt........................ (21,485) (318,061)
Net payments on short-term borrowings................. (230,319) (451,871)
Purchase of treasury stock............................ (50) --
Proceeds from exercise of stock options............... 1,250 1,250
---------- ----------
Net cash used in financing activities.............. (250,604) (768,682)
---------- ----------
Net increase in cash.................................... 1,212,350 232,982
Cash at beginning of the period......................... 3,475,497 1,945,362
---------- ----------
Cash at end of the period............................... $4,687,847 $2,178,344
========== ==========
</TABLE>

F-58
<PAGE> 160

<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
-----------------------
AUGUST 29, AUGUST 30,
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................. 30,889 75,982
Income Taxes.......................................... 149,008 16,547
</TABLE>

See accompanying notes to consolidated financial statements.

F-59
<PAGE> 161

GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 29, 1998
(UNAUDITED)

NOTE 1: The consolidated financial statements include the accounts of General
Microwave Corporation (GMC), its wholly-owned subsidiaries, General Microwave
Foreign Sales Corporation (FSC), Micro-El Patent Corporation and GMC
Associates, Inc. (formerly known as Math Associates, Inc. (Math));
its indirect wholly-owned subsidiaries, General Microwave Israel
Corporation (GMIC) and General Microwave Israel (1987) Ltd. (GMIL);
and its majority-owned subsidiary General Microcircuits Corporation
(GMCC). All intercompany accounts and transactions have been
eliminated in consolidation.

NOTE 2: The accompanying consolidated financial statements have not been
audited, but in the opinion of management, have been prepared in
conformity with generally accepted accounting principles applying
certain judgements and estimates which include all adjustments
(consisting only of normal recurring adjustments) considered
necessary to present fairly such information. Operating results for
any interim period are not necessarily indicative of the results for
an entire year.

NOTE 3: Cash Equivalents

For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. There
were no cash equivalents at August 29, 1998 and February 28, 1998.

NOTE 4: Inventories on hand at:

<TABLE>
<CAPTION>
AUGUST 29, FEBRUARY 28,
1998 1998
--------------- ----------------
<S> <C> <C>
Raw materials............................. $2,339,836 $2,106,835
Work in process........................... 2,352,500 2,484,041
Finished goods............................ 527,725 421,619
---------- ----------
5,220,061 5,012,495
Less progress billings and customer
advances................................ (214,070) (571,606)
---------- ----------
$5,005,991 $4,440,889
========== ==========
</TABLE>

Inventories are valued at the lower of cost or market on a first-in,
first-out basis.

NOTE 5: Accumulated depreciation and amortization of property, plant and
equipment was $8,824,884 at August 29, 1998 and $8,494,439 at
February 28, 1998.

NOTE 6: Reclassifications are made whenever necessary to conform with the
current year's presentation. The remaining current assets and
liabilities relating to the discontinued operations were deemed to be
immaterial and are no longer separately presented on the accompanying
consolidated balance sheets.

NOTE 7: On June 23, 1998 the Stockholders approved an amendment to the
Company's 1990 Stock Option Plan increasing the number of shares of
the Company's common stock that may be issued pursuant to the plan by
50,000 to 175,000 shares.

F-60
<PAGE> 162
GENERAL MICROWAVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8: On August 21, 1998, GMC entered into an agreement and plan of merger
dated as of August 21, 1998 that contemplates the merger of GMC into
a wholly-owned subsidiary of Herley Industries, Inc. of Lancaster,
Pennsylvania for $18.00 per outstanding share of stock of GMC in cash
and a three year warrant to purchase one share of common stock of
Herley Industries, Inc. exercisable at $14.40 per share through
January 11, 1999, and thereafter at $15.60 per share until
expiration. Thirty percent of General Microwave Corporation's
shareholders have signed irrevocable proxies agreeing to the merger
of the two companies. The transaction is subject to the approval of
the stockholders of GMC and customary closing conditions.

F-61
<PAGE> 163

ANNEX A -- AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER

DATED AS OF AUGUST 21, 1998

AMONG

GENERAL MICROWAVE CORP.

ELEVEN GENERAL MICROWAVE CORP. SHAREHOLDERS

GMC ACQUISITION CORPORATION

AND

HERLEY INDUSTRIES, INC.
<PAGE> 164

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I. PRINCIPAL TERMS OF MERGER........................................ A-1
Section 1.1 Surviving Corporation....................................... A-1
Section 1.2 Closing..................................................... A-1
Section 1.3 Effective Time.............................................. A-2
Section 1.4 Certificate of Incorporation................................ A-2
Section 1.5 Meetings of Herley and GMC Shareholders..................... A-2
ARTICLE II. STATUS AND CONVERSION OF SECURITIES............................. A-2
Section 2.1 Status and Conversion of GMC Shares......................... A-2
Section 2.2 GMC Stock Options and Warrants.............................. A-3
Section 2.3 Acquisition to Make Cash and Warrants Available............. A-3
ARTICLE III. CERTAIN EFFECTS OF MERGER...................................... A-4
Section 3.1 Effect of Merger............................................ A-4
Section 3.2 Further Assurances.......................................... A-4
ARTICLE IV. REPRESENTATIONS AND WARRANTIES.................................. A-5
Section 4.1 Representations and Warranties by GMC....................... A-5
4.1(a) Organization of GMC......................................... A-5
4.1(b) Authority of GMC............................................ A-5
4.1(c) Capitalization.............................................. A-6
4.1(d) Consents, etc............................................... A-6
4.1(e) Financial Statements........................................ A-6
4.1(f) Absence of Certain Changes or Events........................ A-7
4.1(g) Governmental Authorization and Compliance with Laws......... A-7
4.1(h) Tax Matters................................................. A-7
4.1(i) Title to Properties; Absence of Liens and Encumbrances,
etc......................................................... A-8
4.1(j) Contracts, etc.............................................. A-9
4.1(k) Litigation.................................................. A-9
4.1(l) Patents, Copyrights, Trademarks, etc........................ A-9
4.1(m) Employee Benefit Plans...................................... A-9
4.1(n) Finder's Fee................................................ A-11
4.1(o) No Failure to Disclose...................................... A-11
4.1(p) Proxy Statement............................................. A-11
4.1(q) Insider Interests........................................... A-11
4.1(r) Labor Controversies......................................... A-11
4.1(s) Use of Real Property........................................ A-12
4.1(t) Accounts Receivable......................................... A-12
4.1(u) Compliance with Environmental Laws.......................... A-12
</TABLE>

A-i
<PAGE> 165

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 4.2 Representations and Warranties by Acquisition and Herley.... A-13
4.2(a) Organization of Acquisition and Herley...................... A-13
4.2(b) Authority of Acquisition and Herley......................... A-13
4.2(c) Consents, etc............................................... A-14
4.2(d) Finder's Fee................................................ A-14
4.2(e) Registration Statement, Proxy Statement..................... A-14
4.2(f) Reports..................................................... A-14
4.2(g) Capitalization.............................................. A-15
4.2(h) Validity.................................................... A-15
ARTICLE V. COVENANTS AND AGREEMENTS......................................... A-15
Section 5.1 Covenants and Agreements of GMC............................. A-15
5.1(a) Registration Statement...................................... A-15
5.1(b) Proxy Statement............................................. A-15
5.1(c) Submission to Shareholders.................................. A-15
5.1(d) Conduct of Business......................................... A-15
5.1(e) Stock Options............................................... A-17
5.1(f) No Other Negotiations....................................... A-17
5.1(g) Financial Statements........................................ A-17
5.1(h) Certification of Shareholder Vote........................... A-17
5.1(i) Completion and Delivery of Schedule......................... A-17
Section 5.2 Other Covenants and Agreements.............................. A-17
5.2(a) Cooperation of Acquisition and GMC.......................... A-18
5.2(b) Efforts to Consummate Transactions.......................... A-18
5.2(c) Vote by the Participating Shareholders...................... A-18
5.2(d) Other Agreements............................................ A-18
5.2(e) Covenant of Herley.......................................... A-18
5.2(f) Permits, Orders and Consents................................ A-18
5.2(g) Officers and Directors Insurance and Indemnification........ A-18
5.2(h) Exchange Act Filings........................................ A-18
ARTICLE VI. CONDITIONS...................................................... A-19
Section 6.1 Mutual Conditions........................................... A-19
6.1(a) Registration Statement...................................... A-19
6.1(b) Shareholder Approval........................................ A-19
6.1(c) Absence of Restraint........................................ A-19
6.1(d) Blue Sky Compliance......................................... A-19
6.1(e) Filings and Approvals....................................... A-19
Section 6.2 Conditions to Obligations of Acquisition.................... A-19
6.2(a) Compliance with Representations, Warranties, Covenants and
Agreements.................................................. A-19
6.2(b) Opinion of Counsel.......................................... A-20
6.2(c) Dissenting Shareholders..................................... A-21
</TABLE>

A-ii
<PAGE> 166

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
6.2(d) Options..................................................... A-21
6.2(e) No Material Adverse Change.................................. A-21
6.2(f) Other Agreements............................................ A-21
6.2(g) Cutoff Date................................................. A-21
6.2(h) Fairness Opinion............................................ A-21
6.2(i) Due Diligence............................................... A-21
Section 6.3 Conditions to Obligations of GMC............................ A-22
6.3(a) Compliance with Representations, Warranties, Covenants and
Agreements.................................................. A-22
6.3(b) Opinion of Counsel.......................................... A-22
6.3(c) Adequacy of Funds........................................... A-23
ARTICLE VII. TERMINATION.................................................... A-23
Section 7.1 Termination................................................. A-23
Section 7.2 Effect of Termination....................................... A-23
ARTICLE VIII. MISCELLANEOUS................................................. A-23
Section 8.1 Extension of Time; Waivers.................................. A-23
8.1(a) By Acquisition.............................................. A-23
8.1(b) By GMC...................................................... A-24
Section 8.2 Costs and Expenses.......................................... A-24
Section 8.3 Amendments.................................................. A-24
Section 8.4 Assignability............................................... A-24
Section 8.5 Reliance by Counsel......................................... A-24
Section 8.6 Notices..................................................... A-24
Section 8.7 Entire Agreement; Law Governing............................. A-25
Section 8.8 Publicity and Disclosures................................... A-25
Section 8.9 Headings.................................................... A-25
Section 8.10 Survival.................................................... A-25
Section 8.11 Counterparts................................................ A-25
Section 8.12 Zissu Proxy................................................. A-25
</TABLE>

A-iii
<PAGE> 167

<TABLE>
<CAPTION>
AGREEMENT
PAGE AND
SECTION
EXHIBIT DESCRIPTION REFERENCE
- ------- ----------- ------------
<S> <C> <C>
A List of Participating Shareholders.......................... 1
B Certificate of Incorporation of Surviving Corporation....... 2 [sec.1.4]
C Form of Warrant............................................. 3 [sec.2.1]
D Form of Irrevocable Proxy................................... 20 [sec.5.2(c)]
E Form of Consulting Agreement................................ 20 [sec.5.2(d)]
F Form of Employment Agreement................................ 20 [sec.5.2(d)]
Part A Qualifications to do business............................... 5 [sec.4.1(a)
Part B Violation of Agreements, Etc................................ 6 [sec.4.1(b)
Part E Undisclosed Liabilities..................................... 7 [sec.4.1(e)
Part F Certain Changes or Events................................... 7 [sec.4.1(f)
Part G Permits, Licenses, Etc...................................... 8 [sec.4.1(g)
Part I Title Exceptions............................................ 9 [sec.4.1(i)
Part J Contracts................................................... 10 [sec.4.1(j)]
Part K Pending Litigation.......................................... 10 [sec.4.1(k)]
Part KK Threatened Litigation....................................... 10 [sec.4.1(k)]
Part L Patents, Copyrights, Trademarks, Etc........................ 10 [sec.4.1(l)]
Part M Employee Benefit Plans...................................... 10 [sec.4.1(m)]
Part Q Insider Interests........................................... 12 [sec.4.1(q)]
Part R Labor Controversies......................................... 12 [sec.4.1(r)]
Part T Accounts Receivable Matters................................. 13 [sec.4.1(t)]
Part V Environmental Matters....................................... 14 [sec.4.1(u)]
</TABLE>

A-iv
<PAGE> 168

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER (herein "this Agreement") dated as of August 21,
1998 by and among General Microwave Corp., a New York corporation ("GMC"),
eleven GMC shareholders identified on Exhibit "A" hereto (the "Participating
Shareholders"), GMC Acquisition Corporation, a New York corporation
("Acquisition") and Herley Industries, Inc. ("Herley"), a Delaware Corporation.

W I T N E S S E T H:

WHEREAS, Acquisition (which is a wholly-owned subsidiary of Herley) desires to
merge with GMC and be the surviving corporation after such merger and GMC and
the Participating Shareholders (being among the principal shareholders of GMC)
also desire that Acquisition merge with GMC upon the terms and conditions set
forth herein and in accordance with the Business Corporation Law of the State of
New York (the "BCL"), and that the outstanding shares of Common Stock, par value
$.01 per share, of GMC (referred to collectively as the "GMC Shares" and
individually as a "GMC Share") be converted upon such merger (the "Merger") into
the right to receive a warrant to purchase Herley Common Stock and cash in the
amount set forth in Section 2.1 hereof (Acquisition and GMC sometimes being
hereinafter referred to as the "Constituent Corporations" and Acquisition,
following the effectiveness of the Merger, as the "Surviving Corporation"); and

WHEREAS, the respective Boards of Directors of Acquisition and GMC have approved
this Agreement and the Merger;

NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions contained herein, and in order to set forth
the terms and conditions of the Merger and the mode of carrying the same into
effect, the parties hereto agree as follows:

ARTICLE I

PRINCIPAL TERMS OF MERGER

1.1 Surviving Corporation. At the Effective Time (as defined in Section 1.3
hereof), GMC shall be merged with and into Acquisition upon the terms and
conditions hereinafter set forth as permitted by and in accordance with the BCL.
At the Effective Time, the identity and separate existence of GMC shall cease,
and Acquisition shall succeed to all rights, privileges, powers, franchises,
properties, assets, debts, liabilities and obligations of GMC in accordance with
BCL.

1.2 Closing. (a) Subject to the provisions of Article VI hereof, the closing
of the transactions provided for in this Agreement (the "Closing") shall take
place in the offices of Blau, Kramer, Wactlar & Lieberman, P.C., or such other
place as the parties may agree, as soon as practicable (and in any event not
later than three business days) following the meeting of the shareholders of GMC
referred to in Section 1.5 hereof, subject to adjournment in the event a
condition set forth in Article VI hereof shall not have been fulfilled at such
time notwithstanding the best efforts of the parties hereto, and shall not have
been waived, in which event the Closing shall take place as soon as practicable
(and in any event not later than three business days) following the satisfaction
or waiver of all of such conditions, or at such other time and place or on such
other date

A-1
<PAGE> 169

as GMC and Acquisition may mutually agree upon (the date and time of such
Closing being herein referred to as the "Closing Date").

(b) Subject to the provisions of Article VI hereof, the Surviving Corporation
shall execute a certificate of merger (the "Certificate of Merger") and cause
such Certificate to be filed with the New York Secretary of State (the
"Secretary") and recorded in accordance with the applicable provisions of
Section 904 of the BCL.

1.3 Effective Time. The Merger shall become effective when the Certificate of
Merger is filed by the Secretary in accordance with the applicable provisions of
the BCL (or at such later time specified as the effective time in the
Certificate of Merger), which Certificate shall be submitted for filing as soon
as practicable after all of the conditions set forth in Article VI are fulfilled
or waived, provided that this Agreement has not been previously terminated
pursuant to Section 7.1 hereof. The date and time when the Merger shall become
effective are herein referred to as the "Effective Time."

1.4 Certificate of Incorporation. The Certificate of Incorporation of the
Surviving Corporation from and after the Effective Time shall be as set forth in
Exhibit B to this Agreement, until thereafter further amended as provided by
law.

1.5 Meetings of Herley and GMC Shareholders. Herley and GMC shall take all
action necessary in accordance with their appropriate state law and their
respective Certificates of Incorporation and By-laws and the Securities Exchange
Act of 1934 and the rules and regulations of the applicable exchange to each
hold a meeting of its shareholders as soon as reasonably possible to consider
and vote upon the adoption of this Agreement and the authorization of the
Merger. In no event shall such meeting be held earlier than 20 business days
following the date on which proxy or information statements (the "Proxy
Statements") are sent to the stockholders of Herley and GMC.

ARTICLE II

STATUS AND CONVERSION OF SECURITIES

2.1 Status and Conversion of GMC shares. At the Effective Time, by virtue of
the Merger and without any action on the part of the holders thereof:

(a) Any GMC Shares held by GMC as treasury shares shall be cancelled and
retired.

(b) Each then outstanding GMC Share remaining (other than GMC Shares to be
cancelled in accordance with Section 2.1(a) hereof and other than GMC
Shares held by shareholders of GMC who properly exercise dissenters'
rights available under the BCL ("Dissenting Shares")) shall be converted
into the right to receive $18.00 in cash, without interest and a warrant
to receive one share of Herley's Common Stock, $.10 par value, in
accordance with the terms and conditions contained in the form of warrant
attached hereto as Exhibit C, which warrant shall lapse, if not earlier
exercised, three (3) years from the date of issuance.

(c) If, between the date of this Agreement and the Effective Time, the
outstanding GMC Shares shall have been changed into a different number of
shares or a different class by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or
readjustment, or a stock dividend thereon shall be declared with a record
date within said period, the merger price per share set forth in Section
2.1(b) hereof shall be correspondingly adjusted. GMC covenants and agrees
not to take any action referred to in the preceding sentence.

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(d) Each Dissenting Share as to which a written objection to the Merger is
filed in accordance with Section 623 of the BCL at or prior to the vote of
GMC shareholders on the Merger taken at the meeting of such shareholders
referred to in Section 1.7 hereof and not withdrawn at or prior to the
time of such vote and which is not voted in favor of the Merger shall not
be converted into a right to receive cash and warrants hereunder unless
and until the holder shall have effectively withdrawn or lost his right to
payment for his GMC Shares under such Section 623, at which time his GMC
Shares shall be converted into a right to receive cash and warrants in
accordance with Section 2.1(b).

2.2 GMC Stock Options and Warrants. All outstanding options or warrants or
other rights (referred to collectively as the "Options" and individually as an
"Option") to purchase GMC Shares shall, whether or not exercisable or vested,
become fully exercisable and vested, and each holder of an Option shall be
entitled to receive from Acquisition, at the Effective Time, for each Share of
GMC subject to an Option, an amount in cash in cancellation of such Option equal
to $18.00 less the per share exercise price of such Option, as such amount shall
be reduced by any amount required for withholding in accordance with applicable
federal and state tax laws and a warrant to receive one share of Herley's Common
Stock in the form of Exhibit D hereto. GMC's Board of Directors will adopt
resolutions terminating GMC's 1990 Stock Option Plan, 1997 Non-Employee
Directors Stock Option Plan and Employee Stock Purchase Plan (the "Option
Plans") effective as of the Effective Date.

2.3 Acquisition to Make Cash and Warrants Available. At or before the
Effective Time, Acquisition shall make available to American Stock Transfer &
Trust Company, or such other entity as Acquisition shall designate to act as
paying agent (the "Paying Agent"), such funds (the "Payment Fund") as are
required for the conversion of GMC Shares and Options into the right to receive
cash pursuant to Section 2.1 hereof and Herley shall deliver to the Paying Agent
a global warrant with respect to such number of shares of its Common Stock as
would be delivered if all of GMC's Shares and Options were converted pursuant
thereto. The Payment Fund may be invested from time to time by the Paying Agent,
as directed by the Surviving Corporation, in (i) obligations of or guaranteed by
the United States of America or any State, (ii) commercial paper rated A-1 or
A-2, and/or (iii) time deposits with, including certificates of deposit issued
by, any office located in the United States of any bank or trust company that
has capital, surplus and undivided profits of at least $50,000,000, and any net
earnings with respect thereto shall be paid to the Surviving Corporation as and
when requested by the Surviving Corporation.

Prior to the Effective Time, GMC shall furnish to the Paying Agent a list
certified by an officer of GMC setting forth the names and addresses of all
persons entitled to receive funds and warrants with respect to Options under
Section 2.2 hereof, the number of Options held by each person and the exercise
prices thereof.

Promptly after the Effective Time, the Paying Agent shall mail to each record
holder of GMC Shares a form of letter of transmittal and instructions for use in
surrendering certificates representing such shares and receiving payment
therefor.

Each holder of GMC Shares or Options to be converted into the right to receive
consideration pursuant to this Article II shall be entitled to receive, upon
surrender to the Paying Agent of one or more certificates for such GMC Shares
for cancellation or the delivery of such documents of cancellation as may be
prescribed with respect to Options, a bank check made payable to such holder for
the amount of cash, without interest, into which the GMC Shares previously
represented by such certificates or Options are

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convertible (under Sections 2.1 or 2.2, as the case may be) in the Merger and
shall deliver to the transfer agent for Herley's Common Stock such documentation
as shall be required to cause such transfer agent to deliver to such holder the
warrants with respect to the GMC Shares or Options. If a check and/or warrant is
to be sent to a person other than the person in whose name the certificates for
the GMC Shares surrendered for conversion are registered, it shall be a
condition of payment that the certificates so surrendered shall be properly
endorsed and the signatures thereon properly guaranteed and otherwise in proper
form for transfer and that the person requesting such payment shall pay to the
Surviving Corporation any transfer or other taxes required by reason of the
delivery of such check and related warrant to a person other than the registered
holder of the certificates surrendered, or shall establish to the satisfaction
of the Surviving Corporation that such taxes have been paid or are not
applicable. Until so presented and surrendered in exchange, each certificate
representing GMC Shares held by GMC shareholders (other than Dissenting Shares)
shall be deemed for all purposes to evidence only the right to receive the cash
and warrants to which such GMC Shares are entitled in accordance with Section
2.1 hereof.

Any portion of the Payment Fund not paid to holders of GMC Shares or Option
holders pursuant to this Agreement within twelve months after the Effective Time
shall be paid over by the Paying Agent to the Surviving Corporation together
with a list of holders of GMC Shares who have not yet surrendered certificates
for GMC Shares to the Paying Agent and such holders of GMC Shares shall
thereafter look only to the Surviving Corporation for payment, but shall have no
greater rights against the Surviving Corporation than may be accorded to general
creditors under applicable law. Notwithstanding the foregoing, neither the
Paying Agent, the Surviving Corporation nor any party hereto shall be liable to
a holder of GMC Shares for any cash delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.

ARTICLE III

CERTAIN EFFECTS OF MERGER

3.1 Effect of Merger. At and after the Effective Time, the separate existence
of GMC shall cease, the GMC Shares shall cease to exist (except as evidence of
the right of the holder thereof to receive cash and warrants therefor in
accordance with the terms hereof), subject to the rights of holders of
Dissenting Shares referred to in Section 2.1(b) hereof, and all rights,
privileges, powers and franchises, and all property, tangible and intangible, of
Acquisition and of GMC shall transfer to, vest in and devolve on the Surviving
Corporation without further act or deed. Confirmatory deeds, assignments, or
similar instruments to evidence such transfer may be executed and delivered at
any time in the name of GMC or Acquisition by GMC's last acting officers or by
the appropriate officers of the Surviving Corporation. The Surviving Corporation
shall be liable for all of the debts and obligations of Acquisition and GMC. Any
existing claim, action or proceeding pending by or against Acquisition or GMC
may be prosecuted to judgment as if the Merger had not taken place or, on motion
of the Surviving Corporation, the Surviving Corporation may be substituted as a
party, and any judgment against Acquisition or GMC shall constitute a lien on
the property of the Surviving Corporation. The Merger shall not impair the
rights of creditors or any liens on the property of either of the Constituent
Corporations.

3.2 Further Assurances. If at any time after the Effective Time the Surviving
Corporation shall consider or be advised that any further deeds, assignments or
assurances in law or any other acts are necessary, desirable or proper (a) to
vest, perfect or confirm,

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of record or otherwise, in the Surviving Corporation, the title to any property
or right of the Constituent Corporations acquired or to be acquired by reason
of, or as a result of, the Merger, or (b) otherwise to carry out the purposes of
this Agreement, the Constituent Corporations agree that the Surviving
Corporation and its proper officers and directors shall and will execute and
deliver all such property, deeds, assignments and assurances in law and do all
acts necessary, desirable or proper to vest, perfect or confirm title to such
property or right in the Surviving Corporation and otherwise to carry out the
purposes of this Agreement, and that the proper officers and directors of the
Constituent Corporations and the proper officers and directors of the Surviving
Corporation are fully authorized in the name of the Constituent Corporations or
otherwise to take any and all such action.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

4.1 Representations and Warranties by GMC. GMC represents and warrants to, and
agrees with, Acquisition and Herley, subject to the exceptions set forth in the
disclosure schedule (the "Schedule") attached hereto, as follows:

(a) Organization of GMC. GMC is duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of New York
with full corporate power and authority to own its properties and to
conduct its business as now conducted. GMC is duly qualified to do
business as a foreign corporation in good standing in all jurisdictions
where the nature of its assets or business requires such qualification and
such jurisdictions are listed in Part A of the Schedule except where the
failure to be so qualified or in good standing would not have a material
adverse effect on the business, properties, assets, results of operations
or condition (financial or otherwise) of GMC. GMC owns, directly or
indirectly, all of the outstanding capital stock of General Microwave
Foreign Sales Corporation, GMC Associates, Inc., Micro-EL Patent
Corporation, General Microwave Israel (1987) Ltd. and General Microwave
Israel Corp. and 97% of the outstanding Common Stock and all of the
outstanding preferred stock of General Microcircuits Corporation
(collectively the "Subsidiaries"). GMC does not own, directly or
indirectly, shares of capital stock in any corporation other than the
Subsidiaries. The Subsidiaries are duly incorporated and validly existing
as corporations in good standing under the laws of the jurisdiction of
their respective organization with full corporate power and authority to
own their properties and to conduct their businesses as now conducted. The
Subsidiaries are duly qualified to do business as a foreign corporation in
good standing in all jurisdictions where the nature of their assets or
business requires such qualification and such jurisdictions are listed in
Part A of the Schedule except where the failure to be so qualified or in
good standing would not have a material adverse effect on the business,
properties, assets, results of operations or condition (financial or
otherwise) of any such Subsidiary. The Certificate of Incorporation and
the By-laws of GMC and of each of the Subsidiaries, heretofore delivered
by GMC to Acquisition, are complete and correct and contain all amendments
thereto.

(b) Authority of GMC. GMC has the corporate power to enter into this
Agreement and, subject to the approval of the Merger by its shareholders,
to carry out the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the Merger and the
transactions contemplated hereby have been duly approved and authorized by
the Board of Directors of GMC and the Board

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of Directors of GMC has recommended that holders of GMC Shares adopt this
Agreement and approve the Merger; except for the adoption of this
Agreement and approval of the Merger by its shareholders, no other
corporate acts or proceedings on the part of GMC are necessary to
authorize this Agreement or the consummation of the transactions
contemplated hereby. Subject to the approval of the Merger by its
shareholders, this Agreement constitutes the valid and legally binding
obligation of GMC enforceable against GMC in accordance with its terms.
Except as set forth in Part B of the Schedule, the execution and delivery
of this Agreement by GMC does not, and the consummation of the
transactions contemplated hereby will not, violate or constitute a default
under (i) any provision of the Certificate of Incorporation or By-laws of
GMC, (ii) any provision of (or result in acceleration of any obligation
under) any mortgage, note, lien, lease, agreement, instrument, arbitration
award, judgment or decree to which GMC or any of the Subsidiaries is a
party or by which GMC or any of the Subsidiaries is bound or to which any
property of GMC or any of the Subsidiaries is subject or (iii) any laws of
the United States or any state or jurisdiction in which GMC or any of the
Subsidiaries conducts business.

(c) Capitalization. The authorized capital stock of GMC consists of 5,000,000
shares of Common Stock. As of the date hereof, 1,678,011shares of Common
Stock of GMC are validly issued and outstanding, fully paid and
nonassessable, and 476,108 GMC Shares are held in the treasury of GMC. As
of the date hereof, 88,000 GMC shares are subject to outstanding Options
under the 1990 Stock Option Plan and 30,000 GMC Shares are reserved under
the 1997 Non-Employee Director Stock Option Plan for issuance pursuant to
options heretofore granted thereunder and 3,372 Shares are reserved for
issuance pursuant to the Employee Stock Purchase Plan. As of the date
hereof, GMC has no commitments to issue or sell any Shares of its capital
stock or any securities or obligations convertible into or exchangeable
for, or giving any person any right to subscribe for or acquire from GMC
any shares of capital stock of GMC and no securities or obligations
evidencing any such rights are outstanding, except pursuant to the
outstanding options and warrants described above.

(d) Consents, etc. No consent, authorization, order or approval of, or filing
or recording with, any governmental commission, board or other regulatory
body is required for or in connection with the execution and delivery of
this Agreement by GMC and the consummation by GMC of the transactions
contemplated hereby, except for (i) the filing of a Form S-4 Registration
Statement (the "Registration Statement") with respect to the warrants and
shares of Herley Common Stock underlying the warrants with the Securities
and Exchange Commission (the "SEC") in accordance with the Securities Act
of 1933, as amended (the "Securities Act"), (ii) the filing of the
Certificate of Merger with the Secretary, (iii) the filing of a joint
proxy statement (the "Proxy Statement") with Herley with the SEC in
accordance with the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), (iv) the filing of a Current Report on Form 8-K with the
SEC, (v) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and
state securities laws and the laws of any foreign country and (vi) such
filings as may be required to be made with respect to the transfer of
title to real property owned by GMC.

(e) Financial Statements. GMC has previously furnished Acquisition with a
true and complete copy of the audited consolidated balance sheet of GMC as
of February 28, 1997 and 1998 and the related audited statements of
consolidated income and retained earnings and of consolidated changes in
financial position for the fiscal years

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then ended including the notes thereto, all reported on by KPMG Peat
Marwick LLP, independent certified public accountants, and the unaudited
consolidated balance sheet of GMC as of May 30, 1998 and the related
unaudited statements of consolidated income and retained earnings and of
consolidated changes in financial position for the three months then ended
(collectively the "GMC Financial Statements"). The GMC Financial
Statements present fairly the consolidated revenues of GMC and its
subsidiaries for the periods then ended in conformity with generally
accepted accounting principles applied on a consistent basis.

GMC and the Subsidiaries have no material liabilities, contingent or
otherwise, (including liabilities for taxes) other than (i) liabilities
which will be shown or reflected in the unaudited financial statements
referred to in Section 5.1(e) hereof (the "August Financials"), (ii)
liabilities incurred in the ordinary course of business since February 28,
1998, and (iii) those liabilities described in part E of the Schedule.

(f) Absence of Certain Changes or Events. Except as set forth in part F of
the Schedule, since February 28, 1998, there has not been any material
adverse change in the financial condition, properties, business or results
of operations of GMC and the Subsidiaries and since May 30, 1998 there has
not been (i) any change in the authorized, issued or outstanding capital
stock or material change in the funded debt of GMC and the Subsidiaries on
a consolidated basis, other than changes in the outstanding capital stock
due to exercise of options under the Option Plans and outstanding warrants
and other than changes due to payments in a accordance with the terms of
such debt; (ii) any declaration, setting aside or payment of any dividend
on, or distribution in respect of, any shares of the capital stock of GMC
or the acquisition for value by GMC or any of the Subsidiaries of any
shares of capital stock of GMC; or (iii) any grant by GMC of any warrant,
option or right to acquire any GMC Shares or other securities whatsoever.
Neither GMC nor the Subsidiaries is currently in default on any
installment or installments on indebtedness for borrowed money, or on any
rental on any long-term lease.

(g) Governmental Authorization and Compliance with Laws. The businesses of
GMC and the Subsidiaries have been operated in compliance in all material
respects with all laws, ordinances, regulations and orders of all
governmental entities. GMC and the Subsidiaries have all material permits,
certificates, licenses, approvals and other authorizations required in
connection with the operation of their businesses, a complete list of
which are set forth in Part G of the Schedule.

(h) Tax Matters.

(A) Except as disclosed in Part E of the Schedule: The amounts shown as
tax liabilities on the consolidated balance sheet of GMC as of May
30, 1998 included in the GMC Financial Statements will be sufficient
for the payment of all federal, state, county, local and foreign
Taxes (as hereinafter defined) of GMC and the Subsidiaries, whether
or not disputed, which were properly accruable at that date. There
are no agreements by GMC or any of the Subsidiaries for the
extension of the time for assessment of any Taxes. Neither the
Internal Revenue Service (the "IRS") nor any other taxing authority
is now asserting, or to the knowledge of GMC threatening to assert,
against GMC or any of the Subsidiaries any claim for additional
Taxes, nor to GMC's knowledge is the IRS or any other taxing
authority auditing any tax return filed by GMC or any of the
Subsidiaries.

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(B) Each of GMC and the Subsidiaries has timely filed (and until the
Closing will timely file) all returns, declarations, reports,
estimates, information returns and statements ("Returns") required
to be filed or sent by or with respect to them in respect of any
Taxes;

(C) As of the time of filing, such Returns were (and, as to Returns not
filed as of the date hereof, will be) true, complete and correct in
all material respects;

(D) GMC and the Subsidiaries have timely paid or provided for (and until
the Closing will timely pay or in good faith contest) all Taxes that
are due and payable;

(E) GMC and the Subsidiaries have complied in all material respects with
all applicable laws, rules and regulations relating to the payment
and withholding of Taxes and have timely withheld from employee
wages and paid over to the proper governmental authorities all
amounts required to be so withheld and paid over under all
applicable laws;

(F) None of GMC or the Subsidiaries has filed a consent pursuant to
Section 341(f) of the Internal Revenue Code of 1986 (the "Code") or
agreed to have Section 341(f)(2) of the Code apply to any
disposition of a subsection (f) asset (as such term is defined in
Section 341(f)(4) of the Code) owned by GMC or any of the
Subsidiaries;

(G) No property used by GMC or the Subsidiaries is property that GMC or
any such Subsidiary is or will be required to treat as being owned
by another person pursuant to the provisions of Section 168(f)(8) of
the Internal Revenue Code of 1954 as it existed prior to the
enactment of the Tax Reform Act of 1986 or is "tax-exempt use
property" within the meaning of Section 168 (h) or the Code; and

(H) None of GMC or the Subsidiaries is required to include in income any
adjustment pursuant to Section 481(a) of the Code by reason of
voluntary change in accounting method initiated by GMC, or for any
other reason, nor does GMC have any knowledge that the Internal
Revenue Service has proposed any such adjustment or change in
accounting method.

For purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies or other assessments, including, without
limitation, all net income, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, excise, severance, stamp, occupation, property
or other taxes, customs duties, fees, assessments or charges of any
kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any tax authority
(domestic or foreign) upon GMC or any of the Subsidiaries.

(i) Title to Properties; Absence of Liens and Encumbrances, etc. Except for
leased properties, GMC and the Subsidiaries have good and marketable title
to all of their tangible properties and assets, real, personal and mixed,
used in their business, including without limitation those referred to in
the balance sheet as of May 30, 1998 referred to in paragraph (e) of this
Section 4.1 (other than properties or assets disposed of in the ordinary
course of business since the date of such balance sheet), free and clear
of all liens, charges, pledges, security interests or other encumbrances,
except as reflected in the GMC Financial Statements or in Part I of the
Schedule.

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(j) Contracts, etc. GMC shall as soon as practicable after execution of this
Agreement and prior to Closing, furnish Acquisition and its counsel with a
complete and accurate list, together with true and complete copies if
requested by Acquisition, of:

(i) all sales contracts of GMC or any of the Subsidiaries having a sales
price of $50,000 or more or not to be performed within one year
regardless of amount and all purchase orders having a purchase price
of $25,000 or more;

(ii) all other contracts of GMC or any of the Subsidiaries (other than
sales contracts and purchase orders), leases, mortgages, indentures,
promissory notes, deeds, loan or credit agreements, or similar
instruments involving amounts in excess of $25,000 or more or not to
be performed within one year regardless of amount;

(iii)all pension, profit-sharing or employee benefit plans, employment
contracts, contracts with unions and other agreements relating to
employees of GMC or any of the Subsidiaries;

(iv) all GMC and the Subsidiaries' policies of insurance issued during the
past five years; and

(v) all deeds to real property owned by GMC or any of the Subsidiaries.

Part J of the Schedule, when furnished to Acquisition and Herley,
will contain a true and complete list of all of the above described
contracts and leases. Except as set forth in Part J of the Schedule,
none of GMC or the Subsidiaries is or will be in default, and no
event has occurred or will have occurred which (whether with or
without notice, lapse of time or the happening or occurrence of any
other event) would constitute a default under any of the above
described contracts and leases, and all such contracts and leases are
valid and legally binding.

(k) Litigation. Except as set forth in Part K of the Schedule, when delivered
to Acquisition and Herley, there is and will be no claim, action, suit or
proceeding in or before any court or administrative or regulatory agency
pending, or to the knowledge of GMC except as set forth in Part KK of the
Schedule contemplated or threatened, against GMC or any of the
Subsidiaries or any of their properties.

(l) Patents, Copyrights, Trademarks, etc. GMC and the Subsidiaries have good
and marketable title to all patents, patent applications, copyrights,
trademarks and trade names, brand names, proprietary and other technical
information, technology, inventions, discoveries, improvements, processes,
know-how, formulae, drawings, specifications, production data, trade
secrets and computer software and programs, and licenses thereof, which
are necessary for the operation of their businesses as presently conducted
and as proposed to be conducted, a true and complete list of which will be
included in Part L of the Schedule. Except as set forth in Part L of the
Schedule, there are and will be no claims or proceedings threatened or
pending against GMC or any of the Subsidiaries asserting that GMC or any
of the Subsidiaries is infringing any such intellectual property rights of
any other person.

(m) Employee Benefit Plans. Other than those set forth in Part M of the
Schedule, GMC and the Subsidiaries do not maintain, administer or
contribute to any bonus, profitsharing, pension, retirement, stock
purchase, stock option, deferred compensation, hospitalization, medical,
life insurance, disability, severance pay or other benefit plan
arrangement or program, including, but not limited to, any employee
benefit

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plan within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), covering any of GMC's or the
Subsidiaries' employees (the "Plans").

GMC has furnished or will furnish Acquisition with (i) complete and
accurate copies of all documents comprising or pertaining to each Plan,
including each amendment and any trust agreement, insurance contract, or
other arrangement for the funding of benefits under such Plan, (ii) copies
of all determination letters or private rulings issued by the IRS with
respect to each Plan and copies of all applications and requests filed
with the IRS for such determinations or rulings, (iii) a copy of the three
(3) most recent annual reports (Form 5500) for each Plan and (iv) a copy
of the most recent summary plan description ("SPD"), and all summaries of
material modifications to such SPD, for each Plan.

Each Plan is, and at all times since its inception has been, in compliance
in all material respects with all the provisions of ERISA applicable to
such Plan, and with all other laws, rules and regulations applicable to
such Plan.

Each Plan that is intended to meet the requirements for qualification
under Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code") or that is intended to qualify for special tax treatment under any
other provision of the Code, is, and at all times since its inception has
been, in compliance with all conditions necessary for such Plan to so
qualify. GMC is not aware of any fact that might cause any such Plan to
lose its qualified status.

No prohibited transaction within the meaning of the applicable provisions
to ERISA and the Code have occurred with respect to any Plan. No
transaction has occurred with respect to any Plan that has resulted in, or
could result in, liability for GMC or any of the Subsidiaries (or for any
successor to GMC or any of the Subsidiaries) under Title IV of ERISA.

GMC, the Subsidiaries and each fiduciary for each of the Plans is in
compliance with the terms of each Plan, and with the requirements and
duties of any and all laws, statutes, orders, decrees, rules and
regulations, including but not limited to ERISA and the Code, applicable
to each Plan. All contributions and other payments required to be made by
GMC or any of the Subsidiaries under or with respect to each Plan under
the terms of such Plan, ERISA (including Part 3 of Subtitle B of Title I
of ERISA), the Code (including Code Section 412), or otherwise have been
made or accruals adequate for such purposes as of the date of the most
recent financial statements of GMC have been provided therefor and
reflected in said financial statements in accordance with GAAP.

There is no pending, or to the best of the knowledge of GMC, threatened,
legal action, proceedings or investigations against GMC, the Subsidiaries
or any Plan, other than routine claims for benefits, which could result in
liability being imposed upon any of the Plans or upon GMC or any of the
Subsidiaries with respect to any of the Plans and there is no basis for
any such legal action or proceeding.

The actuarial present value of accrued benefits (both vested and unvested)
of each of the Plans does not exceed the assets of such Plans based upon
actuarial assumptions which are reasonable in light of the experience of
each such Plan.

Except as set forth in Part M of the Schedule, there are no agreements
between GMC or any of the Subsidiaries and any labor union and GMC and the
Subsidiaries

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are not, and have never been a participating employer in any multiemployer
plan, as such term is defined in Section 3(37) of ERISA, or in any
multiple employer plan described in Section 413(c) of the Code. To the
extent that GMC or either of the Subsidiaries is or has been a
participating employer in any multiemployer plan (as so defined), none of
GMC or the Subsidiaries is now, or would upon withdrawal therefrom become,
liable for any withdrawal liability to or in respect of such multiemployer
plan.

The execution and delivery of this Agreement and Plan of Merger and the
consummation of the transactions contemplated hereby will not result in
any payment (whether of severance pay or otherwise) becoming due from any
of the Plans, or from GMC or any of the Subsidiaries with respect to any
of the Plans, to any individual, or result in the vesting, acceleration or
payment or increases in the amount of any benefit payable under any of the
Plans to any individual.

(n) Finder's Fee. No brokers or finders were employed by GMC or any of the
Subsidiaries in connection with any of the transactions contemplated by
this Agreement and no fee will be payable by GMC, Herley or Acquisition
with respect to the transactions contemplated hereby by reason of any
agreement between GMC or any of the Subsidiaries with any finder,
including Franco, Lewis & Company, Inc.

(o) No Failure to Disclose. GMC has not failed to disclose to Acquisition any
agreement, arrangement, event or occurrence, or threatened or anticipated
event or occurrence known to GMC, which would or might reasonably be
deemed to have a material and adverse effect on the financial condition,
the business or the operations of GMC or any of the Subsidiaries.

(p) Proxy Statement. The information concerning GMC and the Subsidiaries and
the Merger contained in the Proxy Statement (i) will include all
statements of material facts which are required to be stated therein, and
(ii) will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading.

(q) Insider Interests. No officer or director of GMC or any of the
Subsidiaries has any agreement with GMC or any of the Subsidiaries or any
interest in any property, real, personal or mixed, tangible or intangible
(including, without limitation, patents, patent applications, trademarks,
trade names or other intellectual property), used in or pertaining to the
business of GMC or the Subsidiaries except as a shareholder or employee
and except as set forth in Part Q of the Schedule.

(r) Labor Controversies. Except as set forth in Part R of the Schedule, there
are no controversies between GMC or any of the Subsidiaries and any
employees of GMC or the Subsidiaries or any unresolved labor union
grievances or unfair labor practices or labor arbitration proceedings
pending or threatened relating to GMC or the Subsidiaries and there are
not any organizational efforts presently being made or threatened
involving any of GMC's or any of the Subsidiaries' employees. None of GMC
or the subsidiaries has received notice of any claim that it has not
complied with any laws relating to the employment of labor, including any
provisions thereof relating to wages, hours, collective bargaining, the
payment of social security and similar taxes, equal employment
opportunity, employment discrimination or employment safety, or that it is
liable for any arrears of wages or any taxes or penalties for failure to
comply with any of the foregoing.

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(s) Use of Real Property. The real properties owned and leased by GMC and the
Subsidiaries are used and operated in compliance and conformity in all
material respects with all applicable leases, contracts, commitments,
licenses and permits. None of GMC or the Subsidiaries has received notice
of violation of any applicable zoning or building regulation, ordinance or
other law, order, regulation or requirement relating to the operations of
GMC or the Subsidiaries and to GMC's knowledge there is no such violation.
All plants and other buildings which are owned or leased by GMC or any of
the Subsidiaries conform in all material respects with all applicable
ordinances, codes, regulations and requirements, and no law or regulation
presently in effect or condition precludes or restricts continuation of
the present use of such properties.

(t) Accounts Receivable. The accounts receivable which will be reflected on
the unaudited consolidated balance sheet of GMC included in the August
Financials, and all accounts receivable of GMC and the Subsidiaries
arising since the date of such balance sheet arose from bona fide
transactions in the ordinary course of business, and the materials or
services involved have been provided to the account obligor, and, except
as contemplated by the relevant contract, no further materials or services
are required to be provided in order to complete the sales and to entitle
GMC or the Subsidiaries, or their assignees, to collect the accounts
receivable in full. Except as set forth in Part T of the Schedule, no such
account receivable has been assigned or pledged to any other person, firm
or corporation, and no defense or setoff to any such account has been
asserted by the obligor.

(u) Compliance with Environmental Laws. Except as set forth in Part V of the
Schedule:

(i) GMC and the Subsidiaries are in compliance with all environmental
laws, regulations, permits and orders applicable to them, and with
all laws, regulations, permits and orders governing or relating to
asbestos removal or abatement.

(ii) Except for temporary storage on premises pending arrangement for
removal, none of GMC or the Subsidiaries has transported, stored,
treated or disposed of, nor has it allowed or arranged for any third
parties to transport, store, treat or dispose of, hazardous
substances or other waste to or at any location other than a site
lawfully permitted to receive such hazardous substances or other
waste for such purposes; and GMC and the Subsidiaries have not
performed, arranged for or allowed by any method or procedure such
transportation, storage, treatment or disposal in contravention of
any laws or regulations. None of GMC or the Subsidiaries has
disposed, or allowed or arranged for any third parties to dispose, of
hazardous substances or other waste upon property owned or leased by
it.

(iii)There has not occurred, nor is there presently occurring, a Release
of any hazardous substance on, into or beneath the surface of any
parcel of real property in which GMC or any of the Subsidiaries has
or has had an ownership interest or any leasehold interest. For
purposes of this Section the term "Release" shall mean releasing,
spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing or dumping.

(iv) None of GMC or the Subsidiaries has transported or disposed of, nor
have they allowed or arranged for any third parties to transport or
dispose of, any

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hazardous substance or other waste to or at a site which, pursuant to
the U.S. Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA") or any similar state
law, (A) has been placed on the National Priorities List or its state
equivalent, or (B) the Environmental Protection Agency or the
relevant state agency has proposed or is proposing to place on the
National Priorities List or its state equivalent. None of GMC or the
Subsidiaries has received notice, or has knowledge, of any facts
which could give rise to any notice that GMC or any of the
Subsidiaries is a potentially responsible party for a federal or
state environmental cleanup site or for corrective action under
CERCLA or any other applicable law or regulation. None of GMC or the
Subsidiaries has submitted nor was required to submit any notice
pursuant to Section 103(c) of CERCLA. None of GMC or the Subsidiaries
has received any written or oral request for information in
connection with any federal or state environmental cleanup site or
has undertaken (or been requested to undertake) any response or
remedial actions or cleanup actions of any kind at the request of any
federal, state or local governmental entity, or at the request of any
other person or entity.

(v) There are no laws, regulations, ordinances, licenses, permits or
orders relating to environmental or worker safety matters requiring
any work, repairs, construction or capital expenditures with respect
to the assets or properties of GMC or any of the Subsidiaries.

(vi) Part V of the Schedule identifies (A) all environmental audits,
assessments or occupational health studies undertaken by GMC or any
of the Subsidiaries or agents of any of them or by any governmental
agencies with respect to the operations or properties of GMC or any
of the Subsidiaries; (B) the results of any groundwater, soil, air or
asbestos monitoring undertaken with respect to any real property
owned or leased by GMC or any of the Subsidiaries; (C) all written
communications of GMC or any of the Subsidiaries with environmental
agencies; and (D) all citations issued with respect to GMC or any of
the Subsidiaries under the Occupational Safety and Health Act (29
U.S.C. Sections 651 et seq.).

4.2 Representations and Warranties by Acquisition and Herley. Each of
Acquisition and Herley jointly and severally represents and warrants to, and
agrees with GMC as follows:

(a) Organization of Acquisition and Herley. Acquisition and Herley are
corporations duly organized, validly existing and in good standing under
the laws of the States of New York and Delaware, respectively and
Acquisition and Herley and each of its subsidiaries is duly qualified to
do business and is in good standing in each jurisdiction in which the
character of its properties owned or leased, or the nature of its
activities makes such qualification necessary, except where the failure to
be so qualified or in good standing would not have a material adverse
effect on the business, properties, assets, results of operations or
condition (financial or otherwise) of Herley and its subsidiaries taken as
a whole.

(b) Authority of Acquisition and Herley. Acquisition and Herley have the
corporate power to enter into this Agreement and to carry out the
transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the Merger and the transactions
contemplated hereby have been duly authorized by the Board of Directors
and the sole shareholder of Acquisition and by the Board of

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Directors of Herley; and (i) no other corporate acts or proceedings on the
part of Acquisition or Herley are necessary to authorize this Agreement or
the consummation of the transactions contemplated hereby other than the
receipt of shareholder approval by Herley of the shareholders of Herley,
and (ii) this Agreement constitutes the valid and legally binding
obligation of Acquisition and Herley enforceable against Acquisition and
Herley in accordance with its terms. The execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated
hereby will not, violate or constitute a default under any provision of
the Certificate of Incorporation or By-laws of Acquisition or Herley or
any provision of (or result in the acceleration of any obligation under)
any mortgage, note, lien, lease, agreement, instrument, arbitration award,
judgment or decree to which either of Acquisition or Herley is a party or
by which they are bound or to which any of their property is subject, or
any laws of the United States or any state or jurisdiction in which
Acquisition or Herley conducts business.

(c) Consents, etc. No consent, authorization, order or approval of, or filing
or registration with, any governmental commission, board or other
regulatory body is required for or in connection with the execution and
delivery of this Agreement by Acquisition and Herley and the consummation
by Acquisition and Herley of the transactions contemplated hereby, except
for (i) the filing of the Registration Statement with the SEC in
accordance with the Securities Act, (ii) the filing of the Certificate of
Merger with the Secretary, (iii) the filing of the Proxy Statement with
the SEC, (iv) the filing of a Current Report on Form 8-K with the SEC, (v)
such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and
state securities laws and the laws of any foreign country and (vi) such
filings as may be required to be made with respect to the transfer of
title to real property owned by GMC.

(d) Finder's Fee. No brokers or finders were employed by Acquisition or
Herley in connection with any of the transactions contemplated by this
Agreement.

(e) Registration Statement, Proxy Statement. All information concerning
Acquisition and Herley furnished or to be furnished by Acquisition or
Herley for inclusion in the Registration Statement and Proxy Statement is
and will be true and correct in all material respects; the information
concerning Acquisition and Herley contained in the Proxy Statement
furnished by Acquisition or Herley (i) will include all statements of
material facts which are required to be stated therein, and (ii) will not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.

(f) Reports. Herley has filed all forms, reports and documents required to be
filed by it with the SEC since filing its Annual Report on Form 10-K for
the fiscal year ended August 3, 1997 and has made available to GMC such
forms, reports and documents in the form filed with the SEC. All such
required forms, reports and documents (including those which Herley may
file subsequent to the date hereof) are designated as the "SEC Reports."
As of their respective dates, the SEC Reports (i) were prepared in
accordance with the requirements of the Securities Act or the Exchange
Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to the SEC Reports, and (ii) did not at the time
they were filed (or amended or superseded) contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the

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statements therein, in light of the circumstances under which they were
made, not misleading.

(g) Capitalization. The authorized capital stock of Herley consists of
20,000,000 shares of its Common Stock, $.10 par value. As of the date
hereof, 5,266,159 shares of Common Stock of Herley are validly issued and
outstanding (8,371 of which are held for delivery to former shareholders
of an acquired corporation) fully paid and non-assessable, and no Herley
shares are in the treasury of Herley. As of the date hereof 1,765,000
Herley shares are reserved for issuance pursuant to outstanding warrants
and 3,274,868 Herley shares are reserved for issuance under various stock
option plans.

(h) Validity. The Warrants, when issued and delivered by Acquisition and
Herley in accordance with the terms hereof, will be the validly issued and
binding obligations of Herley, each enforceable in accordance with its
terms, and the shares of Herley Common Stock deliverable thereunder, when
delivered upon the proper exercise of any such Warrant in exchange for the
required consideration therefor, shall be duly and validly issued, fully
paid and non-assessable.

ARTICLE V

COVENANTS AND AGREEMENTS

5.1 Covenants and Agreements of GMC. GMC covenants and agrees with Acquisition
as follows:

(a) Registration Statement. GMC will cooperate fully with Herley in the
preparation and filing of the Registration Statement and take all such
actions as Herley may reasonably request to cause the Registration
Statement to become effective.

(b) Proxy Statement. GMC shall cooperate fully with Herley in the preparation
of filing of the Proxy Statement.

(c) Submission to Shareholders. GMC will promptly call a meeting of its
shareholders to consider and vote upon approval of this Agreement and the
Merger and the Board of Directors of GMC will recommend to such
shareholders approval thereof. GMC shall use its best efforts to solicit
and secure from the shareholders of GMC such approval.

(d) Conduct of Business. Without the prior written consent of Acquisition,
between the date of this Agreement and the Effective Time:

(i) GMC will not, and will not cause or permit any of the Subsidiaries
to, engage in any activities or transactions which will be outside
the ordinary course of their respective businesses consistent with
past practices, except as shall be provided for or specifically
contemplated by this Agreement, and GMC and the Subsidiaries will
consult with Acquisition prior to making any significant business
decisions;

(ii) GMC will not subdivide or reclassify the GMC Shares, issue any
shares of its capital stock, except upon the exercise of
outstanding Options under the Option Plans or amend its Certificate
of Incorporation or By-laws;

(iii) GMC will not declare or pay any dividend or other distribution in
respect of its shares of capital stock or acquire for value, or
permit any Subsidiary to acquire for value, any shares of capital
stock of GMC;

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(iv) GMC will afford to the officers, attorneys, accountants and other
authorized representatives of Acquisition reasonable access to its
and the SubsidiariesI plants, properties, books, tax returns and
minute books and other corporate records during normal business
hours in order that Acquisition may have full opportunity to make
such investigation as Acquisition shall desire of the affairs of
GMC and the Subsidiaries. If for any reason the Merger is not
consummated, Acquisition will cause all non-public information
obtained in connection with such investigation to be treated as
confidential, and to be returned to GMC if in tangible form, and
not use or disclose same without the consent of GMC, except where
required to disclose such information pursuant to law;

(v) GMC will comply with all applicable securities laws and will obtain
such governmental permits, orders or consents, if any, as may be
required of it in connection with the transactions contemplated by
this Agreement;

(vi) GMC will not, and will not cause or permit the Subsidiaries to,
take any action to institute any new severance or termination pay
practices with respect to any directors, officers, or employees of
GMC or any of the Subsidiaries or to increase the benefits payable
under its severance or termination pay practices in effect on the
date hereof;

(vii) GMC will not, and will not cause or permit the Subsidiaries to,
adopt or amend, in any material respect, except as may be required
by applicable law or regulation, any collective bargaining, bonus,
profit sharing, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment or other
employee benefit plan, agreement, trust, fund, plan or arrangement
for the benefit or welfare of any directors, officers or employees
of GMC or any of the Subsidiaries;

(viii) GMC and the Subsidiaries will use their best efforts to maintain
their relationships with their suppliers and customers, and if and
as requested by Acquisition, (i) GMC and the Subsidiaries shall
make reasonable arrangements for representatives of Acquisition to
meet with suppliers and customers of GMC and the Subsidiaries, and
(ii) GMC and the Subsidiaries shall schedule, and the management of
GMC and the Subsidiaries shall participate in, meetings of
representatives of Acquisition with employees of GMC and the
Subsidiaries or their union representatives;

(ix) GMC will, and will cause the Subsidiaries to, maintain all of its
and their respective properties in customary repair, order and
condition, reasonable wear and tear excepted, and will maintain,
and will cause the Subsidiaries to maintain, insurance upon all of
its and their properties and with respect to the conduct of its and
their businesses in such amounts and of such kinds comparable to
that in effect on the date of this Agreement;

(x) GMC and the Subsidiaries will maintain their books, accounts and
records in the usual, regular and ordinary manner, on a basis
consistent with prior years;

(xi) GMC and the Subsidiaries will duly comply with all laws applicable
to each of them and to the conduct of their respective businesses;

(xii) no change shall be made in the banking and safe deposit
arrangements of GMC or the Subsidiaries existing on the date hereof
without the prior written

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consent of Acquisition and no powers of attorney shall be granted
by GMC or any of the Subsidiaries;

(xiii) except as contemplated by this Agreement, GMC will not, and will
not permit any of the Subsidiaries to, acquire or agree to acquire
by merging or consolidating with, purchasing substantially all of
the assets of or otherwise, any business or any corporation,
partnership, association, or other business organization or
division thereof; and

(xiv) GMC will promptly advise Acquisition in writing of any material
adverse change in the financial condition, business or operations
of GMC or any of the Subsidiaries and of any breach of its
representations or warranties contained herein.

(e) Stock Options. After the date hereof, GMC will not issue any stock
options under any Option Plan.

(f) No Other Negotiations. Except as contemplated hereunder, prior to the
earlier of the Closing or the termination of this Agreement, neither GMC
nor any of the Participating Shareholders shall directly or indirectly
solicit, initiate or encourage inquiries or proposals with respect to,
furnish any information relating to, or participate in, continue or enter
into any negotiations or discussions concerning, any merger, consolidation
or other business combination with or the purchase of all or a portion of
the assets of, or any equity interest in GMC or any of the Subsidiaries;
and GMC shall instruct each officer, director, affiliate and advisor of
GMC and the Subsidiaries to refrain from doing any of the above. GMC and
the Participating Shareholders agree to advise Acquisition immediately in
writing of, and to communicate therein the terms of, any such inquiry of
proposal which any of them shall receive.

(g) Financial Statements. GMC will deliver to Acquisition all regularly
prepared audited and unaudited financial statements of GMC or of any of
the Subsidiaries prepared after the date hereof in the format historically
used internally, as soon as available, and will deliver to Acquisition the
unaudited consolidated financial statements of GMC for the quarter ended
August 31, 1998, as soon as available which financial statements shall
indicate that there has been no material adverse change in GMC's financial
condition since February 28, 1998.

(h) Certification of Shareholder Vote. On or prior to the Closing Date, GMC
shall deliver to Acquisition a certificate of its secretary setting forth
(i) the number of GMC Shares outstanding and entitled to vote on the
adoption of this Agreement and approval of the Merger, the number of GMC
Shares voted in favor of adoption of this Agreement and approval of the
Merger, and the number of GMC Shares voted against adoption of this
Agreement and approval of the Merger; and (ii) the names of all holders of
Dissenting Shares and the number of Dissenting Shares held by each such
holder.

(i) Completion and Delivery of Schedule. GMC shall use utmost diligence in
completing and delivering the Schedule in a form acceptable to Acquisition
and Herley.

5.2 Other Covenants and Agreements.

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(a) Cooperation of Acquisition and GMC. Acquisition and GMC will fully
cooperate with each other in the preparation of the Registration Statement
and the Proxy Statement.

(b) Efforts to Consummate Transactions. Acquisition, Herley, GMC and the
Participating Shareholders will each use their best efforts to consummate the
Merger and to cause to be satisfied each of the conditions of Closing
contained in Section 6.1 and each of the conditions contained in Section
6.2 (to be satisfied by GMC and Section 6.3 (to be satisfied by
Acquisition).

(c) Vote by Participating Shareholders, etc. The Participating Shareholders
each hereby covenants and agrees that until the earlier of the Closing
Date or the termination of this Agreement, he will (i) continue to hold
all GMC Shares now held by him, and (ii) vote at the meeting of the
shareholders of GMC referred to in Section 1.7 hereof all such GMC Shares
in favor of adoption of this Agreement and authorization of the Merger.
Simultaneously with the execution of this Agreement, the Participating
Shareholders each has executed and delivered or will execute and deliver
to Acquisition irrevocable proxies to vote their GMC Shares at such
meeting in the form of Exhibit D hereto.

(d) Other Agreements. Concurrently with the Closing of this Agreement, (i)
Sherman A. Rinkel, a Participating Shareholder, agrees to execute and
deliver the Consulting Agreement in the form of Exhibit E hereto; and (ii)
Acquisition shall execute and deliver to Mitchell Tuckman, Arnold H.
Levine, Rozalie Schachter and Howard Cohen employment agreements in the
forms set forth in Exhibit F at annual salaries of $160,000.00,
$118,000.00, $120,000.00 and $118,000.00, respectively.

(e) Covenant of Herley. Herley hereby covenants and agrees with GMC and the
Participating Shareholders that Herley shall, except as otherwise stated
in Section 5.2(g) hereof, cause Acquisition to perform and comply with all
of its covenants and agreements contained in this Agreement.

(f) Permits, Orders and Consents. Between the date of this Agreement and the
Closing Date, GMC, Herley and Acquisition shall in connection herewith
comply with all applicable securities laws and will cooperate in the
timely filing or submission of information with governmental authorities,
including any required by the Hart-Scott-Rodino Act, and will obtain such
governmental permits, orders or consents, if any, as may be required in
connection with the transactions contemplated by this Agreement.

(g) Officers and Directors Insurance and Indemnification. It is agreed that
on and after the Closing Date, the Surviving Corporation shall, to the
extent permitted by applicable law, continue unamended the current
provisions of Acquisition's Certificate of Incorporation and By-laws
concerning the indemnification of officers and directors. The directors of
GMC by their approval of this Agreement agree that they waive, and will
not assert, any claims for indemnification which they may have against the
Surviving Corporation to the extent of any increase after the Closing Date
in the market value of the business of the Surviving Corporation.
Notwithstanding the foregoing, nothing herein shall constitute or be
deemed a waiver of any claims of such directors for indemnification to the
extent that such claims are covered by GMC's directors' and officers'
liability insurance.

(h) Exchange Act Filings. For so long as any Warrant remains outstanding and
unexercised, Herley shall use its reasonable efforts to comply with the
filing and reporting requirements of the Exchange Act.

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ARTICLE VI

CONDITIONS

6.1 Mutual Conditions. Neither Acquisition nor GMC shall be obligated to
complete or cause to be completed the transactions contemplated by this
Agreement unless:

(a) Registration Statement. The Registration Statement shall have become
effective.

(b) Shareholder Approval. Adoption of this Agreement and approval of the
Merger by the shareholders of GMC and Herley as may be required by law and
by any applicable provisions of their respective Certificates of
Incorporation or By-laws or the rules or regulations of any applicable
stock exchange or trading system shall have been obtained.

(c) Absence of Restraint. No order to restrain, enjoin or otherwise prevent
the consummation of this Agreement or the Merger shall have been entered
by any court or administrative body and shall then remain effective.

(d) Blue Sky Compliance. There shall have been obtained any and all permits,
approvals and consents of securities or "blue sky" commissions of any
jurisdiction and of any other governmental body or agency, which counsel
for Acquisition or for GMC may reasonably deem necessary or appropriate so
that consummation of the transactions contemplated by this Agreement and
the Merger will be in compliance with applicable laws.

(e) Filings and Approvals. All applicable filings and regulatory approvals
necessary to consummation of the Merger except for the requisite filing of
the Certificate of Merger as contemplated herein, shall have been made or
obtained.

6.2 Conditions to Obligations of Acquisition. Consummation of the transactions
contemplated by this Agreement is subject to the fulfillment to the reasonable
satisfaction of Acquisition of each of the following conditions:

(a) Compliance with Representations, Warranties, Covenants and
Agreements. All of the representations and warranties of GMC contained in
this Agreement shall be true and correct in all material respects at and
as of the Closing Date with the same force and effect as if they had been
made at and as of such date; GMC shall have complied with and performed in
all material respects all of the covenants and agreements contained in
this Agreement to be performed by it at or prior to the Closing Date; and
on the Closing Date, Acquisition shall have received from GMC a
certificate dated that day, signed by the Chairman and by the Chief
Financial Officer of GMC, certifying the foregoing. Until the Closing, GMC
agrees to give Acquisition prompt written notice of any matter or matters
which come to GMC's attention which would constitute a breach of the
condition contained in this Section 6.2(a), together with reasonably
complete details of such matter or matters. Within 20 days after receipt
of any such notice from GMC related to the litigation warranty contained
in Section 4.1(k) or within 10 days after receipt of any such notice from
GMC related to any other matter (or such longer period as GMC shall
agree), Acquisition shall by written notice to GMC state whether it would
upon Closing be willing to waive such condition despite the matters
described in such notice from GMC and in all other such notices previously
received from GMC or, if it would not be willing to so waive without the
imposition of further agreements or conditions upon GMC or the
Participating Shareholders stating the further agreements or conditions it
would seek in connection with such waiver.

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(b) Opinion of Counsel. Acquisition shall have received an opinion dated the
Closing Date from Zissu Gumbinger & Stolzar LLP, counsel for GMC, that:

(i) GMC and each of the Subsidiaries is a corporation duly and validly
organized, legally existing and in good standing under the laws of
the jurisdiction of its incorporation with corporate power and
authority to own its properties and to conduct its business as then
being conducted;

(ii) Neither GMC nor any of the Subsidiaries is required to be qualified
to do business as a foreign corporation in any jurisdiction where
they are not so qualified and where failure to so qualify will have
a material adverse effect on the financial condition or operations
thereof;

(iii) The authorized, issued and outstanding capital stock of GMC is as
stated in such opinion, the outstanding shares have been duly and
validly authorized and issued and are fully paid and nonassessable;
and there are no preemptive or similar rights on the part of the
holders of any class of securities of GMC (other than holders of
options);

(iv) GMC is the record owner, and (to the best of such counsel's
knowledge) the beneficial owner, of all outstanding capital stock
of each of the Subsidiaries except General Microcircuit
Corporation, of which it owns 97% of the outstanding capital stock
as stated in such opinion; and the outstanding stock of each of the
Subsidiaries has been duly and validly authorized and issued and is
fully paid and nonassessable;

(v) GMC has full corporate power to carry out the transactions
contemplated by this Agreement; this Agreement has been duly
executed and delivered by GMC; all necessary corporate action has
been taken by GMC and its Board of Directors and shareholders to
authorize GMC to execute and deliver this Agreement and to
consummate the transactions contemplated hereby; upon the
effectiveness of the Certificate filed with the Secretary, the
Merger will be validly consummated under New York law, the
outstanding GMC Shares will have been validly converted into rights
to receive cash and warrants pursuant to the Merger and the rights
of all outstanding Options (except as otherwise specified in such
opinion) shall have been terminated; and this Agreement is a valid
and legally binding obligation of GMC, enforceable against GMC in
accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, moratorium or other similar laws affecting
creditors' rights generally or by general principles of equity;

(vi) The execution, delivery and performance by GMC of this Agreement
and the consummation of the transactions contemplated by this
Agreement will not constitute a violation of any provision of the
Certificate of Incorporation or By-laws of GMC or any of the
Subsidiaries or, giving effect to any consents which may have been
obtained, of any material agreement, instrument or other document
known to such counsel after reasonable investigation, to or by
which GMC or any of the Subsidiaries is a party or is bound, or any
judgment, decree or order known to such counsel after reasonable
investigation, of any court or other governmental authority which
is binding on GMC or any of the Subsidiaries or any of its or their
property;

(vii) To the best knowledge and information of such counsel, there is no
material litigation or governmental proceeding pending or
threatened against GMC or

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any of the Subsidiaries which has not been disclosed in the Proxy
Statement or in this Agreement;

(viii) No consent or approval by any governmental authority which has not
been obtained is required in connection with the consummation by
GMC of the transactions contemplated by this Agreement; and

(ix) The Proxy Statement complies as to form in all material respects
with the applicable requirements of New York and Federal law and
the rules and regulations of the American Stock Exchange, except
that such counsel need not express any opinion or belief as to the
financial statements or other financial or statistical data
contained in the Proxy Statement or the information which relates
to Acquisition and its affiliates or to the financing of the
transactions contemplated by this Agreement.

(c) Dissenting Stockholders. The holders of not more than 15% in the
aggregate of the outstanding GMC Shares shall have filed with GMC notices
of election to dissent pursuant to Section 623 of the BCL. If such holders
of more than 15% of the outstanding GMC Shares have filed such notices,
Acquisition shall have the right to (i) waive this condition and close,
(ii) terminate this Agreement, or (iii) adjourn the Closing to any date
not later than the cutoff date referred to in Section 6.1(g) hereof to
determine whether such percentage is reduced to 10% or less by holders who
abandon or lose their right to appraisal pursuant to the procedures of
said Section 623. At such time as such percentage is thus reduced to 10%
or less, this condition shall be deemed satisfied.

(d) Options. GMC's Board of Directors shall have adopted resolutions
terminating the Option Plans as of the Effective Date.

(e) No Material Adverse Change. Except as otherwise set forth herein or in
the Schedule, since February 28, 1998, no event shall have occurred, and
no condition shall exist, which has a material adverse effect on the
condition (financial or otherwise) or the business or prospects of GMC or
any Subsidiary or their respective assets; and none of the threatened
litigation referred to in Part KK of the Schedule shall have been
commenced against GMC or any of the Subsidiaries.

(f) Other Agreements. The Consulting Agreement and Employment Agreements
shall have been executed and delivered by the respective parties thereto.

(g) Cutoff Date. The Merger shall in any event have been completed no later
than December 31, 1998. This condition shall be a mutual condition.

(h) Fairness Opinion. GMC shall have received a Fairness Opinion, prepared by
an investment banking or other concern which opinion states unequivocally
that the consideration to be paid by Acquisition hereunder with respect to
GMC Shares is fair and adequate to GMC's shareholders.

(i) Due Diligence. Acquisition shall have completed its due diligence with
respect to GMC and determined, in its sole discretion, that GMC's
representations, warranties and covenants contained herein are true and
correct in all material respects; provided that such due diligence must be
completed by no later than thirty (30) days after the delivery to
Acquisition and Herley of the completed Schedule. Absent notification by
Acquisition and Herley, within the three (3) days immediately after the
end of such thirty (30) day period, this condition shall be deemed waived
by Acquisition and Herley.

A-21
<PAGE> 189

6.3 Conditions to Obligations of GMC. Consummation of the transactions
contemplated by this Agreement is subject to the fulfillment to the reasonable
satisfaction of GMC of each of the following conditions:

(a) Compliance with Representations, Warranties, Covenants and
Agreements. All of the representations and warranties of Acquisition and
Herley contained in this Agreement shall be true and correct at and as of
the Closing Date with the same force and effect as if they had been made
at and as of such date (except for changes contemplated or permitted by
this Agreement or otherwise approved in writing by GMC); Acquisition and
Herley shall have performed all of the covenants and agreements contained
in this Agreement to be performed by them at or prior to the Closing Date;
and on the Closing Date, GMC shall have received from Acquisition and
Herley a certificate dated that day, signed by the President of
Acquisition and by the President of Herley, certifying the foregoing.

(b) Opinion of Counsel. GMC shall have received an opinion dated the Closing
Date from Blau, Kramer, Wactlar & Lieberman, P.C., of Jericho, New York,
counsel for Acquisition, that:

(i) Each of Herley and Acquisition is a corporation validly organized,
legally existing and in good standing under the laws of its
respective jurisdiction of incorporation with full corporate power
and authority to own their properties and to conduct their businesses
as they are then being conducted;

(ii) The authorized, issued and outstanding capital stock of Acquisition
is as stated in such opinion; all the outstanding shares of capital
stock of Acquisition are owned of record and (to the best of
counsel's knowledge) beneficially by Herley;

(iii)Each of Herley and Acquisition has full corporate power to carry out
the transactions contemplated by this Agreement; this Agreement has
been duly executed and delivered by each of Herley and Acquisition
and all necessary corporate action has been taken by each of Herley
and Acquisition, their Boards of Directors and Shareholders in order
to consummate the transactions contemplated by this Agreement, to
execute and deliver this Agreement and to make this Agreement the
valid and legally binding obligation of each of Herley and
Acquisition enforceable against Herley and Acquisition in accordance
with its terms, except as may be limited by applicable bankruptcy,
insolvency, moratorium or other similar laws affecting creditors'
rights generally or by general principles of equity;

(iv) The execution, delivery and performance of this Agreement by Herley
and Acquisition and the consummation of the transactions contemplated
by this Agreement will not constitute a violation, breach or default
under the Certificate of Incorporation of Herley or Acquisition or
either of their By-laws or, to such counsel's knowledge, under any
agreement or other document to or by which Herley or Acquisition is a
party or is bound or any judgment, decree, or order of any court or
other governmental authority which is binding on Herley or
Acquisition or any of their properties; and

(v) No consent or approval by any governmental authority which has not
been obtained is required in connection with the consummation by
Herley and Acquisition of the transactions contemplated by this
Agreement.

A-22
<PAGE> 190

(c) Adequacy of Funds. Simultaneously with the consummation of the
transactions contemplated hereby, Acquisition shall have caused to be
deposited with the Paying Agent funds and warrants in amounts sufficient
to permit consummation of the Merger in accordance with the terms hereof
and GMC shall have received evidence reasonably satisfactory to it and its
counsel that such funds and warrants have been received by the Paying
Agent.

ARTICLE VII

TERMINATION

7.1 Termination. This Agreement may be terminated and cancelled, and the
transactions contemplated hereby may be abandoned, notwithstanding shareholder
authorization, at any time prior to the filing of the Certificate with the
Secretary (a) by mutual consent of Acquisition and GMC, (b) by any party not in
material breach hereof, in the event that any of the conditions specified in
Section 6.1 shall not have been satisfied within the time contemplated by this
Agreement, (c) by Acquisition if not in material breach hereof, if any of the
conditions specified in Section 6.2 shall not have been satisfied within the
time contemplated by this Agreement and (d) by GMC, if not in material breach
hereof, if any of the conditions specified in Section 6.3 shall not have been
satisfied within the time contemplated by this Agreement or if Acquisition has
delivered to GMC notice pursuant to Section 6.2(a) that it is not willing to
waive a conditions.

Any party intending to terminate this Agreement pursuant to Clause (b), (c) or
(d) hereof shall give notice of intention to terminate to the other parties,
specifying the breach of condition giving rise thereto, which termination shall
become effective (1) upon receipt thereof if the condition shall then be
impossible of performance, or (ii) on the tenth day after receipt thereof if the
breach is susceptible of cure and the condition is not satisfied within such
period.

7.2 Effect of Termination. If this Agreement is terminated pursuant to Section
7.1, this Agreement, except as to the second sentence of Section 5.1(b) (iv),
shall no longer be of any force or effect and there shall be no liability on the
part of any party or its respective directors, officers or shareholders;
provided, however, that in the case of a termination pursuant to Section 7.1(b),
(c) or (d) where the nonfulfillment of the condition giving rise to termination
resulted from a breach of this Agreement by another party, the damages which the
aggrieved party or parties may recover from the defaulting party shall be as
determined by law.

ARTICLE VIII

MISCELLANEOUS

8.1 Extension of time; Waivers. At any time prior to the filing of the
Certificate with the Secretary:

(a) By Acquisition. Acquisition and Herley may (i) extend the time for the
performance of any of the obligations or other acts of GMC, (ii) waive any
inaccuracies in the representations and warranties of GMC contained herein
or in any document delivered pursuant hereto by GMC and (iii) waive
compliance with any of the agreements or conditions contained herein to be
performed by GMC. Any agreement on the part of Acquisition to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of Acquisition.

A-23
<PAGE> 191

(b) By GMC. GMC may (i) extend the time for the performance of any of the
obligations or other acts of Acquisition, (ii) waive any inaccuracies in
the representations and warranties of Acquisition contained herein or in
any document delivered pursuant hereto by Acquisition and (iii) waive
compliance with any of the agreements or conditions contained herein to be
performed by Acquisition. any agreement on the part of GMC to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of GMC.

8.2 Costs and Expenses. Except as hereinafter provided, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby will be paid by the party incurring such expenses. GMC shall use its best
efforts to secure bi-weekly billing with respect to legal and accounting costs
associated with the transactions contemplated hereby and promptly furnish copies
of such billings to Acquisition and Herley.

8.3 Amendments. This Agreement may be amended with the approval of Acquisition
and GMC at any time before or after approval thereof by the shareholders of GMC,
but after any such shareholder approval, no amendment shall be made which
reduces the amount or changes the form of the consideration distributable to the
shareholders of GMC without the further approval of the shareholders of GMC.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.

8.4 Assignability. This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and assigns, provided
that this Agreement may not be assigned by any party without the prior written
consent of the other parties.

8.5 Reliance by Counsel. In rendering any opinion referred to herein, counsel
may rely, as to any factual matters involved in their opinion, on certificates
of public officials and of corporate officers, opinions of corporate general
counsel, and such other evidence as such counsel may reasonably deem appropriate
and, as to matters governed by the BCL or the laws of jurisdictions other than
the United States or the State of New York, an opinion of local counsel in such
jurisdictions, which counsel shall be satisfactory to the other parties in the
exercise of their reasonable judgment.

8.6 Notices. Any notice to a party hereto pursuant to this Agreement shall be
in writing, shall be deemed given when received, and shall be delivered
personally or sent by certified or registered mail or by telecopier addressed as
follows:

To Acquisition and Herley:

Herley Industries, Inc.
10 Industry Drive
Lancaster, PA 17603
Attn: Lee N. Blatt
Fax No.: (717) 397-9503

with a copy to:

Blau, Kramer, Wactlar & Lieberman, P.C.
100 Jericho Quadrangle
Jericho, New York 11753
Attn: David H. Lieberman, Esq.
Fax No.: (516) 822-4824

A-24
<PAGE> 192

To GMC and the Participating Shareholders:

General Microwave Corp.
5500 New Horizons Blvd.
Amityville, New York 11701
Attn: Mitchell Tuckman
Fax No.: (516) 276-6089

with a copy to:

Zissu Gumbinger & Stolzar LLP
950 Third Avenue
New York, NY 10022
Attn: Michael I. Stolzar
Fax No.: (212) 888-3182

8.7 Entire Agreement; Law Governing. This Agreement together with all other
agreements contemplated hereby (a) constitute the entire agreement and supersede
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof, (b) may be executed in
several counterparts, each of which will be deemed an original and all of which
shall constitute one and the same instrument, and (c) except as otherwise stated
in any other agreement, shall be governed in all respects, including validity,
interpretation and effect, by the internal substantive laws of the State of New
York.

8.8 Publicity and Disclosures. No press releases or public disclosures of the
transactions contemplated by this Agreement, either oral or written, shall be
made without the prior written consent of all the parties hereto, provided,
however, that no such consent shall be unreasonably withheld or delayed and
provided further that no such consent shall be required if (a) in the opinion of
counsel for the party proposing to make such press release or public disclosure,
such press release and/or public disclosure is required by applicable law, rules
or regulations or by stock exchange requirement, and (b) time does not permit
the obtaining of approval by the other parties.

8.9 Headings. The headings and captions of the sections and subsections of
this Agreement are included for convenience of reference only and shall have no
effect on the construction or meaning of this Agreement.

8.10 Survival. The representations and warranties contained in Article IV
hereof shall not survive the Closing.

8.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered will be deemed an
original, and such counterparts together will constitute one instrument.

8.12. Zissu Proxy. All of Acquisition and Herley's obligations hereunder are
expressly conditioned upon the delivery to Acquisition and Herley, on or before
August 24, 1998, of an irrevocable proxy, in form and substance acceptable to
Acquisition and Herley, executed by Frederick Zissu with respect to all GMC
Shares beneficially owned by him.

A-25
<PAGE> 193

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.

GENERAL MICROWAVE CORP.:

By: /s/ SHERMAN A. RINKEL
------------------------------------
Sherman A. Rinkel
Chairman, Board of Directors

PARTICIPATING SHAREHOLDERS:

/s/ SHERMAN A. RINKEL
--------------------------------------
Sherman A. Rinkel

/s/ MOE WIND
--------------------------------------
Moe Wind

/s/ STANLEY SIMON
--------------------------------------
Stanley Simon

/s/ MITCHELL TUCKMAN
--------------------------------------
Mitchell Tuckman

/s/ EDMOND D. FRANCO
--------------------------------------
Edmond D. Franco

/s/ MICHAEL I. STOLZAR
--------------------------------------
Michael I. Stolzar

/s/ MICHAEL D. MAGIDSON
--------------------------------------
Michael D. Magidson

/s/ ARNOLD H. LEVINE
--------------------------------------
Arnold H. Levine

/s/ ROZALIE SCHACHTER
--------------------------------------
Rozalie Schachter

A-26
<PAGE> 194

/s/ HOWARD COHEN
--------------------------------------
Howard Cohen

/s/ ROBERT DEBRECHT
--------------------------------------
Robert DeBrecht

GMC ACQUISITION CORP.:

By: /s/ LEE N. BLATT, PRESIDENT
------------------------------------
Lee N. Blatt, President

HERLEY INDUSTRIES, INC.:

By: /s/ MYRON LEVY, PRESIDENT
------------------------------------
Myron Levy, President

A-27
<PAGE> 195

EXHIBIT A

PARTICIPATING SHAREHOLDERS

Sherman A. Rinkel

Moe Wind

Stanley Simon

Mitchell Tuckman

Edmond D. Franco

Michael I. Stolzar

Michael D. Magidson

Arnold H. Levine

Rozalie Schachter

Howard Cohen

Robert DeBrecht
<PAGE> 196

EXHIBIT B

CERTIFICATE OF INCORPORATION

GMC ACQUISITION CORPORATION
(A NEW YORK CORPORATION)

Under Section 402 of the Business Corporation Law

* * * * * *

THE UNDERSIGNED, a natural person, being of the age of eighteen or over, for the
purpose of organizing a corporation pursuant to Section 402 of the Business
Corporation Law of the State of New York, hereby certifies that:

FIRST: The name of the corporation is:

GMC ACQUISITION CORPORATION

SECOND: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the Business Corporation
Law provided that the corporation is not formed to engage in any act or activity
which requires the consent or approval of any state official, department, board,
agency or other body.

The corporation, in addition to and in furtherance of the corporate purposes
above set forth, shall have the powers enumerated in Section 202 of the Business
Corporation Law or any statute of the State of New York.

THIRD: The office of the Corporation is to be located in the County of Suffolk,
State of New York.

FOURTH: The total number of shares of stock which the Corporation shall have
authority to issue is TWO HUNDRED (200) shares, without par value.

FIFTH: The Secretary of State is designated as the agent of the Corporation
upon whom process against the Corporation may be served. The post office address
to which the Secretary of State shall mail a copy of any process against the
Corporation served upon him is: c/o Blau, Kramer, Wactlar & Lieberman, P.C., 100
Jericho Quadrangle, Jericho, New York 11753.

SIXTH: The Board of Directors of the Corporation shall expressly have the power
and authorization to make, alter and repeal the By-Laws of the corporation,
subject to the reserved power of the shareholders to make, alter and repeal any
By-Laws adopted by the Board of Directors. Unless and except to the extent
required by the By-Laws of the Corporation, elections of directors need not be
by written ballot.

SEVENTH: Each person who at any time is or shall have been a director or
officer of the Corporation and is threatened to be or is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is, or
he or his testator or intestate was, a
<PAGE> 197

director, officer, employee or agent of the Corporation, or served at the
request of the Corporation as a director, officer, employee, trustee or agent of
another corporation, partnership, joint, venture, trust or other enterprise,
shall be indemnified against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with any such threatened, pending or completed action, suit or
proceeding to the full extent authorized under Section 722 of the Business
Corporation Law of the State of New York. The foregoing right of indemnification
shall in no way be exclusive of any other rights of indemnification to which
such director, officer, employee or agent may be entitled under any By-Law,
agreement, vote of shareholders or disinterested directors, or otherwise.

EIGHTH: Any and all right, title, interest and claim in or to any dividends
declared by the Corporation, whether in cash, stock, or otherwise, which are
unclaimed by the shareholder entitled thereto for a period of six (6) years
after the close of business on the payment date shall be and be deemed to be
extinguished and abandoned; such unclaimed dividends in the possession of the
Corporation, its transfer agents, or other agents or depositaries, shall at such
time become the absolute property of the Corporation, free and clear of any and
all claims for any person whatsoever.

NINTH: Any and all directors of the Corporation shall not be liable to the
Corporation or any shareholder thereof for monetary damages for breach of
fiduciary duty as director except as otherwise required by law. No amendment to
or repeal of this Article NINTH shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any act or omission of such director occurring prior to such
amendment or repeal.

TENTH: From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of New York at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the shareholders of the Corporation by the
Certificate of Incorporation are granted subject to the provisions of this
Article TENTH.

THE UNDERSIGNED, for the purposes of forming a Corporation under the laws of the
State of New York, does hereby make and execute this Certificate and affirm and
acknowledge, under the penalties of perjury, that this Certificate is my act and
deed and that the facts herein stated are true, and I have accordingly set my
hand hereto this 19th day of August, 1998.

--------------------------------------
Melinda O'Donnell
Sole Incorporator
Blau, Kramer, Wactlar & Lieberman,
P.C.
100 Jericho Quadrangle
Jericho, NY 11753
<PAGE> 198

EXHIBIT C

W A R R A N T

FOR THE PURCHASE OF COMMON STOCK, PAR VALUE $.10 PER SHARE OF

HERLEY INDUSTRIES, INC.

(Incorporated under the Laws of the State of Delaware)

VOID AFTER 5 P.M. , 2001

No.

Warrant to Purchase

THIS IS TO CERTIFY that, for value received, is entitled, subject
to the terms and conditions set forth, at or before 5 P.M., New York City Time,
on , 2001, but not thereafter, to purchase the number of shares set
forth above of Common Stock, par value $.10 per shares (the "Common Stock"), of
HERLEY INDUSTRIES, INC., a Delaware corporation (the "Corporation"), from the
Corporation at a purchase price per share of (i) $14.40 if and to the extent
this Warrant is exercised, in whole or in part on or before January 11, 1999, or
(ii) $15.60 if and to the extent this Warrant is exercised, in whole or in part
after January 11, 1999 but during the period this Warrant remains in force,
subject in all cases to adjustment as provided in Section 3 hereof, and to
receive a certificate or certificates representing the shares of Common Stock so
purchased, upon presentation and surrender to the Corporation of this Warrant,
with the form of subscription attached hereto duly executed, and accompanied by
payment of the purchase price of each share purchased either in cash or by
certified or bank cashier's check payable to the order of the Corporation.

1. The Corporation covenants and agrees that all shares may be delivered upon
the exercise of this Warrant and will, upon delivery, be fully paid and
non-assessable, and, without limiting the generality of the foregoing, the
Corporation covenants and agrees that it will from time to time take all
such action as may be requisite to assure that the par value per share of
the Common Stock is at all times equal to or less than the then current
Warrant purchase price per share of the Common Stock issuable upon
exercise of this Warrant.

2. The rights represented by this Warrant are exercisable at the option of
the holder hereof in whole at any time, or in part from time to time,
within the period above specified at the prices specified in Section 1
hereof . In case of the purchase of less than all the shares as to which
this Warrant is exercisable, the Corporation shall cancel this Warrant
upon the surrender hereof and shall execute and deliver a new Warrant of
like tenor for the balance of the shares purchasable hereunder.

3. The price per share at which shares of Common Stock may be purchased
hereunder, and the number of such shares to be purchased upon exercise
hereof, are subject to change or adjustment as follows:

(A) In case the Corporation shall, while this Warrant remains
unexercised, in whole or in part, and in force, effect a
recapitalization of such character that the shares of Common Stock
purchasable hereunder shall be changed into or become exchangeable
for a larger or smaller number of shares, then, after the
<PAGE> 199

date of record for effecting such recapitalization, the number of
shares of Common Stock which the holder hereof shall be entitled to
purchase hereunder shall be increased or decreased, as the case may
be, in direct proportion to the increase or decrease in the number
of shares of Common Stock by reason of such recapitalization, and
the purchase price hereunder per share of such recapitalized Common
Stock shall, in the case of an increase in the number of such
shares, be proportionately reduced, and in the case of a decrease in
the number of such shares, shall be proportionately increased. For
the purpose of this subsection (A), a stock dividend, stock split-up
or reverse split shall be considered as a recapitalization and as an
exchange for a larger or smaller number of shares, as the case may
be.

(B) In the case of any consolidation of the Corporation with, or merger
of the Corporation into, any other corporation, or in case of any
sale or conveyance of all or substantially all of the assets of the
Corporation in connection with a plan of complete liquidation of the
Corporation, then, as a condition of such consolidation, merger or
sale or conveyance, adequate provision shall be made whereby the
holder hereof shall thereafter have the right to purchase and
receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of shares of Common Stock immediately
theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock or securities as may
be issued in connection with such consolidation, merger or sale or
conveyance with respect to or in exchange for the number of
outstanding shares of Common Stock immediately therefore purchasable
and receivable upon the exercise of the rights represented hereby
had such consolidation, merger or sale or conveyance not taken
place, and in any such case appropriate provision shall be made with
respect to the rights and interests of the holder of this Warrant to
the end that the provisions hereof shall be applicable as nearly as
may be in relation to any shares of stock or securities thereafter
deliverable upon the exercise hereof.

(C) In case the Corporation shall, while this Warrant remains
unexercised, in whole or in part, and in force, issue (otherwise
than by stock dividend or stock split-up or reverse split) or sell
shares of its Common Stock (hereinafter referred to as "Additional
Shares") for a consideration per share (before deduction of expenses
or commissions or underwriting discounts or allowances in connection
therewith) less than the current market price per share of Common
Stock on the record date of issuance or grant, then, after the date
of such issuance or sale, the purchase price hereunder per share
shall be reduced to a price determined by dividing (1) an amount
equal to (a) the total number of shares of Common Stock outstanding
immediately prior to the time of such issuance or sale multiplied by
such purchase price hereunder per share, plus (b) the consideration
(before deduction of expenses or commissions or underwriting
discounts or allowances in connection therewith), if any, received
by the Corporation upon such issuance or sale, by (2) the total
number of shares of Common Stock outstanding after the date of the
issuance or sale of such Additional Shares, and the number of shares
of Common Stock which the holder hereof shall be entitled to
purchase hereunder at each such adjusted purchase price per share,
at the time such adjusted purchase price per shall be in effect,
shall be the number of whole shares of Common Stock obtained by
multiplying such purchase price hereunder per share before such
adjustment, by
<PAGE> 200

the number of shares of Common Stock purchasable upon the exercise
of this Warrant immediately before such adjustment, and dividing the
product so obtained by such adjusted purchase price per share;
provided, however, that no such adjustment of the purchase price
hereunder per share or the number of shares for which this Warrant
may be exercised shall be made upon the issuance or sale by the
Corporation of not more than 5,039,868 Additional Shares reserved
for issuance upon exercise of stock options or warrants.

(D) In case the Corporation shall, while this Warrant remains
unexercised in whole or in part, and in force, issue or grant any
rights to subscribe for or to purchase, or any option (other than
the employee stock options referred to in subsection (C) above) for
the purchase of (i) Common Stock or (ii) any indebtedness or shares
of stock convertible into or exchangeable for Common Stock
(indebtedness or shares of stock convertible into or exchangeable
for Common Stock being hereinafter referred to as "Convertible
Securities"), or issue or sell Convertible Securities and the price
per share for which Common Stock is issuable upon the exercise of
such rights or options or upon conversion or exchange of such
Convertible Securities at the time such Convertible Securities first
become convertible or exchangeable (determined by dividing (1) in
the case of an issuance or grant of any such rights or options, the
total amount, if any, received or receivable by the Corporation as
consideration for the issuance or grant of such rights or options,
plus the minimum aggregate amount of additional consideration
payable to the Corporation upon exercise of such rights or options,
plus, in the case of such Convertible Securities, in the minimum
aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange of such Convertible
Securities at the time such Convertible Securities first become
convertible or exchangeable, or (2) in the case of an issuance or
sale of Convertible Securities other than where the same or issuable
upon the exercise of any such rights or options, the total amount,
if any, received or receivable by the Corporation as consideration
for the issuance or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the conversion or exchange of such
Convertible Securities at the time such Convertible Securities first
become convertible or exchangeable, by, in either such case, (3) the
total maximum number of shares of Common Stock issuable upon the
exercise of such rights or options or upon the conversion or
exchange of such Convertible Securities at the time such Convertible
Securities first become convertible or exchangeable) shall be less
than the current market price per share of Common Stock on the
record date of grant, then the total maximum number of shares of
Common Stock issuable upon the exercise of such rights or options or
upon conversion or exchange of the total maximum amount of such
Convertible Securities at the time such Convertible Securities first
become convertible or exchangeable, shall (as of the date of the
issuance or grant of such rights or options or, in the case of the
issuance or sale of Convertible Securities other than where the same
are issuable upon the exercise of rights or options, as of the date
of such issuance or sale) be deemed to be outstanding and to have
been issued for said price per share; provided that (i) no further
adjustment of the purchase price shall be made upon the actual
issuance of such Common Stock upon the exercise of such rights or
options or upon the conversion or exchange of such Convertible
Securities or upon the actual issuance of Convertible Securities
where the same are issuable upon the
<PAGE> 201

exercise of such rights or options, and (ii) rights or options
issued or granted pro rata to shareholders without consideration and
Convertible Securities issuable by way of dividend or other
distribution to shareholders shall be deemed to have been issued or
granted at the close of business on the date fixed for the
determination of shareholders entitled to such rights, options or
Convertible Securities and shall be deemed to have been issued
without consideration; and (iii) if, in any case, the total maximum
number of shares of Common Stock issued upon exercise of such rights
or options or upon conversion or exchange of such Convertible
Securities is not, in fact, issued and the right to exercise such
right or option or to convert or exchange such Convertible
Securities shall have expired or terminated, then, and in any such
event, the purchase price, as adjusted, shall be appropriately
readjusted at the time of such expiration or termination. In such
case, each purchase price hereunder per share which is greater than
the price per share for which Common Stock is issuable upon
conversion or exchange of such rights or options or upon conversion
or exchange of such Convertible Securities at the time such
Convertible Securities first become convertible or exchangeable, as
determined above in this subsection (D), shall thereupon be reduced
to a price determined by dividing (1) an amount equal to (a) the
total number of shares of Common Stock outstanding immediately prior
to the time of the issuance or grant of such rights or options or
the issuance or sale of such Convertible Securities multiplied by
such purchase price hereunder per share, plus (b) the total amount,
if any, received or receivable by the Corporation as consideration
for such issuance or grant or such issuance or sale, plus the
additional amounts referred to and more fully set forth in clauses
(1) and (2) of the parenthetical material above in this subsection
(D), whichever clause and whichever additional amounts may be
applicable, by (2) the total number of shares of Common Stock
outstanding after the date of such issuance or grant or such
issuance or sale, and the number of shares of Common Stock which the
holder hereof shall be entitled to purchase hereunder at such
adjusted purchase price per share, at the time such adjusted
purchase price per shall be in effect, shall be the number of whole
shares of Common Stock obtained by multiplying such purchase price
hereunder, per share, before such adjustment, by the number of
shares of Common Stock purchasable upon the exercise of this Warrant
immediately before such adjustment and dividing the product so
obtained by such adjusted purchase price per share.

(E) For the purpose of subsections (C) and (D) above, in case the
Corporation shall issue or sell Additional Shares, issue or grant
any rights to subscribe for or to purchase, or any options for the
purchase of (i) Common Stock or (ii) Convertible Securities, or
issue or sell Convertible Securities for a consideration part of
which shall be other than cash, the amount of the consideration
received by the Corporation therefor shall be deemed to be the cash
proceeds, if any, received by the Corporation plus the fair value of
the consideration other than cash as determined by the Board of
Directors of the Corporation in good faith, before deduction of
commissions, underwriting discounts or allowances or other expenses
paid or incurred by the Corporation for any underwriting of, or
otherwise in connection with, such issuance, grant or sale.
<PAGE> 202

(F) Subject to the provisions of subsection (G) below, in case the
Corporation shall, while this Warrant remains unexercised, in whole
or in part, and in force, make any distribution of its assets to
holders of Common Stock as a partial liquidating dividend, by way of
return of capital or otherwise, then, after the date of record for
determining shareholders entitled to such distribution, the holder
hereof shall be entitled, upon exercise of this Warrant and purchase
of any or all of the shares of Common Stock subject hereto, to
receive the amount of such assets (or at the option of the
Corporation, a sum equal to the value thereof at the time of such
distribution to holders of Common Stock as such value is determined
by the Board of Directors of the Corporation in good faith) which
would have been payable to such holder had he been the holder of
record of such shares of Common Stock on the record date for the
determination of shareholders entitled to such distribution.

(G) Except as otherwise provided in subsection (B) above, in the case of
any sales or conveyance of all or substantially all of the assets of
the Corporation in connection with a plan of complete liquidation of
the Corporation, in the case of the dissolution, liquidation or
winding up of the Corporation, all rights under this Warrant shall
terminate on a date fixed by the Corporation, such date so fixed to
be not earlier than the date of the commencement of the proceedings
for such dissolution, liquidation or winding-up and not later than
thirty (30) days after such commencement date. Notice of such
termination of purchase rights shall be given to the registered
holder hereof, as the same shall appear on the books of the
Corporation, at least thirty (30) days prior to such termination
date.

(H) In case the Corporation shall, while this Warrant remains
unexercised in whole or in part, and in force, offer to the holders
of Common Stock any rights to subscribe for additional shares of
stock of the Corporation, then the Corporation shall given written
notice thereof to the registered holder hereof not less than thirty
(30) days prior to the date on which the books of the Corporation
are closed or a record date fixed for the determination of
shareholders entitled to such subscription rights. Such notice shall
specify the date as to which the books shall be closed or the record
date fixed with respect to such offer or subscription, and the right
of the holder hereof to participate in such offer or subscription
shall terminate if this Warrant shall not be exercised on or before
the date of such closing of the books or such record date.

(I) Any adjustment pursuant to the foregoing provisions shall be made on
the basis of the number of shares of Common Stock which the holder
hereof would have been entitled to acquire by exercise of this
Warrant immediately prior to the event giving rise to such
adjustment and, as to the purchase price hereunder per share,
whether or not in effect immediately prior to the time of such
adjustment, on the basis of such purchase price immediately prior to
the event giving rise to such adjustment. Whenever any such
adjustment is required to be made, the Corporation shall forthwith
determine the new number of shares of Common Stock which the holder
shall be entitled to purchase hereunder and/or such new purchase
price per share, and shall prepare, retain on file and transmit to
the holder hereof within ten (10) days after such preparation a
statement describing in reasonable detail the method used in
calculating such adjustment(s).
<PAGE> 203

(J) For the purposes of this Section 3, the term "Common Stock" shall
include all shares of capital stock authorized by the Corporation's
Certificate of Incorporation, as from time to time amended, which
are not limited to a fixed sum or percentage of par value in respect
of the right of the holders thereof to participate in dividends or
in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation.

(K) Whenever the price per share hereunder, initial or adjusted, and the
number of shares of Common Stock to be purchased upon exercise
hereof, initial or adjusted, shall be changed or adjusted pursuant
to the provisions of this Section 3, the Corporation shall forthwith
cause written notice setting forth the changed or adjusted price per
share hereunder and number of shares to be purchased upon exercise
hereof to be given to the holder of this Warrant.

4. The Corporation agrees at all times to reserve or hold available a
sufficient number of shares of Common Stock to cover the number of shares
issuable upon the exercise of this and all other Warrants of the same
class.

5. This Warrant shall not entitle the holder hereof to any voting rights or
other rights as a shareholder of the Corporation, or to any other rights
whatsoever except the rights herein expressed, and no dividends shall be
payable or accrue in respect of this Warrant or the interest represented
hereby or the shares purchasable hereunder until or unless, and except to
the extent that, this Warrant shall be exercised.

6. This Warrant is exchangeable upon the surrender hereof by the holder
hereof to the Corporation for new Warrants of like tenor representing in
the aggregate the right to purchase the number of shares purchasable
hereunder, each of such new Warrants to represent the right to purchase
such number of shares as shall be designated by the holder hereof at the
time of such surrender.

7. The Corporation will transmit to the holder of this Warrant such
information, documents and reports as are generally distributed to
shareholders of the Corporation concurrently with the distribution thereof
to such shareholders.

8. Notices to be given to the holder of this Warrant shall be deemed to have
been sufficiently given if delivered or mailed, addressed in the name and
at the address of such holder appearing in the records of the Corporation,
and if mailed, sent first class registered or certified mail, postage
prepaid. The address of the Corporation is 10 Industry Drive, Lancaster,
Pennsylvania 17603, and the Corporation shall give written notice of any
change of address to the holder hereof.

9. The Corporation covenants and agrees that no later than ninety (90) days
after the issuance of this Warrant it will file a registration statement
on the appropriate form (the "Registration Statement") with the Securities
and Exchange Commission in accordance with the Securities Act of 1933, as
amended, and hereby agrees to include in the Registration Statement among
the Securities to be registered the Warrants and the shares of Common
Stock into which the Warrants are exercisable at the Corporation's sole
cost and expense, and, furthermore, to use best efforts to cause the
Warrants to be listed for trading on the NASDAQ National Market System,
provided that all requirements with respect to such listing can be
satisfied by the Corporation without the expenditure of unreasonable time
or expense.

10. Anything to the contrary herein notwithstanding, this Warrant shall be
callable by the Corporation, in whole or in part, at any time after
twenty-one (21) months after the
<PAGE> 204

date of its issuance, at the price of $1.00 per share of Common Stock subject
hereto, on thirty (30) days written notice to the holder hereof, if the average
last reported sales price of the Common Stock reported on the NASDAQ National
Market System (or any successor or other exchange upon which the Common
Stock may be listed for trading) has been not less than $17.60 per share
for the fifteen (15) consecutive trading days immediately preceding such
call date This Warrant shall be exercisable by the holder hereof during the
aforementioned thirty (30) day notice period.

IN WITNESS WHEREOF, the Corporation has caused this Warrant to be executed by
the signature of its President and its seal affixed and attested by its
Secretary.

Dated: , 1998

HERLEY INDUSTRIES, INC.

By:
-----------------------------------
Myron Levy, President

[Corporate Seal]

ATTEST:

- ---------------------------------------------------
David H. Lieberman, Secretary
<PAGE> 205

EXHIBIT D

IRREVOCABLE PROXY

THIS IRREVOCABLE PROXY (this "Agreement") is dated as of the day of August,
1998 by and between GMC Acquisition Corporation, a New York corporation
("GMCAC"), and (the "Shareholder").

WHEREAS, General Microwave Corp., a New York corporation ("GMC") Eleven
Participating Shareholders of GMC, GMCAC and Herley Industries, Inc., a Delaware
corporation ("Herley"), propose on the date hereof to enter into an Agreement
and Plan of Merger (the "Merger Agreement") pursuant to which GMC will be merged
with and into GMCAC on the terms and subject to the conditions contained in the
Merger Agreement; and

WHEREAS, as a condition to its willingness to enter into the Merger Agreement,
GMCAC has requested that the Shareholder signatories thereto grant to GMCAC
irrevocable proxies with respect to all of the shares of Common Stock of GMC
owned by such Shareholders; and

WHEREAS, in order to induce GMCAC to enter into the Merger Agreement, the
execution and delivery of which will inure to the direct and material benefit of
the Shareholders, the Shareholders have agreed to execute and deliver this
Agreement in favor of GMCAC.

NOW, THEREFORE, in consideration of the execution and delivery of the Merger
Agreement by GMCAC and the mutual covenants and agreements set forth herein, the
parties hereto agree as follows:

1. Grant of Irrevocable Proxy. The Shareholder hereby irrevocably appoints and
constitutes GMCAC or any designee of GMCAC, with full power of substitution, the
lawful agent, attorney and proxy of the Shareholder during the term of this
Agreement to vote in its sole discretion all of the shares of Common Stock of
GMC ("Common Stock") of which the Shareholder is the owner of record (the
"Shares") (including any and all Common Stock acquired by the Shareholder after
the date hereof or through the exercise or acceleration of options) in the
following manner for the following purposes: (i) to call one or more meetings of
the Shareholder of GMC in accordance with the By-Laws of GMC and applicable law
for the purpose of considering the transactions contemplated by the Merger
Agreement such that the Shareholder shall have the full opportunity to approve
the Merger Agreement and any and all amendments, modifications and waivers
thereof and the transactions contemplated thereby; (ii) in favor of the Merger
Agreement or any of the transactions contemplated by the Merger Agreement at any
Shareholders meetings of GMC held to consider the Merger Agreement (whether
annual or special and whether or not an adjourned meeting; (iii) against any
other proposal for any recapitalization, merger, sale of assets or other
business combination between GMC and any other person or entity other than GMCAC
or the taking of any action which would result in any of the conditions to
GMCAC's obligations under the Merger Agreement not being fulfilled; and (iv) as
otherwise necessary or appropriate to enable GMCAC to consummate the
transactions contemplated by the Merger Agreement and, in connection with such
purposes, to otherwise Act with respect to the Shares which the Shareholder is
entitled to vote. THIS IRREVOCABLE PROXY HAS BEEN GIVEN IN CONSIDERATION OF THE
UNDERTAKINGS OF GMCAC IN THE MERGER AGREEMENT AND SHALL BE IRREVOCABLE AND
COUPLED WITH AN INTEREST UNTIL THE TERMINATION DATE AS DEFINED IN SECTION 2
HEREOF. This
<PAGE> 206

Agreement shall revoke all other proxies granted by the Shareholder with respect
to the Shares.

2. Termination Date. This Irrevocable Proxy shall expire on the earlier to
occur of the Closing under the Merger Agreement or the termination of the Merger
Agreement pursuant to its terms.

3. Representation and Warranty by the Shareholder. The Shareholder represents
and warrants to GMCAC that the Shareholder is on the date hereof the owner of
record of shares of Common Stock of GMC.

4. Covenant of the Shareholder. The Shareholder covenants and agrees with
GMCAC that he will continue to hold, and will not sell, assign, transfer,
pledge, hypothecate or otherwise dispose of the Shares until the date of
termination of this Agreement pursuant to Section 2 hereof.

5. Specific Performance. The parties hereto agree that the Shares are unique
and that money damages are an inadequate remedy for breach of this Agreement
because of the difficulty of ascertaining the amount of damage that will be
suffered by GMCAC in the event that this Agreement is breached. Therefore, the
Shareholder agrees that in addition to and not in lieu of any other remedies
available in GMCAC at law or in equity, GMCAC may obtain specific performance of
this Agreement.

6. Assignment. This Agreement shall not be assigned by GMCAC to any person
other than Herley or any affiliate of Herley.

7. Amendments. This Agreement may not be modified, amended, altered or
supplemented except upon the execution and delivery of a written agreement
executed by both parties hereto.

8. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal substantive laws of the State of New York.

9. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, personal
representatives, executors, heirs and permitted assigns.

10. Headings. The Section headings herein are for convenience of reference
only and shall not affect the construction hereof.

11. Counterparts. This Agreement may be executed in several counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same Agreement.

IN WITNESS WHEREOF, GMCAC and the Shareholder have duly executed this Agreement
as of the date and year first above written.

GMC ACQUISITION CORPORATION

By:
--------------------------------------

--------------------------------------
[The Shareholder]
<PAGE> 207

EXHIBIT E

CONSULTING AGREEMENT

Agreement dated as of , 1998 between Herley Industries, Inc. and
Sherman Rinkel.

The parties agree as follows:

1. The Parties

(a) The parties to this Agreement are Herley Industries, Inc. and Sherman
Rinkel.

(b) Herley Industries, Inc. is a Delaware corporation. It has an office
at 10 Industry Drive, Lancaster, PA 17603. It is referred to below as
the "Corporation".

(c) Sherman Rinkel is an individual person. His address is 71 Northgate
Circle, Melville, New York 11747. He is referred to below as "Mr.
Rinkel".

2. Mr. Rinkel's Position

Before the effective date of this Agreement, Mr. Rinkel was the
non-executive Chairman of the Board of Directors of General Microwave
Corporation. Pursuant to this Agreement and as of the date hereof, Mr.
Rinkel shall be a part-time consultant to the Corporation; he shall also
be made a director on the Board of Directors of the Corporation to serve
for so long as he continues to be elected as a director of the Corporation
by its shareholders and is employed as a consultant by the Corporation.

3. The Engagement

(a) The Corporation hereby continues the engagement of Mr. Rinkel as a
part-time consultant to the Corporation, and Mr. Rinkel accepts the
engagement.

(b) During the term of this Agreement, Mr. Rinkel shall serve as a
part-time consultant to the Corporation on all matters pertaining to
its business. Mr. Rinkel shall make himself available for
consultation with the officers of the Corporation at times reasonably
and mutually convenient to the parties.

4. Compensation

(a) As full compensation for his services under this Agreement (whether
or not he continues to be elected as a director of the Corporation),
the Corporation shall pay Mr. Rinkel during the term hereof at the
rate of Sixty Thousand ($60,000.00) Dollars per year. This
compensation shall be payable in equal monthly installments. So long
as Mr. Rinkel continues to be a director of the Corporation, the
compensation provided for hereunder shall be in lieu of fees paid to
non-employee directors of the Corporation.

(b) In addition, the Corporation shall reimburse Mr. Rinkel for
authorized out-of-pocket expenses incurred by him in performing his
duties under this Agreement and provide him with an automobile
comparable to the one provided to him prior to the date hereof.

(c) This Agreement shall not entitle Mr. Rinkel to receive any benefits
made available by the Corporation to its employees or executives.

5. Covenant Not to Compete
<PAGE> 208

(a) Mr. Rinkel acknowledges that during the course of his employment with
General Microwave Corporation and thereafter, he gained and continues
to gain extensive knowledge concerning several aspects of the
Corporation's business. In addition, Mr. Rinkel acknowledges that he
gained and continues to gain information of a confidential and
proprietary nature relating to the Corporation and its business.

(b) In consideration of the payments provided for herein, Mr. Rinkel
shall be bound by the covenants set forth herein.

(i) Mr. Rinkel shall not conduct any business involving the
manufacture or sale of any product manufactured or sold by the
Corporation or any of its subsidiaries during his employment
or engagement as a consultant by the Corporation.

(ii) Mr. Rinkel shall not directly or indirectly render any
services of any nature, including advisory services, to any
manufacturer or seller of any product manufactured or sold by
the Corporation or any of its subsidiaries at any time during
his employment or engagement as a consultant by the
Corporation.

(iii) Mr. Rinkel shall not invest in, solicit others to invest in or
otherwise render financial assistance to any manufacturer or
seller of any product manufactured or sold by the Corporation
or any of its subsidiaries during his employment or engagement
as a consultant by the Corporation.

(d) During the term of this Agreement and for two years thereafter, Mr.
Rinkel shall not do any of the following:

(i) Mr. Rinkel shall not disclose any information reasonably known
to him to be proprietary or confidential information belonging
to the Corporation or any of its subsidiaries.

(ii) Mr. Rinkel shall not hire or solicit the employment of any
person who was employed by the Corporation at any time during
the calendar year preceding the hiring or solicitation.

(e) The prohibitions set forth in subsections (c) and (d) shall apply to
the acts of Mr. Rinkel individually or the acts of Mr. Rinkel through
any corporation, partnership or other entity with which he may be
associated. Mr. Rinkel shall be deemed to be associated with any
entity of which he is an officer, director, consultant, agent,
employee, stockholder or partner.
(f) (i) The prohibitions set forth in subsections (c), (d) and (e) shall
not apply to actions taken at the request, or with the consent
or for the benefit of the Corporation.
(ii) The prohibitions set forth in subsections (c), (d) and (e)
shall not prohibit Mr. Rinkel from owning publicly traded
investment securities in any corporation if he owns no more
than five (5%) percent of the total outstanding securities of
any class of that corporation or no more than five (5%) percent
of the total voting securities of that corporation.

(g) General Microwave Corporation and Mr. Rinkel are parties to an
Employee Patent Agreement dated February 4, 1963. The agreement is
referred to below
<PAGE> 209

as the "Patent Agreement". Although Mr. Rinkel is no longer an
employee of General Microwave Corporation or its successor
corporation, his obligations under the Patent Agreement shall
continue as if he were an employee of the Corporation during the term
of this Agreement.

(h) Mr. Rinkel acknowledges that the rights of the Corporation under this
Agreement are of a specialized and unique character and that a
breach, or threatened breach of this Agreement by Mr. Rinkel, will
cause the Corporation irreparable injury and damage which cannot be
reasonably or adequately compensated in damages or in action at law.
In the event of a violation of the terms of this Agreement, the
Corporation shall, in addition to any other relief, be entitled to
injunctive relief in any court of competent jurisdiction.

(i) The failure of either party to require performance by the other party
of any provision of this Agreement shall in no way affect the right
of that party to enforce that provision of any other time, no shall
it affect the party's right to enforce any other provision of this
Agreement. The waiver by any party of a breach of any provision of
this Agreement shall not be taken or held to be a waiver of any
subsequent breach of the provision or as a waiver of the provision
itself.

(j) If it is determined that any provision of this Agreement is too broad
or otherwise unenforceable for any reason, Mr. Rinkel expressly
agrees that any court of competent jurisdiction may narrow the terms
of the provision so as to render them enforceable according to their
intent and purpose.

6. Term

(a) The term of this Agreement shall be for two years commencing on the
date GMC is merged into GMC Acquisition Corporation.

(b) This Agreement shall terminate automatically upon the death of Mr.
Rinkel, and the Corporation shall not be required to pay Mr. Rinkel
or his estate any amounts payable to him which accrue after that
date.

(c) This Agreement shall also terminate if Mr. Rinkel is unable to
perform the services required of him by this Agreement for any period
exceeding or aggregating 40 days during any 160 day period for any
reason not caused by the Corporation.

7. Choice of Law

This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.

8. Notices

Notices given under this Agreement shall be valid only if in writing and
properly mailed. A notice shall be properly mailed if postage is prepaid,
and if the notice is properly addressed. A notice to a party shall be
properly addressed only if addressed to the address of the party set forth
on page 1 or to any other address as the party may designate by giving
notice to the other party.

To signify his agreement to the foregoing, Sherman Rinkel has executed
this Agreement.
<PAGE> 210

To signify its agreement to the foregoing, Herley Industries, Inc. has
caused this Agreement to be executed and attested to by its duly
authorized officers.

--------------------------------------
Sherman Rinkel

HERLEY INDUSTRIES, INC.

By:
-----------------------------------
Myron Levy, President

Attest:

- ---------------------------------------------
<PAGE> 211

EXHIBIT F

FORM OF EMPLOYMENT AGREEMENTS

EMPLOYMENT AGREEMENT

AGREEMENT made as of the day of , 1998 by and
between Herley Industries, Inc., a Delaware corporation (hereinafter the
"Company") and , residing at (hereinafter called
the "Employee").

W I T N E S S E T H:

WHEREAS, the Company and the Employee desire to enter into an Employment
Agreement relating to the Company's employment of the Employee; and

WHEREAS, this Agreement is intended to supersede and replace all prior
agreements, understandings and arrangements between the Company and the
Employee, including any and all agreements with General Microwave Corp. ("GMC"),
relating to such employment.

NOW, THEREFORE, it is agreed as follows:

1. Retention of Services. The Company hereby retains the services of Employee,
and Employee agrees to furnish such services in the New York Metropolitan Area,
upon the terms and conditions hereinafter set forth.

2. Term. Subject to earlier termination on the terms and conditions
hereinafter provided, and further subject to certain provisions hereof which
survive the term hereof, the term of this Agreement shall be comprised of a two
(2) year period of employment commencing on the date on which GMC is merged into
GMC Acquisition Corporation and terminating two (2) years thereafter.

3. Duties and Extent of Services During Period of Employment. During the term
of employment, Employee shall be employed on a full-time basis as an executive
of the Company. In such capacity, Employee agrees that he shall serve the
Company under the direction of the Board of Directors and executive officers of
the Company to the best of his ability, shall perform all duties incident to his
offices on behalf of the Company and shall perform such other duties as may from
time to time be assigned to him by the Board of Directors and executive officers
of the Company. Employee shall also serve in similar capacities of such of the
subsidiary corporations of the Company as may be selected by the Board of
Directors.

4. Remuneration. During the period of employment, Employee shall be entitled
to receive the following compensation for his services: A salary at the rate of
$ per annum, payable in equal bi-weekly installments, or in such other
manner as shall be agreeable to the Company and Employee.

5. Employee Benefits; Expenses.

(a) During the period of employment, the Employee shall be entitled to
participate in the Company's medical insurance, life insurance and pension
plans in the same manner as other of the Company's executives in positions
of similar authority and importance.

(b) For purposes of determining vacation and other payments or benefit
entitlements dependent, in whole or in part, on length of service, the
Employee's services to GMC
<PAGE> 212

Corp. shall be treated as if same had been performed as an employee of the
Company.

(c) During the period of employment, Employee shall be furnished with office
space and facilities commensurate with his position and adequate for the
performance of his duties; and he shall be provided with the perquisites
customarily associated with the position of an executive of the Company.

(d) It is contemplated that during the period of employment, Employee may be
required to incur out-of-pocket expenses in connection with the
performance of his services hereunder, including expenses incurred for
travel and business entertainment. Accordingly, the Company shall
reimburse Employee for all reasonable out-of-pocket expenses incurred by
Employee in the performance of his duties hereunder upon submission of
reasonable documentation therefore in accordance with the Company's
policies.

(e) During the period of his employment hereunder, Employee shall be entitled
to either (i) receive an allowance with respect to an automobile in the
same amount as he currently receives from GMC; or (ii) continue to use any
leased vehicle provided by GMC for the shorter of (x) the term of such
lease or (y) the term of his employment hereunder. If the lease with
respect to any such vehicle expires during the term of this Agreement or
any extension hereof, the Company shall have the option of either
furnishing a replacement vehicle or a cash vehicle allowance.

6. Disability. If Employee, during the period of employment, becomes unable
for three consecutive months or more, or any 180 days in any twelve-month
period, due to ill health or other physical or mental incapacity, to perform his
services hereunder, the Company may thereafter, upon at least 45 days' written
notice to Employee, place him on disability status. After such action by the
Company, Employee shall only be entitled to the disability benefits under his
insurance policy during the disability period.

7. Confidential Information.

(a) In the course of Employee's employment by the Company, Employee will have
access to and possession of valuable and important confidential or
proprietary data or information of the Company and its operations.
Employee will not during Employee's employment by the Company or at any
time thereafter divulge or communicate to any person nor shall Employee
direct any Company employee, representative or agent to divulge or
communicate to any person or entity (other than to a person or entity
bound by confidentiality obligations similar to those contained herein and
other than as necessary in performing Employee's duties hereunder) or use
to the detriment of the Company or for the benefit of any other person or
entity, any of such confidential or proprietary data or information or
make or remove any copies thereof, whether or not marked or otherwise
identified as "confidential" or "secret." Employee shall take all
reasonable precautions in handling the confidential or proprietary data or
information within the Company to a strict need-to-know basis and shall
comply with any and all security systems and measures adopted from time to
time by the Company to protect the confidentiality of confidential or
proprietary data or information.

(b) The term "confidential or proprietary data or information" as used in this
Agreement shall mean information not generally available to the public,
including, without limitation, all database information, personnel
information, financial information, customer lists, supplier lists, trade
secrets, patented or proprietary information, forms,
<PAGE> 213

information regarding operations, systems, services, know how, bid
preparation, computer and any other processed or collated data, computer
programs, pricing, marketing and advertising data.

(c) Employee will at all times promptly disclose to the Company in such form
and manner as the Company may reasonably require, any inventions,
improvements or procedural or methodological innovations, programs,
methods, forms, systems, services, designs, marketing ideas, products or
processes (whether or not capable of being trademarked, copyrighted or
patented) conceived or developed or created by Employee during or in
connection with Employee's employment hereunder and which relate to the
business of the Company ("Intellectual Property"). Employee agrees that
all such Intellectual Property shall be "work-for-hire" and shall be the
sole property of the Company. To the extent any such Intellectual Property
does not constitute a "work-for-hire" under U.S. law, Employee hereby
assigns to Company all right, title and interest in such Intellectual
Property. Employee further agrees that Employee will execute such
instruments and perform such acts as may reasonably be requested by the
Company to effectuate such assignment and otherwise to transfer to and
perfect in the Company all rights in such Intellectual Property.

(d) All written materials, records and documents made by Employee or coming
into Employee's possession during Employee's employment by the Company
concerning any products, processes or equipment manufactured, used,
developed, investigated, purchased, sold or considered by the Company or
otherwise concerning the business or affairs of the Company shall be the
sole property of the Company, and upon termination of Employee's
employment by the Company, or upon request of the Company during
Employee's employment by the Company, Employee shall promptly deliver the
same to the Company. In addition, upon termination of Employee's
employment by the Company, Employee will deliver to the Company all other
Company property in Employee's possession or under Employee's control,
including, but not limited to, financial statements, marketing and sales
data, customer and supplier lists, database information and other
documents, and any Company credit cards.

(e) The Employee shall immediately disclose to the Company any information
relating to business opportunities relating to the business of the
Company, and/or its subsidiaries which may be offered or communicated to
the Employee.

(f) The provisions of this Section 7 shall survive the termination of this
Employment Agreement.

8. Termination.

(a) The Company recognizes that, for the period during which Employee has been
employed and/or associated with the Company, the Company has been
intimately familiar with the ability, competence and judgment of Employee,
which are acknowledged to be of the highest caliber. Accordingly, the
Company and Employee agree that Employee's services hereunder may be
terminated for "cause" by the Company only (i) for an act of fraud or
embezzlement adversely affecting the financial interest of the Company,
(ii) in the event that the Company places Employee on disability status
pursuant to Section 6 hereof more than once during the term hereof, (iii)
in the event of a conviction of the Employee for any felony, (iv) in the
event of material breach by the Employee of the terms of this Agreement,
following the receipt by the Employee of ten (10) days notice of such
breach and the
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Employee's failure to cure such breach within such grace period, (v) in
the event of any willful breach by the Employee of this Agreement, or (vi)
in the event that the Employee materially breaches any of his
representations, warranties, covenants or agreements contained in the
Agreement and Plan of Merger of even date herewith to be executed by the
Company. This Agreement shall also terminate on the death of Employee.

(b) If the Company terminates Employee's employment hereunder for any reason
other than for "cause" as set forth in Section 8(a) hereof, Employee's
compensation shall be paid to him as provided hereunder for the remainder
of the term of this Agreement. If the Company terminates Employee's
employment hereunder for "cause" as set forth in Section 9(a) hereof,
Employee shall not be entitled to receive any further compensation
hereunder which has not already been earned pursuant to the terms hereof.
Employee and the Company acknowledge that the foregoing provisions of this
paragraph 8(b) are reasonable and are based upon the facts and
circumstances of the parties at the time of entering into this Agreement,
and with due regard to future expectations.

9. Consolidation or Merger. In the event of any consolidation or merger of the
Company into or with any other corporation during the term of this Agreement, or
the sale of all or substantially all of the assets of the Company to another
corporation, person or entity during the term of this Agreement, such successor
corporation shall assume this Agreement and become obligated to perform all of
the terms and provisions hereof applicable to the Company, and Employee's
obligations hereunder shall continue in favor of such successor corporation.

10. Notices. Any notice to be given to the Company hereunder shall be deemed
sufficient if addressed to the Company in writing and delivered or mailed by
certified or registered mail to its offices at 10 Industry Drive, Lancaster, PA
17603, or such other address as the Company may hereafter designate, with a copy
to David H. Lieberman, Esq., Blau, Kramer, Wactlar & Lieberman, P.C., 100
Jericho Quadrangle, Jericho, New York 11753. Any notice to be given to Employee
hereunder shall be delivered or mailed by certified or registered mail to him
at: or such other address as he may hereafter designate.

11. Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the successors and assigns of the Company, and unless clearly
inapplicable, all references herein to the Company shall be deemed to include
any such successor. In addition, this Agreement shall be binding upon and inure
to the benefit of the Employee and his heirs, executors, legal representatives
and assigns; provided, however, that the obligations of Employee hereunder may
not be delegated without the prior written approval of the Board of Directors of
the Company.

12. Amendments. This Agreement may not be altered, modified, amended or
terminated except by a written instrument signed by each of the parties hereto.

13. Prior Agreements Superseded. This Agreement supersedes any employment or
consulting agreements, oral or written, entered into between Employee and GMC
and the Company prior to the date of this Agreement.

14. Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Delaware, without regard to
conflicts of laws.
<PAGE> 215

15. Acknowledgment. Employee acknowledges that he has carefully read this
Agreement and hereby represents and warrants to the Company that Employee's
entering into this Agreement, and the obligations and duties undertaken by
Employee hereunder, will not conflict with, constitute a breach of or otherwise
violate the terms of any other agreement to which Employee is a party and that
Employee is not required to obtain the consent of any person, firm, corporation
or other entity in order to enter into and perform his obligations under this
Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.

HERLEY INDUSTRIES, INC.:

By:-----------------------------------
Myron Levy
President

EMPLOYEE:

--------------------------------------
Name:
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ANNEX B -- AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER

Amendment No. 1 to Agreement and Plan of Merger

AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER dated as of November 18, 1998,
among General Microwave Corp., a New York corporation ("GMC"), eleven GMC
shareholders identified on Exhibit "A" hereto (the "Participating
Shareholders"), GMC Acquisition Corporation, a New York corporation
("Acquisition") and Herley Industries, Inc. ("Herley"), a Delaware Corporation.

W I T N E S S E T H:

WHEREAS, GMC, the Participating Shareholders, Acquisition and Herley are parties
to an Agreement and Plan of Merger dated as of August 21, 1998 (the "Merger
Agreement"), pursuant to which GMC is to be merged with and into Acquisition and
the outstanding shares of Common Stock, par value $.01 per share, of GMC
(referred to collectively as the "GMC Shares" and individually as a "GMC Share")
are to be converted upon the merger into the right to receive a warrant to
purchase Herley Common Stock and $18 in cash; and

WHEREAS, the parties to the Merger Agreement desire to amend the Merger
Agreement to provide that Acquisition will merge with and into GMC and GMC will
be the surviving corporation in the merger; and

WHEREAS, the parties to the Merger Agreement further desire to make certain
other amendments to the Merger Agreement.

NOW, THEREFORE, in consideration of the mutual agreements contained herein, the
parties hereto agree as follows:

SECTION 1. Amendments. The Merger Agreement is hereby amended as follows:

(a) Section 1.1 is hereby amended and restated as follows:

"1.1 Surviving Corporation. At the Effective Time (as defined in Section
1.3 hereof), Acquisition shall be merged with and into GMC upon the terms
and conditions hereinafter set forth as permitted by and in accordance
with the BCL. At the Effective Time, the identity and separate existence
of Acquisition shall cease, and GMC shall succeed to all rights,
privileges, powers, franchises, properties, assets, debts, liabilities and
obligations of Acquisition in accordance with the BCL."

(b) Section 1.3 is hereby amended and restated as follows:

"1.3 Effective Time. The Merger shall become effective when the
Certificate of Merger is filed by the Secretary in accordance with the
applicable provisions of the BCL (or at such later time specified as the
effective time in the Certificate of Merger), which Certificate shall be
submitted for filing as soon as practicable after all of the conditions
set forth in Article VI are fulfilled or waived, provided that this
Agreement has not been previously terminated pursuant to Section 7.1
hereof. The date and time when the Merger shall become effective are
herein referred to as the "Effective Time." The Effective Time shall be
after January 1, 1999."

"1.4 Certificate of Incorporation. The Certificate of Incorporation of
the Surviving Corporation from and after the Effective Time shall be the
Certificate of

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Incorporation of GMC. Simultaneously with the Effective Time, the GMC
Certificate of Incorporation shall be amended to conform to the
substantive provisions of the Certificate of Incorporation attached as
Exhibit B to this Agreement."

(d) Section 3.1 is hereby amended and restated as follows:

"3.1 Effect of Merger. At and after the Effective Time, the separate
existence of Acquisition shall cease, the GMC Shares shall cease to exist
(except as evidence of the right of the holder thereof to receive cash and
warrants therefor in accordance with the terms hereof), subject to the
rights of holders of Dissenting Shares referred to in Section 2.1(b)
hereof, and all rights, privileges, powers and franchises, and all
property, tangible and intangible, of Acquisition and of GMC shall
transfer to, vest in and devolve on the Surviving Corporation without
further act or deed. Confirmatory deeds, assignments, or similar
instruments to evidence such transfer may be executed and delivered at any
time in the name of GMC or Acquisition by GMC's last acting officers or by
the appropriate officers of the Surviving Corporation. The Surviving
Corporation shall be liable for all of the debts and obligations of
Acquisition and GMC. Any existing claim, action or proceeding pending by
or against Acquisition or GMC may be prosecuted to judgment as if the
Merger had not taken place or, on motion of the Surviving Corporation, the
Surviving Corporation may be substituted as a party, and any judgment
against Acquisition or GMC shall constitute a lien on the property of the
Surviving Corporation. The Merger shall not impair the rights of creditors
or any liens on the property of either of the Constituent Corporations."

(e) All references in the Merger Agreement to the Surviving Corporation
following the effectiveness of the Merger shall be deemed to refer to GMC,
rather than Acquisition.

(f) Section 4.1 is hereby amended and restated as follows:

"4.1 Representations and Warranties by GMC. GMC represents and warrants
to, and agrees with, Acquisition and Herley, subject to the exceptions set
forth in the disclosure schedule (the "Schedule") to be delivered to
Acquisition and Herley, as follows:"

(g) All references to the Schedule in the Merger Agreement shall be construed
to reflect that such Schedule was not attached to the Merger Agreement at
the time of its execution and is not a part of, or an exhibit to, the
Merger Agreement. Notwithstanding the foregoing, the Schedule and its
contents shall be considered together with the Merger Agreement for the
purpose of determining GMC's compliance with its representations,
warranties and covenants contained in the Merger Agreement.

(h) Section 5.2(g) is hereby amended to add the following:

"The foregoing shall not be construed to prevent GMC's purchase of an
officers and directors' liability insurance policy having a term of three
years from the Effective Time and covering acts prior to the Effective
Time."

(i) Section 6.2(g) is hereby amended and restated as follows:

"(g) Cutoff Date. The Merger shall in any event have been completed no
later than January 8, 1999. This condition shall be a mutual condition."

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(j) The form of Consulting Agreement attached as Exhibit E to the Merger
Agreement is hereby amended as follows:

(A) Section 2 shall be amended and restated as follows:

"2. Mr. Rinkel's Position

(B) Section 4(a) shall be amended and restated as follows:

"4. Compensation

(a) As full compensation for his services under this Agreement,
the Corporation shall pay Mr. Rinkel during the term hereof
at the rate of Sixty Thousand ($60,000.00) Dollars per year.
This compensation shall be payable in equal monthly
installments."

(k) All references in the Exhibits to the Merger Agreement to the merger of
GMC into Acquisition shall be deemed to refer to the merger of Acquisition
into GMC, with GMC as the surviving corporation. All references in such
Exhibits to the "Surviving Corporation" shall be deemed to refer to GMC.

SECTION 2. All capitalized terms used herein, unless otherwise defined
herein, are used herein as defined in the Merger Agreement. Except as expressly
provided herein, all terms and provisions of the Merger Agreement shall remain
in full force and effect.

SECTION 3. This Agreement may be executed in any number of counterparts, each
of which when so executed and delivered will be deemed an original, and such
counterparts together will constitute one instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.

GENERAL MICROWAVE CORP.:

By: Sherman A. Rinkel
-----------------------------------
Sherman A. Rinkel
Chairman, Board of Directors

PARTICIPATING SHAREHOLDERS:

/s/ SHERMAN A. RINKEL
--------------------------------------
Sherman A. Rinkel

/s/ MOE WIND
--------------------------------------
Moe Wind

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